"The Inflation Job" Reality Vs. (Dr.) Jay Dunking Ability
Macro and Micro, Value and Growth, Long/Short Equity, Income (DGI, Bonds, Pref.'s)
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- What does inflation really mean (for stocks)? It may not be as simple as you think.
- Why TIPS are in such high demand? They surely have a very good reason!
- You can run, you can jump, you can score, but can you dunk? One Jay can, the other - unlikely.
- Can (Dr.) Jay deliver a slam-dunk, or is he about to surrender to the mighty, burning hot, Phoenix?
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In the famous movie "The Italian Job", Charlie Croker and his team plan an elaborate gold heist against their former ally, after the latter has betrayed and left them for dead in Italy.
Similarly, in the less-famous "The Inflation Job" reality, Jay Powell and his team plan an elaborate money heist against their former yield-curve ally, after the latter has betrayed and left them with a dead-inflation in the US.
But it wasn't actually dead. Dying perhaps, but not yet done.
And just like the Phoenix, it seems like inflation is arising from the ashes.
After going almost a generation without meaningful inflation, many believe it has been vanquished. Aging demographics, globalization, and advancing technology have held prices down.
Will this remain true in 2021?
Based on investors' appetite for TIPS, and how the breakeven rate keep climbing - 2021 might be different.
In the late 60s, many believed stocks were the perfect hedge against inflation. This line of thinking argued companies could raise prices along with costs, providing a barrier from inflation. This thinking is again present today. But this did not hold true in the 70s.
Below is the inflation-adjusted SPX (orange line) and DJIA (blue line) from 1958 to 1995.
From the 1968 peak to the 1982 low, the S&P 500 lost 65% of its inflation-adjusted value. It was not until 1993 that the inflation-adjusted SPX exceeded its 1968 peak! 1995 for the DJIA!
For nearly 30 years, equities lost purchasing power for its holders.
Inflation took a tremendous toll on these investors in the 1970s and 1980s.
People at the time were painfully aware of how inflation was destroying value, as captured by this famous August 12, 1979 'Business Week' cover.
Yes, the timing of the cover was contrarian, as it came near the end of the long inflation period. But the point was correct. Inflation can destroy stock investors.
Should inflation return in 2021, don't fall for revisionist history that it is good for equities.
On the other hand, the combination of partial (turning full) lockdowns and holiday lull has plunged the economy back to its worst levels from last March.
Of course, this should isn't "suppose" to last for more than another week or so, right?... But, right now, it's bad!
With the breakeven moving past the closely-watched 2% mark, it's only natural (pun intended) that:
- Prices of natural resources keep rising; it's unclear what is the egg and what is the hen, but the two clearly feed each other.
- Bond prices - especially long-duration, lower-rated, credits - start losing steam, following a tremendous run last year.
- Investors (and stock prices) might be starting to take this issue more seriously than they have thus far.
(Dr.) Jay (might be willing to 'everything in his power/Powell', but even he can't allow inflation to jump too high and too fast.
For example, number 6 seems like something Jay - not the Dr. - can't afford...
Even in Europe - would you believe - there are sings of inflationary pressures.
Ok, perhaps 'inflationary pressures' is a big of an exaggeration for the time-being, but if in March there was a near-zero probability for inflation moving than 1%, whereas now odds are about 40% for >=1% - this is a real shift in expectations, at least in European (humble) terms.
In precious metals we trust!
This is the real slam-dunk of 2021, and these are only the early days of the golden-inflationary Phoenix arising from the ashes.
In one hand he is lifting inflationary pressures, and in the other hand he is raising gold and silver to the sky.
Do you dare messing with the Phoenix!?
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