As you can see on the chart below, each deflationary episode (highlighted in yellow) has led to a sharp decline in equities and a sharp rise in TLT (US Bonds) or flight to quality !
I suspect that in the next few weeks we will see yet another deflationnary episode. This will perhaps mark the peak of the long term bull market in US Bond and probably the last QE that Ben Bernanke will ever make !
Because in the long run, as the US Bond market enters a Secular Bear market and with rising interest rates, any additional round of QE will probably lead to "hyperinflation", and no one wants that !
That's why I think that Ben Bernanke will be totally impotent in terms of monetary easing after QE3.
The only thing that Bernanke will probably achieve in the longer run is the collapse of US T Bonds with all the gigantic debt accumulated in the past few years !
In the chart below you can see how I expect thing to unfold. I do however believe that after the next plunge in the equity market there won't be the same spectacular rally that we had in the previous instances, and do believe that equities and US Bonds will start to fall altogether !
Because it will probably be the last QE ! Click click .. no more bullets !