PERHAPS THE ULTIMATE QUESTION OF THE DAY…IS IT DIFFERENT THIS TIME?

It is said the most dangerous phrase in the markets is “it is different this time.” As widely discussed, inflationary expectations are at the highest level since 2006.  Household inflation is running at the highest rate in over 40 years and the Federal Reserve has adamantly stated that such pressures are “transitory.” Some pointed to April’s disappointing retail sales as possible evidence that these pressures are indeed “transitory.”

It is tempting to point that the slowing of transfer payments as a reason for a disappointment in retail sales, sales however are at levels why above anything observed prior to the distribution of the latest stimulus package.

Income –that is wage, rental and proprietors’ income are all considerably higher than they were end of 2019.  Unsurprisingly there is a solid correlation between income and inflation going back more than a century.

The economy is near record levels for income growth and QE is running at full speed for the foreseeable future, massive supply bottlenecks, all of which is greatly rising inflationary expectations.

Speaking of expectations, a sentiment indicator deteriorated unexpectedly as all become increasingly concerned about rising prices. According to the University of Michigan Sentiment survey, consumers expect a 4.6% increase in inflation over the next year, the highest reading in over a decade. Forty three percent of the respondents said prices could rise by 5%, the greatest reading in over 2 decades, fearing inflation could outpace income growth.

Inflation is two-part phenomena; too much money chasing to few goods fearing higher prices tomorrow. It is part monetary and part psychological. At this juncture both elements are present.

Will it be different this time? The answer to this question is perhaps more significant than ever given the massive federal debt. The CBO (Congressional Budget Office) projected last week that based upon current interest rate assumptions, debt service coverage will amount to a very manageable 8% of the federal budget. What it also projected is if funding costs rise to the average levels of the last 50 years, debt service would amount to about 50% of the budget.

Wow! Talk about the ultimate exploding ARM. Like all I do hope that it is indeed different this time.

The economic calendar is comprised of various housing statistics, manufacturing surveys and the Minutes from the April FOMC meeting.

Last night the foreign markets were down. London was down 0.61%, Paris down 0.37% and Frankfurt down 0.29%. China was up 0.78%, Japan down 0.92% and Hang Seng up 0.59%.

The Dow should open moderately lower on the outlook for inflation and a potential spike in COVID cases in part of the world. The 10-year is off 2/32 to yield 1.64%.

 

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