The concentration of the media on round numbers is going to drive me to drink that bottle of Pappy Van Winkle. In true philosophical inquiry, round numbers never fit in the square pegs of the unbalanced thinking at Notes From Underground. In Tuesday’s post I am going to run through several points that I’ve mentioned over the past several months. All of these issues will have some relation to the developing narrative that we are experiencing in the markets: 1. High-yield debt is weakening as reflected by the ETF HYG as Treasury rates rise. The problem for investors is that when the HYG ETF was making lows it was due to the decline in OIL and GAS prices as energy companies issued a great deal of junk bonds. Now the drop in HYG and LQD [a high-grade ETF] is related to the increased yields and the impact on balance sheets. As Jim Bianco and others have discussed, it is not the 10-YEAR yield rising that is the problem, but the TWO-YEAR YIELD and shorter duration paper that has risen to 2%-2.5%. There is a great deal of borrowing priced to Libor, so the rapid increase in rates is projected to have a negative impact on profits. If the FED is right and WAGES are set to rise in response to potential inflation the feedback loop will cause forward earnings to be less than projected. This week we are seeing PROFIT REPORTS exceed already high projections but the EQUITIES are struggling. In my opinion, this suggests that interest rates are going to be an investor concern as the profit story recedes.... https://yragharris.com/2018/04/24/3percent/
Markets Better Prepare for Stagflation
Investors better wake up to the growing risk of stagflation. The coming weeks promise to deliver the verdict on how they should be positioned. By all metrics, inflation is heating up. But it’s not clear the same can said for underlying economic activity. According to producers, input costs have risen for six of the past eight months. And it’s not just big companies that are feeling pressure. One in four small businesses say they plan to raise prices, a 10-year high, according to the National Federation of Independent Business. Inflation’s persistence will finally begin to trickle through to consumers.