The Age-Old Question; Inflation or Deflation?

I try to have a lot of different ways of looking at the macro backdrop because if enough of them imply the same thing then a strong probabilities-based thesis can be made.

For instance, currently we are looking at long-term Treasury yields hit (10yr) or get very close to (30yr) upside targets. You know my stance there; I think risk is pretty high for a downward reaction in yields before too long. I’ve backed that view with portfolio balancing positions in 3-7yr and 7-10yr bonds. But even if a reaction comes about (and especially if it doesn’t), the big question is whether or not we are going into territory that has been uncharted for decades.

So are we going to eventually break the Continuum’s limiter? Here is the 30yr yield, almost to a target that few saw coming several months ago, outside of this website when we ID’d the downward consolidation as a bullish flag and used daily charts to gauge bullish patterns in the 10yr & 30yr.


A secular breakout would imply a new and virulent kind of inflation, summoned by fiscally stimulating politicians even as the Fed tries however meekly to bring in the inflation summoned by its own monetary stimulus policy (I assume with the full approval of the politicians under whom it toiled in 2008-2016). Something as profound as this decades-old deflationary backbone that supported all manner of financial (read: inflationary) shenanigans is bound to let loose inflation of unquantifiable power if it breaks.

In other words, if the trend does eventually change, get ready for “something completely different”, to quote Monty Python. That would be the von Mises Crack Up Boom or some similar event that sets the hounds loose. It would actually be most comfortable for the whole thing to liquidate and start over but in the spirit of the inflation mini hysteria currently going on, I thought I’d carry it to the next level like a good muck raking blogger.

Funnily enough, the post started as a way to put up this old NFTRH chart that I just found. Rejoining the post’s initial thought, the speculative (risky) TSX-V vs. the real Canadian stock market, TSX, is a gauge of the will to speculate in the various risk ON ‘inflation trades’. I have not looked at this since the 2016 ‘inflation trade’ that began in gold and eventually brought commodities and stocks along with it, started to consolidate. The chart’s notes are exactly as I’d left them. I find the 2018 upward break of consolidation interesting. Maybe you do too, eh?

cdnx, tsx

[edit] As a side note, see Charlie Bilello’s analysis of what the two conditions, inflation and deflation, have meant for stock market returns over the years and decades.

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