Inflation Bites

Mentioning inflation is of late becoming more and more a topic it seems. We've mentioned it several times now since it's the least likely event many expect and the government has done everything in its power to hide it from you and the focus has been so long on deflation and slow growth.
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One month ago, Bridgewater's Ray Dalio warned the New York Fed that even a modest, 1% rise in rates, and thus inflation, would lead to trillions in losses and "trigger the worst price decline in bonds since the 1981 bond market crash." Now, it is the turn of Elliott Management's Paul Singer. In a letter to investors seen by CNBC's Kate Kelly, Elliott Management execs warned of essentially the same thing: that a rapid inflation is the $30 billion hedge fund's biggest concern in the current environment, and that such a spike would not only collapse bond prices, but potentially lead to a stock market crash.

                                    
                                                                                                                       
"This may seem like a strange thing to worry about under the current circumstances, but the tide toward inflation could turn rather abruptly," wrote the money managers in their Q3 letter dated Oct. 28. "If inflation starts accelerating to an annual rate of high single digits or greater, it will be quite difficult for the mix of strategies that Elliott favors to 'keep up.'"

However, sudden price hikes were only one of the Elliott team's worries, according to the recent letter. Another is Singer's biggest recurring fear: that the artificial market created by central bankers over the past 7 years will undergo rapid "renormalization." Lingering over Elliott's portfolio management is a persistent fear that central bankers — by collectively cutting interest rates 673 times since the financial crisis — have so upended the natural price levels of stocks, bonds and many other assets, "that the economy and markets are operating in denial of reality."

Paraphrasing from the latest Greenlight letter, sent on the same day, in which David Einhorn said that "we have central bankers who are determined to see flashing lights that aren’t there.... we are more than seven years into an economic recovery, yet central bankers behave as if we’re still in crisis", Elliott writes that "every sniffle is being treated by central banks as acute respiratory distress syndrome worthy of 'code-blues' and teams of frantic pumpers and fixers...  what this policy landscape has engendered is a widespread belief, or at least a strong suspicion, that stock and bond prices won't ever be allowed to go down in any meaningful way."

 zerohedge.com/news/2016-11-02/what-keeps-elliotts-paul-singer-night-spike-inflation-could-leat-market-crash