Both the US 5Y/5Y Forwards and 5Y Break-Even (see chart below) have firmed above their psychologically important 2% cut-off, as investors have started to accept a more robust shift towards fiscal stimuli and hence, potentially higher inflation. Though Modern Monetary Theory (MMT) is no doubt about to soon be fiscally launched, we suspect that politically the time for MMT has not quite arrived yet, as it likely requires further market dislocations and political coalescence first. While no one globally is practicing austerity, there is equally no desire quite yet to embark on a permanent expansion of fiscal spending.

EXAMPLE: THE SORRY DELAY SINCE EARLY FALL 2020 OF THE CRITICAL US $1.9T STIMULUS

We are likely instead to witness as we recover from COVID that the G-5 fiscal deficits will be pulled back by maybe ~US$3 trillion over ‘21-22, leaving central banks to balance volatility and market risks.

We sense:

• Most investors seem to accept that aggressive use of monetary levers generates disinflation, not inflation (i.e. money printing is not equal to inflation because Velocity of Money fails to kick in).
• Most investors also accept that technology and financialization are highly disinflationary.
• This leaves only two sources of any meaningful inflationary pulse:
• Fiscal spending, and in particular the fusion of fiscal and monetary levers and
• Capacity constraints.

There is no doubt that, mathematically, headline CPI (to a lesser extent, core), will record a significant move into 2H’21.

Assuming oil prices remain at ~$55/barrel (we think it could go to $80 with Biden’s recent Executive Orders) and the CRB indices do not significantly exceed 180-200, then G-5 (i.e. US, UK, Eurozone, Japan and China) headline CPI could mathematically rise towards 3% plus from 0.5% today.

However, after that inflation is likely to recede to ~2% by early 2022 as bankruptcies and Covid-19 economic realities like the current moratorium on rent & mortgage payments is faced (see charts to right).

2020 VIDEOS OUTLINING THE COMING RISE IN INFLATION & COMMODITY PRICES

Supporting Newsletter -#1 – https://conta.cc/31jo7QU

Supporting Newsletter -#2 – https://conta.cc/3jmiwiB

Supporting Newsletter -#1 – https://conta.cc/3kXkKGu

Supporting Newsletter -#2 – https://conta.cc/2G7pE5e

Supporting Newsletter -#1 – https://conta.cc/2XQpe8H

Supporting Newsletter -#2 – https://conta.cc/3gXZ8bo

10Y INFLATION BREAKEVEN BREAKING KEY OVERHEAD SUPPORT

There are three critical numbers to follow to understand interest rates:

1. Oil Prices,
2. The 10Y UST Yield and
3. The US dollar

One year ago, yields were going down, oil was going down, and the Dollar was going up. Today, Treasury yields are going up, oil is going up, and the Dollar is going down!

Alarm Bells should be going off as this is exactly what happens in a poorly run “Banana Republic”!

This is because we are facing structural regime changes in the US economy.

• Real Rates are negative in the US and are now one of the lowest in the world. A year ago, the Dollar was the only major currency offering positive real rates. Money follows real rates like water flowing downhill. As a result the US Current Account can soon be expected to come under pressure.
• The US Election has solidified the fact that the US is moving away from sustained energy independence with the Biden executives orders cancelling the Keystone pipeline and the halting of oil and gas activities on Government land.
  • Oil production in the U.S. is collapsing. 
  • The Texan wildcatters have lost out in the price war against the Saudis and the Russians.
  • U.S. oil production has already gone down 2.5 million barrels per day and is slated to go down by another 2.5 million over the next twelve months, because every major oil company is cutting capital expenditures.
  • Chevron and Exxon capital spending plans over the next five years are at half the level they were in 2014.
  • As the U.S. economy picks up after Covid, America will be importing oil on a massive scale again. 
  • The U.S. will be back to exporting $100 to $120 billion to the rest of the world, mostly to places that don’t like America, who will turn around and sell those Dollars for Euros. (This is bearish for the Dollar.)
• The US Twin Deficits (Current Account and Trade Balance) can also be expected to reverse and re-accelerate lower with MMT polices looming ahead.

These factors almost assure the US dollar will weaken, likely starting sometime in the spring.

As a result we can initially expect 10Y UST yields to rise since they mirror the 5Y Nominal GDP rate which is recovering along with higher budget deficit financing costs (required to attract Foreign Direct Investment).

The US is trapped. The decision will soon be to either let inflation run unabated or let the US$ fall (or likely some combination)!