Overheating Economy And Inflation

You knew that this chart would be next. The 10-year yield rose sharply on Friday after we all thought we were done worrying about the 10-year yield for a few weeks. But here it is again.

There has been quite a debate this week about whether we should avoid technology or continue to own it and ride out the weakness until it is back in favor again. 

I'm not the kind of investor/trader who can ride out weakness in a stock. It is guaranteed that if I decide to ride it out by holding technology, then I will get impatient and sell exactly at the bottom. So, knowing myself, I have to use any strength in the market to sell my remaining technology and hope that I'll be smart enough to get back in when the time is right.

The Longer-Term Outlook

The ECRI index continues to tick higher, pointing to economic growth. Is it worrisome that this index continues to tick higher and higher? Is this index pointing to an overheated economy four to six months from now? I think it might be, and the worry is that the inflation pressures will be too great for the Federal Reserve to resist raising short-term rates.

Lakshman Achuthan discussed inflation this past week. He says that we are experiencing "cyclical" inflation, and not "transitory" inflation as described by the Federal Reserve. The last cyclical upturn, in his opinion, was in 2016 and it lasted until 2018, a two-year period of inflation.

Lakshman says that we are now about six months into a cyclical upturn in inflation, and this cycle of inflation will be with us for longer than we think. As you may know, I think very highly of the opinions of Lakshman Achuthan, so I'm taking this seriously. 

I'll be investing in areas of the market that will benefit from inflation and higher rates, and I will also be quicker to take profits because I know that fears of inflation are what generally ends a bull market. At some point, higher inflation will lead the Fed to raise short-term rates, and rising short-term rates will lead investors to start to sell stocks.

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Disclaimer: I am not a registered investment adviser. My comments reflect my view of the market, and what I am doing with my accounts. The analysis is not a recommendation to buy, sell, ...

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