January 20, 2022

What I Mean

    I’ve been questioned on occasion over the past few months when I’ve written about inflation and my concerns over its timeline. Notably I’ve highlighted the challenges posed by both the transient pandemic and the problematic distribution logistics of goods and services, over the reality of oil prices rising, that are in my opinion, for no apparent reason than because the industry, and speculators, want it too. Curious, because OPEC certainly suggested otherwise when it voted to increase supply last month. The point is that with such an uncertain timeline and the strengthening evidence that supply chain and semiconductor problems will ease, in my opinion, time will tell if inflation will be short lived. Or what I mean is not that inflation will necessarily come down in the near future, but rather before year end it will simply stop going up. That would be a good outcome for everyone, including the Fed.

    So, what do we do in the meantime? Well. I’ve written in the past how the opening month of a new year is often met with two occurrences. The purchases of the “Dogs of the Dow” which fulfill the image of the Index, which has underperformed the S&P 500 and NASDAQ over the past few years, and is due for a welcome correction to offset the inflation driven correction occurring in the other indexes. The second occurrence has to do with the interest rate markets. The 10yr Treasury has gone from a low of 1.35% last month to a recent high of 1.87% over fears of the intensity of the recently announced intention of the Fed to raise interest rate in March. I bring this up, because four times a year (Feb, May, August, and November) the US Treasury has what is referred to as a quarterly refunding. This is where longer maturities (3yr and 10yr notes and 30yr bonds) than are customarily auctioned on the open markets weekly (3mo Treasury Bills), are brought to auction. The amount, consistent with growing deficits and the need to print money, is near 100 billion dollars. The first week of February the auctions will be announced, the following week they will be auctioned to a group of Treasury designated Primary Dealers, who will distribute the new longer maturity notes and bonds. Having been active in the bond markets for 30yrs, it comes as no surprise that interest rates are being lifted to a level that makes them more attractive to global buyers. By the third week in February, all trades will settle, and until the Fed meeting in March the capital markets could see some volatility.

    Current behavior of the capital markets is suggesting a typical worst case scenario. This is normal, since the impulsiveness of investor selling is always consistent with the procrastination exhibited when it becomes time to buy, maybe it’s some moderation is economic growth to calm the Fed, or the warmer weather brings a sharp decline in cases of omicron, nudging expectations from pessimistic to more optimistic. For now, the markets are oversold, especially technology, but it could continue for a while longer for the reasons mentioned above, but it will also eventually pause, and it will then eventually end. 

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