If Inflation Is Not Going To Worry Investors, What Will?

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

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What Inflation?

October CPI was 0.9% higher than September, in China factory prices increased by the fastest rate in 26 years while Brazil also posted higher inflation data than forecast.  With numbers like these in the same month that the Fed confirmed they would begin rapidly tapering their Quantitative Easing program one might assume that P/E multiples would be ratcheting down and Treasury bond yields spiking up.

Nope. The stock market is modestly in the red and negative real yields are evidently acceptable in the short run.  Bottom line is that the massive liquidity that has been injected into the capital markets by central banks continues to lift all boats, and stocks continue to possess the best fundamental story with solid earnings, a vibrant IPO market and even many solid dividend plays which pay more than the negative-real-yield fixed income markets.  If inflation is not going to worry investors, what will? Stay long until a Black Swan arrives.

Dollar Rising

Suddenly, there are plenty optimistic forecasts for the four quarter.  First, after the FOMC statement and Fed Chairman Jerome Powell failed to address hiking key interest rates, Treasury yields have meandered lower, which is just causing more money to pour into the stock market.

Second, the U.S. dollar is expected to strengthen with China’s growing economic isolation and Germany’s export machine sputtering, so more international capital is expected to flow into U.S. Treasury securities.

Third, retail sales are expected to soar this holiday shopping season due to high consumer confidence as well as rising personal income.  I should add that the shortage of some key goods should not derail holiday spending, since when consumers have money in their pockets, they will spend it.

Speaking of shortages, Fed Vice Chairman Richard Clarida said that most of his Fed colleagues who participate in rate-setting meetings believe the risks right now are tilted to higher-than-anticipated inflation outcomes.  Clarida is a key architect of the Fed’s policy statements, so his comments are signaling that the Fed has become frustrated with surging inflation and intends to squelch it 2022, even though it has failed to forecast more than one key interest rate increase.

Chinese Producer Prices Soaring

Speaking of inflation, the Labor Department announced on Tuesday that its Producer Price Index (PPI) surged 0.6% in October but the wholesale inflation is even worse in China.  The National Bureau of Statistics announced on Wednesday that its Producer Price Index (PPI) surged by a record 13.5% annually in October compared to a year earlier.  This was a 26-year high.

Although wholesale inflation is out of control in China, its’ official consumer inflation is running at a 1.5% annual pace in October.  Fixed electricity prices are one reason that consumer inflation has not risen as much as wholesale inflation in China.  Regardless, President Xi has his hands full in China, so no wonder he has not traveled internationally for over 21 months as China’s domestic problems continue to escalate.

Speaking of consumer inflation, the U.S. Labor Department on Wednesday announced that the Consumer Price Index (CPI) surged 0.9% in October.  This represents the largest monthly increase in the CPI since June.

In theory, if the Biden Administration can deal with lowering domestic energy prices as well as supply chain issues, which would boost vehicle production and curtail used car prices, then inflation could be tamed somewhat.  However, as China and Europe have demonstrated, inflation is a massive global problem.

What is so odd is that interest rates have moderated this week, since major central banks are in no hurry to raise key interest rates to squelch inflation.

Heard & Notable

Faye Hurst from Virginia who bought 40 identical tickets for the same lottery drawing ended up winning 40 times for a grand total of $108,000. Hurst said she didn't have to spend much time picking her numbers for the drawing as she has been playing the same numbers every day. Source: UPI