Gordon T Long

Gordon T Long

Global Macro Research | Macro-Technical Analysis 





What exactly are we afraid of? It was always a safe bet that there would be an inflation scare at some point early this year. Just the base effects caused by the shutdown and the dive in the crude oil price 12 months ago more or less guaranteed that year-on-year comparisons would look scary for a while. As for the official market view, five-year break-evens have moved up to 2.31%. As the Federal Reserve wants inflation to run above 2% for an extended period – isn’t this is outright good news?


The five-year five-year forward break-evens are suggesting that the market is expecting prices to cool and average almost exactly 2% over the coming years. That suggests positive reflation over the next few years, but not a return to a true inflationary regime and psychology. The present inflation pressure is significantly about global supply chains being broken and shortages of most goods are prevalent (enlarge graphic) and an over-leveraged financial system reacting to a temporary inflation scare driving a funding rate scare.

Bloomberg’s John Authers recently reported:

“What has really driven the stock market rotation in recent weeks isn’t a fear of inflation so much as a swift rise in bond yields. In the short term, this might engineer a selloff — but that is due to the mathematics of leveraged investing, rather than the discount rates for future cash flows.

Tom Tzitzouris of Strategas Research Partners suggests that stocks have avoided an overall selloff because yields have barely touched what he describes as the “danger zone.” He defines this using a “fair value” metric for yields. On this definition, fair value is the expected cost of carry, which should generally be close to the consensus expectation of the neutral fed funds rate over 10 years. Tzitzouris’s model posits that a danger zone is reached when the the actual yield exceeds this fair value by 15 basis points or more. And the market has shown a remarkable ability to flirt with that zone so far this year without going significantly far above it:



Compare and contrast with the infamous “taper tantrum” of 2013, when bond yields shot up in response to a shift in messaging from the Fed’s Ben Bernanke. On that occasion, yields spent the better part of two months in Tzitzouris’s danger zone. This led to an initial fall in U.S. stocks, and then to severe problems for a range of emerging markets.

Why does it work that way? Tzitzouris suggests it is because of the wide use of leverage.

For leveraged investors using popular models based on value at risk, it needn’t take a rise of more than 20 or 25 basis points to force them to close a position — which means selling stocks. That is what happens if the rise happens quickly. If the rise happens slowly, and remains below the danger zone, they can take evasive action by rotating toward stocks with cheaper valuations, rather than bailing out of equities altogether. The speed of the increase matters.

So far, the rise in bond yields has been enough to force a big rotation within stocks, but not one at the level of asset classes, from equities back to bonds.

Thinking through the intuition further, if a rise in bond yields is due to higher growth expectations (which is the case this time), and those expectations also raise expectations for future earnings, higher rates can be dealt with, at least in the models that investors use. When rates rise due to a change of philosophy by the Fed (as in the taper tantrum), or due to an attack by bond vigilantes, then this is much more damaging to the stock market. 

So far, this increase in bond yields hasn’t been anything like 2013.

It is a fair guess that if real yields were continuing to move upward in a straight line, as they did in spring 2013, stocks would be staging quite a selloff. But they aren’t. The latest inflation numbers helped stall the rise in bond yields.”


It could be a while before we can discern the outlines of whether we truly have a secular shift toward higher inflation.People who seldom get these things wrong, like Dr Lacy Hunt say no to any evidence of such a secular shift as he continues to stay long the US long term bond.

If we consider non-fiat money like Gold and Black Gold, it suggests things are only trying to normalize towards a post Covid era..



The 800# Financial Guerrilla is the Bond Market which always leads the stock market. Problems for the stock market are normally seen in the bond / credit market first!


Additionally, we often see looming problems for currencies on the horizon. This is also showing as the US dollar normally tracks the “Twin Deficits”

“The very fact that markets reached all-time highs while global economies, GDP’s, employment rates and social conditions reached new lows in the backdrop of a world-wide shutdown, ought to have everyone, including those who know nothing about free market capitalism, scratching their heads. This is because there is no such thing as free market capitalism in a world where central banks, eight key commercial banks, and one or two global “institutions” (hint: IMF and World Bank) have effectively and completely taken over, as well as distorted, almost every aspect of the natural supply & demand forces to which we and Adam Smith once swooned.”

Matthew Piepenburg via GoldSwitzerland.com,



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