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Today, we have been taking profits across the board, reducing our exposure to Chinese equities and European Equities as we see global equities topping out.
We also shorted the EUR – See BUY THE US DOLLAR
Tapering pressure is building
As we expected, see INFLATION IS BACK, The pressure is building on the FED to change its language with many economists sounding the alarm bell on the FED’s assumption that inflation will be transitory.
Today, the economist who helped change the way the Federal Reserve assesses long-run inflation expectations says their current level means the central bank needs to start laying the groundwork for shrinking its massive bond-buying program.
As head of monetary and financial market analysis at the Fed Board of Governors almost two decades ago, Brian Sack and his colleagues championed the use of a forward measure of inflation expectations to help guide policy.
Now director of global economics at hedge fund D.E. Shaw & Co., he says the so-called five-year, five-year forward breakeven inflation rate has climbed to a level where further increases would be problematic for the central bank.
The rate, which looks past some of the short-term noise that affects consumer prices, reached a seven-year high last month of 2.55%. That level translates into an average of over 2% annually during the half decade beginning in 2026 on the price measure the Fed actually targets. So the central bank is effectively on course to achieve its average 2% inflation goal in the eyes of investors.
The rebound from ultra-depressed levels seen during the pandemic’s initial onslaught is beneficial, Sack says. But advancing much further risks pushing inflation expectations to levels that would make it harder for the Fed to meet its twin objectives of stable prices and maximum employment.
“Inflation expectations have already risen to a level consistent with the Fed’s mandate, so my view is that the Fed should not allow them to rise further,” said Sack,. “It may be time to adjust the policy message to reflect that.”
The tweak in signaling may already have begun. An array of Fed officials have indicated that it may be getting close to the time to debate trimming the bond purchases. The Fed is currently adding $80 billion of Treasuries and about $40 billion in mortgage-backed securities every month to its balance sheet, to support growth and keep markets functioning smoothly.
For now, officials aren’t expected to adjust that pace at their meeting next week.
Most Fed officials insist that inflationary pressures bubbling up now are mainly the transitory result of imbalances between supply and demand as the economy revives. Recent readings are also unusually elevated when compared to the extraordinarily low levels registered a year ago.
Treasury Secretary Janet Yellen told Bloomberg News on Sunday that President Joe Biden should push forward with his $4 trillion spending plans even if they fuel inflation that persists into next year and higher interest rates.
Economists such as Roger Bootle, Jason Furman and Lawrence Summers are less confident that that the acceleration in inflation will prove temporary. Summers, for example, has warned that besides pressure from stimulus and pent-up demand, rising costs for housing, medical services and labor will also come into play.
It’s a crucial debate for central bankers, who view expectations for price pressures as a big part of the actual trajectory of inflation.
The dynamic has become even more important in the wake of their new approach to targeting inflation: To help the economy recoup lost jobs, the Fed now plans to keep rates low until price gains average 2% over time, contingent on longer-term inflation expectations also remaining well anchored at that level.
The 10-year breakeven rate, the bellwether gauge for inflation expectations in the future touched 2.59% on May 12, its highest since 2013, after surging from a nadir of 0.47% in March 2020. It traded around 2.4% Today.
Some investors have downplayed the climb in breakevens, saying they need to be adjusted lower because the readings also reflect the premium resulting from inflation risk — which they contend is more about uncertainty over the path of price pressures than actual inflation expectations.
Sack doesn’t agree. His analysis shows that inflation risk premium is actually negative, or at most zero, which would mean actual inflation expectations are higher than breakevens indicate.
That’s because when the economy sours, prices of risky assets tend to decline and so do breakevens.
The Fed looks at an array of measures to estimate inflation expectations, including surveys. The true question is for how long can they continue to ignore the markets pricing and, as we argued before, continuing to pour liquidity in an economy that is already firing on almost all cylinders.
U.S. consumer prices climbed in April by the most since 2008, rising 4.2% from the same period a year earlier. The reading for May, to be released Thursday, is forecast to show prices accelerated at a 4.7% annual clip.
The possibility of a change of discourse at the FED cannot be ignored..
Kicking off tapering discussions would mark a big moment for financial markets as it would be a precursor to a pull-back in the Fed’s support for the economy.
With the nation’s vaccine roll-out sparking a surge in consumer spending, forecasts for growth are mounting accordingly. Economists predict a roughly 9% annualized pace of expansion this quarter, after a 6.4% rate last quarter.
Continuing QE in a quarter when the economy is growing so rapidly isn’t going to help contain inflation expectations.
Meme Stocks are wild …
We love Reddit, Robinhood and Meme Stocks… This new breed of investors investing on new methods of social media herd mentality offers amazing investment patterns and opportunities…
Non content of getting badly burnt with Cryptos – Bitcoins are down another 10 % today – they are ramping up stocks to valuations that do not make sense and will not hold there…
Today we also increased our short position in GAMESTOP
GAMESTOP rose 1600 % in the past year, on nothing but truly thin Social Media air.
Its results are due tomorrow after the close and these young punters probably expect them to be better than expected…
So be it… but they will be disappointed
Today, GAMESTOP trades at a 24.3 Billion Market Capitalisation. It has lost 164 million USD in 2020, is expected to lose another 155 million in 2021, 25 in 2022 and expects a paltry 5 Million Dollar profits in 2023…
Back in 2018, when the company was clocking US$ 521 million of profits ( 100 x the profits expected for 2023) the market capitalisation of the company was 1.6 Billion, less than 1/10th its current market Cap.
These “Meme” Investors have no clue of what managing a company is about and even less about the financial markets.
They see investing as a video game and are as much blinded by the rag-to-riches stories of the Powell Mania as this whole generation is fascinated by self-image and the pseudo-ideal lives of celebrities and influencers.
But sustaining the valuations of these companies will be another story and as is the case with all bubbles, they will deflate, leaving an entire generation with losses and a bad taste for investing.
New Asset Allocation
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