Inflation or Liquidation?

Conventional and traditional market analysis talks about investing as if it is a logical or normal discipline; as if there is a right way or wrong way to do it successfully. Invest for the long-term letting your adviser worry about the details, as if there is continuum in play that will… continue. That’s conventional stuff.

My version of unconventional analysis accepts that it’s a desperately propped up casino in which we ply our trade. As you know, the bedrock of how I see the financial markets is viewed in this one simple chart of the 30yr Treasury yield continuum, with its EMA 100 limiter. This deflationary downward trend is symbolic of the deflationary backbone against which the Fed (and politicians, let’s not forget them) take inflationary liberties whenever given the opportunity.

For context, here is a post from 2018 explaining why experts Bill Gross, Jeff Gundlach, Ray Dalio and even the estimable PTJ were wrong in their bond-bearish orientation (expecting yields to rise further) as the Continuum approached the limiter. Of course, as the limiter got pierced Powell inexplicably (to many) hawked like hell as the stock market liquidated into the Christmas Eve Massacre buying opportunity that year. That kicked off a new journey to the Continuum’s lower bound.

The most recent opportunity for policymakers to inflate – still well in play – began in 2019, a year before COVID-19 slammed the process into overdrive. It became acute in Q1 2020. This directly followed that late 2018 period when most market participants were dumbfounded about the Fed’s lack of engagement to prop the markets. You and I knew, however, that there was a perfectly good reason for that.

Ole’ Jerome was not going to incinerate the Fed in an inflationary blaze with the 30yr yield making good on a threat to break the Continuum’s limiter. Fast-forward to today, the damn Fed is trying to engineer another inflationary impulse to the upper bound.

30 year treasury yield

Here is another view of it, courtesy of the St. Louis Fed (my mark ups). This is simply a macro market of fading inflation expectations over time, as policymakers take up the inflationary torch – especially at those times of market liquidation and deflationary terror.

These charts are the engine room of the Good Ship Lollipop, as it sails along through the cycles. I have been expecting an inflationary 2021, but if the charts are to continue with their trends the inflation will fail and liquidate once again. It’s not a conventional playing field that your financial adviser is playing on. Hopefully she understands that. If you’re doing it yourself and are reading this website, I gather you already understand it.

5 year inflation rate

Inflation or liquidation? The answer is likely to be both, again. Timing is what is at issue, not the eventuality.

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