Do We Need Some Inflation? Market Commentary from Cabana’s CEO – September 28, 2021

4 weeks ago

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A few weeks ago, I mentioned that we were watching for a break above 140 bps (1.4%) on the ten-year treasury bond, coupled with a positive stock market close. We got just what we were looking for last week and the breakout held for an important technical “weekly close.” To me this is strong evidence of renewed belief in continued economic growth going forward and, a big positive for equities of all types going into the fourth quarter. Naysayers will point to the prospects for inflation and the choking off of corporate profits due to rising rates. I say we need some inflation. The current interest rate environment is abnormal and the result of a very sick economy. The problem is we have been sick so long we forgot what it is like to walk across the room without a walker and an oxygen mask. It is a good thing to be healthy enough to take the oxygen off and put one foot in front of another. This may seem scary and we might even stumble but that’s how we get stronger as human beings and as an economy.  

True to form we are also seeing a healthy rotation into cyclicals and small caps and out of bonds and mega cap technology stocks. It is worth noting that the equal weight S&P 500 (RSP) is starting to outperform its market-cap-weighted counterpart (SPY) for the first time since July.  

I’ll close by pointing out the obvious Gorilla in the room, which is the uncertainty surrounding the legislation pending in Washington DC. Much of the grandstanding is typical and largely blather, but the issue of our default on our debt obligations is serious business. All the other stuff, including a government shutdown, can certainly cause some protracted economic pain as I have pointed out previously, but a default by the US government on its interest payments could be catastrophic to the worldwide financial system. It could also end a couple hundred years of US global leadership. For these reasons I believe the crisis will be averted but it does give rise to the question of “why do you ever play around with something that can kill you?” Food for thought. 


February 23, 2021

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