Inflation: The Next Stage of the Global Financial Crisis 2007-2031

The comments below are an edited and abridged synopsis of an article by Bill Blain

Last week the market thought that inflation wasn’t an issue. Yield curves flattened, bonds tightened, and even though stocks were anticipating the best-ever-earnings-season, there was nothing to worry about in terms of rising prices.

Inflation: The Next Stage of the Global Financial Crisis 2007-2031 | BullionBuzz | Nick's Top Six
Debt crisis flowchart on a chalkboard with globe showing USA

But in the UK, inflation has risen to 2.5%. The US CPI data is 5.4% year over year, and 0.9% over the last month. When it happens in Europe, the Germans will have a hissy fit.

Inflation matters. It is critical to bonds and long-term returns. The media is full of analysis on how the Fed, BoE and ECB will hold off any hint of tapering in response to inflation in order to keep frothy markets from collapsing.

Fed-watching used to be the art of understanding the nuances of Fed-speak, dissecting the commentary and numbers and drawing conclusions based on a clear understanding of what was left unsaid and the Fed’s mandate.

But today, Fed-watching is about understanding that it is trying hard not to spook markets over rate rises and taper-talk, or doing anything to upset what it’s done over the last 12 years—frothing markets with unlimited QE, inappropriate rates, regulation and spin.

The reality is that central bankers have no answer to inflation. They are caught between inflation and a market collapse, which is why so many analysts are confident the markets will keep going higher, because central banks have little choice but to go with it and keep up the stimulus.

Most of the market is fixated on what the S&P does, what new high the NASDAQ will make, or where Amazon is going. They have no vision. Even the bond market seems blind.

The reality is that investment should be about the long term. If you ignore the future in favour of short-term gains, it’s easy to dismiss the evidence that inflation is a real issue.

Blain discusses the complex inflation outlook; oil being an outlier; important underlying trends in the economy; house price inflation; the possibility of a second housing bubble bursting; and the changing structure of the market.

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