The Inflation Era Has Arrived!

IMF Says Inflation Pressures Non-Existent

The Federal Reserve isn`t the only one, everyone from the IMF, Bond Funds, Wall Street Analysts, Hedge Funds and the Big Banks are on the wrong side of the market both in terms of inflation already in the economy, current inflation expectations and being properly positioned or hedged for the inflation trade.

The Wolf has Arrived, but investors ignored the Inflation Data

We have tried to warn market participants even three weeksago laying out what would happen to the CPI Data, and based upon many of the responses to our warning; the complacency on this issue regarding inflation is off the charts. The entire world is asleep at the wheel regarding bubblinginflation, when the stock market keeps putting in higher highs after a 35% year that should have been a warning sign that there is way too much liquidity in the system. 

We noted that normally the market would go down on QE tapering, and the opposite caught many hedge funds off guard who tried to seasonally short the market in late April, and it is apparent that runaway inflation in terms of excess liquidity in the system is what is pushing the stock market higher. 

 

Above Trend Growth Equals Above Trend Inflation

But that is financial system inflation, we point to the stock market because that was a clue regarding inflation in the real economy that was well above what the trend had been the past 7 years. However, the PPI & CPI Reports for the last 4 months captured the above trend spike in inflation as well as the Employment Reports. Jan Hatzius, Goldman Sachs chief economist, says he believes the economy is now growing at an above-trend pace (see clip above). Goldman’s own current activity indicator is showing its fastest growth since the crisis, according to Hatzius. Well, we really shouldn`t be surprised that above trend growth brings above trend inflation pressures into the economy.

It is obvious that everyone from the central banks to the yield chasing carry traders would want to discount inflation concerns in order to keep the proverbial party rolling along in terms of monetizing the debt at ridiculously low levels, and borrowing free money for eternity. But for every action there is a reaction, and it was only a matter of when and not if, that market forces, in this case higher inflation, would react to such an excessively loose monetary policy experiment.