Goldilocks today, stagflation or deflation tomorrow?
I get to write a post like this with a level of authority simply because NFTRH and possibly this public website were the only two entities that I know of that were talking about a pullback in the inflation trades at the height of the hysteria.
The beginnings of our watch for a cool down in long-term yields and inflation hysterics roughly coincided with this excellent contrary indicator served up Zero Hedge (as you may know, Larry blocked me on Twitter not long after for the deplorable act of uploading golden cheerleaders to his feed).
This widely broadcast announcement of inflation (which we were aware would be coming nearly a year earlier, in the midst of 2020’s market destruction) was conveniently around the time that the Continuum was dinging the caution zone on the reflationary party.
But the question now is whether or not the current Goldilocks bounce, which was the implication of an inflationary cool down, will persist, get back on the message of inflation (which as it intensifies would have stagflationary implications on the economy) or heaven forbid, reverse into a deflationary liquidation of the last year’s policy excesses (understatement of the year)?
Here is the 30yr yield on a daily view. We’ve come quite a long way off of the inflationary reflation hysteria, haven’t we?
Inflation expectations have cracked by the RINF indicator.
And are even worse when comparing 20+ year Treasury bonds to TIPs.
So to mix popular culture references, we are not in Kansas anymore. Instead, Goldilocks is in the 3 Bears’ house eating her “just right” bowl of porridge.
Is she staying a while or vacating the cabin before trouble starts?
The Fed was not going to continue the inflation with Zero Hedge on the job (ref. tweet above) and the likes of ole’ Larry influencing his herd that way (in other words, with everybody knowing about and reacting to the inflation the Fed had created). The Continuum’s right side shoulder is in and now we’ll watch other indicators closely in order to define what’s next… resumed inflation/stag, perma-Goldilocks or most unexpectedly, a deflationary liquidation.
Personally, I have my options in a favored order. But only good work going forward will confirm or alter plans. One thing is for sure, we were on the Goldilocks situation of today in real time and in time to factor ahead of time the market’s most recent rotations back to Tech/Growth from then-overplayed reflation trades. Now who is over-played? Another good question.
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