This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here.
The U.S. economy’s health is steadily recovering. We are seeing signs across various industries of revitalized demand by consumers.
Here is a keen FEB comment from one Institute for Supply Management (ISM) Machinery Industry purchasing manager: “Prices are going up, and lead times are growing longer by the day. While business and backlog remain strong, the supply chain is going to be stretched very [thin] to keep up.”
Acknowledging looming record inflows of fiscal spending and unprecedented monetary support, along comes a new problem (as if we didn’t have enough already): Consumer and Producer Price Inflation risk.
That is, with Aggregate Demand increasing, our economics textbooks suggest we should expect increasing Inflation. Yet Core Consumer Price Inflation barely crossed the +2.0% annualized Rubicon for the better part of the last few decades.
That period included a post financial crisis recession, where massive amounts of Quantitative Easing were first introduced (when pundits across the board predicted higher Inflation as well).
It is true? That “this time is different”?
For our first attempt to answer that, query the 20+ year flatness to the CPI.
Consult the chart…
Now, consult the next chart. Below is a decades-long time series of the Real M2 Money Stock, percentage change from one year ago. You can tell. This inflow of money we are currently experiencing dwarfs the quantitative easing of the post financial crisis recession era, with an unprecedented +25% year-over-year-rate.
With this in mind, let’s recall: the main reason inflationary pressures — from a higher inflow of money — never materialized after the financial crisis in ’08 to ’09 was the lack of a Real-World effect. That is, the rubber never met the road. Most of the Fed’s added digital capital was used to capitalize banks; rather than lifting internal activities within the physical economy.
In order to trigger the inflation through the traditional channels, that is Consumer and Producer Price Inflation, we would need to see economic activity rise markedly, along with a subsequent exchange of money.
The Velocity of Money is a measure of this very phenomenon. It gives a good indication of the amount of induced activity seen in our economy. As you can see in the graph below, we have witnessed a drastic decrease in the velocity of M2 since the financial crisis.
The latest coronavirus lockdown (not surprisingly) led to an even more drastic pullback.
One major contributor to this is a potential Savings glut. This is related to increasing Uncertainty among U.S. Consumers. A time series below shows you. The 2008 financial crisis led to a steady increase in the Personal Savings Rate. The most recent lockdowns drastically increased this rate. Raise fears dramatically, and shutdown spending outlets with public health orders, and the result is not very surprising!
However, as U.S. Consumers regain confidence, their Savings should eventually find a way back into the physical economy. That is, the chicken has to come home to roost at some point.
While this might be far enough in the future, to allow the Fed to counteract this development with higher rates, it remains important for investors: Consider a possible increasing Inflation playbook.
Stock traders and asset allocation investors need to get a better sense of which sectors might benefit from such a scenario. In particular, when the U.S. economy is relatively early on in any expansionary phase, the typical cyclical sectors and economically sensitive sectors to benefit are Financials, Energy and Industrials.
However, don’t incorporate unlikely scenarios into our thinking. Studies that examine “typical” behavior can include periods of high oil-shock supply-side Consumer Price Inflation, which occurred in the U.S. during the 70s-80s. Annual CPI increases we have seen in the last 2 decades are more useful as a guide, in terms of sector performance. OPEC+’s huge excess supply shelves the Energy sector this time around.
During more recent periods of increasing Consumer Price Inflation, especially the post-2000 period, Core Consumer Inflation increases were much more nuanced, barely breaking the +2.0% barrier. A time series data breach of small magnitude may have raised a few eyebrows at the Fed. But not much more than that.
Over the last 2 decades, during periods of rising Consumer Price Inflation, the Industrial sector and the Technology sector outperformed the market in more than 80% of the cases. Our economist insight into this phenomenon? When you lock the bubble-popping Fed out of the game, statutorily, that keeps the ‘Momo’ rising for cyclical and growth driven sectors.
The Financial sector underperformed.
Nevertheless, we are confident widening credit spreads will benefit the Financial sector tremendously, this year and next year. Banking institutions have the cheap savings pool in hand, pay paltry short term deposit rates, and can lend at much higher long-term loan rates. Job and business stress, and consequential losses should fall, which directly benefit Insurers. Brokers have seen huge increases in stock trading activity.
In that final and very specific sense, this time is different.
Zacks Top 10 Stocks for 2021
In addition to the stocks discussed above, would you like to know about our 10 best buy-and-hold tickers for the entirety of 2021?
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Inflation Risk... Much Ado About Nothing?
This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here.
The U.S. economy’s health is steadily recovering. We are seeing signs across various industries of revitalized demand by consumers.
Here is a keen FEB comment from one Institute for Supply Management (ISM) Machinery Industry purchasing manager: “Prices are going up, and lead times are growing longer by the day. While business and backlog remain strong, the supply chain is going to be stretched very [thin] to keep up.”
Acknowledging looming record inflows of fiscal spending and unprecedented monetary support, along comes a new problem (as if we didn’t have enough already): Consumer and Producer Price Inflation risk.
That is, with Aggregate Demand increasing, our economics textbooks suggest we should expect increasing Inflation. Yet Core Consumer Price Inflation barely crossed the +2.0% annualized Rubicon for the better part of the last few decades.
That period included a post financial crisis recession, where massive amounts of Quantitative Easing were first introduced (when pundits across the board predicted higher Inflation as well).
It is true? That “this time is different”?
For our first attempt to answer that, query the 20+ year flatness to the CPI.
Consult the chart…
Now, consult the next chart. Below is a decades-long time series of the Real M2 Money Stock, percentage change from one year ago. You can tell. This inflow of money we are currently experiencing dwarfs the quantitative easing of the post financial crisis recession era, with an unprecedented +25% year-over-year-rate.
With this in mind, let’s recall: the main reason inflationary pressures — from a higher inflow of money — never materialized after the financial crisis in ’08 to ’09 was the lack of a Real-World effect. That is, the rubber never met the road. Most of the Fed’s added digital capital was used to capitalize banks; rather than lifting internal activities within the physical economy.
In order to trigger the inflation through the traditional channels, that is Consumer and Producer Price Inflation, we would need to see economic activity rise markedly, along with a subsequent exchange of money.
The Velocity of Money is a measure of this very phenomenon. It gives a good indication of the amount of induced activity seen in our economy. As you can see in the graph below, we have witnessed a drastic decrease in the velocity of M2 since the financial crisis.
The latest coronavirus lockdown (not surprisingly) led to an even more drastic pullback.
One major contributor to this is a potential Savings glut. This is related to increasing Uncertainty among U.S. Consumers. A time series below shows you. The 2008 financial crisis led to a steady increase in the Personal Savings Rate. The most recent lockdowns drastically increased this rate. Raise fears dramatically, and shutdown spending outlets with public health orders, and the result is not very surprising!
However, as U.S. Consumers regain confidence, their Savings should eventually find a way back into the physical economy. That is, the chicken has to come home to roost at some point.
While this might be far enough in the future, to allow the Fed to counteract this development with higher rates, it remains important for investors: Consider a possible increasing Inflation playbook.
Stock traders and asset allocation investors need to get a better sense of which sectors might benefit from such a scenario. In particular, when the U.S. economy is relatively early on in any expansionary phase, the typical cyclical sectors and economically sensitive sectors to benefit are Financials, Energy and Industrials.
However, don’t incorporate unlikely scenarios into our thinking. Studies that examine “typical” behavior can include periods of high oil-shock supply-side Consumer Price Inflation, which occurred in the U.S. during the 70s-80s. Annual CPI increases we have seen in the last 2 decades are more useful as a guide, in terms of sector performance. OPEC+’s huge excess supply shelves the Energy sector this time around.
During more recent periods of increasing Consumer Price Inflation, especially the post-2000 period, Core Consumer Inflation increases were much more nuanced, barely breaking the +2.0% barrier. A time series data breach of small magnitude may have raised a few eyebrows at the Fed. But not much more than that.
Over the last 2 decades, during periods of rising Consumer Price Inflation, the Industrial sector and the Technology sector outperformed the market in more than 80% of the cases. Our economist insight into this phenomenon? When you lock the bubble-popping Fed out of the game, statutorily, that keeps the ‘Momo’ rising for cyclical and growth driven sectors.
The Financial sector underperformed.
Nevertheless, we are confident widening credit spreads will benefit the Financial sector tremendously, this year and next year. Banking institutions have the cheap savings pool in hand, pay paltry short term deposit rates, and can lend at much higher long-term loan rates. Job and business stress, and consequential losses should fall, which directly benefit Insurers. Brokers have seen huge increases in stock trading activity.
In that final and very specific sense, this time is different.
Zacks Top 10 Stocks for 2021
In addition to the stocks discussed above, would you like to know about our 10 best buy-and-hold tickers for the entirety of 2021?
Last year's 2020 Zacks Top 10 Stocks portfolio returned gains as high as +386.8%. Now a brand-new portfolio has been handpicked from over 4,000 companies covered by the Zacks Rank. Don’t miss your chance to get in on these long-term buys.
AccessZacks Top 10 Stocks for 2021 today >>