Friday, October 9, 2015

Inflation Expectations......ANOTHER PESKY FACT!

<div dir="ltr"><b><font face="verdana, sans-serif"><font
size="6">Inflation Expectations</font><br><br><font size="4">At a
certain point, one has to wonder <font color="#ff0000">if there will
ever be a time </font>when developed market policy makers throw in the
towel.</font><br><br><font size="4">When both Japan and Europe slid
back into deflation lately, it served notice that trillions upon
trillions in central bank asset purchases <font color="#ff0000">are
definitely not working to restore confidence in the global economic
recovery and/or reinvigorate inflation
expectations.</font></font><br><br><font size="4">However, <font
color="#ff0000">you cannot simply print trillions in paper liabilities
in order to purchase your own other paper liabilities (and no, that is
not a typo, that's just simply what's happening here) without creating
distortions across capital markets and that's exactly what's happened
across the globe as the Fed and its DM brethren have "accidentally"
engineered an epic case of capital misallocation that, far from
promoting an increase in global demand and trade, has actually
contributed to a global deflationary supply
glut.</font></font><br><br><font size="4"><font color="#ff0000">There
is increasing evidence of a loss of confidence that the Fed is
actually in control.</font> Ignore for a moment the stock market's
celebration of weaker than expected payrolls. Instead investors should
focus on <font color="#ff0000">the rapid decline in US inflation
expectations since the Fed meeting</font> – even now converging to
dire eurozone levels!</font><br><br><font size="4"><font
color="#ff0000">Bond investors are signalling to us that they don't
believe the Fed is in control anymore.</font> The Fed by contrast is
brushing aside the market?s deflation concerns. And when the yen
renews its slide, <font color="#ff0000">expect round two of Asian
emerging currency weakness to begin and US and eurozone inflation
expectations to head lower
still.</font></font></font></b><div><b><font face="verdana,
sans-serif"><font size="4"><br></font></font></b></div><div><b><font
face="verdana, sans-serif"><font size="4"><img
alt="Inline image 1" width="860" height="445" style="margin-right:0px"
size="4" color="#ff0000">The collapse in inflation expectations tells
us that the market believes the central banks, despite their monetary
profligacy, are failing to prevent the western economies from turning
Japanese, and thus at risk of repeating their devastating slide into
outright deflation in the 1990s.</font><br><br><font size="4">Since
2013, stocks rallied while disinflationary pressures were reinforced
by a strong USD, low commodity prices and a decline in global demand.
If pre-2013 coordination between the two is taken as a reference, then
based on current stock prices breakevens should trade about 1.5%
wider. This means the Fed should be hiking because inflation is above
target. Alternatively, given the current level of inflation, S&amp;P
should be trading at half of its value.</font><br><br><br><font
size="4"><font color="#ff0000">So the S&amp;P should be trading at
900... or even less?</font> Yes, according to the following Deutsche
Bank chart:</font></font></b></div><div><b><font face="verdana,
sans-serif"><font size="4"><br></font></font></b></div><div><b><font
face="verdana, sans-serif"><font size="4"><img
alt="Inline image 2" width="924" height="687" style="margin-right:0px"
size="4">Only one question remains: which breaks first - do inflation
expectations surge higher, soaring by some 150 bps to justify equity
valuations, <font color="#ff0000">or do equities

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