Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

THE DAILY EDGE (16 December 2016)

U.S. Consumer Prices Posted Fourth Straight Rise in November Consumer prices rose in November for the fourth consecutive month, the latest sign of firming U.S. inflation as the Federal Reserve moves ahead with its plan to gradually ramp up short-term interest rates.

The consumer-price index, a measure of what Americans pay for everything from potatoes to prescription drugs, increased a seasonally adjusted 0.2% in November from a month earlier, the Labor Department said Thursday. (…)

Excluding the often-volatile categories of food and energy, prices also rose 0.2% from October. The rise in both overall and core prices matched economists’ expectations, though the monthly gain in core prices was a more modest 0.151% without rounding and little changed from October’s 0.149% increase. (…)

Compared with a year earlier, overall prices in November rose 1.7%, the strongest annual price growth since October 2014. Core prices were up 2.1% on the year for the second straight month. (…)

The index for medical care rose 4% on the year in November and shelter costs were up 3.6% from a year earlier. Food prices were down 0.4% from November 2015 and energy prices rose 1.1% on the year.

The Labor Department on Thursday also reported that private-sector U.S. workers saw a 0.3% decline in their inflation-adjusted weekly earnings in November compared with the prior month. Average hourly earnings fell 0.1%, prices rose 0.2% and the average workweek was unchanged from October. (…)

  • Prices for goods other than food & energy declined 0.3% (-0.7% y/y) after a 0.1 rise.
  • Non-energy services prices increased 0.3% (3.0% y/y), the quickest gain in three months.
  • Shelter prices rose 0.3% (3.6% y/y) while owners’ equivalent rent of primary residences increased 0.3% (3.5% y/y). Rental prices of primary residences also rose 0.3% (3.9% y/y).

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.2% annualized rate) in November. The 16% trimmed-mean Consumer Price Index also rose 0.2% (1.9% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

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The Cleveland Fed also provides daily nowcasts for the core PCE and core CPI. Mid-December, the core PCE has edged up to +1.8% YoY.

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  • The “sticky CPI” sticks above 2.5%. The Sticky Price Consumer Price Index (CPI) is calculated from a subset of goods and services included in the CPI that change price relatively infrequently. Because these goods and services change price relatively infrequently, they are thought to incorporate expectations about future inflation to a greater degree than prices that change on a more frequent basis. One possible explanation for sticky prices could be the costs firms incur when changing price.

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Home Builders’ Confidence Rises in Anticipation of Trump Boost U.S. builders’ confidence in the market for single-family homes jumped in December to the highest level in more than a decade.

(…) Builders’ confidence rose seven points this month to a reading of 70 in the first survey conducted entirely after the election. Readings above 50 indicate more builders view conditions as good than poor. Current market conditions and expectations for the next six months both significantly improved. The component measuring traffic of prospective buyers moved into positive territory for the first time in more than a decade. (…)

Builders’ hopes may be just that although traffic of prospective buyers, the only objective measure in this survey, did increase nicely last month. The Trump effect could be significantly tampered by this:

But “with nearly 1 in 4 construction workers from other countries and labor shortages a significant headwind, closed-door immigration policies could bulldoze builder confidence.”

Mortgage rates have been historically low this year, but have risen around three-quarters of a percentage point since the election. Home-loan rates could face additional upward pressure with the Federal Reserve signally further increases to the central bank’s benchmark rate next year, after announcing a move Wednesday.

Also, consider this problem (From The Daily Shot):

Most measures of consumer confidence rose sharply post-elections. Yet:

Total retail sales & spending at restaurants nudged 0.1% higher (3.8% y/y) during November following a 0.6% October rise, revised from 0.8%. A 0.4% increase had been expected in the Action Economics Forecast Survey. Three-month sales growth eased to 1.2%, its slowest pace since May.

A 0.5% decline (+3.3% y/y) in purchases of motor vehicles &  parts held back last month’s overall spending increase. The decline roughly matched a 0.8% drop in unit sales of light vehicles. Excluding autos, overall retail sales improved 0.2% (3.9% y/y) after a 0.6% gain. That was the weakest rise in three months. A 0.5% increase had been expected. 

Discretionary spending growth slowed markedly. (…) To the upside were restaurant sales. Sales at food service & drinking places rose 0.8% (4.9% y/y), a rebound after a 0.3% decline.

Sales in the retail control group, which measures nonauto sales less gasoline & building materials, inched 0.1% higher (3.4% y/y), the weakest gain in three months. Three-month growth improved, however, to 4.1%, the strongest rise since Q2. (…)

(…) Dealership sales, measured in dollars, fell a seasonally adjusted 0.5% in November from the prior month, the Commerce Department said Wednesday. Light-vehicle sales, in units, were up 0.1% through November, compared with the same period in 2015, according to Autodata Corp., but that small gain is due to increases in sales to fleet buyers, such as car-rental firms.

Manufacturing output of motor vehicles and parts fell 2.3% last month, the first pullback in six months, the Federal Reserve said on Wednesday.

With vehicle supplies outstripping demand, prices are being slashed.

Last month’s stockpile of 4 million vehicles, or a 73 days’ supply, is the highest level recorded for a November, according to WardsAuto.com. Haig Stoddard, a Wards analyst, said last week that auto makers will need a strong sales performance in December to keep first-quarter production schedules intact.

Average incentives, including rebates and discounts, reached a record $3,542 per vehicle this year, market-research firm J.D. Power said. Though transaction prices have averaged a record $31,044 in 2016—driven primarily by customer migration to pickups and SUVs from cheaper cars—the 9.9% discount offered on those vehicles exceeds the previous high set in 2008, when sales were collapsing.

In addition to conventional rebates, auto finance companies are making deals with an increasing number of buyers who have negative equity on the cars they are trading in. J.D. Power estimates that 31.3% of buyers in November were upside down—meaning they still owed more than the vehicle was worth—on their auto loan, the highest level since June 2006.

(…) According to DynamicAction Inc., which analyzed $4 billion in online transactions, the number of U.S. receipts that included promotions jumped 79% in November from the same period a year earlier. For the first week of December, the number was more than double that of a year ago. (…)

Fed Raises Rates, Boosts Outlook for Borrowing Costs in 2017
Hawkish Fed Exacerbates Dollar Fears for Emerging Markets
Chinese Consumer Inflation Heats Up

China’s consumer-price index increased 2.3% in November from a year earlier, a quicker pace than a 2.1% year-over-year gain in October, the National Bureau of Statistics said Friday. (…)

A big factor in higher prices was fresh vegetable prices, which climbed 15.8% from a year earlier last month, lifting the headline CPI figure by about 0.37 percentage point. (…)

Gasoline and diesel prices were up 4.6% and 6.0% respectively. (…)

China’s producer-price index rose 3.3% in November from a year earlier, compared with a 1.2% on-year increase in October. The PPI increased 1.5% in November from a month earlier. In October, it rose 0.7% from the preceding month. Economists’ median forecast had been for only a 2.4% increase. (…)

China Central Bank Extends Emergency Loans to Financial Firms China’s central bank extended hundreds of billions of yuan in emergency loans to financial firms on Friday and ordered some of the country’s biggest lenders to extend credit as well, as it moved to ease a liquidity crunch and continuing debt selloff.

(…) If the bond selloff accelerates, some analysts fear China could see a market crash like the one that hit stocks last year. (…)

On Friday, the PBOC tapped an emergency lending facility it created in 2014 to extend 394 billion yuan ($56.7 billion) in six-month and one-year loans to 19 banks. That pushes the net amount extended through the facility to 721.5 billion yuan so far in December, a monthly record, according to Beijing-based research firm NSBO.

The PBOC also ordered a few large banks to extend longer-term loans to nonbank financial institutions, while China’s securities regulator asked brokers tasked with making a market in bonds to continue trading and not shut any companies out of the market, according to Mr. Zheng of Dongxing Securities. (…)

(…) Underscoring the skittish feeling among investors, Thursday’s selling pressure was also driven by rumors spreading through the markets. A midsize Chinese brokerage denied a report in a major Chinese newspaper that it had defaulted on a large bond payment. One of the country’s biggest fund managers, meanwhile, denied a rumor circulating on cellphone chat groups that it was facing large redemptions.

Analysts said such rumors carried weight because many fund managers are heavily in debt, making them vulnerable to declining bond prices. (…)

Surprised smile
   
 
 
SENTIMENT WATCH

The Dow’s 8% gain in the five weeks after Donald Trump’s victory is the biggest surge following any U.S. presidential election in history. The rally, which has the blue-chip average on pace for its fastest 1,000-point rise ever, has been accompanied by a sharp jump in bullish sentiment.

When stocks move this far this fast, caution is usually warranted. This time, history might suggest otherwise.

There have been five other instances in which the Dow jumped at least 5% in a five-week period following a presidential election. Over ensuing six-month time frames, it continued rallying four of five times, gaining another 10%, on average.

The most recent example came in 1996. The Dow jumped 5.3% in the five weeks after Bill Clinton was re-elected and then surged another 18% over the following six months. It had similar reactions following elections in 1900 and 1924. The only time the pattern didn’t prevail was in 1952 when Dwight Eisenhower was elected. The Dow jumped 5.3% immediately after the election, but then fell 7.5% over the ensuing six months. (…)

In early November, only 23% of AAII respondents said they were bullish, among the lowest readings of the year. By Thursday, that had jumped to 45%, the third-highest reading in 2016 and one of the sharpest swings in the current bull market.

A similar move in sentiment took place in May 2013, just as stocks had rallied right before the so-called taper tantrum. Right on cue, bullish sentiment peaked in late May and stocks fell in the following weeks.

But investor sentiment is often most useful as a contrarian indicator when it hits extremes. It isn’t there now. One of the AAII’s lowest bullish readings ever came on March 5, 2009, which almost precisely marked the beginning of the current bull market. The most bullish reading was captured in January 2000, just two months before the dot-com bubble peaked.

Today, the absolute level of bullishness is still far from stretched. Bullish sentiment has remained below 50% for 102 consecutive weeks. “It has become seemingly impossible for the bullish camp to get a majority,” analysts at Bespoke Investment Group wrote Thursday.

Now if you missed THE TRUMP LOVE-IN yesterday, please have a look.

(…) The true danger to this latest bull run—the Trump rally—comes from itself. The genius of a matador is to wear out the bull by persuading it to keep charging, entrancing the audience in the process. The stock market has been attracted by the flourishes of Mr. Trump, the appealing prospect of tax cuts and infrastructure spending.

The question for the next month is whether the bull will be worn out before Mr. Trump even takes office.

When markets move a long way very fast, they become vulnerable. Late investors who pile on to little more than momentum have less confidence in their positions. The more momentum builds, the more it hurts if the bull trips and those momentum investors jump off.

This market has moved very fast indeed. The post-election rotation from defensive stocks to economically sensitive cyclical shares has been the biggest of any similar period since the bounce back after the Lehman crash. The 10-year bond’s losses have almost matched the selloff of the 2013 taper tantrum. And the dollar has surged 9% against the yen, taking it to its strongest since 2002 against a basket of currencies. (…)

The market is becoming ever more crowded into the Trump trade, leaving it more vulnerable to any sign that Mr. Trump might not be as effective as hoped. Those who are staying on had better hope this bull isn’t tiring.

World Energy Hits a Turning Point: Solar That’s Cheaper Than Wind

THE TRUMP LOVE-IN

This recent headline caught my attention: Another Reason Wall Street Loves Trump, like if loving Trump was so universally widespread. Even more so because this particular reason to love the President-elect is not of the pie-in-the-sky sort like infra-spending and manufacturing revival. Banks are actually seeing renewed and profitable activity in their trading.

(…) Average daily bond trading volume rose by 22% from a year earlier in November, according to data from the Securities Industry and Financial Markets Association. Volumes have been rising since midyear, but the election put them in overdrive. (…)

The more important question now is how long the pickup can last. If the Federal Reserve signals more rate increases coming when it meets next week, that could keep trading elevated. (…)

J.P. Morgan Chase Chief Executive James Dimon, speaking this week, said fixed-income trading has fallen around 35% from its peak years ago. Of that, Mr. Dimon figures around half is “gone forever,” while the rest “may very well be cyclical and will come back eventually.” (…)

Three questions?

  1. How much money will banks lose on their bond holdings because of the jump in rates? The Financial Times puts current global bond losses at $2.1 trillion and counting.
  2. What would be the net effect on bank profits and capital ratios if tax rates are cut given that the deferred tax credits booked after the massive 2008-09 losses assumed a 35% tax rate?
  3. Last but not least, are rising rates any good for equities?

I have no clue on #1 and #2 but here’s a hint on #3 (click on chart to enlarge).

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In the 12 periods of rapidly rising long-term rates between 1965 and 1996 (I grouped a few short periods on the chart), not one was accompanied with any meaningful gains in equities while most saw equities perform a really deep dive (average –14.5%).

True, that was in the previous century. Since 1996, there were some instances when rising rates coincided with higher equity prices, like in 1998-2000, maybe 2005-06,  and 2010. The first two instances saw equity valuations truly explode as investors bought into “great stories”, only to totally deflate when the dreams turned into terrible nightmares.

Humans are sometimes very open to “great stories”, especially when they come with labels like “game changer”, “revolution”, “new paradigm” and the famous “this time is different”. Sometimes, humans can be in such a need for any “credible” stories, they show an amazing capacity to adapt to rapidly changing narratives.

Only two months ago, “lower for longer” was almost universally tagged on long-term interest rates and inflation. And that was good for equities. Now, we get sharply rising rates along with inflating inflation expectations and that is also good for equities. Nobody really cares to document why, other than claim that the Trump revolution will have such an impact on profits…yaddi, yaddi, yadda.

The bond market cares deeply about inflation and real returns, except when central bankers decide to take it over to achieve their own particular goals which recently were very foreign to positive real returns.

Mr. Trump’s magic is expected to do the job on growth and inflation, right when central bankers wish to return to the back pages and let the bond market be the bond market, that is a generally pretty good discounter of inflation. So rates will be let loose and finally normalize. But what does that mean practically? It means positive real long-term rates around 1.3% give or take 1.0%.

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Current inflation is anywhere between 1.5% and 2.5% depending on the yardstick and is generally expected to be above 2.0% in 2017, meaning 10Yr rates in the 3.5% range from the current 2.4%. A tremendous jump from the July low of 1.5%. Will equity investors be able to cling to a good enough story, dismiss this new competition and overlook what that means to indebted corporate America and emerging markets already struggling with the mighty dollar?.

It happened before. In fact, there seems to be a pattern to investors’ “irrational exuberance”: almost once every decade investors totally overlook valuations when presented with a “game-changing” story. There was the brief Kennedy mania in the early 1960s, the nifty-fifties in the early 1970s, the brief Reagan mania in the early 1980s, the real-estate boom in the late 1980s, the internet revolution in the late 1990s and the housing mania in the late 2000s.

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Now the Trump mania. Based on the Kennedy and Reagan exuberances, equities could run some more, possibly to the 22-23 levels on the Rule of 20 scale. That would mean 2350-2450 on the SPX or another 5-10%.

Long-term interest rates serve to discount future earnings. But real rates also fluctuate along with investors’ greed and fear. Using inflation as a discount factor provides a more stable valuation gauge than trying to value equities with rates that are themselves subject to fickle investor psychology, or central bankers manipulation. The latest period of central bank experiments is a prime example. The “lower for longer” mantra was a trap to keep P/Es at a high level.

The Rule of 20 continues to help investors objectively assess the risk/reward ratio for equities. After proving its effectiveness in early 2009, against most other popular tools, and all the way up through 2014, the Rule of 20 kept its usefulness during the 2015-16 dry spell, adequately measuring the lack of rational upside since early 2015 and protecting against three sudden and serious setbacks during the period: two near –15% corrections in August 2015 and early 2016 and a smaller –6.5% drop in June 2016.

Combined with Edge and Odds’ thorough and objective assessment of the economic, financial and media environment, the Rule of 20 keeps delivering what counts most for investors: a simple, dependable and objective measure of the risk/reward ratio in order to optimize the crucial asset allocation between equities and cash.

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We are admittedly in a tough moment for investors faced with all these Trump stories boosting an already expensive equity market (“exploding profits will take care of this”) and simultaneously dismissing any notion of risk emanating from the fixed income world (“rising rates mean a better economy”), a potential inflation revival (“corporate pricing power is back”) and/or the vagaries of a rising dollar on emerging market economies (“exports are only 12% of GDP”).

Barry Ritholtz could be right: pricey equities can get pricier and new market highs can be considered bullish. Many investors will surely not want to leave money on the table, love Trump or not: Six Things to Consider as Stocks Break Records (with my comments):

1- Sentiment: Has gotten frothy as the market has run up. One of the more interesting ways to track sentiment is to use the Wall Street Journal as a reference guide. Stock-market researcher Laszlo Birinyi notes that when new market highs are consigned to page C4 or otherwise buried in the back pages, it is still early in the cycle. By the time it makes it to the front page, we might be getting ahead of ourselves.

After months of back-of-the-paper articles (see pages C4, C4, B12 and B1). Here is yesterday’s front-page Journal headline: “Postelection Rally Lifts Stocks to New Heights.”  The A1 coverage suggests that more investors are aware of — and participating in — the market rally. That might imply that a short-term retreat is due.

But also consider Bob Farrell’s rule #9: When all the experts and forecasts agree — something else is going to happen.

There is also the notion that there is lots of cash on the sidelines and that small investors have yet to enter the fray and push valuations to the extreme like they always do. Two problems here: one, small investors are already very well invested as Lance Roberts shows with this AAII chart. Their level of cash is also close to historical lows, which also holds for the institutional crowd.

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Ned Davis Research confirms with this chart (via CMG’s Steve Blumenthal):

12-02-02

2- Valuations are elevated: Markets are overvalued relative to historical averages. This may be true, but it misstates an important fact. Markets are rarely fairly valued. When stocks are undervalued, people can be too nervous to put capital to work; when they are expensive, they are reluctant to overpay.

Here is the thing about equities: Pricey markets often become pricier, cheap markets often become cheaper. It is important to remember that markets are at fair value for only the briefest of moments. Then they quickly careen off course, staying cheap or overvalued for years at a time.

The Rule of 20 chart above partly supports this view. It also illustrates that extreme high valuations beget extreme “corrections”. Bob Farrell’s #4: Exponentially rising or falling markets usually go further than you think, but they do not correct by going sideways

3- Earnings: It may be counterintuitive, but consider this: markets are forward looking and valuations look elevated sometimes because the economy and corporate profits have to catch up with prices. That’s what the first three-quarters of this year were about: stocks prices were little changed as they waited for earnings to rise enough to justify valuations.

I am always amused when people talk about forward looking markets, like if “markets really knew”. They sure try to gaze into the future, but that does not mean they know. What did they know in 1962, 1968, 1972, 1980, 1987, 2000 and 2007? Bob Farrell’s #9 again.

4- Then there’s the CAPE ratio: This is Yale economist Robert Shiller’s measure of cyclically adjusted price-to-earnings ratio. My colleague Michael Batnick crunched the numbers on CAPE, and he found that “over the past 25 years, the CAPE ratio has been above its historical average 95% of the time. Stocks have been below their historical average just 16 out of the last 309 months. Since that time, the total return on the S&P 500 is over 925%.”

In other words, CAPE is a useful guide to give you some ideas about future expected returns, but as a market-timing tool, it is of little use.

Some ideas? Please, be more specific. I have been warning of the CAPE drawbacks since January 2009 when I was treated a “bloody fool” (e.g.: The Shiller P/E: Alas, A Useless Friend, “LEAVING CAPE TOWN”). Good to see other people are finally realizing its limitations. Nobody seems to care about The Rule of 20 which is perhaps too simplistic for guru-fiefdom. It certainly does not require any Nobel prize to understand and use it.

5- New market highs are bullish: We said this two years ago, but it remains true today. I am always astonished when I hear that new market highs are a reason to avoid equities. Of all of the many factors that have been demonstrated to generate returns, I believe momentum — and in particular, trend — is misunderstood by many investors.

Think of it this way — which is the better way to generate gains, investing in markets that reach new lows or new highs?

Hmmm…Hopefully we will all get Barry’s wise word when the time comes. Because it will come. Bob Farrell’s #5: The public buys the most at the top and the least at the bottom and #1: Markets tend to return to the mean over time. Ben Graham also had a view on that: You don’t have to trade with Mr. Market when he wants to, but only when you want to. Warren Buffett has more:

  • I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.
  • Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
  • Risk comes from not knowing what you’re doing.

And these crucial ones from Peter Bernstein:

  • We can never know the future — least of all at the very moments when it seems most certain.
  • You must weigh not only the alluring probabilities of being right, but the dire consequences of being wrong. Light bulb

6- The election is over: The chief executive officer of Southwest Airlines noted that bookings have risen since the election. Maybe this is because everyone is so enthusiastic about Donald Trump’s victory and his plans to cut taxes and roll back regulations. My guess is that this election — the most insane, bizarre, surprising, reality-show-of-a-car wreck of our lifetimes — left many people too exhausted to think of doing anything other than watching the spectacle unfold.

Regardless of who you supported, and whether or not America is or was or will be great again, many people are relieved that the race is over. People are returning to their regular lives, and that means working, traveling, spending and investing in the equity markets.  

But wasn’t this election supposed to be a slam dunk?

Back in 2009, people were so disgusted of equities, however cheap they were, that no positive view or interpretation was acceptable. Everything was gloomy and bleak. Now, however expensive equities can be, there is always a positive spin to just about everything. Michael Lewitt quoted Daniel Kahneman last week:

An unbiased appreciation of uncertainty is a cornerstone of rationality – but it is not what people and organizations want. Extreme uncertainty is paralyzing under dangerous circumstances, and the admission that one is merely guessing is especially unacceptable when the stakes are high. Acting on pretended knowledge is often the preferred solution.

Here’s the reality as I see it:

  • Equities are overvalued by most measures.
  • The Fed clearly wants to raise short-term rates, not necessarily bad for equities but a potential headwind nonetheless. More on this? EQUITIES AFTER FIRST RATE HIKES: THE CHARTS SINCE 1954
  • Higher U.S. interest rates would likely push the USD up. More economic headwind, more earnings headwind.
  • USA Inc. is very, very leveraged.
  • Rising long-term rates could prove a strong headwind for the economy and equities. They generally do. A crude estimate by Peter Boockvar (via David Rosenberg) is that, given current leverage in America, a 100 basis points increase in market rates causes interest charges to soar $470 billion or 2.5% of GDP.
  • Buybacks and dividend growth are slowing as companies must address their debt ratio amid slower cashflow growth and rising rates.
  • World politics are getting complicated (USA, Brexit, Italy, France, China).
  • Central banks are getting complicated. What else can they really do?

Rather than being fearful of leaving money on the table, why not consider leaving risk on the table? Not only is there Bob Farrell’s rule # 9 and Warren Buffett’s rules #1 and #2, there is also the forgotten fact that expensive equities are fertile ground for black swans and ground hogs, especially when accompanied with rapidly rising interest rates.

I am thus leaving my equity rating at 2 stars, meaning a below neutral stance. Not an outright negative for 2 reasons:

  1. A recession is not in sight (will we really see it coming?) 
  2. Importantly, the “120 yield spread” remains very positive. As shown in A Powerful Combo: the Rule of 20 and the “120 Yield Spread”, the Rule of 20 barometer, being a valuation gauge, has occasionally had timing issues that the 120 Yield Spread alleviated:
    • The S&P 500 Index gained 43% between August 1970 and December 1972 while the Rule of 20 P/E ranged between 20.3 and 24. The yield spread was well above 120 for most of this period. Earnings were generally flat throughout the period but inflation dropped from 6% to 3%.
    • The S&P 500 Index jumped 50% between November 1990 and January 1994 even though the Rule of 20 P/E was well above 20 and often above 22. The yield spread stayed well above 120 (reaching 360 in January 1993). Earnings declined during the first 12 months (recession) but recovered 40% thereafter. Inflation declined from 6.3% to 2.5%.
    • Same thing between September 2002 and May 2005 when the S&P 500 Index advanced 46% while the Rule of 20 P/E was above 20. The yield spread stayed well above 120 (reaching 370 in May 2004). Earnings exploded 60% post recession more than offsetting a rise in inflation from 1.5% to 3.5%.

Pointing up A caveat to the caveat: in all three instances, the equity rallies started at the end of a recession-induced bear market…Furthermore, the current spread of 198 could be seen as artificial given the artificially low short term rates…which the Fed clearly wants to normalize. Three more hikes and we’re below 120. Maybe Mr. Market will see that coming.

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