COTW: The Dog That Wags All Tails

February 19, 2018

The chart below can be downloaded here.

 

Given the recent increase in volatility, we thought it made sense to hit pause and zoom out for some perspective on how we got here.  Why are markets so concerned about a seemingly modest uptick in inflation? Why are rate hikes a bad thing if economic growth is relatively strong?  We believe a key development to watch this year is the potential end of 9-year negative real rate regime that has driven down the yields (and, by implication, the expected forward returns) for government bonds, high yield, stocks, real estate, private equity and a host of other assets. 

 

To date, rate hikes have not kept pace with inflation, keeping real (inflation-adjusted) interest rates below zero. As long as that dynamic holds, market participants are still being encouraged to invest in riskier assets or suffer a guaranteed loss of purchasing power if they hold cash or cash proxies. However, if inflation grinds higher and the Fed continues hiking as expected, this 9-year tail-wind to risky assets will end. This could have enormous implications for capital markets. We use the Core PCE Price Index below because it is a more stable series, but using headline inflation (CPI) paints a similar picture. CPI is currently about 0.5% higher than Core PCE.

 

 

IMPORTANT DISCLOSURES

SpringTide Partners, LLC is a Registered Investment Advisor with the state of Illinois and other states jurisdictions where required. Registration with the SEC or any state securities authority does not imply a certain level of skill or training. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. All investing carries risk including risk of principal loss. All statements made on this website are opinions of SpringTide Partners, LLC and are subject to change. SpringTide Partners, LLC assumes no responsibility towards the accuracy of the data included. Statements made on website shall not constitute investment advice.

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