The inflation trade is in jeopardy from… inflation.
That’s one takeaway from the latest installment of BofA’s popular weekly “Flow Show” series.
The bank’s Michael Hartnett likes to talk about “peaks,” and this week he was talking peak EPS growth, peak fiscal stimulus and, notably, peak inflation.
As noted here Thursday following May CPI, annualized three-month inflation is running over 8% in the US. The figure (on the right, below, from BofA), illustrates the point.
Irrespective of whether inflation is transitory (Hartnett says it’s not), the near-term implication is that Americans’ purchasing power will be eroded.
With no more direct checks on the way and with some states already ending enhanced unemployment benefits, consumption could be curtailed. Apparently, Hartnett isn’t necessarily buying the idea that an abundance of “excess” savings and pent-up demand will make the American consumer resilient in the face of higher prices this summer.
The effects of stimulus on incomes and outlays were quite glaring over the first four months of 2021. The figure (below) just shows personal income and spending. It looks like an EKG. The erratic month-to-month gyrations are the direct result of “stimulus on”/”stimulus off”.
For BofA’s Hartnett, “US homebuilding stocks are an excellent example of the market anticipating inflation negatively impacting spending on real estate.” The homebuilder ETF is down four of the last five weeks.
Seen in this context, the recent decline in yields following a prolonged rangebound grind is no surprise. As the table (above, from BofA) shows, “peak CPI” (defined as the annualized three-month figure) has, on average, been followed by a 67bps drop in 10-year yields.
Still, Hartnett warned that “inflation is not transitory.” Writing in equations (as he often does), Hartnett suggested asset allocation “in the ‘20s =commodities>stocks>cash>bonds>US$.”
It will be interesting to see what Americans do with their credit cards. $83B was paid down in 2020 and $49B was paid down in Q1 2021.
If you think inflation is a problem now … wait until the fall harvest comes in after a summer of drought and fires.
Care to expand on that ? (ok H suggested that) CA has been dealing with drought and fires for….a long time.
Yeah, fire-wise it has been some tough years. PG&E deservedly went thru bankruptcy again…
Yet CA remains the salad bowel for the US. You might be receiving some of Cali’s fruit this summer.
A lot of our communities now have suggested/ mandatory water restrictions. same as the 70’s…..and other drought eras….
I can not speak for other states, but it would appear folks adapt.
So yeah, the price of your avocados might be higher, Use jam instead on your toast and almonds on your salad!
Don’t use almonds on anything. Almond trees are the most inefficient users of water in farming. In spite of the demand for this fad nut, many CA farmers are cutting down or burning their trees. Almonds are an ecological nightmare and there isn’t enough water in the prime growing regions to sustain the crop.
The Wonderful Company won’t be cutting back on almond farming anytime soon. They own significant water rights.