SOCIAL SECURITY’S COLA IS EXPECTED TO BE THE HIGHEST SINCE 1983

Value and cyclical lead equities higher.  Small caps outperformed all indices under the simple reflationary premise.

Treasuries declined in price as it is now being projected that Social Security’s Cost of Living Adjustment (COLA) for 2022 will be 6.1%, the greatest increase since 1983.

A government spokesperson stated “we have not seen this strength, breadth and persistence of inflation since the 1980s”

The ramifications are huge.  Approximately 65 million Americans receive Social Security and such will further add to fiscal stimulus.  However, this money will have to be borrowed from future benefits, placing more burden upon government spending.  Perhaps even more significant, other COLAs (corporate, municipal, etc.) are tied to the same index or at the same rate as Social Security’s increase.  This is inflationary.

The late 1970s is the last time the country experienced cost push (wage inflation) and the government instituted wage and price controls to stem the inflationary spiral.

As noted many times, inflation is at a 40-year high yet Treasury yields are around all-time lows.  The last time the Social Security COLA was this high the 30-year Treasury average yield was over 11% versus 1.85% today.

For what is worth department, according to the mono variable sensitivity analysis screen provided by Bloomberg, if yields rose to this level, the one-year annual return for this benchmark would be -80% and one would have to hold the bond to 2035 to break even.

Yesterday I referenced Goldman Sachs research stating the Treasury market is in a greater bubble than NASDAQ’s 2000 bubble right before the index plunged about 80% in 18 months.  Perhaps this is/was Goldman’s reference point.

Reminding all, there are two basic types of inflation…demand pull which is product inflation and is normally resolved via “the ultimate supply response.”  The other is cost push which is wage inflation and once embedded in the economy is extremely difficult to reduce without strong policy response.

Treasury prices were posting nominally gains before the statement was released.  Prices ended lower by over a point as the reflationary trade returned.

Has the trend changed again?  Only history will answer this question.

After the close, NFLX posted results that disappointed.  As written many times, a handful of megasized tech companies front loaded about 5 years of revenue and earnings growth in about 18 months.  The valuation of these companies however is suggesting that such growth will last into perpetuity.

Is NFLX a harbinger of results to come?  Bloomberg wrote late last week “mega sized tech companies have no margin in error as there is no room for forgiveness…”  When earnings were initially released, shares fell about 7%.  Currently shares are down about 2%.

What will happen today?

Last night the foreign markets were up.  London was up 1.63%, Paris up 1.30% and Frankfurt up 0.92%.  China was up 0.73%, Japan up 0.58% and Hang Seng down 01.3%.

The Dow should open nominally higher as a slew of corporate earnings took the focus off concerns about the economic impact of coronavirus flareups.  The 10-year is off 6/32 to yield 1.25%.

 

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.