Inflation Gauges and Wages, a Look at Bulls and Bubbles, and a Refresher on Bond Risks

Given the level of stimulus pumped into the system over the last year, there is much anticipation around inflation. Levels have remained relatively subdued overall apart from certain sectors. And so far in 2021, the rate of mortgage delinquencies has slowed which is being helped by state and local eviction orders.  As lawmakers continue to debate over the federal minimum wage, we look at how the proposed $15 per hour would stack up compared to the income of the rest of the workforce. Turning to the equity markets, while the 2020 bear market was unlike any other, the subsequent bull is following similar patterns (so far) to those that came before it.  Meanwhile, given record low interest rates, the fixed income markets are poised for their own potential bear market if and when rates begin to rise—investors should be mindful of the level of credit and duration risk present in their portfolios.

Before we get into the charts, this is a friendly reminder there will be no chart blog on Monday, February 15th in observance of President’s Day. We will be back on Wednesday February 17th. 

1. So far, inflation remains subdued as the CPI and Core CPI both are at 1.4%…

Source: The Daily Shot, from 2/11/21

2. The Fed’s “favorite” inflation measure, the PCE, shows the Covid factor at work. Energy and commodity price increases show up in goods, but services remain a significant drag…

Source: The Daily Shot, from 2/11/21

3. The CPI measure does not include housing prices, which have skyrocketed. Instead, it uses equivalent rents, which have declined with the Covid induced flight to the ‘burbs…

Source: The Daily Shot, from 2/11/21

4. Mortgage delinquencies are not as big as the GFC and are getting better, but still could pose a systemic threat…

Source: The Daily Shot, from 2/12/21

5. More evidence as to why we should focus the new stimulus to those in need. Millions of new homeless helps no one. Missing rent leads to delinquent mortgages which leads to another systemic banking issue.

Source: The Daily Shot, from 2/12/21

6. Mini rant!  The current Federal minimum wage produces $15,080/year in total income, some of which may be taxable.  Could you live on this?  How about raise a family? Even at $15 an hour, the annual income produced is $31,200.  There is a side benefit to increasing the minimum wage:  What funds Social Security and Medicare? Taxes on wages, half paid by employees and half by their employers. Increasing the minimum wage should also increase the solvency of our social programs…

Source: The Daily Shot, from 2/11/21

7. A historical look at past bull markets:

Source: The Daily Shot, from 2/11/21

8. We have written about bubbles, bears and troubles many times. 1Q20’s decline was, so far, one-of-a-kind.  Most bears take years. Where do you think we are now?

Source: The Daily Shot, from 2/12/21

9. As predicted, the bubble has popped. Let’s ask all the buyers above $400 how they fared. It is fun until the music stops….

Source: The Daily Shot, from 2/11/21

10. Some good charts to show clients.  Bond risk includes credit quality, which has been steadily declining for years…

Source: The Daily Shot, from 2/12/21

11. It also includes duration risk.  Investment grade debt has also been increasing its duration (and maturity) for years as issuers lock in the lower rates for longer terms.

Source: The Daily Shot, from 2/12/21

12. With all due respect, when Italy’s 10-year bonds are yielding less than half of the 10-year UST, what are the markets saying?!

Source: The Daily Shot, from 2/12/21

13. The good news, we are getting more efficient with inoculations. The bad news, at the current rate, it will take about one year to get to 80% of the U.S. vaccinated (using only approved vaccines)…

Source: The Daily Shot, from 2/12/21