Inflation – Will It Or Won’t It?
“Inflation is like toothpaste – once you got it out, you can’t get it back in again.”
Forget everything you think you know about inflation. It is not solely a consequence of “monetary phenomena”, but largely about the behaviour of crowds. That’s why it’s so dangerous to growth and markets.
After a torrid week for markets as Big Tech got spanked, and bonds rallied on a risk-off move following the mixed employment data, there is a distinct feeling of uncertainty and more pain to come in the December markets. Bond yields falling as inflation fears multiply is a very mixed message… but hey-ho, these are the markets we live in..
Aside from the pandemic, politics, geopolitics and all the other bad stuff that riles markets, the inflation threat has been the most threatening known unknown that will make markets nervous through 2021. Inflation is nailed on to remain incendiary and volatile through the coming year – adding more angst to markets as participants ponder the consequences. It’s a massive threat to markets, society and economic growth – whether it is real or not!
The big news was Jerome Powell, Fed chair, finally admitting the post Covid inflation we’ve seen building over the past 18 months is anything but “transitory”. That’s come as something of a surprise to many analysts who went with the central bankers dismissing inflation as a likely short-lived issue, a mere post-pandemic hurdle that would swiftly be passed-by. Over coming weeks sentiment is likely to shift towards worrying about new long-term inflation scenarios as the inflation numbers remain stubbornly high. It’s difficult to imagine an inflationary scenario that’s positive.
Inflation is currently running a shocking 5-6% across the Western Economies – for how much longer, or how much higher is a “how long is a piece of string question.” We don’t know. Many economists still expect it will fall. Inflation is now in a spiral of supply chain hick-ups, wages, earnings and contradictory expectations. Inflation may ease tomorrow. It may not. We just don’t know how the consequences will play out.
For instance; one aspect of the unexpected consequences of inflation are fears stagflation will boost rising pandemic populism, leading to protectionism and the end of globalisation – a less connected global economy is likely to prove inflationary, especially in terms of increased tariffs.
What is most frightening is how little financial professionals – from central bankers, investors and traders – really understand about what inflation is and how it emerges. Much of the market simply accepts the monetarist argument inflation is “everywhere a monetary phenomenon” as an irrefutable truth that can’t be denied.
Monetarist traditionalists assume you can address inflation by addressing just one aspect of it – the supply of money. Oh dear… Markets are so much more subtle than simple monetarist imperatives. The next time some “expert” tells you inflation is all the fault of Governments borrowing to much, ask them to explain why. What a vast number of market participants don’t get is inflation doesn’t follow rules – it follows sentiment.
Government’s and central banks have been stuffing the global economy with liquidity for the last decade, but its only in the last few months the Pandemic shock has crystalised real inflation. Why…? Because inflation suddenly became a real fear after it remerged due to supply chain shocks.
Let me coin a new mantra on inflation: “Inflation is everywhere what people fear it might become…”
Conventional wisdom assumes inflation can be mitigated inflation by cutting liquidity; central banks raising interest rates (tightening), while Governments can raise taxes and cut spending programmes (austerity). These monetary arguments are theoretically logical, and can be backed up by historical data – but they are loaded because if you tell the crowd inflation is coming, they will probably believe it.
Financial markets work because participants are constantly evaluating every nuance of information to determine future prices. Prices are but a reflection of the market putting together everyone’s perception like some enormous voting machine. Inflation is just a particularly important part of the economic picture influencing the market vote at present. Should we let us panic us?
Maybe not – we’ve just undergone a period of unmatched and sustained global monetary creation though the past 12 years – since 2009. Stock prices have tripled – posting massively higher gains than the relatively lacklustre economic growth we saw over the same period. It’s financial asset inflation pure and simple. It’s happened because stocks look relatively cheap to ultra-low interest rates, and central banks have been pumping liquidity into the financial system (in the hope of creating economic activity) via QE.
The result is massive financial asset inflation on a cause and effect basis: make money cheap and financial assets will rise.
(Conversely, that’s why everyone predicts a stock market crash when rates (the price of money) rise!)
But long-term Financial Asset Inflation since 2009 has created a whole series of massively destabilising consequences. The rich have become phenomenally richer – buoyed by soaring stock prices. (These are likely to be the same people telling us government borrowing and spending is bad…) Expectations markets will only keep going higher have sucked in legions of retail investor convinced they’ll also get rich (only if they stay lucky). The results of chronic inequality, political blindness and insane financial optimism make for a hopeless unbalanced and unfocused economy.
The real value of the global economy is not the market cap of an electric car company worth trillions, but the number of electric cars being produced and sold. (These are very different metrics – one is perceived future value, the other real value.)
Inflation in the real economy is not just cause and effect. It’s a constantly evolving perception and expectations led threat. It changes as the votes with the markets change and the behaviours of economic participants change.
The supply chain crisis as the global economy reopened triggered a host of consequences around the globe. What’s happened has been complex, and spawned a host of unforeseen knock on effects. The coronavirus, and successive lockdowns are still throwing new shocks into the system – as a result the system is becoming increasingly chaotic and impossible to predict as the threat board keeps changing.
This is roughly how its worked:
Economies around the globe shuttered themselves through lockdowns and working from home.
Goods become scarce – from construction lumber to microchips at both micro and macro level, from local shortages to national level.
Prices of scarce goods rocket – often temporarily till new supply leavens shortages.
However, workers perceive higher prices and demand higher wages to compensate – triggering wage inflation.
Prices become elastic to the upside and sticky to adjust downwards.
Companies raise margins and prices to meet wage demands, fuelling further wage demands and declining demand.
The intricate balances between demand and supply become increasingly chaotic, and more so when new Covid lockdowns raise new supply chain threats.
Throw in an energy inflation spike and you create a recipe for disaster.
The key thing is not that inflation is simply due to the consequences of too low interest rates (the monetary phenomenon) or rising government indebtedness (pumping money into the economy), but is due to the expectations of crowds towards perceptions of rising costs.
In crisis human behaviour tends to become increasingly difficult and fractious to predict. The unpredictable behaviour of crowds makes Central Bankers policy choices fraught. Traditional inflation responses like austerity, raising taxes, tighter monetary policy, are as likely to cause market instability and generate increased expectations to push inflation as to ease it.
The time to cut liquidity; the amount of money sloshing around the financial system was long-time ago. That money – that’s fuelled financial asset inflation – is now pouring into the real economy in terms of buying real assets like property, pushing up real inflation.
Its complex. And likely to remain so..
Euronav (NYSE:EURN) Cut to “Sell” at Zacks Investment Research
Euronav (NYSE:EURN) was downgraded by Zacks Investment Research from a “hold” rating to a “sell” rating in a research report issued to clients…
According to Zacks, “Euronav is a tanker company. It owns, operates and manages a fleet of vessels for the transportation and storage of crude oil and petroleum products. The company also offers ship management services. It operates primarily in Europe and Asia. Euronav is headquartered in Antwerp, Belgium. “
A number of other brokerages have also issued reports on EURN. ING Group upgraded shares of Euronav from a “hold” rating to a “buy” rating in a research report on Friday, October 22nd. Oddo Bhf upgraded shares of Euronav from a “neutral” rating to an “outperform” rating in a report on Friday, October 15th. Finally, TheStreet upgraded shares of Euronav from a “d+” rating to a “c-” rating in a report on Thursday, October 7th. One analyst has rated the stock with a sell rating and three have assigned a buy rating to the company. According to data from MarketBeat, the stock has an average rating of “Buy” and an average price target of $11.50.
Shares of EURN stock opened at $8.38 on Thursday. Euronav has a 1 year low of $7.55 and a 1 year high of $11.20. The firm’s 50 day moving average is $8.98 and its 200-day moving average is $9.11. The firm has a market capitalization of $1.69 billion, a price-to-earnings ratio of -5.20 and a beta of 0.29. The company has a current ratio of 1.05, a quick ratio of 1.01 and a debt-to-equity ratio of 0.65.
Euronav (NYSE:EURN) last announced its earnings results on Thursday, November 4th. The shipping company reported ($0.53) earnings per share (EPS) for the quarter, topping the Zacks’ consensus estimate of ($0.56) by $0.03. Euronav had a negative net margin of 71.01% and a negative return on equity of 14.82%. The company had revenue of $66.32 million for the quarter, compared to analyst estimates of $65.05 million. During the same period in the prior year, the business earned $0.22 earnings per share. On average, equities research analysts forecast that Euronav will post -1.59 earnings per share for the current fiscal year.
Hedge funds have recently modified their holdings of the company. Fifth Third Bancorp increased its position in shares of Euronav by 86.1% during the third quarter. Fifth Third Bancorp now owns 8,495 shares of the shipping company’s stock worth $83,000 after acquiring an additional 3,931 shares in the last quarter. Wells Fargo & Company MN increased its position in shares of Euronav by 67.1% during the second quarter. Wells Fargo & Company MN now owns 10,864 shares of the shipping company’s stock worth $101,000 after acquiring an additional 4,362 shares in the last quarter. FNY Investment Advisers LLC bought a new stake in shares of Euronav during the fourth quarter worth $142,000. Two Sigma Advisers LP bought a new stake in shares of Euronav during the third quarter worth $218,000. Finally, Lester Murray Antman dba SimplyRich bought a new stake in shares of Euronav during the third quarter worth $232,000. 37.76% of the stock is owned by institutional investors.
Euronav NV engages in the transportation and storage of crude oil. The firm operates through the following segments: Operation of Crude Oil Tankers (Tankers) and Floating Production, Storage and Offloading Operation (FpSO). The Tankers segment provides shipping services for crude oil seaborne transportation.
Recommended Story: Economic Bubble
For more information about research offerings from Zacks Investment Research, visit Zacks.com
The post Euronav (NYSE:EURN) Cut to “Sell” at Zacks Investment Research appeared first on ETF Daily News.
M2 and Nominal GDP Update: still growing rapidly
I am fascinated by the fact that these days hardly anyone is talking about the very rapid growth in both M2 and nominal GDP. Both suggest that inflation…
Chart #9 compares the growth of the personal consumption deflators for services and durable goods. Of interest is the explosive growth in durable goods prices.
A Market Green Light or No?
Was “selling the rumor” responsible for the recent weakness? … how are traders sizing up Wednesday’s Fed release? … what’s important in today’s…
Was “selling the rumor” responsible for the recent weakness? … how are traders sizing up Wednesday’s Fed release? … what’s important in today’s market
Wall Street traders often front-run major events that are likely to move the markets.
It’s the old adage of “buy the rumor, sell the news” (though in reverse).
Is that what’s been happening with the market weakness over the last few weeks? Have traders been bailing on stocks based on the rumor of what the Fed will do, preparing to buy back stocks after the fact?
Our technical experts, John Jagerson and Wade Hansen of Strategic Trader believe that’s what’s been happening.
From their Wednesday update:
Traders like to be ahead of the curve by both buying before the news is confirmed and then taking their profits off the table once the news is official.
The opposite phenomenon frequently occurs as well; traders sell their stocks before the news is confirmed and then buy back into their previous positions once the news is official.
While there isn’t an old saying that goes, “Sell the rumor; buy the news,” we think that is what has been happening in the stock market.
Traders have been worried for the past two weeks that the Federal Open Market Committee (FOMC) might signal the following things in today’s Monetary Policy statement:
- More than four rate hikes this year…
- An individual rate hike larger than a 0.25%…
- An accelerated tapering of its bond-purchase program…
- And a dramatic reduction of its $9-trillion balance sheet this year.
This worry has caused traders to sell into the rumor… or the worry, in this case.
As you know, the Federal Reserve released its policy statement on Wednesday.
How did it impact these fears? And what does that mean for a market rebound?
Let’s find out.
***Is Wall Street “buying” the news now?
For newer readers, John and Wade are the analysts behind Strategic Trader. This premier trading service combines options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways.
In their Wednesday update, they dove into the details of the Fed’s policy statement. They identified language that speaks directly to the fears that have been weighing on Wall Street traders.
From the update:
The FOMC just released its statement, and here’s what it said:
- It will likely start raising rates in March.
- “With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”
- It is not planning on more than four rate hikes in 2022, but it’s not taking the option off the table.
- “In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”
- It will be accelerating its tapering… slightly.
- “The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March.”
- It has no plans to start dramatically reducing its balance sheet.
- “The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.”
John and Wade sum up by saying they believe that this statement should ease Wall Street’s worries.
Now, that doesn’t automatically mean these traders will push stocks higher. Rather, it just removes this overhang from the market. But traders are still highly sensitive to economic data and earnings.
***On that note, we’re beginning to see a pattern of Wall Street shrugging off strong earnings, focusing on weaker guidance
On Wednesday, this market darling reported strong fourth-quarter results that included a record number of vehicle deliveries.
Adjusted earnings came in at $2.52 per share versus the forecast of $2.36 per share. Revenue rose 65% year over year in the quarter, while automotive revenue totaled $15.97 billion, up 71%.
Great quarter, right? Deserving of a nice pop in the share price?
Nope. Wall Street decided to focus on the potential for problems in the months ahead.
Tesla sold off 5% after hours on Wednesday. And the pressure continued yesterday, with the stock ending the day down 12%.
Here’s CityIndex explaining why:
Tesla warned its ability to meet its ambitious target to grow deliveries this year will depend on the availability of equipment, maintaining operational efficiency and ‘stability in the supply chain’.
It is that last factor that markets fear the most.
Tesla has so far proved to be far more resilient to the supply constraints hampering the global automotive market compared to its rivals, but the company is not immune and warned supply chain issues are ‘likely to continue through 2022’.
***It was similar with Netflix’s earnings last week
The streaming giant beat on its bottom line and was in-line with revenue expectations. But shares plummeted in after-hours trading based on fears of slowing subscriber growth.
From The New York Times:
Netflix added 8.3 million subscribers in the fourth quarter, raising its worldwide subscriber base to 222 million, but the company said on Thursday that it expected growth to slow in the opening months of 2022.
That news, in the company’s earnings release, prompted the stock to drop nearly 20 percent in after-hours trading.
Netflix ended up falling more than 30% over ensuing trading sessions and remains down 26% as I write.
Now, compare Tesla and Netflix to Apple, which released earnings yesterday after the bell.
The world’s most valuable company smashed its revenue record, also topping earnings of $30 billion for the first time.
Most importantly, CEO Tim Cook said that the supply chain challenges are improving. Though Apple hasn’t given formal guidance since the beginning of the pandemic, here were Cook’s comments:
What we expect for the March quarter is solid year-over-year revenue growth.
And we expect supply constraints in the March quarter to be less than they were in the December quarter.
Bottom-line, Apple’s growth story remains intact. So, its share price is benefitting, up 6% as I write.
This all points toward a reality of today’s market…
What matters now is growth.
Can a company continue to grow despite inflation, a rising rate environment, and the threat of a slowing economy?
If so, Wall Street will reward it. If not, watch out.
***Looking at growth on a macro level, we received encouraging GDP news yesterday
Gross Domestic Product grew at a 6.9% annualized pace in the fourth quarter. That’s much higher than the 5.5% estimate.
Plus, consumer spending, which makes up more than two-thirds of GDP, climbed 3.3% for the quarter.
So, there are positives here (despite today’s massive inflation number…but that’s no surprise anymore).
Just make sure any trade you’re considering is similarly rooted in fundamental strength – which means growth.
Returning to John and Wade, they believe some short-term bullish trades are setting up.
They’re not pulling the trigger yet. Instead, they’re giving the market a few more days to digest recent news. But they’re feeling cautiously bullish.
I’ll give them the final word:
What matters most is not whether the Fed will raise the overnight rate in March and then again in the second quarter – traders are already pricing that in. What is important is whether the underlying fundamentals are still positive…
We don’t want to fall into the trap of ignoring the bad news in favor of the good, which is why we are recommending patience before adding more risk to the portfolio.
However, it’s essential to be aware of the solid prospects the market still has in the near term to rally and provide easy profits.
So, for now, we don’t recommend making any changes to our trades. Still, we think the likelihood of new opportunities and some profitable exits over the next few days is high.
Have a good evening,
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