Three Things Happened In The Market On May 15th, And They All Indicate Inflation

While it may appear to most investors that important market movements and trends appear without warning out of nowhere any warning, this is rarely, if ever the case. Astute observers will note irregularities and important trend changes long before the mainstream media starts reporting them to the broader public. The overnight collapse of some mortgage companies in December 2006 was an early warning sign of the impending Credit Crisis that didn’t peak until the fall of 2008. It got little media attention at the time, however. May 15, 2018 could turn out to be another landmark day warning us that a big change, this time a new era of inflation,  is on the way.

The U.S. Federal Reserve has little concern about inflation at the moment. It rarely does before inflationary forces become entrenched and almost impossible to eradicate. Currently, the Fed is focusing on the neutral rate of interest, which consensus has at 2.5% for its funds rate. Supposedly, once that rate is achieved, which could be as early as the end of this year, the economy and rates will be in balance and everything will just coast along in the best of all possible worlds. Left undiscussed, is how the central bank’s policies can control what takes place internally in the U.S. in a substantially globalized world.

The bond market stated its disagreement with this view on May 15th. Yield on the 10-Year US Treasury traded as high as 3.095%. This confirmed a double bottom was made in 2012 and 2016 by trading above the 3.04% high between the two lows. Far more importantly, this is the first higher, high since the yield peaked and started falling in 1981. Yields, of course, rise with inflation. The significance of the end of a 37-year trend cannot be understated, especially since the fall in interest rates has acted as support for rising stock prices during this period. The opposite will act to keep stocks down, and this is likely to be the case for 20+ years since that is historically how long interest rate trends have lasted in the  U.S. You can read more about this in my article: “Why A New Long-Term Uptrend In Interest Rates Has Begun.”

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