Inflation Will Rise for the Next 25 Years
Japan went to negative rates, so there is lots of talk about how low negative rates around the world can go.
And since everyone is trying to competitively devalue, it is a race to the bottom in interest rates.
But it could get even weirder…
Inflation Is Back
The Fed is dumb but not unintelligent, if that makes any sense. They have 250 economists crunching numbers. They know when inflation is coming. Why do you think they wanted to raise rates four times this year?
Because we are starting to see signs of inflation like this:
As you can see, wage expectations are starting to pick up. No surprise, after we heard about all of those minimum wage hikes last year — as usual, the market is self-correcting. Low wages is the cure for low wages. The market just doesn’t operate on anybody’s schedule.
We could see inflation of 3–4% in a couple of years.
No Wonder Precious Metals and Commodities Are Rallying
Of course, if you like inflation, then you like gold:
And you like iron ore:
And anything else that will hurt if you drop it on your foot.
In contrast, the fluff with fluffy subjective valuations is getting hammered:
The Fed’s Hands Are Tied
It’s unlikely, however, that the Fed hikes again this year to cope with rising inflation.
$6 trillion of global bonds now are trading with negative yields. Just let that sink in for a bit.
Even the most novice investor can understand that owning a bond with a negative yield in a high inflation environment is the most nonsensical thing ever.
What I am saying is that the bond market is sowing the seeds of its own destruction. It is a bubble. High bond prices will be the cure for high bond prices, when the market gets around to it.
The Inflation Trade Has Just Begun
I know I’m throwing a bunch of charts around, but there’s actually something to this. If you buy Amazon, it is an implicit deflation bet. You are betting on the deflationary forces of technology, that prices will continue lower.
Since 2011, Amazon (and all that stuff) has been going higher.
Since 2011, metals and commodities and EM have been going lower.
Suddenly, three weeks ago… these trends abruptly reversed.
My thesis is that the deflation trade is over. Which means: don’t buy AMZN, and don’t short gold. This is the first inning.
I have gotten some pushback on this thesis. The deflationary mentality is pretty entrenched. For now, the inflation is imaginary. But don’t you think it’s weird that gold, iron ore, steel rebar, and copper are rallying in the middle of what might be a bear market?
I think it’s weird.
As usual, the market is doing what nobody expected to happen. Nobody is positioned for an inflation trade. Some well-known market pundits and economists have been talking down emerging markets for years.
They haven’t stopped. The thing about most people is, they always miss the turn because the bearish thesis is most compelling on the lows. And they are blind to evidence that contradicts their thesis.
All of this could be coincidence. I could be nuts. Wouldn’t be the first time.
But I have always believed that the inflation trade from 2000 to 2011 was the motive wave, and the correction from 2011 to 2016 was the corrective wave, and now we are back on the primary trend, in an inflation bull market lasting 25 years or more.
I told you I think really big picture.
Subscribe to The 10th Man
Sign up for The 10th Man and get my weekly insights into the financial markets written in a human language.
