Did the Fed Really Kill Inflation Last Week?

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by Graham Summers of Gains, Pains, & Capital

The financial media is awash with gurus and pundits who argue that inflation is over because bond yields have fallen.

None of these people are acknowledging a key fact however…

That fact? That Bond (and their yields) are the single most manipulated asset class on the planet. As I write this the Fed is buying $80 billion worth of them every month.

This is twice the amount the Fed bought during its previous record during QE 3. So it’s a little difficult to argue that an asset class is reflecting reality or market conditions when a central bank is buying nearly $1 trillion of it every year.

This is particularly true when you consider the “dumb money” component of what the Fed is doing.

One of the most common adages in investing is the famous phrase, “buy low and sell high.”

What this means is that your goal should be to invest in something when it’s cheap or trading at a “low” level… and then sell it when it’s expensive or trading at a “high” level for a profit.

What this phrase leaves out is that in order for something to move from” low” to “high,” it will require a greater number of buyers (or more capital) to buy it, pushing it up.

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This is the “greater fool” or “dumb money” part of investing: namely, that unless you are buying something specifically for its yield or payment, you are basically buying it in the hope that someone else will want to buy it from you later at a higher price.

Normally, when you’re buying something, this is just a hope. But thanks to current Fed policies, when it came to buying US Treasuries over the last 16 months, you had a guaranteed buyer lined up every single month.

Put another way, the Fed has been literally broadcasting to the bond markets, “hey everyone, going forward we’re going to be buying bonds at various fixed intervals… oh and by the way, we won’t be too picky about the price we pay.”

Put simply, the Fed has provided the ultimate “dumb money” buyer to the bond markets: a buyer who literally broadcast in advance when he would be buying and made it clear that price was not an issue.

The deflationist crowd believes that the Fed’s recent shift in policy stopped bond yields from breaking their downward channel (blue lines in the chart below)… but the reality is that it was highly unlikely that bond yields would break this on the first try, no matter what the Fed did.

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Remember, the only time these yields ripped through that top blue line on the first try was in 2018 the Fed was raising rates every three months while also shrinking its balance sheet by $50 billion per month. This was the single most hawkish Fed policy in history.

So, it’s not unusual that bond yields took a breather here. And those same deflationists better pray that yields are not forming a bull flag here. Because if they are, then we’re moving into an inflationary framework and their entire world view is wrong.

On that note, we have published a Special Investment Report concerning FIVE secret investments you can use to make inflation pay you as it rips through the financial system in the months ahead.

The report is titled Survive the Inflationary Storm. And it explains in very simply terms how to make inflation PAY YOU.

We are making just 100 copies available to the public.

To pick up yours, swing by:

phoenixcapitalmarketing.com/inflationstorm.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

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