Inflation Admittedly Not Transitory, Energy Volatility and Effects of Rising Yields

Is the Fed behind the curve? It wouldn’t be the first time! Recently they started admitting that many of the inflationary inputs are not transitory. We show you some reasons why. If inflation is here for at least a while, can history show us what might happen to the various markets, sectors and profits?

1. Yesterday, the World Health Organization predicted that half, yes half, of all Europeans will have or will just have had Covid. The ports of Los Angeles and Long Beach are so short of healthy workers that the backlog of ships to unload is growing again. China just closed its third city so far due to a Covid outbreak. It is reasonable to assume bottlenecks are going to get worse before they get substantively better. This is likely to help prevent overall inflation from being transitory.

Source: The Daily Shot from 1/12/22

2. Many inputs to inflation are long-term/permanent. A rent increase is for one or more years. Salary increases are annual. These are not transitory! Focusing on core inflation is a fool’s errand…Do you need to heat your home/office, travel or eat? Volatility does not erase reality.

Source: @TheTerminal, Bloomberg Finance L.P. 

3. Energy prices are volatile, but over the last 12 months oil is up almost 50%. This will infiltrate into almost every facet of our economy and our lives. It also takes time. For example, fuel and fertilizer price increases today will not be felt by consumers until the farmers produce is brought to market months from now.

Source: The Daily Shot from 1/12/22

4. Steel and lumber prices are surging again. Here is lumber:

Source: The Daily Shot from 1/12/22

5. Will a USD retreat further strengthen the costs of commodities?

The Daily Shot from 1/12/22

6. “Hello Houston…”

Source: The Daily Shot from 1/11/22

7. Producer price inflation was peaking, but with more than 25 million people contracting Covid in the last two weeks alone, what will happen next? Here are the world’s second and fourth largest economies. Please note the percentages:

Source: The Daily Shot from 1/11/22

Source: The Daily Shot from 1/12/22

8. What are the effects of inflation on markets?

9. Now for the important question: Will rising yields derail the equity markets? By many measures, the markets are at extreme valuations:

Source: Goldman Sachs 

10. Equity valuations have been helped by profit margins. Will goods and labor inflation eat into these margins?

Source: Oxford Economics 

Source: JP Morgan Guide to the Markets as of 12/31/21