Inflation Drops Most In 13 Years. Is That Good For Stocks?
As reported last week, inflation in the U.S. has dropped by the largest amount in thirteen years. Or, as reported at CNN.com, the inflation risk to the economy is seen as easing. How great is that? Beyond the short term, that is likely bad news for the stock market if it continues.
If inflation is abating, that means the profits from commodity related companies and many cyclicals are going to be under pressure. Remember we aren't witnessing normal inflation caused by pricing power and increased wealth. We are seeing abnormal inflation caused by monetary conditions, economic malaise and overvalued equities. That means other companies which have been raising prices due to higher input costs are likely going to start lowering prices at some point. Why? Because margins will become excessively wide if inflation continues to abate. In other words, companies that have raised prices due to rising input costs will see margins expand as those costs drop. Given we live in a market based economy, we can expect price cuts from those companies to spur demand or take market share. So with commodity prices falling and prices falling from other finished goods, what happened to inflation? Das ist kaput. Now as an aside, falling input prices might re-ignite the economy and inflation temporarily. Then what? Cause the Fed to raise rates? I'm not saying that is going to happen. It is simply an observation that this may not be such great news.
End game? Cyclical profits drop if commodities continue to drop. (Cyclical profits have been propping up this market and are the highest in half a century.) Other company's profits may temporarily rise due to lessened commodity input costs IF demand stay strong otherwise they fall as well. While I've been in the camp that inflation is temporary and not the end state concern, that is based on many variables which will unfold over time and may change.
Think the money coming out of commodities will instead go into more productive assets? That's what has been happening in the stock markets recently with the move to mega caps and some large technology shares. So, how does that translate into corporate spending and economic growth? That is a good question. We are in a capex recession and it probably isn't going to end before this cycle ends for a multitude of reasons. So, I believe this rally is misguided. But, then Wall Street is always wrong eventually. The key is to figure out when.
Want the market to continue higher? I'd say you might wish for inflation. Worried about the global housing market? Wish for inflation to keep the asset prices up. But, if you have a variable rate mortgage, you should wish for no inflation so your adjustable rate mortgage payment stays low. Wait a minute. You should wish for inflation so your home value doesn't fall. Flip, flop, flip, flop. Don't want to wish? Distract yourself. Maybe it'll all go away before tomorrow.
As I've written before, if inflation abates, the growth cycle is in jeopardy.
If inflation is abating, that means the profits from commodity related companies and many cyclicals are going to be under pressure. Remember we aren't witnessing normal inflation caused by pricing power and increased wealth. We are seeing abnormal inflation caused by monetary conditions, economic malaise and overvalued equities. That means other companies which have been raising prices due to higher input costs are likely going to start lowering prices at some point. Why? Because margins will become excessively wide if inflation continues to abate. In other words, companies that have raised prices due to rising input costs will see margins expand as those costs drop. Given we live in a market based economy, we can expect price cuts from those companies to spur demand or take market share. So with commodity prices falling and prices falling from other finished goods, what happened to inflation? Das ist kaput. Now as an aside, falling input prices might re-ignite the economy and inflation temporarily. Then what? Cause the Fed to raise rates? I'm not saying that is going to happen. It is simply an observation that this may not be such great news.
End game? Cyclical profits drop if commodities continue to drop. (Cyclical profits have been propping up this market and are the highest in half a century.) Other company's profits may temporarily rise due to lessened commodity input costs IF demand stay strong otherwise they fall as well. While I've been in the camp that inflation is temporary and not the end state concern, that is based on many variables which will unfold over time and may change.
Think the money coming out of commodities will instead go into more productive assets? That's what has been happening in the stock markets recently with the move to mega caps and some large technology shares. So, how does that translate into corporate spending and economic growth? That is a good question. We are in a capex recession and it probably isn't going to end before this cycle ends for a multitude of reasons. So, I believe this rally is misguided. But, then Wall Street is always wrong eventually. The key is to figure out when.
Want the market to continue higher? I'd say you might wish for inflation. Worried about the global housing market? Wish for inflation to keep the asset prices up. But, if you have a variable rate mortgage, you should wish for no inflation so your adjustable rate mortgage payment stays low. Wait a minute. You should wish for inflation so your home value doesn't fall. Flip, flop, flip, flop. Don't want to wish? Distract yourself. Maybe it'll all go away before tomorrow.
As I've written before, if inflation abates, the growth cycle is in jeopardy.
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