Teeing up the market for the next disaster–Fed obsession continues

— An eight basis point drop in the US Treasury 10-year yield portends Fed action to slow the economy

— Will the dreaded taper come sooner and be at a faster pace than already feared?

—  Inflation … according to one pundit the so-called “whisper” number on the Producer Price Index to be released tomorrow is 10% … pretty hot if correct.

— Again, I ask the question, what is the emergency we face that necessitates a sub 2% or 3% yield on the ten year treasury note?

— Beware, media inspired, data point investing!

The 10-year soars. The yield collapses. The market is gripped by fear of the Fed

As the ‘data point seers’ (those who like to make a big deal of single data points) wait eagerly for today’s Fed pronouncements and the producer price index numbers for November, the 10-year shaved a cool 8 basis points off its yield, trading at one point during the day at a 1.41% yield. This is getting a bit old, as is the fascination to trade on the negative aspects or implications of higher rates and inflation. In my mind greater inflation and higher rates are most certainly signs of a much stronger economy that does not need the ‘life support’ of low interest rates to thrive and survive. I challenge anyone looking at the tapering of Quantitative Easing whether fast or slow would be relevant in this circumstance.

Inflation and the ‘whisper number’

The producer price index is due out this morning before the NYSE opening and there are rumors, “whisper numbers”, floating that it will be a doozie + 10%. This is in the face of street estimates at .05% (vs. .06% last month). This is to be expected in the face of the supply chain disruptions, labor shortages and the generally stronger economy that we have experienced. It comes after decades of muted inflation that globalization gave us. “Transient” was not at all a correct way to describe the inflationary pressures we face. Inflationary pressures aren’t transient. The ability to raise prices will inure to the benefit of corporate earnings, those who own productive assets and many workers at the low end who have seen dramatic increases in their wages since the pandemic. A $7.35 an hour is a relic of the distant past. Meanwhile, higher skilled workers are seeing opportunities/mobility not available to them for years. This was reinforced by the record high 4% quit rate last month. Despite the data point seers out there inflation and the higher rates it will bring may turn out to be a significant tail wind.

Again I ask what is the emergency that necessitate sub 2% or 3% long interest rates?

There is a choir of supposed sophisticated investors who have been advising caution since the earliest days of this secular bull market. They continue to sing their sad song in the face of overwhelming evidence of a strong economy. Cover your ears and beware the temptation to be a media/ data-point driven investor. It is truly an idiot’s game. Stay the course. We have further to go. The most compelling advice I heard Monday came from Richard Bernstein who would “own everything but ‘bubble assets’ tech and crypto, …”

What do you think?