Weekly Market Pulse: The More Things Change, The More The Song Remains The Same

Markets continue to move based on the expectation of a post-virus boom. At least that is the dominant narrative right now. The economy, boosted by another round of stimulus, will surge once the virus is under control and things return to normal. President Biden last week offered his version of optimism by saying that families would be able to gather for a July 4th celebration, but only in small groups for backyard barbecues. I’m guessing that the President doesn’t get out on his own much because if he did he’d know that offering that as some kind of aspiration sounds pretty silly to most of the country. I’ve got news for the Biden administration; the barbecue has already started.

But whether the party is truly started or not, markets are trending toward higher economic growth and inflation. Interest rates, nominal and real, are rising. Inflation expectations are rising. Stocks and commodities are rising. Real estate prices are rising. And absolutely everyone seems to be talking about commodity prices and inflation. Which makes me wonder if all the people so sure an inflation surge is on the way have bothered to look back over the last 20 years of commodity prices. This chart does not scream inflation:

Commodity prices haven’t even gotten back to the levels that prevailed in the post 2008 crisis period. And forget about anything resembling the last weak dollar period from 2002 to 2008. If this is the beginning of a so called “super cycle” in commodities, we have a long, long way to go. Market perception today is that commodity prices are soaring and if you look only at the 12 month rate of change that is true. But in context this move is nothing.

We are seeing rising prices of a lot of items and shortages keep making headlines. But this was a very different recession than any in the post war era. This recession was essentially a supply shock in slow motion. Every post war recession as far as I know was demand led. We’ve never shut down the economy voluntarily – well mostly – before. And the government response is exactly what one would expect for a demand shock – always fighting the last war –which is only going to make things worse, if temporarily. Supply will eventually catch up to demand – the cure for high prices is high prices – but in the meantime, juicing everyone’s – almost everyone’s – bank account with stimmy checks isn’t going to produce anymore computer chips.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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