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Inflation is Transitory and a non-issue...Really?

BentinPartner Weekly

Dear Reader,

US Retail sales climbed 5.3% last month (and +7.4% from a year ago) after decreasing 1.0% in December, beating expectations for a 1.1% increase. January Producer Prices also came stronger than expected climbing 1.3%, the biggest gain since December 2009 with prices rising sharply for both Goods and Services. Commodities prices rose as well and JPMorgan boosting its Q2 growth forecasts to 9.5% and the 2021 expansion to 6.4%.

At the same time, Fed officials lined up last week to reassert that heightened inflationary pressures were transitory and a non-issue.

Former US Treasury Secretary L. Summers begged to disagree, warning that the Federal Reserve will likely be pressured into raising interest rates earlier than expected and possibly early next year. He also argued against the latest USD1.9trn pandemic plan saying that the measure will pump too much cash into the economy, pushing it past capacity limits and triggering inflation as he called for a focus on longer-term investments instead (for which the power grid failure in Texas last week provided some support). The Fed current stance, he said, suggests that Fed officials are “not recognizing the era they are headed into,” arguing that the central bank will soon face the same challenges that it did in the 1970s when it failed to get a grip on inflation.

The salient event last week was the hearing of Robin Hood and Citadel on the recent volatility events surrounding penny stocks squeezed by retail investors on the face of large hedge funds’ short positions in the same stocks. What came out of it was…not much beyond questioning the “order flows” compensation (allowing hedge funds to front-run orders milliseconds before they are passed to the exchanges which is the mechanism by which brokers finance their so-called “0” commission plans).

Th. Peterffy, Chairman of Interactive Brokers detailed in a CNBC interview some more interesting flaws in the financial tubing warning that “We have come dangerously close to the collapse of the entire system and the public seems to be completely unaware of that, including Congress and the regulators”.

The general impression from last week is that a global mania is grappling financial markets on certain themes with frenzy types of behavior on penny stocks, certain investment themes, and bitcoins in particular. Nothing of what needs to be done on the regulatory side to contain a stampede that will end up in tears at a huge systemic risk is actually done, including letting corporations (Microstrategy) tap billions of dollars at zero rates in the corporate debt market …for the sole purpose of buying and holding bitcoins.

If there is nobody there to police these practices, there will be consequences expanding well beyond the price of bitcoins itself…

As a more general warning, JPMorgan’s gauge of cross-asset complacency based on valuations, positioning, and momentum neared the highest level since the dot-com bubble burst. Bank of America also reported its clients are engaged in an unprecedented frenzy of risk-taking, sounding the alarm on greed across markets. Cash levels slumped to the lowest since 2013 with 84% of fund managers now expecting global corporate profits to improve over the next 12 months.

Felix Zulauf’s observations are always insightful and I concur with most of what he said in this Barron’s article.

Over The Past Week…

Over the past week, the S&P500 dropped -0,2% (4,3% YTD) while the Nasdaq100 dropped -1,1% (5,5% YTD). The US small cap index dropped -0,6% (14,9% YTD).

Cboe Volatility Index rallied 3,8% (-3,1% YTD) to 22,05.

The Eurostoxx50 gained 0,6% (5,2%), outperforming the S&P500 by 0,8%.

Diversified EM equities (VWO) dropped -0,1% (11,9%), outperforming the S&P500 by 0,1%.

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,1% (0,5%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,1% (0,4%).

10Y US Treasuries underperformed with yields rising 13bps (42bps) to 1,34%. 10Y Bunds climbed 12bps (26bps, Z-score 2,1) to -0,31%. 10Y Italian BTPs underperformed rising 15bps (8bps) to 0,62%, outperforming Bunds by -6bps.

US High Yield (HY) Average Spread over Treasuries dropped -4bps (-41bps) to 3,19%. US Investment Grade Average OAS dropped -3bps (-6bps) to 0,96%.

In European credit markets, EUR 5Y Senior Financial Spread climbed 2bps (0bps) to 0,59%.

Gold sold off by -2,2% (-6,0%) while Silver dropped -0,3% (3,4%). Major Gold Mines (GDX) sold off by -5,9% (-9,1%, Z-score -2,1).

Goldman Sachs Commodity Index rallied 2,5% (14,4%). WTI Crude gained 1,7% (22,1%).

Have a nice week ahead and stay safe.


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Marc Bentin, BentinPartner GmbH

Founder, Chief Investment Officer

BentinPartner GmbH is a Swiss-registered independent financial adviser.

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