Inflation Mirroring History, Fed May be Forced to Act, and Equities Stand Strong…For Now

The CPI is now well above the pre-Covid trend, leading the Boomer generation to draw parallels to the 1970’s. Yet, barring extreme competition or a collapse, the Fed continues its transitory thinking that the surge caused by reopening’s and pent-up demand is temporary. This hypothesis can be supported by the price of lumber “normalizing” after the sudden increase in demand has now tapered off. But could the CPI spike force the Fed’s hand to act sooner than it would have liked? Looking to equities, retail flows have surged into the U.S. in June, but meme stocks continue to struggle and a rotation into crypto looks unlikely especially as we see how regulation around crypto evolves. Fund managers put more money into tech recently, which has buoyed U.S. equities in their sustained outperformance of international equities, but could they be poised for reinflation?

1. Comparisons to the 1970’s makes most Boomers shiver. Inflation is not fun. However, now the Fed can buy and sell bonds in the open market…

Source: The Daily Shot, from 7/13/21

2. Yesterday’s 5.4% inflation print now has the CPI well above the trendline. As we have been saying for months, be careful what you wish for. If this continues, will the Fed be forced to act sooner and more powerfully to check inflation?

Source: The Daily Shot, from 7/14/21

3. The Fed’s thought process so far has been that the re-opening and demand surges will be temporary. Once prices go up, absent rampant competition or demand collapse, they stay high…

Source: The Daily Shot, from 7/14/21

4. An example of “complete normalization”? Temporary price spikes due to sudden and intense demand have retreated after supply increases and waning post-pandemic demand:

Source: The Daily Shot, from 7/13/21

5. At what level will someone stand up and say, “The Emperor has no clothes?”

Source: Bloomberg, as of 6/30/21

6. Look at the slopes of the last three bulls versus this one. As we learned from Covid last year, bears can happen faster as well. A harbinger?

Source: JP Morgan, from 7/13/21

7. The good news is earnings are robust and the multiples are falling:

Source: JP Morgan, from 7/13/21

8. Meme stocks and Cryptos are both in bear markets over the past month. Did enough small investors get burned and learn their lesson or will they rise again?

Source: The Daily Shot, from 7/14/21

9. Will U.S. tech ever allow International equities to shine again?

Source: JP Morgan, from 7/13/21