Warning: The Smart Money And The Smartest Money Both Smell Inflation

January 11, 2018

If you want to make money investing, you first need to understand the structure of the asset classes in our current financial system.

Everyone likes to go bonkers over stocks, but the reality is that the stock market is in fact one of the smallest and least liquid markets on the planet. All told, US stocks are roughly $26 trillion in market cap.

By way of contrast, the US debt markets (Treasuries, corporate, municipal, local, etc.) is well north of $60 trillion.

And the currency markets (which cannot be accurately measured because every trade involves a currency pair) trades over $5 trillion per day.

Put simply, currencies are the “smartest” money, followed by bonds, and then finally stocks. So when a seismic change takes place, currencies and bonds pick up on it LONG before stocks do.

With that in mind consider that the $USD is collapsing, having gone almost straight down for 12 months.

Now consider that the US Treasury bond market, is falling in price, resulting in yields spiking above their 20-year downtrend.

BOTH of these assets are forecasting the same thing: INFLATION.

Inflation forces the $USD DOWN and bond yields UP.

So we've got both the "smart" money and the SMARTEST money forecasting the same thing.

And it's going to blow up the Everything Bubble.

All of the debt that has been added to the system since 2008 was done so at ridiculous risk valuations courtesy of the Fed intentionally creating a bubble in bonds.

Put another way, the Fed chose to deal with the 2008 crisis by creating a bubble in US Treasuries: the most senior asset class in the US financial system.

However, these bonds trade on inflation.

When inflation rises, so do bond yields.

When bond yields rise, bond prices fall.

When bond prices fall, the Everything Bubble bursts.

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Graham Summers is Chief Market Strategist for Phoenix Capital Research, an independent investment research firm based in the Washington DC-metro area with clients in 56 countries around the world.

Graham’s clients include over 20,000 retail investors as well as strategists at some of the largest financial institutions in the world (Morgan Stanley, Merrill Lynch, Royal Bank of Scotland, UBS, and Raymond James to name a few). His views on business and investing has been featured in RollingStone magazine, The New York Post, CNN Money, Crain’s New York Business, the National Review, Thomson Reuters, the Glenn Beck Show and more.

The Incas thought gold represented the glory of their sun god and referred to the precious metal as “Tears of the Sun.”