PERHAPS THE LARGEST QUESTION FACING THE MARKETS

Perhaps the largest question facing the markets is whether the commitments by the Federal Reserve and the Biden Administration to let the economy run hot will spark destabilizing inflation.

The answer to this question is pivotal in determining market direction.

As widely discussed, valuations are at best “stretched” as equity investors applaud increasing vaccination efforts, rising stimulus prospects and slowdown in COVID infections across the globe.

Inflation expectations are now the highest since 2013 and many regards the Fed’s strategy of permitting inflation and growth “to run above the prescribed speed limit for an undefined period of time or amount” is akin to walking on a razor blade.

To the best of my knowledge this strategy has never been attempted.  I must write there are ample examples of lesser developed countries experimenting with massive deficit spending to increase economic activity, most of which ended in complete disasters.

There are only two ways to overcome massive debt…inflate or restructure.  Restructuring is not an option given the US is the world’s only reserve currency.  Almost everything is priced off the dollar and the US Treasury.

Yesterday Dallas Fed President Robert Kaplan stated “bouts of higher inflation that exceeds previously perceived limits will not be surprising but they are likely to be transitory.”  Kaplan further stated the question might be “how persistent might these bouts be.”

Wow!

Inflation is a two-part phenomenon; too much money chasing too few goods fearing higher prices tomorrow.  It is part monetary and psychological.

Bonds trade on future inflationary expectations.  What happens if these expectations become unanchored?  Hopefully we do not find out with a $30 trillion-dollar deficit, a deficit that might be closer to $35 trillion in quick order, up from $20 trillion about 15 months ago.

Commenting in yesterday’s market activity, markets ended mixed, perhaps reflecting upon the infinite number possibilities of the most aggressive monetary and fiscal policy in history.

What will happen today?  Will the CPI impact trading?  FRB Chair Powell is scheduled to speak.  Will his remarks impact trading?  And then there is the 10-year Treasury auction.  Will demand exceed expectations?

Last night the foreign markets were mixed.  London was up 0.24%, Paris down 0.02% and Frankfurt down 0.04%.  China was up 1.43%, Japan up 0.19% and Hang Seng up 1.91%.

The Dow should open nominally higher.  Oil is broaching $60/barrel (WTI) and Brent is over $61. The dollar is lower. The 10-year is off 2/32 to yield 1.17%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.