Unless we are headed into a hyper-inflationary period such as that we saw in the mid 1970s and early 1980s.
This is a nuanced situation. Most people writing about inflation and rates or programming computers that implement trading programs to react to news that might change their trajectory do not get the complexity of what they are writing about. They operate with the simple proposition that both are bad. Most have not studied the issues facing the market 40 years ago. Many were not even alive. A moderate increase in rates and inflation (not runaway) would be very beneficial. If you, in your heart-of-hearts, believe that type of severe environment is on our doorstep, and if you are really good at market-timing, be my guest … SELL!. If the moon, the sun and the stars align you will save yourself a lot of pain. If, on the other hand, inflation and rates move up at a gradual pace over the next few years you could be missing out on another wonderful leg up in the current bull market.
I’m in the moderate pace camp
Why? Because I believe we are in the beginning stage of coming out of a two decade period of severe deflationary pressures caused by the advent of world-wide competitive labor and capital markets … in a word, globalization. Globalization has kept wage growth in check in the developed world and it has kept pressure on manufacturers to keep prices low to compete with foreign made goods. In the case of US corporations global competitive pressures have removed an important tool from their growth tool box … PRICING. For most of the past 20 years corporations have had to rely on unit growth and financial engineering (mergers and acquisition and stock repurchases) to move the profit ball ahead. There has been no pricing. Globalization continues to be a drag on inflation and will probably continue to be so moving forward. This would bolster the case for a measured pace on the inflation front and, as the price of money in part depends on inflation, it would seem to auger well for moderately rising rates. My sense is, based on every Fed pronouncement I’ve heard, this is where the Fed’s collective judgement is today.
In the meantime most central banks, including the Fed, have been on a mission to re-stimulate some inflation. Remember, this is a good thing if it gives corporations some pricing power. Since the United States entered the re-inflation game much earlier than most world economies, we may begin to see the benefits earlier than most. Take this headline from Monday April 30, as an example: “McDonald’s shares soar as menu price increase feeds earnings beat.” McDonald’s stock rose almost 10 points (6.3%) on that news, closing up 4.2% on the week. And it was not just the US that made ‘”Mickey D’s” numbers. The strength was global. Although McDonald’s leads with its cheap-eats menu, it seems consumers are stepping up and paying higher prices for their premium offerings. The money printing may finally be working.
The important point here, as it pertains to future earnings for many companies, is that PRICING has been a missing ingredient in the profit equation. It may be on its way back and may provide significant future earnings upside surprises.
Media Schizophrenia
According to Psychology Today:
“Schizophrenia is a disabling, chronic, and severe mental illness that affects more than 21 million people around the world. Symptoms include hearing internal voices, having false beliefs, disorganized thoughts and behavior, being emotionally flat, and having hallucinations. These symptoms may leave a person feeling fearful and withdrawn. Their disorganized behavior can be perceived as incomprehensible or frightening to others.
People with schizophrenia may not make sense when they talk. They may sit for hours without moving or talking, or may seem like they are talking to themselves.”
Schizophrenia is obviously nothing to joke about. It is a serious mental disorder. However, there are certain symptomatic traits that the schizophrenic personality may have in common with the financial media. They are highlighted above and exemplified below.
Here are 2 headlines from the CNBC web site pre-market Friday, May 5. Both reflecting a reaction to the April Jobs Report … First the headline numbers from the Wall Street Journal.