Interest Rates Are Rising For Lots Of Reasons Besides Inflation- by NEIL S. SISKIND

The words “inflation” and “interest rates” are being used interchangeably these days. For example, market analysts say things like, “As we enter into this inflationary environment it affects asset prices.”. But that is not accurate. Inflation has not yet proved out. What analyst should say is, “As we enter into a higher interest rate environment, it affects asset prices.”.

Reflation, or growth, is not “inflation”. (Let me digress for a second to mention that “inflation” has become a pejorative. Some inflation is good. Such as when you get a raise. But back to my point.) Sales and prices and wages can rise without an inflation scare being necessary, as long as the numbers stay in acceptable ranges.

Just to be clear, stocks can rise in an inflationary environment. But not in a higher interest rate environment that lacks inflation. Again, two different things.

Here are 6 reasons, other than inflation (well, other than housing inflation), why interest rates are rising:

  1. As the result of quantitative tightening to reel-in a housing bubble;
  2. as the result of Fed rate hikes to reel-in a housing bubble;
  3. due to corporations selling short term bonds to move that capital into investments that will benefit from new tax laws;
  4. due to the U.S. government financing its spending;
  5. due to investors concern about falling bond prices and growing debt and deficits;
  6. due to foreign nations’ concerns about falling bond prices and growing debt and deficits.

Interest rates rising without inflation is a negative because it indicates fear on the part of the Fed that there are asset bubbles (equities and housing), especially where FOMC minutes indicate no concern for wage or consumer price inflation. It also means that the government is funding its spending and debt with higher interest rates. It also means that bond investors are finding better places for their fixed income investments. Finally, it means that consumer and homebuyers’ borrowing costs are rising- while their incomes aren’t.

I’m not yet sure that inflation is in the mix, but I don’t believe it to be the case. We will see in the March employment report and the next PCE report. Oil prices are all over the map (speaking both geographically and figuratively).

Whether tax cuts for consumers and tax incentives for businesses to spend offset the growing debt expenses for consumers and businesses remains to be seen. But as businesses spend on cap-ex, input costs, such as oil, may rise. So, again, let’s hope incomes and tax cuts offset the additional costs to consumers and businesses.

Some interpret the recent employment and CPI and PPI reports as inflationary. But wage growth was weak, the CPI was no higher than the prior month, and the PPI probably reflected prices rising from the weaker dollar, rather than growing demand. Thus, these rises are potentially transitory, and not reflective of growth. They also could reflect fancy accounting by the government to establish inflation concerns as cover to raise interest rates to control a housing bubble. 

The weakening dollar is not necessarily something higher interest rates can cure. Especially if fiscal stimulus and rising debt and deficits are concerns. If rates go too high to protect the dollar, investors’ worst fear, recession, would be realized.

If it were not for tax cuts, we would already be sinking fast. I’m confident that the White House and Congress coordinated the tax cuts to accompany the rate hikes and quantitative tightening in hopes of a soft landing for assets. Let’s hope the tax cuts pan-out to be a net positive rather than a debt drag for the nation and a big knock on the dollar.


Bloomberg TV vs. CNBC

CNBC is finance-lite. They only really talk about stocks with little updates about U.S. bonds or local real estate trends. A lot of their programming is stock traders and this guy, Cramer, who scream and yell at each other about stocks.

Bloomberg’s anchors are brilliant. They constantly talk in significant details about currencies, interest rates, Treasury auctions, quantitative tightening, short term bonds, long term bonds, and all of this in the context of these things in every country and how they all affect flows to and away form U.S. markets and assets.

Inflation: The Government And Investment Banks Are Misleading You- by NEIL SISKIND

January’s CPI report, while higher than forecast, was no higher than the prior month.

Wages are arguably neither higher nor sustainably higher based on the most recent employment report.

PPI increase was mainly, or mostly, due to the weaker dollar.

Energy stocks are down.

But, interest rates are rising.

Alan Greenspan said we have a stock and bond bubble. But no words about a wage or growth bubble. Also, like everyone else, he fails to mention a real estate bubble. Not because one does not exist, but, perhaps for his lack of desire to revisit the nightmare he presided over in 2007, he like everyone in the financial industry, “won’t go there”. He sees deficit problems, in general, going forward.

Janet Yellen has never even mentioned wage or price inflation concerns. Plus, the PCE index remains, stubbornly, below the Fed’s 2% target.

We are getting tax cuts and fiscal stimulus from Congress while the Fed tightens monetary policy. Why?

Houston- we have a problem.

The government and investment banks don’t want us selling stocks and real estate in a panic. So, they’re selling us an inflation story as a red herring so that rates can go up in an in orderly fashion to deflate a housing bubble.

But with a weakening dollar, little inflation showing up, energy stocks falling, tax cuts, and more bond sales coming to finance government spending even as inflation allegedly exists, it’s hard to buy into their red herring. Interest rates are rising- but the inflation story is missing the facts. Just because the CPI or PPI rise, it can reflect many things, from dollar weakness, to simple “acceptable” growth, to manipulation of the numbers to get a desired result. The Fed wants rates higher but can’t and don’t point to any “unacceptable” inflation. They, Congress and the Fed, are clearly only targeting assets (housing). Even as rates rise, the dollar is not strengthening. Does that sound … “sound”?

The Fed needs higher rates to prevent a housing bubble from expanding. But higher rates can make it burst. The Fed is trying to walk the line by raising rates slowly and predictably, while Congress lowers taxes to create a softer landing. Congress’ actions are creating a weakened dollar due to deficit concerns- but this helps with their inflation case. But the weakening dollar due to investor concerns also causes its own set of problems, such as higher energy prices, which, while helping the government point to inflation as a red herring to justify rate hikes, hurts consumers as interest rates rise and wages don’t. What a pickle. Perhaps the government and the Fed have some pickeled herring – instead of a red herring. Much easier to swallow.

So what will happen with stocks? I don’t know and it doesn’t matter. People can always talk themselves into reasons to buy and sell stocks. This is about mortgage rates, bonds, housing stock, jobs, wages, small business expansion and survival, and long term deficits and growth- i.e. the real economy. Stocks and earnings are symptoms of what happens with all of the rest. Stocks follow bonds, stocks follow housing, stocks follow consumers, stocks, eventually, respond to the dollar’s predictions.

What can investors do?

If the above is accurate, investing for inflation would be a mistake. Investing for higher interest rates would be a proper strategy. With higher interest rates and low inflation, stocks would be lower due to deflation and multiple compression (as you saw 2 weeks ago, when yields went up, stocks went down), commodity prices would be lower due to lower demand (as you saw 2 weeks ago when yields went up, commodities and energy went down), bonds will be lower due to quantitative tightening (as you saw, bonds went lower 2 weeks ago) but will eventually be a safe haven for yield and eventually principal growth, overseas markets will provide growth if the U.S. deflationary environment does not spill over; the dollar will go lower, so other currencies, such as the Euro, are worth a look, real estate will buckle causing all of the above to be amplified, and, finally, cash is king.

The “x” factors are how tax reform affects consumer spending, and how cap ex and potential infrastructure spending can help maintain employment. In either case, stagnant incomes (combined with higher interest rates and a weaker dollar) are still a problem for the U.S. consumer, and, thus, U.S. businesses.

For now, cash is the best bet (if the dollar keep weakening, other currencies or gold should also be considered; a weaker dollar should cause some energy or commodity inflation if consumer spending doe snot totally collapse), and if tax reform inflates the economy, jump back in after stocks and real estate capitulate to more sustainable levels. Neither are going up, significantly, from here, so there is nothing to miss by waiting in cash with decent yield. If you own good stocks, like Microsoft, that have growth, great cash flow, a solid business in the right areas like the Cloud and gaming, plus a dividend, just hold on for the long run.

Licensing: C’mon, Kevin O’Leary- Get More Creative- by NEIL S. SISKIND

Kevin O’Leary, Shark Tank’ s Mr. Wonderful, often scolds Shark Tank entrepreneurs, warning them about how easily he, or anyone else, can easily knock-off their product and sell his, or their, own version. He complains that, while a product may be good, it has nothing “proprietary”; nothing invest-able; that the entrepreneur will be crushed like a cockroach against more well-known brands.

But the man who describes himself as “very creative” is lacking in creativity and missing many opportunities.

What does it mean for something to be “proprietary”? It means that it has not only something unique, but it has something protected by valuable Intellectual Property- namely a patent, a copyright, or a trademark. It has something that can not easily, or legally, be copied.

Kevin, if a product that you really like is not proprietary … then make it proprietary!

Oh, grasshopper and great master of licensing- where is the licensing mastery?

How many products in the market are nothing but simple products- shirts, eyeliner, sneakers- but with an athlete’s or celebrity’s name and image attached to become part of the brand, or acting as the products spokesperson?

Entrepreneurs try to claim that they have a brand that their customers love. You, Kevin, correctly in many cases, reply that no one knows who they are. They have a product, but it is not a recognized brand beyond a small group of customers; that there’s no real “brand equity” or proprietary “brand”.

You often comment, Kevin, that something is merely “a product”, but hardly “a business”. Once you co-brand the product with a celebrity name, and it works, you just feed the beast by adding a second and third product using the same business plan with the same or some other recognized personality. Once the first product works, just rinse and repeat.

If you like a product, Kevin, just license a recognized celebrity’s name and image, add it to the packaging, build a pretty website, even re-name the product. And just like that, Mr. Wonderful …

It’s proprietary!

What Is Really Going On With Interest Rates?: Some Government Slight Of Hand- by NEIL SISKIND

The media does not seem to understand the difference between inflation and interest rates. They are two different things.

Interest rates can rise without inflation. And it’s happening now. Interest rates rising, not inflation, is what investors fear. In particular, investors fear higher rates without any inflation in wages. Investors also fear the signal that would be sent with rising rates in the face of little to no inflation.

What is going on?

Interest rates can go up when institutions and/or nations sell bonds, even when there is no inflation, such as through quantitative tightening.

Interest rates can go up because of dollar weakening, which causes inflation, despite lack of demand or growth. In fact, the fear of lack of growth can cause a currency to weaken.

Secretary Mnuchin said that the White House supports a weaker dollar. Trump intervened to “take back” that statement.

A weak dollar not only helps exports but also give the Fed “cover” to raise rates. Why would the Fed want to raise rates without inflation? Why does it need a false premise- a red herring- a scapegoat?

Fear of asset bubbles can be the only answer- and real estate assets, in particular.

A weaker dollar that causes “some” inflation lets the Fed point to a reason for raising rates that prevents a panic in the real estate market and complete economic collapse, with the eventual benefit that the dollar rises, thereafter.

Have you ever seen such weak inflation? Hardly any wage growth, hardly any CPI or PPI growth (and to the extent of any, it is likely mostly dollar induced), yet the Fed is pushing up rates on all ends of the curve with rate hikes and quantitative tightening.

Meanwhile, Congress cut taxes. If the Fed is right to manage inflation, why is Congress adding fiscal stimulus while the Fed takes it away?

That is probably because it doesn’t exits.

If there is no inflation and the Fed simply wants to normalize rates in a strong economy, then why would Congress add stimulus if all is strong?

Probably because Fed rate hikes can stop growth and deflate the economy.

Either way- adding to a good economy or to an overheating economy- doesn’t make a lot of sense.

This does not tell me that Congress and the White House were wrong about tax cuts (putting a deficit conversation aside for the purposes of this article). Tax cuts tell me that monetary tightening has to be done, but needs to be offset. And this means that there really is no inflation, except in assets.

Recent employment and Price Index numbers are a diversion created with the help of a weakening dollar. The best government report you can get is the tax cut. As the Fed tries to slow inflation, Congress would not be trying to add to it. The tax cut is the ultimate “tell”.

I don’t believe Congress would seek to stimulate a good economy. The most amateur economist can tell you that that would be immediately inflationary and have immediate negative impacts.

Would anyone believe that the Fed and the White House are not coordinated? Who would believe such a thing? Children?

While I could explain the ups and downs of stocks in recent weeks following this report or that report, stocks are really less relevant or effective storytellers than are the dollar (or currencies, more generally) and even certain commodities, which have been declining. Bonds are usually important storytellers, too; but herein, the question to be answered is what story bonds are telling. The dollar and energy may be providing the answer. Bonds are sinking for the wrong reasons; not due to growth and inflation, but due to quantitative tightening.

Many In The Market Have It Backwards On Inflation

Inflation in prices affects margins- especially if higher prices can’t be passed through to consumers. This is bad inflation.

Higher wages hurt margins, but also stimulate the economy because consumers can spend and also buy homes. This can be “good” inflation.

Many in the market see wages as a hit to margins. Yet, they see price increases as something businesses can pass through to consumers, rather than taking the hit.

But higher prices for consumers along with higher interest rates and without higher wages is a bad thing.

But higher prices for businesses that they can pass through to consumers who are earning more is not bad for businesses, and maybe not too terrible for the economy.

We need wage inflation- to a degree. We do not need price inflation as much. We do need pricing power for businesses. But not if incomes are not rising, too.

The CPI number should be more concerning, in general, than the employment number, in general (though in this specific situation, neither should be a concern).

Any problem with inflation in the near future will most likely be caused by the dollar, rather than by demand- unfortunately.


Many Things Make Interest Rates Rise- by Neil Siskind

Higher interest rates do not necessarily mean there is a lot of demand in an economy. Rates can rise as the result of quantitative tightening, other nations selling and moving capital into other nations’ bonds, a weak dollar, inflation in prices that can not be passed on by businesses or absorbed by consumers (such as an oil shock)- and other issues that do not reflect a strong economy.

So, Healthy And Natural, Huh?

With rising interests rates, it is natural and expected that stock valuation compress. P/E ratios shrink.

If stocks are overvalued, or highly valued, it is healthy to have shakeouts that bring valuations back into balance.

So-  are stocks the only asset class to which this applies? Are stocks the only assets where valuations get compressed and re-balanced by interest rates? Can you think of any other assets that should get re-balanced by rising interest rates? Hmmm.

If you think that interest rates affect stocks, what do you think that they will do to housing? Housing can’t correct in a day or a week. Corrections take months … even years. Markets are not liquid likes stocks. Prices go down for lengthy time periods.

Real estate values affect consumer spending, consumer confidence, and household health. And jobs in the real estate industry are lost upon “healthy and natural re-balancing”. Real estate jobs have been one of the major affects on recent (alleged) wage gains.

Another Successful Licensing Deal Closed- by NEIL SISKIND

In this e-commerce world, large consumer products sites are seeking their own private label brands under which to sell product. I just completed a license agreement where my client (in)licensed a pet trademark for a particular category to sell through their popular pet website. This is an unusual license and required me to negotiate special terms because of the nature of Internet sales. Licensors (trademark owners) have historically not licensed their brands for online sales only. But in this new retail paradigm, I expect this to become more and more prevalent. Sales terms, volume expectations, guarantees, distribution methods, and trademark usage all had to be customized from typical license agreement terms to fit an online business structure. Very interesting. I look forward to monitoring the progress and using the data for future agreements and transactions.