Inviting the Vampire

By -

Nosferatu's Shadow

Dear SOH, I love October and Halloween, don't you?  😉

This article in no way pretends to be real, actionable analysis like that which appears in Notes From the Rabbit Hole (NFTRH) each week.  Rather, it is just a metaphorical riff on a big picture macro economic theme that is currently in play.

Setting the clock back to January of 2011, we find long term Treasury bond yields hitting a critical high along the 'continuum' and finally beginning to signal an end to the inflation hysteria – born of the previous Fed sponsored QE campaign – as illustrated on the blog in May.  At that time, it was noted that the Wizard (metaphor temporarily switched to 'Vampire' for today's article) was powerless to work his magic against an oncoming economic contraction in the face of inflamed inflation expectations (long term yields at a 'do or die' breakout point parameter) and a then rising 'austerity' movement in the US.

Well, you see in the picture above (source info) that times are much different, a mere 6 months later.  Indeed, austerity has been cast to the scrap heap as the usual macro-managers come out of the woodwork, one after another, and invite the Vampire back into our homes.  You know the legend is that the Vampire must be invited in, don't you?  There is nothing like decelerating global macro-economic fundamentals and caving asset markets when it comes to inviting the Vampire to do his work.

Why are we using the Vampire as the metaphor for the US Fed (and I might add, its counterparts the developed world over)?  Because they are now being called upon… invited to provide more policy – in the name of asset price inflation – that is ultimately destructive to would-be normal, healthy economies that thrive on productivity and investment of capital toward these things of productivity and value.

In short, more inflationary policy creates more macro debt burden, provides potential asset price inflation and a growing overhang from which many economies will fail to recover (insert here the macro subplot in Greece and the PIIGS in general, which are just a tip of an awfully big iceberg) as inflationary policy sucks the life out of a real economy over time and cycles.

So we have come full cycle.  The updated chart of the 'continuum' is in a picture, an invitation.  The most recent red arrow indicated a time when the Vampire was reviled and politically scorned.

The 'continuum' AKA secular trend in 30 yr yields

Now we have a different atmosphere – expected by this writer and indicated by the chart above so many months ago – with deflation and systemic collapse at the forefront of the collective financial and economic mindset.  Austerity?  Please, give me a break.  The Vampire has already received his invitation, but having been scorned so soundly earlier this year, he sits back and lets the call become louder by the week.

The balance of current NFTRH analysis holds that he may await a final capitulation to be sure that the invitation is near unanimous.