I borrowed part of today’s title from a BMO research report – borrowed from the hit television Zombie Apocalypse series “Fear the Walking Dead”. Beginning mid-November, BMO notes that the current monthly purchase pace will be pared by $10 billion and $5 billon, respectively. And, a similar taper will occur mid-December. The recent Fed statement said that “similar reductions in the pace of net asset purchases will likely be appropriate each month”. It’s anticipated that the Fed will have stopped accommodation by June of next year. Here’s the important thing that I will address in today’s blog: I continue to suggest that the inflation threat, and the corresponding countering by the Fed, will be bigger than anticipated.
Hey, don’t get me wrong. The Fed has now pushed its inflation expectations to longer than their original statements. It now says it expects “elevated” inflation will persist well into next year owing to longer lasting supply bottlenecks and shortages. But don’t worry, they say – it will start “moving down” by the second or third quarter as these supply constraints abate. And this is where I am calling them out. I noted recently that its not just the supply chain that is pushing inflation. Its going to be wage inflation that will keep this inflation party going. Again from the BMO report: With production and nonsupervisory workers’ hourly wages up 5.7% y/y (btw, above both CPI and PCE inflation), and the trend in hourly compensation costs among nonfarm businesses up 4.1% annualized after adjusting for productivity gains the Fed may not be watching for long before it starts “walking” (tightening) again.
As readers of this blog know – we at ValueTrend were very early on the inflation trade, and we have been pounding the table that this “transitory inflation” talk by the fed is self-serving nonsense. Here’s why: In the face of longer termed inflation, easy money policies of the Fed and obscenely large Fiscal spending by Biden’s hard-left policies would be imprudent. And Biden owes the Bernie Sanders followers, who threw their support behind his election. That means social spending, and lots of it….a recipe for piling more wood onto the flames of inflation. Far better to deny inflation now than break the promises to those you owe your power to. Read my comments regarding tax n’ spend MMT concepts here.
As such, now I am seeing the big banks in both the USA and Canada finally recognize what we at ValueTrend have been saying all along. To quote the BMO report “We reckon persistently strong underlying demand, pumped by excess savings and liquidity, will encumber the abatement of bottlenecks and shortages. This will likely result in an inflation profile that—once again—is higher than the Fed anticipated.”
Beware the “Walking Fed” and the “Big Bag of Biden Borrowing”!
No doubt that the Fed will inevitably be forced to address the “threat of more persistent, longer-term inflation” as it becomes apparent that inflation isn’t ebbing as much as promoted. The Fed will likely concede that these risks and threats have escalated to the point of necessitating rate hikes faster and greater than expected. But for now, transitory inflation is the talk – and we know the reason why. I continue to recommend that readers of this blog maintain a presence of inflation sensitive positions. This means commodities, and the producers. It means stocks that benefit from rising inflation (rising interest rates) such as financials. It also means reducing exposure to interest sensitive stocks like utilities.
Finally, above I’ve posted the same Fed-taper chart that I have posted a few times in the past. Don’t fight the Fed, as is said. Fed tapering events are highlighted in red. What happened after every taper? Answer: Pullback!
Sure, inflation is spiking right now, and is likely to pull back a bit in a year or so as the supply chain at least partially works its way out of its dilemma. But, as I have noted before, wage inflation is a longer termed, more sticky type of inflation. And that’s here to stay for a while. And if Biden gets his next round of spending, which is largely focused on social policy (aka non GDP-enhancing) – that will certainly fan the fames of inflation.
Beware the day that the market wakes up to the fact that this is not transitory inflation.
Beware the need by the Fed to counter that inflation.
Beware the Walking Fed!
Your thoughts do sound ominous!
What is your current cash position?
Do you still expect markets to rally through November and December?
Well, ominous for some parts of the market –particularly highly leveraged stocks in the technology and high growth sectors. But GREAT news for commodities. In fact, some day…even gold!
Markets would pull back on the heavy influence of the growth stocks – but commodities would rally, and insurance in particular may be ok as rates rise (they often hold exposure to short termed bonds and money market, and rising rates help their bottom line as they roll them – also banks, who issue mtgs etc at higher rates can benefit from a better profit spread).
We have about 10% cash. That may change–I am legging in, but carefully. And yes, markets are often very strong in November and early December in particular. My blog comment today is more forward looking to perhaps next summer….
Along with financials I expect most commodities like energy, gold, silver, copper to benefit. NA is certainly in a world of hurt with 2 out of touch leaders in charge.
Can you provide an explanation of a twist. Google says it swapping one product for another usually for the sellers benefit. I note Twist B does not show as having ended. Interesting as well that the end of QE3 produced a mostly sideways movement before the start of a long climb. Was that because the economy was strong enough at that point to sustain a small rise in rates. If so is it possible that we get a correction in time on modest rate hikes as opposed to a significant pullback?
Q1: Twist as I understand it: Operation twist was effectively selling short termed bonds and redeploying the $ into long termed bonds. This government-created demand for long bonds pushes long term rates lower (prices on long bonds rise = yields fall). Lower long-term interest rates mean people can more easily afford long-term loans (buying houses, cars etc). Businesses can invest into new projects with low rate long termed loans – this is simulative.
It also means that bonds within an investment portfolio will yield less – which can push more money into equities (creating TINA…There is NO Alternative to stocks) or just spending the money. EG–if you are adverse to investing into stocks because you fear risk, and you don’t like your 10 year bond yield of 2%, you might just say “I am just going to take the money and buy the Porsche I always wanted–or a new fridge…etc”.
Q2: Results of Twist ending: Yes, markets can go flat – not necessarily fall, at the end of a stimmi program. My point is that markets dont keep going up–at least they didnt in the past when programs ended. So yes, it could be a “flat” correction this time. Point is-the party will end for never ending up, up, up with no real pauses. Normal markets with … brace yourself…corrections (“say it ain’t so,!”) will return.
Hi Keith, I agree that the FED is close to painting itself in a corner, although I also believe, at least for now, they understand how to play with the market. I watch my emails closely as to when you are launching the new analysis course as I am on the list to sign up. I’m worried, I have a plan as you suggest, hard to believe the bear-o-meter is still neutral but not fighting it. Bought your book, look forward to the course – hopefully sooner than later – more profitable to chart a trend than chart my emotions- Your readers do appreciate the effort you put in.
Really interesting that you enquired about the course, and specifically about the emotional side of trading. I had just finished the course material and was ready to submit it, then driving home a week ago, I realized that dealing with emotions is one of the hardest things in trading to do, yet I hadn’t addressed that in the program. Years ago I read the book Trading in the Zone. So, I “re-visited it” and jotted down the key points, which ended up now being a part of the course. Just put that section together yesterday! Still–I might recommend you buy the book, or (if you you like audio books like I do) buy it on audible. It helped me quite a bit over the years.
I am likely to submit the course material this week to the producer, who will then begin to “make it pretty” via graphics etc. Filming should start in 2-3 weeks – and all will be done me-hopes by the end of the year.
Its been a big project, but its been really exciting – I really want this to be well received, so I am trying not to leave anything out. The main goal was to be pragmatic, not theoretical. You will like it.
FYI, Mark Douglas also wrote a book before Trading in the Zone. It’s called The Disciplined Trader, I read it this summer, and I highly recommend it if you like his 2nd (a classic).
Keith, some (lesser) analysts I follow have very recently started to tout small caps (XSU) at least as a ride into January. Does this make sense to you at this time?
Yes, I blogged on the US small caps a while ago-like it alot-we hold a position in the US small capped ETF which we bought last month- and will add to it. Possibly this week as market finally pulls back a bit.
Great call on gold! How do you determine an entry or exit after a breakout? The increased volatility seems to make any move risky. Also, some of the clean energy names have similar chart patterns. Any thoughts on clean energy?
Hi Keith, just thought you should be aware that your Nov 6 blog heading is staples, but is about cons disc. Please excuse me if this has already been pointed out.. BTW loved your latest book- and also your previous ones too! I am a much better investor since following you for several years now. Looking forward to your course,
kennybkool ( first time contributor)
thanks Ken re the video- I kinda banged that one out after a busy week–I will get the title corrected!