Reactions to rising inflation have started
The reality of inflation is bitter and consumers are taking notice. Such an environment has been absent for years, so now is the time for investors to shift gears and take action.
The upward trends in inflation are different from all other economic and market growth cycles. The negative results produce reactionary behavior by business, finance, government and consumers that favors the uptrend.
Now that rising inflation is the topic of the day, anticipatory and reactionary actions are already visible:
Businesses get the green light to raise prices –
“Inflation helps increase profit margins”
“Companies are seizing a rare opportunity to raise prices and exceed their own growing costs.”
The Wall Street Journal (November 15, page A-1)
Consumers start buying before any price increases –
“Buyers are increasing their spending, despite inflation”
“Retail sales rose 1.7% in October as consumers weathered the pandemic with higher prices.”
The Wall Street Journal (November 17, page A-1)
Financial management begins to make aggressive changes –
“CalPERS to borrow, add risks to achieve goals” [Higher inflation means higher liabilities, requiring higher returns]
California’s $ 495 billion public employee retirement system’s decision reflects prospects for darkening safe, publicly traded investments by households and institutions and sets the tone for increased risk-taking by pension funds to. across the country. “
The Wall Street Journal (November 16, page B-1)
The government seeks to play an active and consumer-friendly role –
“The president calls for an investigation into the price of gas”
President Biden has asked the Federal Trade Commission to investigate the involvement of oil and gas companies in illegal behavior aimed at keeping gasoline prices high, as part of the latest White House effort to address public concerns about the costs of everything from fuel to groceries. “
The Wall Street Journal (November 18, page A-1)
Federal Reserve tries to find its way as ‘temporary’ and ‘transitional’ insurances fail –
“Fed officials express determination to deal with inflation risks”
“Federal Reserve officials in discussions earlier this month said the central bank would” not hesitate “to take appropriate action to deal with inflationary pressures that posed risks to the economy.”
Associated press (November 25)
Analysts speak openly about the reality of inflation –
“The Fed is running out of excuses for inflation”
“Anytime the Federal Reserve finds an excuse to justify soaring inflation and why it won’t last, the data flips it.
“Inflation has not been shown to be temporary and has accelerated, reaching its highest level in a single month since January 1990. It is high even when measured against pre-pandemic prices, he said. So it’s not just about catching up with the deflation of It’s no longer just about a small set of supply chains disrupted by Covid, or the demand for used cars and other popular items. flexible targeting of average inflation, tapering off.
“The only explanation left is that inflation will always be transient, not as temporary as hoped, but will go away on its own. Investors are still buying the story, but the risk increases as the Fed must act much more aggressively. “
James Mackintosh in The Wall Street Journal (November 15, page B-1)
The bottom line: Wall Street braces for dramatic investment shake-up
Wall Street is scanning the horizon for signs of rising inflation hitting where it will hurt the most: fixed income. The people of Wall Street know that bondholders will suffer greatly when “watchful” bonds return to demand a total return for risk.
Long-term bond yields moved independently of the Federal Reserve’s handling of short-term interest rates. As the Fed begins the necessary return to short-term market-determined rates, the long-term bond market will regain this independence. After all, a ten-year bond producing a negative real return is now guaranteed to be a real loser in a period of rising inflation.