After the Taper, Inflation

• It gives an incentive to the banks to finally start lending funds out into the economy due to the 'carry' spread (a profit mark up for lenders over their cost of borrrowing. Specifically because of the gap between rising long-term yields on Treasury bonds and the officially-held zero rate of the Fed Funds.
• It could be a positive for gold and commodities as 'price' signals in the economy finally start to gain traction (the last two ISM 'prices' data were quite elevated) as a long-bemoaned lack of 'velocity of money' (i.e. deflationary drag) transforms, at least temporarily into a phase where inflation drives up costs.
• It's an inflationary fix and is part of the reason we have followed the bank sector's leadership in the stock market. They would benefit. Precious metals and commodities could benefit as people chase price signals and think "uh oh, INFLATION!" (although it should be noted that a period of 'cost chasing' and inflationary hysterics is not the preferred long-term fundamental underpinning for gold; ongoing economic contraction is).

"The Bank Index ratio to the S&P 500 (BKX-SPX) is breaking out to the upside in defiance of a bear case in stocks. The BKX has modestly led the SPX since 2011. We have noted that this is a necessary bullish factor for the financialized economy, which is quite different from a real or organic economy.

 

"Remember the 'carry trade' of the Greenspan era? That would be the same carry trade that helped bloat the banking sector, putting its big, fat too big to fail hands in just about every cookie jar in America. 

 

"The banks love rising long-term yields because they basically receive free money from the Federal Reserve as the first users of newly created funds on the short end, which is being held down by ZIRP. They then roll these funds into loan products, mark them up per long-term yields and voila, instant profits courtesy of a 'borrow short, lend long' gimmick. 

 

"Let's see how this develops, but we should note that Bernanke has not created anything new under the sun. The great carry trade of last decade was just another unnatural systemic stress that led to the 2008 resolution.

 

"Do you suppose that Fed officials are ready to let the banks do the heavy lifting, now with the incentive (carry) to get the funds 'out there' to the public? This condition came hand in hand with an inflation problem last decade and now that everybody seems to know there is no inflation, would not a new phase of rising inflation expectations go well right about now?"

"It's worth mentioning that the bottom in loan growth just happened to correspond to the start of Fed's taper. Coincidence?"

"The key to this change in trend is that improvements in loan growth have been primarily driven by a sudden jump in corporate lending. Why is corporate America increasing its borrowing all of a sudden? The most likely answer is the improvement in capital expenditures (capex), which is evidenced by firmer capital goods spending by US companies."

"Thus the similarities in timing of the bottoming of loan growth in the US and the start of Fed's taper may not be a coincidence after all."