Gary Tanashian (biwii.com) submits: Two years ago I wrote Frankenmarket Lives, the title of which was a metaphor for a stock market that was stitched together and animated by its creators using inflation of money aggregates whereas the article's namesake, Frankenstein (1931), was given "life" through what might best be called electro-shock therapy.
In keeping with this popular culture theme - because after all, I believed then as I do today that economics and finance, no matter how complicated and/or scary, can be entertaining or at least interesting - Bride of Frankenmarket checked in a year later with a status update of the market monster at a time when the "inflationists" and "deflationists" were going at each other with their particular visions of how the entire mess was going to come apart.
Meanwhile, the public slept through the debate right up until the day the "inflationists" won, which I will define here as gold's smashing of the 700/oz. level after barely taking a breather in the 600's, in a catch-up move to commodities that had gone parabolic due to positive correlations to economic growth and the China bubble, er, story. Frankenmarket tried to keep pace as well, "staggering forward, arms outstretched" eking out modest gains while eating the dust of the spectrum of commodity-related assets running ahead of it. But that was then (all the way back to early/mid May when everything topped out) and this is now.
Boris Karloff's third and final role (there were many more regrettable sequels to come later) as the most famous monster of all time came in Son of Frankenstein (1939). The movie was considered credible but despite having the biggest budget, was not up to the standards of the previous two. If there is to be a Son of Frankenmarket, it will need a bigger budget as well because it will be an exercise in the law of diminishing returns, whereby more and more liquidity (inflation) is required to achieve ever-less satisfying results. In fact, this phase of Frankemarket's journey could become a slippery slope right into Abbott & Costello Meet Frankenstein (1948).
Above, it was mentioned that the "inflationists" won. Well, they did until they didn't. Their spectacular rising star of a commodity bubble flamed out in a fascinating display of greed and fear. For added emphasis the G8, Ben Bernanke, various Fed officials and even John (strong dollar) Snow have signaled that inflation is getting uncomfortably high. This all after the fact of the commodity complex's apparent top. It's those darned "inflation fears" that must be contained. Because if they get out of hand (and what group is more backward-looking than the general public, who finally woke up to inflation at about the time gold savaged the $600 level?) it's skip "Son of" and proceed directly to Abbott & Costello.
So the bond market needs to catch a break. Ten year yields have been in a steady upward march and that must be reversed, even if temporarily, to get those expectations under control. I look at daily, weekly and monthly charts in an ongoing manner. Here is a simple daily chart showing $TNX as still bullish but with downside to the 4.6% to 4.8% area in the near term.
The obvious question here is how much inflation fighting can an overleveraged, over speculated and over gamed economic and financial system take? If the dominos of debt repudiation begin to fall in earnest (deflation) and people begin scrambling for dollars at all costs, will there be any coming back? Rates remain historically low, but that is but one global labor arbitrage away from being kaput. Inflation being "money" creation and deflation being "money" taken out of circulation, it has nothing to do with rising or sinking prices.
This is precisely where the latest sequel of the reflationary cyclical bull market comes in. If there is to be an extended bull beyond the current correction, it will need juice. A lot of it. The returns will likely be diminishing as in somewhat less satisfactory (Son of) or a total joke (Bud & Lou). But we will not know which it will be until the process gets further along, and as part of the process, conventional thinkers and their conventional advisors need to get a whiff of deflation and buy the bond story. If this ends up being more than just a "scare", then forget the cute Frankenstein metaphor and get ready for the Texas Chainsaw Massacre series.