NFTRH+; The current macro

I want to make a point that inflationary fear and associated fear of the hawking Fed does not necessarily translate to a bearish stock market. When deflation exerts, prices go down, including equity prices. When inflation hysteria is in play, theoretically at least, people buy assets to rid themselves of cash or to keep up with generally rising prices of a wide spectrum of assets. This includes stock markets, which have acted as an inflation refuge right along with hard assets.

What is happening with the Fed now is opposite to 2020. Back then they wanted everyone out of bonds/cash and into assets. Today, they want the herds back in bonds. In my opinion this is because with no bond market there would be no continuum of dis-inflationary macro signaling over the decades; and with no dis-inflationary signaling the end would be at hand for the Fed’s usual operation, which is to inflate the system at every point when things get dicey.

In other words, the Fed cannot effectively inflate against inflation. It can, however, effectively inflate against deflation or more accurately, acute FEAR of deflation.

Bonds are the traditional receiver of liquidity-seeking funds in a deflationary phase. They are the opposite of that now, as inflation makes headline after headline. So the fear we may have gotten in our gut yesterday – with an assist to the mainstream media scaring us with the oh so scary Fed jawbones – will not necessarily translate to the way fear episodes usually go.

If the inflation does a U-turn and fails in spectacular fashion, then we may see a deflationary liquidation sooner rather than later. But as it stands now the market’s signals are as follows…

  • T-bills on through 30yr Treasury bonds are forecasting inflationary pressure, while…
  • Certain indicators continue to diverge the inflation trades (mainly inflation expectations are diverging as even the TSX-V the Baltic Dry Index have bounced just a bit lately with the developing inflation hysteria).

If inflation expectations take a new leg higher it is going to get really complicated and even your normally grounded letter writer would be thinking about a von Mises style Crack-up-Boom. Okay, relax Gary. Let’s take it chunk by chunk. The Fed is chasing inflation right now and we are looking up at 2.5% to 2.7% on the 30yr yield Continuum. As I’ve been saying a lot lately, it’s a week-to-week market.