Morning Note: Irony, Inflation, and What We’re Really Modeling

So, the irony in the financial world today — it’s so thick, as they say, you can cut it with a knife.

China, who, in recent history, has been no stranger to bubble-blowing, has its own Guo Shuqing, their chief bank regulator, calling out an equity market bubble in the U.S. which “runs counter to the real economy.” I.e., he’s pointing to the Fed and a monetary policy that indeed explains how we got here. Same finger-pointing at the EU…

He’s also pointing his finger inward at China’s own property markets. 

As I reported recently, China has indeed been tightening the liquidity screws of late, in hopes of tamping down on speculation and, in the process, averting a major market meltdown going forward.

Note the recent action in the MSCI China (stock) Index.

Year-to-Date:


And how about the folks at the Reserve Bank of Australia? Per economist Peter Boockvar this morning:

“So the Reserve Bank of Australia wants sustainably higher inflation between 2-3%. They suppress interest rates and do QE in order to get there.

The market begins to sniff out that we’re headed in that direction and the RBA expands QE because the RBA doesn’t like the timing of it.

Today they met and said “The Board does not expect these conditions to be met until 2024 at the earliest.” These being “until actual inflation is sustainably within the 2-3% target range.”

This is tone deaf because the markets are saying maybe that comes sooner rather than later. The RBA has clearly chosen door #1 in that they want to fight the market and that is a dangerous stance as the markets have a lot of ammunition too.”

That’s our story as well my friends. The Fed for years has been efforting to create a little inflation. Now we’re on the cusp of perhaps more than a little, and they’ve inflated such ginormous debt and equity bubbles to the point where they sincerely can’t do a thing about them. I.e., there’ll be no tightening of monetary policy as far as the eye can see — and they’ll claim that they see little (or only transitory) inflation the whole time. 

Well, while transitory is indeed a possibility, inflation is nevertheless happening in the manufacturing space (big time!).

Here’s from February’s Institute for Supply Management manufacturing survey:

Commodities Up in Price

Acetone; Acrylonitrile Butadiene Styrene (ABS) Plastic (2); Aluminum (9); Aluminum Extrusions; Capacitors; Copper (9); Corrugate (5); Corrugated Boxes (4); Crude Oil (3); Diesel (2); Electrical Components (3); Electronic Components (3); Fiberglass Products; Freight (4); High-Density Polyethylene (HDPE) (2); Lumber (8); Methyl Methacrylate; Natural Gas (2); Nylon Fiber (2); Ocean Freight (3); Oil-Derived Products; Packaging Supplies (3); Paper Products (3); Personal Protective Equipment (PPE) — Gloves (3); Plastic Resins (6); Plywood; Polyethylene; Polyethylene Terephthalate (PET); Polypropylene (8); Polyurethane Foam Products; Polyvinyl Chloride (PVC) (5); Precious Metals (2); Propylene (2); Resin-Based Products; Resistors; Rubber Products; Semiconductors; Solvents — Other; Soybean Products (5); Steel (7); Steel — Carbon (3); Steel — Cold Rolled (6); Steel — Hot Rolled (6); Steel — Scrap (3); Steel — Stainless (4); Steel Plate; Steel Products (6); and Wood — Pallets (3).

Commodities Down in Price

Dairy.

And here, from the report’s featured comments, is what the folks in the transportation, machinery and lumber spaces have to say about inflation:

“Steel prices have increased significantly in recent months, driving costs up from our suppliers and on proposals for new work that we are bidding. In addition, the tariffs and anti-dumping fees/penalties incurred by international mills/suppliers are being passed on to us.” (Transportation Equipment)

“Prices are going up, and lead times are growing longer by the day. While business and backlog remain strong, the supply chain is going to be stretched very [thin] to keep up.” (Machinery)

“Prices are rising so rapidly that many are wondering if  [the situation] is sustainable. Shortages have the industry concerned for supply going forward, at least deep into the second quarter.” (Wood Products)

Hmm…


Asian equities leaned green overnight, with 10 of the 16 markets we track closing higher.

Europe’s hanging in there as well this morning, with 13 of the 19 bourses we follow trading higher as I type.

U.S.major averages, on the other hand, are trading lower to start the day: Dow down 126 points (0.44%), SP500 down 0.63%, SP500 Equal Weight down 0.53%, Nasdaq 100 down 0.98%, Russell 2000 down 1.02%.

The VIX (SP500 implied volatility) is up 2.74%. VXN (Nasdaq 100 i.v.) is up 3.56%.

Oil futures are down 0.03%, gold’s down 0.08%, silver’s down 0.45%, copper futures are up 1.06% and the ag complex is down 0.12%.

The 10-year treasury is up (yield down) and the dollar is up 0.05%.

Led by base metals, miners, AT&T, energy and materials — but dragged by Asia-Pac, tech, emerging market equities and utilities — our core mix is off 0.23% as I type. 


After 36 years of intimate engagement with markets and investors, I 100% sympathize with the following from the book on the elusive Jim Simons (likely history’s best performing money manager), The Man Who Solved the Market:

“…popular math tools and risk models are incapable of sufficiently preparing investors for large and highly unpredictable deviations from historic patterns—deviations that occur more frequently than most models suggest.”


““What you’re really modeling is human behavior,” explains Penavic, the researcher. “Humans are most predictable in times of high stress—they act instinctively and panic. Our entire premise was that human actors will react the way humans did in the past . . . we learned to take advantage.””


Have a nice day!
Marty

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