This Will Be the Spark

Putting to one side the omnipresent "Black Swan" risks of Japan's markets imploding, the Euro Zone going bust, China/Taiwan, North Korea, and of course Russian/Ukraine, the far more imminent risk as I see it is inflation surging back higher in the face of a Fed Chair staying stubbornly methodical and hellbent on not surprising markets. 

But what Jay Powell does not realize is that in order to effectively swat down inflation long-term, a Fed Chair must be willing to be the villain--This is something I noted last year, and still very much believe it despite the rally in equities. Surprise rate hikes in between FOMC's, surprising announcements of higher QT, not couching every rate hike with some dovish future promises, not always relying on being "data dependent," are all tactics Powell has refused to use, so far, but are eventually going to be necessary as this inflation is clearly entrenched. If equities were correct in their diagnosis that inflation was defeated then we would have already seen rates sink back below 2% on the 10-Year. 

Instead, rates are back on the move higher to dovetail the moves in cocoa, rice, orange juice, gasoline, among other commodities which have been surging this summer. 

Rates on the 10-Year moving back above 4.1% to breach the highs from earlier this month will be the spark, as Powell will have to move off his steady, methodical modus operandi and slam on the brakes of the economy to have a chance at slowing down the resurgence of inflation. 

As for TLT, the ETF for Treasuries (inverse to rates), the sheer amount of bullishness on buying bonds from veterans fighting the last war (deflation) rivals the absurd euphoria in the Nasdaq at the moment. That, too, will pass. 

But not before we see the deflationists tap out.