A Simple Explanation Of Inflation- By Neil Siskind

If wages gives companies power to raise prices then inflation can be good- or at least, not too bad.

If inflation forces incomes higher so that consumers can keep up with inflation, then inflation can be managed by consumers.

It is only if wages go up in this way that businesses can raise prices on consumers.

It is only if business can raise prices that they can afford to raise wages.

So- if the dollar forces prices higher, or there are any supply shocks, or if interest rates go higher for any reason except due to higher incomes, or if Amazon is in the world, and businesses can’t raise prices on consumers- it is harmful to the economy.

So, any rise in interest rates and/or prices without wage increases is bad news.

Higher inflation is not the same as higher interest rates. Interest rates can go higher without inflation as is happening now (arguably). The Fed is trying to normalize interest rates on all ends of the curve, even though proof of income growth is scant.

Also, if due to deficits- too much government spending- investors (including foreign nations) don’t want U.S. bonds, then bond yields have to rise in order to get buyers. Deficits also weaken the dollar, causing inflation.

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Here’s Why Stocks And Bond Are Selling Off- “Together” (Part II)- by NEIL SISKIND

Now that the CPI report has indicated some inflation to some people (not to me), the assets that should rise in an inflationary environment are rising- gold, metals, oil, stocks. But here are the problems: First the CPI was no higher than December. It was only higher than the consensus. Second, retail sales were weaker- again. Third, price rises were due to a weak dollar, not due to more spending and more pricing power. Fourth, rising gasoline and holiday spending are behind us. Fifth, a lot of spending was on health care and insurance- not indicative of a stronger consumer. Sixth, the Fed looks at the PCE much more than CPI as an inflation indicator.

So- even assuming inflation, we have seen the “bad” kind of inflation now- from a weaker dollar- as opposed to the “good” kind- wage growth, consumer discretionary spending, and business pricing power to pass-through higher debt costs.

Last week, stocks and commodities should have gone up, because, allegedly, we had wage inflation. But, they went down. But, now, stocks should be going down, because we have some dollar induced inflation, health care cost inflation, without proof of sustainable wage inflation and business pricing power (as far as I’m concerned). Yet, stocks are going up.

The kind of inflation we “allegedly” have based on the CPI is the kind that leads to higher long and short interest term rates, and then deflation, because wages and businesses can’t keep up.

In other words, any inflation or rise in interest rates without wage growth and pricing power is deflationary. To have no inflation at all with rising rates is bad. To have “bad” inflation with still no “good” inflation, with rising rates, is very bad.

Stocks will head lower and so will real estate if wages and pricing power do not keep up with the Fed’s determination to continue with QT and Fed rate hikes to normalize.

Today’s CPI- if accurate, is the worst possible outcome. Stocks will selloff. But commodities may not if the dollar (vs. Yen) remains weak (depending on earnings growth, this can lead to stagflation). Real estate can benefit from inflation, but it is already to high and will, more likely, suffer from higher rates without higher incomes. No one is rushing in to buy real estate at these prices to hedge against inflation.

Inflation can make stocks rise- but not if incomes and businesses can’t keep up. This fear will return to the markets later this week, and, especially if the March employment report is weak on wage growth.

4 Things About Interest Rates That You Won’t See Mentioned Anywhere

Since the market meltdown began, investment bank stock analysts and financial TV commentators discuss all sorts of issues to explain the present situation with stocks, bonds, and the economy. But none of their reporting mentions how the real economy, rather than the stock market and public companies, is affected by rising interest rates. Interest rates affect real incomes of both consumers and businesses. Investors need to understand the consequences of:

  1. Interest rates effect on housing
  2. Interest rates effect on business balance sheets and re-setting of existing and new debt
  3. Interest rate effects on consumer debt, and, thus, consumer spending
  4. Interest rates are rising due to the U.S. government selling bonds to finance spending and/or due to quantitative tightening (in which case, investors won’t return to bonds for safety, and, thus, pushing rates downward, because bonds could continue to move lower, regardless of investor buying).

All of these things affect business sales and profits. In particular, these things affect the growth or decline of housing prices- which, as we saw in 2007, can affect everything else.

Even if consumers get raises, growing debt costs can eat into any such gains. With lack of any noteworthy wage inflation, this is problematic. Business earnings projections are affected by growing debt service costs. Housing is directly affected by higher interest rates, not only in the cost of buying a home, but also because of higher consumer debt, overall.

Houses and products have to be bought by people. Other than through tax cuts, this is how revenues and earnings grow. Higher debt costs have to be factored into the sales projections of everything. Yet, I have not seen them factored into anything- not into home builder stocks or consumer stocks. Let’s hope any wage increases offset the additional consumer debt expenses. Let’s also hope that the tax cuts make the higher cost of capital for businesses irrelevant.

 

Prison Reform

As part of my developing positions and concepts on prison reform, as added to this blog from time to time:

Inmates should not be freely moving around a prison facility, indoors or outdoors, at anytime. Inmates should be in their cells with doors closed and locked. Inmates should be out of their cells only for showers, exercise, and meals. When inmates are moved from their cells to these locations they should be handcuffed with legs shackled. In cafeterias they should have legs shackled to tables. Outdoor exercise should be in isolated gated units. Showers should be in individual stalls with one leg shackled. In sum, prisoners should not be physically interacting and roaming around prisons at anytime.

 

No One Will Mention Housing

You think interest rates affect stocks? Wait until you see how they affect home buying.

 

Neil S. Siskind, Esq., President
The Siskind Law Firm
Tel: 646.530.0006

Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
Neil-Siskind-photo
Learn more at:  http://www.neil-siskind-the-fatherhood-assignment.org/

Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
Neil-Siskind-Picture

The Neil S. Siskind Nature Preserve is over 8 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.

Neil Siskind, Founder, “National Fatherhood Day” – March 29th

Neil-Siskind-pics
To encourage recognition of the needs of boys and girls who are living without fathers or father-figures in their lives.

Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com
Caring is Free®

You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.

Neil Siskind’s Volunteer Work:

– Memorial Sloan Kettering Cancer Center, Volunteer

– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskindhelp children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal

– Make-A Wish Foundation- Help Neil Siskind make sick children’s wishes come true by creating your own fundraiser: Neil-Siskind/Help-Make-A-Child-Smile.htm

– DonorsChoose.org- Donate to one of my needy public classrooms: http://www.donorschoose.org/NeilSiskindGiving

– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/


Neil Siskind’s Pro Bono
 Work:

– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com

– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– Veteran FreeStart Business– Pro Bono: We seek to help put Iraq and Afghanistan war veterans in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.

Neil Siskind’s Government Work:

– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern

Neil Siskind’s Community Assistance:

Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.

Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/

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Treasury Yields Are Not Grown With Fairy Dust

They are not grown with magic beans either.

Financial analysts say that it is expected that rates would rise from growth or inflation and we should not be surprised. 

But, interest rates don’t rise because of expectations or a feeling that it’s time for it; it’s not through some magical force that, if you believe it strongly enough, it will happen.

Why did bonds go lower and yields higher? Because people felt it was time? That’s not how this works. People (or institutions, or nations) have to actually sell. And if people sell, it’s because:

(i) there’s some place better to put money (because of growth or inflation, for example).

Or

(ii) investors believe that an outside force will push the value of their investment down. 

Since money has not gone out of bonds and into other asset classes, then bond sellers are not selling because of expectation of growth or inflation- or else other asset classes that thrive in these environments would have received the capital.

So, it’s crystal clear that there is some other reason. You can’t just stick with your one reason about something if the facts prove that it is simply untrue. That’s called “insanity”.

Stocks (including bank stocks), energy, metals, etc., did not go down just because yields went up. That is simply not how this works. Stocks, and energy, and commodities, and bank stocks, all went down because, along with selling of those assets by investors in those assets, bond sellers chose not to buy these things.

So- “no answer” is not an answer. “These things happen” is not an answer. Some “outside force” compelled bond owners to sell bonds. And that same force compelled them to not buy other assets. It’s very basic logic, really.

So what is it?

Financial professionals think that investors are reacting to the wage report … and they are right. Investors are reacting to the wage report … to the weakness of it! Investors saw a weak PCE number, and weak wage growth, all while the Fed is raising rates on all ends of the curve with hikes and quantitative tightening. Thus, there is no safety in stocks, bonds, commodities, etc., and this is why everything “everything” is lower. It is not inflation to which investors are reacting, or they would be buying inflation sensitive assets … stocks, gold, copper … which are ALL down. Investors are in fear of asset bubbles being popped because of limited pricing power for businesses and weak wages in the employment report, combined with an aggressive Fed on all ends of the curve.

And that’s why ALL assets have “deflated”. Investors fear “DE”-flation … and even recession.

As far as I recall, the last time both stocks and bonds bled such red, simultaneously, was following the 2007 and 2008 crashes. Stocks had crashed, and the Fed had to buy bonds to get them higher and get the yield down.

 

Neil S. Siskind, Esq., President
The Siskind Law Firm
Tel: 646.530.0006

Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
Neil-Siskind-photo
Learn more at:  http://www.neil-siskind-the-fatherhood-assignment.org/

Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
Neil-Siskind-Picture

The Neil S. Siskind Nature Preserve is over 8 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.

Neil Siskind, Founder, “National Fatherhood Day” – March 29th

Neil-Siskind-pics
To encourage recognition of the needs of boys and girls who are living without fathers or father-figures in their lives.

Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com
Caring is Free®

You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.

Neil Siskind’s Volunteer Work:

– Memorial Sloan Kettering Cancer Center, Volunteer

– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskindhelp children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal

– Make-A Wish Foundation- Help Neil Siskind make sick children’s wishes come true by creating your own fundraiser: Neil-Siskind/Help-Make-A-Child-Smile.htm

– DonorsChoose.org- Donate to one of my needy public classrooms: http://www.donorschoose.org/NeilSiskindGiving

– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/


Neil Siskind’s Pro Bono
 Work:

– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com

– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– Veteran FreeStart Business– Pro Bono: We seek to help put Iraq and Afghanistan war veterans in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.

Neil Siskind’s Government Work:

– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern

Neil Siskind’s Community Assistance:

Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.

Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/

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Here’s A Secret About Wages

Financial “professionals” think that investors are reacting to the wage report … and they are right. Investors are reacting to the wage report … TO THE WEAKNESS OF IT! Investors see a weak PCE number and weak wage growth while the Fed is raising rates on all ends of the curve with hikes and quantitative tightening.. There is no safety in stocks, bonds, commodities, etc., … this is why EVERYTHING is lower. It is not inflation to which investors are reacting, or they would be buying inflation sensitive assets … stocks, gold, copper … which are ALL down. Investors are in fear of a popping of asset bubbles because of lack of pricing power by businesses and WEAK WAGES in the employment report, combined with an aggressive Fed.

Investors fear “DE”-flation … and, perhaps even recession.

 

 

Neil S. Siskind, Esq., President
The Siskind Law Firm
Tel: 646.530.0006

Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
Neil-Siskind-photo
Learn more at:  http://www.neil-siskind-the-fatherhood-assignment.org/

Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
Neil-Siskind-Picture

The Neil S. Siskind Nature Preserve is over 8 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.

Neil Siskind, Founder, “National Fatherhood Day” – March 29th

Neil-Siskind-pics
To encourage recognition of the needs of boys and girls who are living without fathers or father-figures in their lives.

Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com
Caring is Free®

You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.

Neil Siskind’s Volunteer Work:

– Memorial Sloan Kettering Cancer Center, Volunteer

– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskindhelp children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal

– Make-A Wish Foundation- Help Neil Siskind make sick children’s wishes come true by creating your own fundraiser: Neil-Siskind/Help-Make-A-Child-Smile.htm

– DonorsChoose.org- Donate to one of my needy public classrooms: http://www.donorschoose.org/NeilSiskindGiving

– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/


Neil Siskind’s Pro Bono
 Work:

– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com

– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– Veteran FreeStart Business– Pro Bono: We seek to help put Iraq and Afghanistan war veterans in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.

Neil Siskind’s Government Work:

– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern

Neil Siskind’s Community Assistance:

Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.

Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/

Sponsored Advertisements

Inventors, IP Owners, Manufacturers
Learn How To Bring Products To Market And To Expand Your Distribution Channels
The Complete Guide To The Ways To Manufacture & Sell Your Products

If This Continues, Watch Out For Housing

If interest rates keep causing selloffs of stocks without any proof of solid and sustainable income growth, the combination of higher debt and lower assets will send housing tumbling. Let’s hope wages and stocks head higher.

Even in such a turnaround, housing is in a dangerous place. Prices and incomes are terribly out of sync.

 

 

Neil S. Siskind, Esq., President
The Siskind Law Firm
Tel: 646.530.0006

Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
Neil-Siskind-photo
Learn more at:  http://www.neil-siskind-the-fatherhood-assignment.org/

Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
Neil-Siskind-Picture

The Neil S. Siskind Nature Preserve is over 8 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.

Neil Siskind, Founder, “National Fatherhood Day” – March 29th

Neil-Siskind-pics
To encourage recognition of the needs of boys and girls who are living without fathers or father-figures in their lives.

Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com
Caring is Free®

You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.

Neil Siskind’s Volunteer Work:

– Memorial Sloan Kettering Cancer Center, Volunteer

– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskindhelp children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal

– Make-A Wish Foundation- Help Neil Siskind make sick children’s wishes come true by creating your own fundraiser: Neil-Siskind/Help-Make-A-Child-Smile.htm

– DonorsChoose.org- Donate to one of my needy public classrooms: http://www.donorschoose.org/NeilSiskindGiving

– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/


Neil Siskind’s Pro Bono
 Work:

– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com

– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– Veteran FreeStart Business– Pro Bono: We seek to help put Iraq and Afghanistan war veterans in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.

Neil Siskind’s Government Work:

– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern

Neil Siskind’s Community Assistance:

Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.

Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/

Sponsored Advertisements

Inventors, IP Owners, Manufacturers
Learn How To Bring Products To Market And To Expand Your Distribution Channels
The Complete Guide To The Ways To Manufacture & Sell Your Products

LOL- Now Jim Cramer is Bullish on Snap After Making A Joke About An Article I Wrote

Jim Cramer has been knocking Snap for a year – and, just like how he had been telling investors to buy stocks with both hands right before the crash- he’s been wrong. I wrote an article noting Jim Cramer’s unfair negative bias where I said that we will soon see Snap… crackle … and pop!

The next day, on TV, Cramer spoke about Snap, and, strangely, said that “Snap will snap, crackle, and pop right off the map”. Hmmm.

As we know now- Snap is killing it. And suddenly- Cramer is recommending it. Hmmm.

Nothing like a positive recommendation “AFTER” a stock goes up. Isn’t that the same kinda bogus stuff that Cramer insults analysts about doing all the time? Hmmmmm.

 

Here’s Why Stocks And Bond Are Selling Off- “Together”- by NEIL SISKIND

Stocks are selling-off at the same time that bonds are selling-off. Experts are perplexed. But, this dual selloff can occur in only one environment:

Where the Fed will discontinue buying treasuries, pushing bond prices down, and yields up (i.e. quantitative tightening; herein, “QT”), sans business pricing power and sustainable consumer income growth.

There is no other explanation based on all the present facts and data about the economy. Even if there is inflation (more about this to come), it would not demand such an equities selloff, even with QT, where earnings growth is projected to be solid and wages are climbing. Moreover, though, if there is inflation, energy and the dollar would be rising with rates and inflation pressures, but they are not. There would have to be a ton of inflation for stocks to selloff with bonds- but how could that possibly be- when energy is weakening?

Inflation

It’s premature and simplistic to assume that investors, collectively, are selling stocks and bonds just to re-balance their portfolios due to higher inflation. To accept that, we first need proof of persistently higher wage and price inflation as the causes of higher 10 and 30 yr. Treasury note yields. The dollar has weakened while rates have risen, the Fed has not changed its plan of slow and steady normalization, energy is weakening, and Neel Kashkari and Janet Yellen are expressly dubious about persistent wage and pricing pressures (Kashkari said, “[t]here still may be some slack in the labor market”; and that wage growth in the recent jobs report “could be a blip”). The wage data in the January employment report had lots of holes in it: weekly hours worked were down; the labor participation rate is down; there is historically low wage growth, in general; many states mandated minimum wage increases; we are late in the economic and wage cycles; much of the wage growth was in real estate, which is cyclical; there is little to no pricing power for businesses, which is necessary for sustainable wage growth; plus several other factors that present doubt as to persistent wage pressures – so there is no real cause for sudden inflation fears.

When investors expect inflation, they don’t sell bonds for the purpose of making longer term interest rates rise, or because longer term interest rates will rise, magically, from inflation. That is faulty logic. What happens is that investors seek ways to benefit from inflation- such as through energy, commodities, or even equities- and this movement of capital from bonds to other asset classes causes interest rates to rise. The goal of bond sellers is not to make interest rates rise, the goal is to benefit- or at least be protected- from inflation. Following an inflationary report, such as on wages, bond sellers with inflation concerns would not sell their bonds, and do nothing (cash loses value in inflationary environments). Yet, energy, gold, and stocks, asset classes to own in inflationary environments, have been level to down, and investors are in cash, all of which are even more evidence that it is QT, not inflation, that has been spooking investors. In fact, it’s QT without inflation- without wage growth for consumers and homebuyers to manage higher borrowing costs, without pricing power for businesses so they can pass-through their higher costs of capital- that is scaring equities investors.

There is nothing- nothing at all- that proves, or is even good evidence of inflation- certainly not the, overall, tepid and modest recent employment and PCE reports.

Finally, equities often rise, not fall, with inflation, because it gives businesses pricing power.

Deflation

In a deflationary or recessionary environment, stocks can crash, but bond prices should rise (as investors search for yield). If investors were forecasting deflation or recession, they would buy bonds and flatten the yield curve, not steepen it. But- in the case of QT, the QT, itself, may cause the deflation, prompting investors to sell stocks- without buying bonds, since QT will force bond prices lower (helping with yield, but hurting principal). Decreases in energy prices, a weakening dollar, and consolidating equities, may be indicating investor sentiment toward a deflationary environment as the Fed “forces” yields higher on all ends of the curve. But deflationary sentiment, itself, did not cause the dual (stock “and” bond) selloff, and interest rates to rise (that wouldn’t make any sense); QT caused the bond selloff and interest rates to rise, followed by the stock selloff because of QT’s likely deflationary effect.

 

There is really nothing surprising about this dual selloff. Deficits matter, and the Fed wants to normalize its balance sheet. It is common knowledge that the Fed kills bull markets.

Janet Yellen thinks there could be a real estate bubble, which, in my opinion, was Ms. Yellen’s primary impetus for beginning to raise the Fed funds rate- not because of wage or PCE pressures. We do, in fact, have asset inflation (bubbles, perhaps).

Alan Greenspan acknowledged stock and bond bubbles- but made no claims about wage or price inflation. He believes in long term inflation due to the debt and deficits- which will hurt the dollar- which is, arguably, happening now. But, he also notes we are at risk for stagflation– asset price growth without economic growth (so, that does not indicate a risk of unruly wage and income growth … just the opposite).

Everything lines-up for a QT causation theory. Growth “and” bonds should, and would, be implicated in a QT environment. These recent selloffs are less of a worry, primarily, about growth and earnings, than a concern about bond prices for bond investors, and, collaterally, higher debt costs that will result for businesses, consumers, and homebuyers (which, of course, would affect growth and earnings). Anticipation of QT taking bond prices down, while deflating assets and equities through higher interest rates combined with tepid wage growth, with no ability of businesses to pass-through the higher borrowing costs, is the causal event of the simultaneous stock and bond market selloffs.

Of course, certain financial products and computer programmed algorithms have enhanced the selling.

Even if inflation is showing up in CPI and PPI reports, it is likely mostly due to the weakening dollar causing higher prices for businesses and consumers. This kind of inflation (rather than demand or wage driven inflation) makes it all the more problematic that wages are not really rising while interest rates are. This scenario buries the consumer with higher borrowing costs and higher product prices, but little to no wage growth (in fact a weaker dollar lowers real wages). This also burdens businesses with costs that they can’t easily pass on to consumers. So everyone’s costs go up. So far, I see the recent price index increases as unremarkable and unsustainable.

I do not believe that investors think that we have a risk of sustainable long-term inflation- I believe that investors think the risk is of deflation– especially now, as interest rates rise without proof of sustainable income growth. The dollar may be in agreement with this position. Energy, too. Maybe stocks, also- we’ll see.

Watch the dollar. Watch upcoming wage data. Listen to what business leaders say about their pricing power. Deflation is the risk- especially if yields rise- and incomes don’t. Remember- true and organic business earnings can’t increase on the back of a consumer who has stagnant wages and higher debt costs. If QT pushes rates up further, without wage inflation, it would be a major problem, particularly in the context of an overheated housing market.

If equities markets turn up from here while yields rise, with energy and the dollar also gaining, and, especially, if future employment data confirms wage pressures, I could rethink QT being the primary protagonist. Let’s see what equities do from here and what forthcoming wage data exhibit. Time will tell.

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endnotes

  1. In general, interest rates are rising on all ends of the curve for reasons other than rising wages and from businesses passing costs through to consumers, including due to Fed rate hikes to control further asset (housing) inflation, growing bond supplies resulting from QT, new bond issues from the the U.S. Treasury, and bond selling by other nations and U.S. corporations.
  2. Financial “professionals” think that investors are reacting to the wage report … and they are right. Investors are reacting to the wage report … to the weakness of it! Investors see a weak PCE number and weak wage growth while the Fed is raising rates on all ends of the curve with hikes and quantitative tightening. There is no safety in stocks, bonds, real estate (home-builders), energy, bank stocks … This is why everything is lower- because of weak wages, not because of higher wages. Investors fear de-flation, not in-flation. For example, how would you expect housing to do with stagnant or only slightly higher incomes, along with rapidly rising interest rates?
  3. To be clear, investors cannot even hide in bonds because QT is taking the Fed bid out of the market, and investors would lose principal. This aspect is helping yields go even higher, still.
  4. The U.S. government and Japan have also added to our bond supply.
  5. Stock analysts are reminding markets that even though stocks and bonds are performing poorly, the economic fundamentals and earnings stories are still intact. I find this curious, at the least. Interest rates (i.e. cost of capital, i.e. operations costs) have risen rapidly and suddenly, yet not even one earnings revision has come out. What about energy company earnings? What about home builder earnings? Does cost of capital suddenly not matter in business? What about businesses’ customers to whom they sell their products- don’t higher debt costs affect their customers’ spending? Stock analysts go on television to explain that it’s normal for higher interest rates to cause stock price multiples and P/E ratios to compress. But what about revenues and earnings? Don’t higher borrowing costs cause those to compress?
  6. QT and interest rate hikes will lead to a reduction in money growth and money supplies and velocity, which could be deflationary and recessionary. While a more detailed discussion of money supply is beyond the scope of this article, the issue is worthy of mention as part of a discussion about how QT can negatively affect investor sentiment about both bonds and stocks, simultaneously.

 

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About the Author

Neil Siskind is: President of The Siskind Law Firm, focused on product investments, trademark licensing, product distribution, and real estate; Founder & Chairman of The Fatherhood Assignment™, a think tank and advocate for children with absentee fathers; Founder of the global charity marketing initiative, Caring is Free®; Founder of National Fatherhood Day™; Owner & Conservator of The Neil S. Siskind Nature Preserve, over 8 acres of conserved waterfront land along New York’s majestic Hudson River; and author of The Complete Guide To The Ways To Manufacture & Sell Your Products. If you are in need of office space in South Florida, contact Neil Siskind about space availability at The Siskind Executive Office Complex in Boca Raton, FL.

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