Deltec Think About This Will Repression Hit The Inflation Target? | Page 5

Think About This
INVESTMENT RESEARCH
This may be no surprise, but it is important to consider what this message implies in terms of their actions
and reaction functions, and to judge the likely success of this new approach. In short, their new approach
justifies more stimulus. The rate of Central Bank balance sheet expansion may have hit a record and the
size of their asset purchases and support programs may be vast, but they are saying they can do more, and
that they will do more. This step towards price level targeting, the stimulus it justifies, and the ongoing
financial repression only helps our cause.
But will the Fed’s extreme monetization succeed in generating inflation? This question is key because if
they do, the bond market (and then every other market to various degrees) will get punished. Markets are
pricing near zero interest rates into perpetuity. Any shift in this status quo will have massive repercussions.
Through commodities, through dollar weakness and the emerging market stimulus this generates, and
through asset prices themselves maybe they have a chance to generate an inflation overshoot. But
double-digit unemployment, weak balance sheets, globalisation, and technology driven deflationary
forces are all very powerful. Nothing they’ve tried thus far has worked. So we are skeptical that the Fed will
succeed in generating inflation any time soon. Their foot will remain heavy on the stimulus pedal, the
financial repression will continue as will the current trajectory for real assets and alternatives.
US 10 YEAR GOVT. BOND YIELD VS. 2 YEAR BREAKEVEN INFLATION EXPECTATIONS
US 10-year Bond Yield
US 2 Year Breakeven Inflation Expectations
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
2010 2012 2014 2016 2018 2020
US 10 Year Govt Bond - 2 Year Breakeven Inflation Expectations
Sources: Bloomberg, Deltec
www.deltecbank.com
Deltec Bank & Trust Limited