7 charts from the past week that tell an interesting story in markets and investing…
1) The Most Universal Tax of All
Thomas Sowell once said that inflation was the “most universal tax of all,” a “way to take people’s wealth from them without having to openly raise taxes.”
On that point, the confiscation of wealth continues apace.
Consumer prices in the US rose 7.5% over the last year, the highest rate of increase since 1982. And there’s a strong case to be made that the actual rate of inflation is even higher.
Once again, the increases in prices were widespread. Here’s the breakdown from the CPI report:
And here’s how US inflation compares with the rest of the world…
2) A Recessionary Signal?
The American people are becoming increasingly concerned about higher prices, with one index of consumer sentiment falling to its lowest levels in over a decade.
With data going back to 1952, the only time sentiment was this low without the US being a recession was during the 2011 bear market (August – October 2011).
Nearly half of all consumers in the sentiment survey are expecting declines in their inflation-adjusted incomes over the next year. If they are correct, that would mean a continuation of the trend we’ve seen over the last 10 months, with increases in wages failing to keep pace with increases in prices.
3) Is Higher Inflation Here to Stay?
We know inflation is high today, but will it continue to be high a year from now?
I asked this question on twitter this week with the following responses…
Few seem to be in the transitory camp, which is in alignment with the latest survey from the New York Fed. The results of that survey showed US consumers expecting inflation to average 6% over the next year and 4% per year over the next 3 years.
4) Losing Credibility
With each passing month, the Federal Reserve loses more and more credibility as an inflation fighting institution.
The 0% Fed Funds rate has made zero sense for some time, and is a glaring outlier relative to other periods in US history with a 4% Unemployment Rate.
But that picture is expected to change soon, with the market (Fed Funds Futures) now pricing a more rapid pace of rate increases, with 4 hikes by the middle of the year…
Expectations can change, but the bond market is quickly adjusting to reality of normalization, with Treasury yields surging to their highest levels since the start of the pandemic.
5) How Low Can Valuations Go?
The “stocks only go up” mantra was largely built on the mistaken belief that record-low interest “justified” sky-high valuations.
Even if you believed this to be true, there was a problem with this logic, as I wrote last year:
“If your entire bullish argument is predicated on low interest rates, that alone is not enough. You will need even lower interest rates (and even higher valuations) in the future to experience above-average returns. And if rates were to rise instead of fall (which would not be an unreasonable expectation as we hit all-time lows last year), your entire argument falls apart.”
Fast forward to today and we’ve seen just that, with many high growth/multiple stocks (ex: ARK Innovation ETF) declining by over 50%.
The question many are asking is how much lower can valuations go?
If we look at the Nasdaq 100 over the last 10 years, we find that even after the recent correction, the median Price to Sales ratio remains elevated at 6.4x. Ten years ago (in 2012) this multiple stood at 3x.
What was the 10-Year Treasury yield and Fed Funds Rate back in 2012?
Exactly the same as they are today: 2.0% and 0-0.25% respectively.
Which means that a) multiples can certainly go lower and b) sentiment, much more than interest rates, are the primary driver of valuations.
6) Record Trade Deficit
The US trade deficit hit a record high in 2021 at $859 billion, as the demand for overseas goods from US consumers skyrocketed following the stimulus bills.
7) The Tide is Turning
New cases of covid-19 in the US continue to plummet, now down over 80% from their January high.
As a result of this move lower and increasing pressure from constituents, the tide is turning. 11 states (California, Connecticut, Delaware, Illinois, Massachusetts, Nevada, New Jersey, New York, Oregon, Rhode Island, and Washington) announced changes to statewide masking policies in just the past week.
Have a great week everyone!
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