The Inflation Bogeyman Has Officially Arrived

Hey There Income Hunters,

We were ready for this, weren’t we?

So far it has played out exactly according to script.

Yesterday was wild because watching the price action it was clear that many traders did not know how to react dd

Bond yields went down at first, which was the easiest call. Bonds get wrecked by inflation and the Consumer Price Index (CPI) number at +3% is a nightmare for the Fed.

And I’ll keep saying it …

The Fed cannot raise interest rates.

Here is a slide from yesterday’s Power Income LIVE

With the U.S. debt-to-GDP ratio at 133%, $1 dollar of debt only produces $.30 of growth. Plus, the Treasury has to refund over $1 trillion of debt a year at current rates.

So … for every 1% that rates rise, our debt increases by $10 billion dollars.

The Fed has to be ready to cap interest rates from rising via yield curve control, which translates into doing as much quantitative easing as necessary to hold rates below a certain level.

The financial condition of the market is more fragile now with inflation front and center.

The mistake the Fed has always made in the past was to raise rates too soon, which caused a meltdown in asset prices …

I am willing to bet that Jerome “J-Pow” Powell and the gang will not make that mistake this time around.

Here is where we are after yesterday’s CPI announcement and where the money flows next …

Follow the Money

1. Cash starts moving out of bonds and into commodities and precious metals. The chart below shows that after yesterday’s CPI number gold appears to be too cheap relative to where the 10-year inflation adjusted rate is …

While gold is too cheap in the long-term, the asset class in the most trouble is bonds. As bond yields go higher, inflation-adjusted bond yields also rise, which hurts gold.

I expect gold to explode higher when the Fed commits to holding rates down via yield curve control. Then gold (and silver) will be off to the races.

2. At this stage, inflation is a good thing for the economy and economic numbers will continue to be strong. Yesterday, the worst sector performer was consumer discretionary, which should be a good performer as the economy re-open.

3. We may get a correction in commodities — and that is the sector with the greatest momentum. Any correction should be bought because President Biden will get the infrastructure bill through — and then some.

China’s Belt and Road global growth initiative has lit a fire under Biden, which may translate into even more fiscal stimulus. That will add to the already excessive global demand for raw materials needed to build roads, bridges, cars, etc.

The commodity secular bull market that is in full force now is just beginning — and that is an asset class you must be involved in.

Just keep going back to this chart to remind yourself where the greatest opportunity is. Commodities have come off the matt versus stocks and there is no looking back …

Bring It Home

This is a time it’s really important to avoid the talking heads narrative. Instead, let the market tell you what’s going on… 

We’re seeing some of the inflation that was in financial asset prices move into goods, services and raw materials. That shift hurts mega-cap growth tech stocks and there is still a lot of froth left in many of them …

Remember: #IncomeHunters have to make adjustments when the flow shifts

The next big event is higher yields — maybe as high as 2% on the 10-year — that will force the Fed to make a move. That means yield curve control will be the next bazooka-shot of stimulus that will have markets screaming higher once again.

Until Then…

Live and Trade With Passion My Friends,


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