This article was originally posted on the
Buzz & Banter
where subscribers can follow over 30 professional traders as they
share their ideas in real time. Want access to the Buzz plus
unlimited market commentary?
Click here to learn more about MVPRO+
The number one topic since Thursday's (July 3) Employment Report
has been inflation. Depending on whom you listen to, the US is
either about to or already experiencing an inflationary cycle. The
idea of inflation -- rather than the actuality -- is easily
attached to in "Sounds Right Macro," as virtually everyone can
point to something that is now priced higher than before as
evidence. The truth is creating inflation is much harder than most
In the developed market space, disinflation (and even flashes of
deflation) have been far more common over the last 30 years. Asset
price inflation has filled the void and created a safe harbor for
the Neo-inflationists. The recent drop in the unemployment rate has
sparked a flurry of inflation sightings.
Although I believe this cycle will be scored nominally, I am not
convinced that a general inflation cycle has emerged. Central
Bank(er) focus and QE have promulgated the impending inflation
story. Remember the dollar-crashing hype of 2010? The reality is
the widespread development of derivative contracts act as a huge
impediment to a central bank that wants more inflation. Consider
the economic blowback to the Fed taper last Spring. Futures markets
were able to fast-forward to multiple tightenings at the first hint
of Federal Reserve adjustment.
Former Federal Reserve Chairman Paul Volcker showed incredible
resolve in cracking the 1970s inflation spiral. His success is
highly correlated -- but rarely linked to -- the invention and use
of financial futures. The ability to create inflation in the
developed world since the widespread use of these products has been
spotty, at best.
Even after last week's solid report, Treasury futures have
rebounded into the growing inflation meme. The energy complex
retreated sharply. If and when inflation gains some traction in the
US, I fully expect the Bond Vigilantes to ride into town "a
whoopin' and a hollerin' ," as Slim Pickens used to say, and scare
the daylights out of the citizens of Rock Ridge.