Something strange happened in the markets last month that signals trouble ahead…
When stocks fell from their September highs, you would have expected investors to run for cover in the world’s safe-haven asset – US Treasurys.
But that’s not what happened.
While stocks were plunging, Treasurys also fell. Yields on 30-year Treasurys increased to 3.4% from 3.22% (and yields have already more than doubled from their 2016 lows).
It’s a sign that the market is worried about the US government’s ability to pay its exploding debts and that inflation is creeping back into the market. That makes me a bit nervous because we haven’t seen inflation in a decade.
We’ve seen an increase in oil prices, food prices, rent and many other things that eat into people’s savings. Unemployment is low and US wages increased 3.1% in September (the highest in nine years). And core inflation is already running above the Fed’s target of 2%.
In general, inflation is nothing to panic about. The Fed is supposed to raise rates when inflation heats up, which it’s been doing.
But as rates have moved higher, we’ve already seen stocks and real estate fall.
The entire financial system has been dependent on super low rates for the past ten years. The Fed held rates at zero for a decade and printed trillions of dollars.
The increase in prices and interest rates to date is only the beginning.
Just take a look at what’s happening in the economy right now…
Food companies like Coca-Cola, Mondelez, Hershey and Kellogg are all raising prices as both ingredient and transportation costs increase. Kellogg’s CEO recently said in an interview, “We think 2019 will be more inflationary than we have seen historically since the recession.”
McDonald’s and Chili’s both raised prices.
Airlines are paying 40% more for jet fuel than they were a year ago.
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