The failure of central-bank models to forecast the slowdown in global inflation “leaves investors in the dark about the most important economic measure today and why it’s so low,” according to a recent article in The Wall Street Journal. Contradictory messages from the bond, equity and commodities markets is “adding to the confusion from central banks struggling with the breakdown of their inflation models,” the article says. The yield curve has been flattening such that 10-year bond yields are a paltry .77 percentage points higher than two-year bonds. While this is often a red flag, the low-growth environment, the article […]
While gold has been the popular inflation hedge over the past ten years, copper was a better bet according to a recent Bloomberg article. “While data show that broad community indexes provided the best bang for the buck during periods of rising costs in the U.S., the red metal stands out. According to the article, for every 1% annual increase in the consumer price index since 1992, copper rose by nearly 18% compared to 5.2% for gold (according to data compiled by Bloomberg). Copper, says Jodie Gunzberg of S&P Dow Jones Indices in a recent interview, is “more sensitive to […]
The best scenario for investors is steady and low levels of inflation that ward off deflation but also discourage central banks from hiking rates too rapidly, says a Wall Street Journal article from last month. So far, the article asserts, “Trumpflation” has been embraced by deflation-fearing investors—but shareholders should be “keeping a watchful eye on consumer prices, as they often rise much faster than anticipated.” Richard Turnill, chief investment strategist at BlackRock Investment Institute, argues that although higher inflation supports corporate earnings (since increased wages are then spent by consumers), it can push down share valuations. Jason Trennert, chief investment […]
Along with its recent rate increase, the Fed has upgraded its growth and inflation forecasts—and this could bode well for commodity stocks, writes Validea CEO John Reese in in his article this week for Nasdaq. Reese cites a tighter labor market, stabilizing oil prices and slowing appreciation of the U.S. dollar as potential contributors to inflation, and cites AAII Journal data pointing to a strong outlook for commodity stocks: He identifies five commodity stocks worth a look: Ternium SA (TX), a producer of steel products and iron ore, is favored for its price-sales ratio, debt-equity ratio and cash flow-per-share (which […]
The results of a study on asset performance during periods of both low and high inflation are presented in this month’s issue of AAII Journal by Craig Israelsen Ph.D and developer of the 7Twelve Portfolio The median level of inflation used was 3.29%, as it allowed researchers to divide the 46-year period between 1970 and 2015 in half: 23 years with below-median inflation and 23 years with above-median inflation. Findings showed that during the period of low inflation, large-cap U.S. stocks returned 10.5% (inflation-adjusted) while the same class gained only 4.4% during a high-inflation period. The performance of all seven asset classes […]
As the S&P continues to hover at record high levels, the question remains as to how long it can continue. In a recent article for Forbes, Jurrien Timmer, Director of Global Macro at Fidelity Investments, outlines what he sees as five potential market scenarios down the road: Secular stagnation: The status quo—”a continuation of the slow-growth, low-inflation regime that has been in place since the global financial crisis ended.” Deglobalization: Post-Brexit, Timmer sees potential for a scenario of “diminished interdependence and integration between the economies of nations.” That is, a reversal of what has emerged over the past few decades […]
Rob Arnott, founder and chairman of Research Affiliates, says that the recent market environment is reminiscent of 1999, just before the tech bubble burst. Writing in Barron’s, Arnott argues that the following four “conditions parallel the extremes of the late 1990s:” “Falling inflation expectations,” which Arnott argues “snap back in reasonably short order.” He observes that “after inflation expectations hit a basement low of 0.9% in December 1998, within six months they had jumped to 2.0%” and “over the past three years, 10-year inflation expectations have plummeted by over 50% . . . to 1.2% in early February 2016” but […]
A recent piece in Forbes offers 4 suggestions for beating inflation. After noting that “the present 0% rate [of inflation] blends an upward march of 2% in the cost of services with a collapse in the price of oil,” the article observes that “if commodities rebound over several years, 4% inflation could surface.” To protect against this risk, the article explores 4 options: Treasury Inflation-Protected Securities (TIPS): These offer real protection for the principal invested, but a very low rate of return. Funds that roll over maturing bonds offer more liquidity, but do not provide the same guaranteed protection. Gold: […]
In an article in Canada’s Financial Post, columnist David Pett offers up some valuable investment insights from James Paulson, chief investment strategist at Wells Capital Management, who has been mostly correct in his stock market and economic calls since early in the bull market. Paulson explains that often, investors weight the consensus opinion in the market too heavily and lose sight about the factors that end up influencing what happens in the future. Paulson recently wrote, “combined, indisputable consensus trends and unrecognized themes can represent potential shocks to the investor mindset”. In Paulson’s view, there are five indisputable consensus themes […]
Billionaire investor Ron Baron has a message for those who are trying to predict how day-to-day news will impact the stock market: Stop.
Growth in US productivity has slowed considerably over the past decade, and explanations abound as to why. But Wharton professor and author Jeremy Siegel says the reality may be that new innovations have led to flawed data that underestimates just how productive the US has been.
Charles Schwab’s Liz Ann Sonders says that the risk of a correction is elevated, but she thinks the bull market is still in tact.
With the Nasdaq recently closing above 5,000 for the first time in a decade-and-a-half, bears have said that the index really should be adjusted for inflation to get a better assessment of where things stand, valuation-wise. Barry Ritholtz says that’s nonsense.
Contrarian guru David Dreman says policymakers have created “a form of financial Ebola” that is threatening to wipe out the savings of many Americans.
A periodic look through the archives of the greatest investor in history In Berkshire Hathaway’s 1979 Letter to Shareholders, Warren Buffett talked about the impact that inflation and taxes can have on an equity portfolio and a business. Below is an excerpt from the letter.