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All Inflation Is Transitory. The Fed Will Be Late Again


  • While the "sell signal" remains intact, not surprisingly, the breakout above the consolidation on Thursday failed, with the selloff on Friday putting the market back where it started the week.
  • There is a significant difference between a "recovery" and an "expansion." One is durable and sustainable; the other is not.
  • The "frenzy" of investors to get into the market is unlike anything we have seen since 1999.

inflated dollar
Photo by photoMacgyver/iStock via Getty Images

Market Review & Update

Last week, we said:

"The market is trading well into 3-standard deviations above the 50-dma, and is overbought by just about every measure. Such suggests a short-term 'cooling-off' period is likely. With the weekly 'buy

This article was written by

Lance Roberts profile picture

After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; I have pretty much "been there and done that" at one point or another. I am currently a partner at RIA Advisors in Houston, Texas.

The majority of my time is spent analyzing, researching and writing commentary about investing, investor psychology and macro-views of the markets and the economy. My thoughts are not generally mainstream and are often contrarian in nature but I try an use a common sense approach, clear explanations and my “real world” experience in the process.

I am a managing partner of RIA Pro, a weekly subscriber based-newsletter that is distributed to individual and professional investors nationwide. The newsletter covers economic, political and market topics as they relate to your money and life.

I also write a daily blog which is read by thousands nationwide from individuals to professionals at www.realinvestmentadvice.com.

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Comments (53)

Lance Brofman profile picture
In the past, fears of higher inflation have caused the Federal Reserve to preemptively raise interest rates. That has typically been how the expansion phase of the business cycle ends. This tightening was thought to be required, since monetary policy impacts economic activity with long and variable lags. However, Chair Powell has explicitly stated that the Federal Reserve will not consider raising rates until after inflation definitively has exceeded its 2% target. Furthermore, transitory inflation does not count, and in any case, there will be no tightening until employment reaches the pre-pandemic level. That would require about 8.4 million more jobs than indicated in the recent employment report.
There have already been some upticks in the inflation indices and spikes in the prices of some commodities, such as lumber. GDP and payroll employment are expected to grow rapidly in the next few quarters as the economy rebounds from the pandemic. Many consumers are flush with cash from the various pandemic relief/stimulus programs. There is some pent-up demand for travel and leisure activities that were restricted by the pandemic.

The question arises as to whether the already observable and coming inflation, is transitory or permanent. In the travel and leisure sectors, prices are rising as many hotels and airlines are operating at reduced capacity. One travel expert recently said:

…As demand spikes, supply will struggle to keep up, causing travel to become more expensive. Many hotels, bars, tours and attractions are still operating at reduced capacity; rental car agencies downsized their fleet to cut costs; and more people are clamoring for all of the above…
An increase in prices due to pent-up demand, simultaneously with reduced capacity, would appear to be the definition of a transitory price increase. Of course, the most important definition of a transitory price increase is whatever the Federal Reserve thinks it is.

The premise for higher inflation is that supply shortages and reopening of some parts of the economy that had been restricted because of the pandemic will combine to put upward pressure on prices. There certainly will be higher utilization of some resources in 2021. There are also some resources for which, demand may not recover to pre-pandemic levels in the foreseeable future. Working from home reduces the need for office space. In addition, not commuting to a workplace reduces fuel consumption and reduces demand for prepared food.

There are bottlenecks in products such a construction material, especially lumber. The boom in new residential construction is concentrated in some areas. Some of the housing boom is due to people moving from one region to another because of the pandemic. The price of existing houses has been boosted by many homeowners being unwilling to put their homes on the market, due to a reluctance to allow strangers in their homes during the pandemic. These housing and lumber price increases appear transitory.

There is uncertainty as to how much inflation will occur and whether it will be perceived as transitory or permanent. Even assuming the worst case of significant inflation that appears to be permanent, there is then the question of what will then be the impact on interest rates. Forty years ago, that would have been a silly question. Everyone then knew that higher inflation was associated with higher interest rates.

Today, it is not a certainty that higher inflation will cause higher interest rates. For advanced economies with stable political systems and rule-of-law governance, higher inflation might not cause higher interest rates. If inflation increases, but interest rates do not, then real interest rates become more negative. Forty years ago, most believed that persistent negative real interest rates were not possible. However, then there was also a much stronger view that persistent negative nominal interest rates were not possible. The trillions in securities today trading with negative nominal interest rates, suggests that persistent negative real interest rates are possible.

One scenario that could occur, would be that short-term interest rates, which are controlled by central banks remain low, but long-term rates increase. This would be a steepening of the yield curve. That would promote carry-trade investments, such a mREITs which generate income from portfolios of longer-term mortgages and mortgage-backed securities, financed with short-term borrowing..." seekingalpha.com/...
Djreef1966 profile picture
@Lance Brofman When buyers willingly pay higher prices, as Buffet and others have pointed out, inflation won’t be transitory. I’m afraid we’re stuck with this for awhile.
@Djreef1966 , How many years?
Djreef1966 profile picture
@kimbillro some prices may be more or less sticky permanently (or for a very long time) dependent upon scarcity.
We pay a lot of attention to the Fed the Fed the Fed. Maybe not enough to an interconnected fragile global economic and financial system. Total global debt is approaching $300 TRILLION. 350% of global GDP. An astounding amount of that GLOBAL debt has the quality of sewer gas.

IMO inflation that matters is already far above the Fed’s delusional 2%. Take a peek at lumber and fuel prices, housing prices. But the Fed is now trapped like a rat in a shoebox. They should lightly tap on the monetary brakes ..... NOW. Stop buying an obscenely dumb amount of bonds before they are chasing the horse that is out of the barn and five miles down the road.
@Lipstick43 Judgement day will arrive sooner than later.
@LIBERTYORDEATH END THE FED , Don't worry, a top will be hit this year!
terryongarland profile picture
Starting home remodel..new cabinets..yikes !..a sheet of kiln dried American plywood $70. Lumber futures up 7% today...
Yes, I will change my plans..those existing cabinet boxes are gold..will reface instead. I am adjusting..but people the world over will act in their best interest too.
Real inflation is 10% … Just ask any housewife… Feds do not want to measure accurately… COLAs for SS and others would bankrupt Government… We are all trapped….
@AZ BOY I think my ammo kept up with inflation and then some. Time for hard assets?
Zakhal profile picture
I was waiting for sp500 to go 4300 but now it and many other assets are stuck on a tight range that could break either way. Im waiting for them to start move this or next week.
@Zakhal , It's hard to get in front of the move.
Zakhal profile picture
@kimbillro Sp500 is doing small break now, the decision is happening this week. If this correction stops dead then we might see 4300 soonish. Tesla broke under its channel. Its time to decide.
@Zakhal , It's dangerous because there is a ton of leverage and everyone is in. If it buckles too far the little guy will get killed with margin calls. Margin debt is the highest in history. Since I sold quite a while ago I think I'll take my late morning nap.
Also: The Value of the Dollar
Ludwig Von Mises once wrote" Government is the only agency that can take a valuable commodity like paper, slap some ink on it, and make it totally worthless." That is what is happening now.
@1941joefat , The ink WAS valuable too!
@1941joefat the quote of the week!
This man is a genius. I cannot disagree with anything he has outlined. Where do we go, if we have massive cash reserves on the sidelines? 20 years ago, I knew, but today, I still wonder if owning swiss francs would be something to own. They do not print money. They run surpluses every year, if my memory serves me correctly. There is going to be a great deal of money made shorting the right ETF or just going long the SDOW. What do you think Lance? on a timely basis that is.
@1941joefat , The swiss print money but buy the best stocks they can like FAANG.
@1941joefat you could consider diversifying. Buy some gold, some VXX and SPXU, a bag of rice, prayer beads, and an AK47! 😉
stoney500 profile picture
@1941joefat Tried that! Outcome? Definitely a bad idea.

Idea makes sense and is true but that helps you make $$ by ZERO percent.

When has the Fed ever gotten it right. They are the cause of the boom and busts. Your right they are between a rock and a hard place. They will be totally unprepared for the housing meltdown 2.0 in the next 3 to 6 years.
The Fed needs to put on their big boy pants and slow down the stock and housing market’s by taking baby steps and start increasing rates.
@markmaui they don’t even need to do that. All they need to do is TALK about raising rates. And yet....they won’t even do that.
Which tells you something. They’re pedal to the metal. If they do an orderly drawback they’ll get blamed for every 100 point drop in the market. If they do nothing and it implodes.....oh well! Not our fault. Evil corporations, capitalism, the RICH! Did it. Much better way to go.
Or they could blame Robinhood investors.
@anon_cowrd , They will blame those that live from paycheck to paycheck for not spending enough money. "Lock the hoi polloi up!"
we are all pawns in Fed game.
@anon_cowrd , Who's the rook?
It's scary. Years of kicking the can down the road by all politicians.
@Pippy54 don’t worry they’ll be fine. They can always confiscate more public money.
@dynx , They control the printing presses.
@kimbillro That's how they confiscate it...
The thing that will kill this market is inflation and Biden’s tax hikes.
Not to mention unneeded stimulus. I wish someone would steal the freaking printing press.
@markmaui , Some people are down to wishing for an old time bear market.
KT Investments profile picture
The CPI table doesn’t make sense to me. If you mulitiply last column by weights you will get 6% not 2.64%. What am I missing?
Djreef1966 profile picture
@KT Investments ya, those percentages don’t look right.
@Djreef1966 , Where did they come from?
Djreef1966 profile picture
@kimbillro The Eight Components of CPI chart above.
As of the May 3rd market close, SPY's 50-day SMA is 399. 3-Standard Deviations above that SMA is 439. Market close today is 418. We are not above your article's initial premise. In fact, SPY's 50-day, 2- Standard Deviations is 426 (again, market close is only 418).

I am using StockCharts Bollinger Band calculations to establish 50-day SMA and deviations from it. Either you or StockCharts calculations are wrong.
13414652 profile picture
Powell is stuck in a trap of his own making, now frantically denying reality.
The bromidic snollygoster in the White House is now the prisoner of the Fed, although he and the Congress fail to understand their impotence.
The Four Horsemen are in the wings. Or is that the Headless Horseman?
I can't wait for the next chapter.
Never in my life have I heard the term "bromidic (trite) snollygoster" (shrewd, unprincipled person, especially a politician) let alone used on a financial site. Just had to look it up!
13414652 profile picture
@jvictor777 In so many ways this person of limited ability and even more questionable credentials is, despite being the oldest person to have taken office as president, so apt for these grubby, shabby, shallow, manipulated times, as he regurgitates meaningless buzzword twaddle, written by those others who really pull his strings, and barely understood even (or perhaps especially) by himself. Such a pitiable spectacle, relieved only by the presence of "Dr" Jill by his side, ever ready to whisper in his ear to tell him the day of the week and where he actually is and why.
The previous President was equally pathetic, (obviously for different reasons).
Richard S. Daskin CFA, CFP(R) profile picture
The Fed has stated that they want to be late. They are trying to target average inflation and have fallen short of their goals in the past. So, they are really trying to hit something north of 2% for some time. The path of the virus will largely determine growth and profits over the next 12 months. Smart policy can increase growth rates in the future. But it won't just happen.
@Richard S. Daskin CFA, CFP(R) only policy I see in the near future is geared to strangling growth.
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