Reactions To Rising Inflation Have Begun – Investment Drama Ahead

Inflation reality is biting, and consumers are noticing. Such an environment has been absent for years, so it’s time for investors to shift gears – and act.

Inflation uptrends are unlike all other economic and market growth cycles. The negative results produce reactionary business, financial, government and consumer behavior that fosters the uptrend.

Now that rising inflation is the topic of the day, anticipatory and reactionary actions already are visible:

Businesses get green light to raise prices –

Inflation Helps Boost Profit Margins

“Companies seize rare opportunity to increase prices and outrun their own rising costs.”

The Wall Street Journal (November 15, page A-1)

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Consumers begin to buy ahead of possible price rises –

Shoppers Increase Spending, Despite Inflation

“Retail sales rose by 1.7% in October as consumers bucked the pandemic, higher prices.”

The Wall Street Journal (November 17, page A-1)

Financial management begins to make aggressive shifts –

CalPERS To Borrow, Add Risk To Meet Targets” [Higher inflation means higher liabilities, requiring higher returns]

“The move by the $495 billion California Public Employees’ Retirement System reflects the dimming prospects for safe publicly traded investments by households and institutions alike and sets a tone for increased risk-taking by pension funds around the country.”

The Wall Street Journal (November 16, page B-1)

Government seeks to exhibit active, consumer-friendly role –

President Calls for Inquiry into Price of Gas

“President Biden called on the Federal Trade Commission to investigate whether oil-and-gas companies are participating in illegal conduct aimed at keeping gasoline prices high, in the latest effort by the White House to respond to public concerns about costs for everything from fuel to groceries.”

The Wall Street Journal (November 18, page A-1)

Federal Reserve attempts to find its way as “temporary” and “transitory” reassurances fail –

Fed officials express resolve to address inflation risks

“Federal Reserve officials in discussions earlier this month said the central bank ‘would not hesitate’ to take appropriate actions to address inflation pressures that posed risks to the economy.”

Associated Press (November 25)

Analysts become outspoken about the inflation reality –

The Fed Is Running Out of Excuses on Inflation

“Every time the Federal Reserve comes up with an excuse for raging inflation and why it won’t last, the data knock it back down.

“Inflation hasn’t turned out to be temporary and has accelerated, reaching the highest in a single month since January 1990. It is high even when measured against pre-pandemic prices, so this isn’t merely catch-up for the deflation of last spring. It is no longer merely about a narrow set of Covid-disrupted supply chains, or demand for used cars and other popular items. Even the get-out-of-jail-free card of FAIT, the Fed’s year-old policy of flexible average inflation targeting, is wearing thin.

“The only explanation remaining is that inflation will still be transitory–not as temporary as hoped, but that it will go away on its own. Investors still buy the story, but the risk is rising that the Fed has to act much more aggressively.”

James Mackintosh in The Wall Street Journal (November 15, page B-1)

The bottom line: Wall Street is preparing for a dramatic investment shakeup

Wall Street is scanning the horizon for signs of rising inflation hitting where it will hurt worst: Fixed income securities. Wall Streeters know that bond holders will suffer mightily when the bond “vigilantes” return to demand full return for risk.

Long-term bond yields used to move independently from the Federal Reserve’s short-term interest rate management. As the Fed begins the needed shift back to market-determined short-term rates, the long-term bond market will regain that independence. After all, a ten-year bond yielding a negative real yield now is assured of being a real loser in a rising inflationary period.

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