Cooling Off Inflation With Soft Landings

0
Cooling Off Inflation With Soft Landings
geralt / Pixabay

In his Daily Market Notes report to investors, while commenting on soft landings, Louis Navellier wrote:

Get The Full Henry Singleton Series in PDF

Get the entire 4-part series on Henry Singleton in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q3 2021 hedge fund letters, conferences and more

Seth Klarman’s 2021 Letter: Baupost’s “Never-Ending” Hunt For Information

Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More

Retail Disaster

The retail sales report was a disaster. It was only up 0.3% in November. Electronic and appliance store sales declined 4.6% in November, the gas station sales rose 1.7%. Essentially, the higher prices at the pump are basically sucking up all the money in consumers' pockets. Consumers are not spending. General merchandise store sales declined 1.2% in November, led by a 5.4% drop in Department store sales. Online sales were unchanged which was quite shocking. The continuing very poor retail sales report means we're going to have downward GDP revisions. We're going to be growing at probably 4% or less in the fourth quarter.

Soft Landings

This means we're probably going to have more of a dovish FOMC statement because the Fed's job is to engineer a soft landing. Soft landings make inflation cool off. But it's easier said than done. And that's kind of the Fed's conundrum. But I do expect that what we call the dot plot, which is a survey of the FOMC members, is going to show that they're going to be raising key rates two to three times next year. So, the Fed funds rate will be up to 0.75% percent, with maybe even more rate increases in 2023. The Fed is just going to get their rates in line with market rates. That's all they're doing.

We expect the Fed to reduce quantitative easing from 105 billion to 90 billion a month. They might give some further guidance if they want to wind it down further. But that's fully discounted. The only reason the Fed could rock the markets today at 2:00 is if they taper more than expected or have more rate increases than what I just said. So, I think we're going to be okay. I'm anticipating that we'll have a relief rally. If not today, we'll have it tomorrow because we'll just be glad that the FMC decision is over and we can move onward and upward.

The big news on the interest rate front is the institutional and international buying pressure for Treasuries is relentless. Treasury bond yields remain remarkably low despite inflation. And that's because, compared to the rest of the world, the US is an oasis, so foreign capital flows here. It represents 69% of the ten-year treasury sales last Wednesday.

Meanwhile, China is slowing down and is becoming increasingly isolated. The Biden administration just banned US companies from doing business with eight companies in China. China is slowing down as an economy, as well as Germany which is a very large economy in Europe.

We expect that this demand push inflation caused by an economic rebound is going to cause prices to eventually moderate. A lot of it is weather-related since we have cold winters.

Sunny Long-Term

I kept telling everybody to wait until the last week of the month to buy. I'm expecting a nice rally in late December. We might rally a little going into Christmas but the big rally will be after Christmas and just before the New Year. Then we should gap higher in January with new pension funding, new institutional money flowing in the market. All that should help quite a bit.

Regardless of what happens today, whether the 10-year yield is 1.45% or 2% at year-end, rates will still be well below current inflation, and are still very low by long-term standards. Fixed income will still be unattractive compared to equities, still yielding less than many dividend opportunities, on top of duration risk from forecasted central bank rate increases.  History says that if rates are rising from strong business growth, and not stagflation - inflation without growth - that it will not restrain stocks valuations from rising.  Rough water may be ahead in the short term, but the long-term outlook remains sunny.

Coffee Beans

Honey spill due to a semi crash created a 'sticky situation' on Indiana highway causing hours of delays on Tuesday. The clean-up operation lasted for several hours and all lanes of traffic were reopened early Tuesday afternoon. Source: UPI

Updated on

No posts to display