By Jeff Anderseron, CFA
This Week: The S&P 500 closed the week at 4,544.90, and the Dow climbed to all-time highs. The S&P 500 is up 1.64% this week and 21% year-to-date. The US 10 Yr Treasury Bond yield drifted higher, settling in at 1.64%. Crude Oil continued its strength, closing at $84.18 per barrel, notching gains of nearly 2% on the week and gaining 74% year-to-date reminding us that near-term inflation is real.
Fed Chairman Jerome Powell Says Supply-Side Constraints Are Creating More Inflation Risk:
On Friday, Fed Governor Jay Powell stated that the “Supply-side constraints have gotten worse”. The Fed had previously predicted that much of these constraints to have lessened by year-end. Mr. Powell went on to add that the central bank will “need to make sure that our policy is positioned to stay flexible in the months ahead”. We are witnessing the negative effects of shutting down a global economy. Is the Fed moving away from its “inflation-is-transitory” stance? Despite these constraints, the breakeven inflation rate going out 5 years is around 2.75% vs 2.5% for the 10-year rate, both well below the current inflation run rate. Bond yields remain low and the velocity of money (which is a key gauge of inflation – higher velocity implies higher inflation) is yet to move higher, implying that long-term inflation is still not a foregone conclusion. Looking at the chart from the St Louis Federal Reserve, despite the amount of liquidity provided by the Fed, velocity remains anemic. Money has not flowed out into the real economy to support the belief that inflation is purely a monetary phenomenon. Arguments can be made about the trajectory of inflation, but what we can be certain of is that money in the future will be worth less than it is worth today.
The Chips that make the world Go Round:
Taiwan has 63% market share of the global semiconductor industry. Semiconductors are the new oil of the 21st century, a vital component in almost every product. Martijn Rasser, a senior fellow at the Center for a New American Security was quoted saying, “Whoever controls the design and production of these microchips, they will set the course for the 21st century.” Approximately 90% of the semiconductors used by US technology companies rely on Taiwanese manufacturing. This concentration is likely to issue #1 when it comes to American and Chinese relations.
There’s Money in the Banana Stand:
There is no argument that the Pandemic has widened the wealth gap. The stimulus provided by Governments around the world was necessary for many, and a boon for others. American and European households are sitting on record amounts of savings. Some of it will be used as security for future uncertainties, but much of it is just waiting to be spent. This cash hoard is likely one reason by supply constraints is an issue as there is a lot of deferred consumption.