The Fed’s “Frankenstein” Policies Are About To Turn On Their Master

January 22, 2018

The financial media is finally catching on to something we’ve been screaming about for years…

That the Fed’s preferred metric for measuring inflation is a complete joke.

Making matters more difficult, the Fed’s preferred inflation gauge does a pitiful job of capturing the quandary facing many households that live paycheck to paycheck. The so-called core PCE is the central bank's go-to inflation metric. It is derived by netting out the necessities of food and energy from personal consumption expenditures. But the core PCE also minimizes the weight of rent and over-emphasizes health care due to Medicaid and Medicare’s inputs.

Source: Bloomberg

What the article misses is that the scheme is intentional.

The reality is that since the US abandoned the Gold Standard in 1971, the Fed has effectively been “papering over” declining living standards in that the actual “cost of living” in the US has soared relative to real incomes.

This fact stares all of us in the face every day. Back in the late ‘60s / early ‘70s, one parent worked and most Americans had a decent quality of life. Today both parents typically work and are one financial emergency away from being broke.

The Fed masks this by understating inflation and by providing an endless stream of easy credit/ debt. This is why the Fed's continuous “gosh, inflation is just too low… we better keep on printing money forever,” shtick is so ridiculous.

However, like the famous Frankenstein monster, the Fed’s inflationary policies are about to turn on their master.

The fact is that inflation is actually clocking in well over 3%. And it’s about to blow up the Everything Bubble.

Bonds trade based on inflation.

If inflation rises, so do bond yields.

When bond yields Rise, bond prices FALL.

And when bond prices FALL, the massive debt bubble begins to burst.

On that note, the yield on the most important bond in the world: the 10-Year Treasury, has already broken above its 20-year trendline.

The US is not alone… the yield on 10-Year German Bunds has also broken its downtrend.

Even Japan’s sovereign bonds are coming into the “inflationary” crosshairs with yields on the 10-Year Japanese Government Bond just beginning to break about their long-term downtrend.

Globally the world has added over $60 trillion in debt since 2007… and all of this was based on interested rates that were close to or even below ZERO.

All of this is at risk of blowing up courtesy of this spike inflation. And it's going to collapse most asset classes in ways we haven't seen since 2008.

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Graham Summers is Chief Market Strategist for Phoenix Capital Research, an independent investment research firm based in the Washington DC-metro area with clients in 56 countries around the world.

Graham’s clients include over 20,000 retail investors as well as strategists at some of the largest financial institutions in the world (Morgan Stanley, Merrill Lynch, Royal Bank of Scotland, UBS, and Raymond James to name a few). His views on business and investing has been featured in RollingStone magazine, The New York Post, CNN Money, Crain’s New York Business, the National Review, Thomson Reuters, the Glenn Beck Show and more.

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