In my last market comment, I tried to find the silver lining in the ongoing Bondpocalypse. Today I’ll look at the sunny side of the bear market in stocks.
The central bugaboo for both is the same. After years of being confined mostly to asset prices, inflation finally made its appearance in consumer prices. Long time readers know we view them as simply different manifestations of the same underlying phenomenon: depreciating currency. It shows up first in real time, tick-by-tick markets, and from there wends its way through the economy and into things people buy with value stored in these assets. This is one of the reasons we have inflation … it’s fun at first. Only later do we discover lunch wasn’t free.
From this springs our optimism. As stock prices have renewed their inflationary ways over the past four quarters. we’ve repeatedly fretted that the hard won progress on consumer price inflation was at risk. Most of the economedia was fooled by watching the latter lagging indicators, and from the looks of it, even the Federal Reserve, but not Financology. Reported consumer inflation reached its nadir in June, only to begin to resume its march higher.
This works both ways. We’ve said before and we’ll say it again: another leg down in stocks is a precondition for the same in consumer price inflation. We’re getting it. The dollar has been rising against just about everything under the sun … foreign currencies, commodities, bonds, stocks … the notable exception being oil. Unless the trend reverses soon, this too shall fall.
This rising of the dollar at the leading edge represents another deflationary impulse entering the pipeline. Should it persist, consumer price inflation will be quenched.
But for all the good news, I can’t help but be drawn to the dark side. Looking out a little further, it’s unrealistic to expect the official response to sinking stock prices to be limited. The Federal Reserve has an undistinguished history of leaving its foot on the monetary gas pedal long after it’s arrested the declines. It’s a creature of Wall Street, and can’t resist the pressure. Stocks will crater, it will stop the carnage, but then fail to quit when it should. Thus begins the next wave of consumer price inflation…
came across a quote I liked, to the effect that the pathology lies in the boom. the bust is just the accounting catching up
Good one, JK. The memory-free media would do well to remember that. We just experienced the lowest interest rates in, depending which source you prefer, hundreds or thousands of years. Trillions worth of bonds traded at such high prices they sported negative yields.
But when the reaction comes, all that will be forgotten. Central banks will be faulted for only the “policy error” of being too diligent in fighting the inflation they caused. It’s like the historical revisionism of the Great Depression: It all went wrong in the thirties … the twenties bubble had nothing to do with it.
Have we just seen the equivalent of Ben Strong’s “coup de whiskey”? If busts tend to be proportional to the preceding booms, there is quite a spectacle ahead. The timeline is obscure, but given the epic bear market in bonds, some kind of “financial accident” seems practically assured. At the very least, a rude awakening as Visions of Sugar Plums and Soft Landings give way to hard reality.
“The dollar has been rising against just about everything under the sun … foreign currencies, commodities, bonds, stocks … the notable exception being oil. Unless the trend reverses soon, this too shall fall.”
I wasn’t expecting immediate gratification for this forecast, but oil just got walloped by 5+%. It may be kicking off a new trend, or it could be nothing more than a correction to overbought conditions within an ongoing rally. Dr Copper doesn’t have the last word, but leans towards the former. lIt “bears” watching…
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