The global securities market got a surprise recently when U.S. core consumer
price inflation crept up to 2.3% year over year in the month of August. This
closely followed core measure, which strips out the more volatile food and
energy costs, increased 0.3%; this was the biggest rise in core CPI since February.
According to the government, while the costs associated with food and energy
decreased, price increases came primarily from medical care commodities and
medical care services. According to the Bureau of Labor Statistics (BLS), the
prices for medicine, doctor appointments, and health insurance rose the most
since 1984.
Unfortunately, it doesn't appear that consumers will have any relief from
the rising cost of health care. According to Freedom Partners the average state
increase for health insurance premiums under the Affordable Care Act was 15.1%
from 2015, as the promised premium reductions from Obamacare circles the drain.
The rise in health care costs stands as another glaring example of the negative
consequence of supplanting free-markets with government control. Demonstrating
once again how flawed Keynesian economic policies inevitably lead to stagflation.
Unprecedented debt levels, massive money printing and intractable asset bubbles
have failed to produce viable growth. And with the "stag" firmly in tow, it's
only a matter of time before the "flation" kicks into full gear.
But once inflation targets are finally achieved, central banks will be forced
to either rapidly raise interest rates, or sit back and watch the free market
take charge and do it for them.
In our current low growth and incipient inflation environment, central banks
have embraced the role as master to the subservient financial markets. And
for the past eight years, equity prices and bond yields have moved in Pavlovian
fashion to every dovish or hawkish utterance out of a central bankers' mouths.
But let's not forget, at the height of the 2008 financial crisis these same
markets were nobody's lackey. The stock market dropped over 50% despite the
fact that the Fed was busy slicing interest rates from 5.25%, down to 0%. The
truth is that governments and central banks only have the ability to control
markets for a relatively brief period of time and eventually market forces
always prevail.
Therefore, ultimately inflation will supersede central banks in their ability
to control the yield curve. This will be especially shocking to people like
Haruhiko Kuroda, the Head of the Bank of Japan (BOJ), who recently had the
audacity to proclaim he can peg long-term rates at 0%, despite having an inflation
target that will now be allowed to rise above 2%,
Recently, we received a small taste of how this may play out when a handful
of individuals on the FOMC a.k.a. (the Federal Open Mouth Committee) and the
President of the European Central Bank, Mario Draghi, forced markets to consider
there may someday be limits to their monetary policies. This caused the Dow
to shed nearly 400 points in one day and pushed long-maturity Treasury yields
much higher.
Bond yields in developed markets also rose in tandem. In Japan, yields rose
from -0.28%, to 0% and in Germany yields jumped from minus 0.19%, to 0.01%.
But more importantly, commodities, bonds and stocks all dropped together--for
a few volatile days markets gave investors nowhere to hide. This is a small
preview of what lies in store for financial markets once the thin veil is removed
on this artificial and tenuous global economy.
Just imagine the shock to bond prices once Mr. Kuroda is successful in creating
his newly espoused "overshoot" on the 2% inflation target in Japan; especially
after pegging the 10-year at less than or equal to 0% for so very long. Yields
will spike aggressively in an attempt to price in rising inflation, an insolvent
government and the mandatory removal of the BOJ's bid. That means yields will
surge 100's of basis points in a relatively short period of time. And since
the bond market is global in nature the end of the Japanese bond bubble will
send yields soaring worldwide.
Manipulated markets can't last forever and never end well. Currently, every
market on the planet is extensively mispriced because every asset's value is
a function of sovereign debt yields that are now under the control of world
central bankers. However, such an ability to dominate markets is temporary.
And once yields normalize the entire economic charade, which has been based
on a global artificial wealth effect, will come crashing down.
