Doug Noland

TSP Smart: Global Financial Quagmire

Our system faces a serious inflation problem. At the same time, Market Structure and systemic fragilities simply cannot tolerate a significant tightening cycle. It is a Quagmire. The writing’s on the wall: faltering markets will spur a major tightening of financial conditions, while consumer inflation remains elevated.

TSP Smart: Collision Course

Everything points to powerful inflationary dynamics and a Federal Reserve hopelessly “behind the curve.” The market is now pricing in a 2.86% Fed funds rate at the FOMC’s December 14th meeting. Moreover, the Fed is expected to soon commence its $95 billion monthly balance sheet reduction (“QT”).

TSP Smart: Stumbling into a New Cycle

This implies a major cycle inflection point for the bond market, now faced both with a secular upturn in inflation and diminished QE prospects. And a secular jump in Treasury yields would demand a long overdue downward valuation adjustment for stocks, corporate Credit and other financial assets.

Doug Noland: Inklings of Secular Change

At this point, the Fed would have to dramatically tighten financial conditions to reset inflation expectations. But such a move would collapse fragile Bubbles. Going forward, de-risking will require more selling of securities holdings, rather than simply buying cheap hedges.