The Great Inflation Debate, Take Two. In our February 17th Chartbook EVA, we entered into the always hotly contentious realm of attempting to determine the true level of inflation and, closely related to that, its trend. It goes without saying—but I will anyway—that there are few areas where the words “Believe those who are seeking the truth; doubt those who say they have found it” are more applicable.
Fed Storm Rising. It’s been roughly 13 years since I borrowed—and modified—that title from Tom Clancy for our old hardcopy client newsletter, The Strategist. It was written during the early stages of the last Fed tightening cycle, a hiking campaign which was to last for two years, jacking up its overnight rate from the previously-unimaginable level of 1% to a peak of 5 1/4% in June, 2006.
Despite the fact the Fed increased rates at 17 consecutive meetings from 2004 to 2006, the S&P 500 rose pretty much steadily throughout this period. Stocks even made a slightly higher high in October of 2007, in the wake of the Fed’s somewhat panicky 50 basis points (1/2%) cut, in September of that year, due to the escalating crisis in the housing market. On the day this sharp rate reduction occurred, the Dow spiked 2.5% while the S&P 500 vaulted an even larger 3%. Investors were clearly remembering the old Wall Street maxim that you don’t fight the Fed.
The Opinion Exchange. One of our primary goals with this newsletter is to provide our readers with a wide range of viewpoints. As noted previously, the risk with this is that we don’t convey a clear idea of our actual views. Yet, we’ve always felt that’s a chance worth taking, particularly since we try to subsequently clear up any ambiguities.
Time for a surreality check. Somehow, I don’t think I’m alone in waking up on certain mornings wondering into what parallel universe I’ve been transported. The daily surreality show I’m referring to includes, but is not limited to, watching what are decidedly unpresidential press conferences by our new president—not to mention an endless stream (of consciousness) tweets—and shockingly public feuds with the US intelligence community. These recurring events have caused global uncertainty surveys to go postal.
In the world of inflation, expectations are important. If you ask most people in the US what they believe inflation is expected to be, they are likely to say around 2-3%…why? Because that is what they have experienced over the past 5-10 years.