The financial world loves coming up with new buzz words to encapsulate what is trending. Alan Greenspan famously referred to “irrational exuberance” in describing the property bubble of the early 2000’s. “Green-shoots” was used extensively in the aftermath of the Great Financial Crisis in describing the early signs of the recovery. “Taper Tantrum” was used in describing the sharp rise in 10 yr. US treasury yields in 2013 and sharp market sell-off when the US Federal Reserve spoke of tapering their quantitative easing (QE) program. “Asian Contagion” was very descriptive of the currency crisis in 1997, which spread through Asia like a virus affecting the entire region. So, what is buzzing now.
For some reason, the current word trending makes me think of Sci Fi and according to google there was a book published in 2016 titled Transient Echo’s, which is described as a dystopian Sci-Fi novel. Not that I ever read the book, but I digress.
The word is “transient” or “transitory”, which was recently used by the current Fed chairman, Jerome Powell, in describing their view for US inflation. 101 economic theory distinguishes between structural and cyclical inflation, which I guess the latter is now trending as transitory. But enough of the fluffy banter as this is serious stuff. Inflation is a big deal and something the world has almost forgotten about since Paul Volcker was elected US Fed chairman in 1979 when he single-handedly set about taming the inflation dragon, which had ruled from 1965 to 1982.
The Fed believes the current spike in inflation is transitory been driven by the base affect (measuring off a previous low point), once-off consumer spending of the covid fiscal handout and temporary supply constraints, which given slack in the economy will see the inflation number peak and then fall back within range. Based on this view the Fed has no intention of changing its accommodative policy stance, which is supportive of risk assets. Keep in mind the Fed has a dual mandate of maintaining price stability (inflation targeting) and promoting full employment, which they consider to be at or below 3.5% unemployment. The Fed employs the best and brightest and they have unlimited access to the most valuable up to date market data. So, the odds are that they are right, but what if they are wrong. In fact, policy error is probably higher now than ever before given the unchartered waters the world finds itself in.
The rise in US 10 yr. yields is a barometer for future inflation risks and should be closely watched by investors. Having bottomed at c. 0.6% the sharp move to the current rate c. 1.7% is indicative of a market worried about future inflation risk.
Mark Williams
Mcomm, CFP®, HdipTax
T. 021-205 1133
Email. service@mwwealth.co.za
