Another issue that could contribute to the inflation environment is recent evidence that key foreign investors of US Treasuries are beginning to reduce their purchases. This has pushed certain US mortgage rates up to their highest levels in several years. The importance of foreign investment to the US Treasury market is magnified by the fact that US debt continues to expand. Evidence of the rotation away from US Treasury holdings was seen last month, when Japanese holdings of US Bonds fell to their lowest levels since October 2011. Even a slight removal of foreign buying in the face of expanding supply should mean US Treasury yields will have to increase that much further to attract buyers.


Furthermore, China has recognized the potential threat to their economy from the cycle of tariffs and is moving aggressively to expand infrastructure activity, which should add to wage pressures and to physical commodity demand. However, China’s ability to contain inflation has moved beyond its borders and has become difficult for them to control.


Chart 2: Foreign Holdings of US Treasury Securities (Billion USD) 1250


China, Mainland Japan 1200 $1,171.00 1150 1100 1050 In 3rd place is Ireland with holdings as of 300.2 Billion as of July 2018 1000 $1,035.50


While the energy space isn’t a glaring inflationary force yet, it should be noted that US oil production continues to post new all-time highs at the same time that US crude stocks in the US have maintained a sizable, 78.6 million barrel deficit relative to year ago levels. Record US production is being swallowed up by domestic demand and by expanding exports. US and China refinery throughput levels continue to operate at record levels, which suggests the demand for gasoline and other petroleum products remains high. Demand for energy worldwide is such that extremely low prices in corn and soybean oil are ramping up biofuel production. This may soon provide a floor to grain prices.


Source: US Treasury Dept.


Chart 3: US Weekly Crude Stocks - Current vs Last vs Average 5 Yr Avg


550 530 510 490 470 450 430 410 390 370


Source: EIA Last 2018


The classic definition of inflation is “money chasing money,” and the cycle of tariffs, rising energy prices, rising developing-world wages, and rising interest rates sets the stage for the start of something.


Mark Bowman The Hightower Report E: info@hightowerreport.com


Published on 19 September 2018


This report includes information from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/ or commodity option thereon. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. Any reproduction or retransmission of this report without the express written consent of The Hightower Report is strictly prohibited. Violators are subject to a $15,000 fine per violation.


Another issue that could contribute to the inflation environment is recent evidence that key foreign investors of US Treasuries are beginning to reduce their purchases. This has pushed certain US mortgage rates up to their highest levels in several years. The importance of foreign investment to the US Treasury market is magnified by the fact that US debt continues to expand. Evidence of the rotation away from US Treasury holdings was seen last month, when Japanese holdings of US Bonds fell to their lowest levels since October 2011. Even a slight removal of foreign buying in the face of expanding supply should mean US Treasury yields will have to increase that much further to attract buyers.


The record US debt is mirrored around the world, as many nations loosened money and borrowed heavily to survive the subprime crisis and have yet to work it off. A slight rise in US yields would likely result in wave of higher yields in non-US debt as well, as governments and central banks are forced to compete.


35 | ADMISI - The Ghost In The Machine | September/October 2018


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Million Barrels


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