TL;DR - Too Long Didn't Read
-Stalled stimulus deal could take months for money to be distributed
-Why we're not worried about inflation in the near-term
-10yr US Gov Bond yield spikes, and bonds sold off across the risk spectrum
Hi there—here is this week's update!
There is still no fiscal stimulus deal with the US government. This deal is vital to keep our economy from redlining.
Capitol Hill is about $1 Trillion away from a deal, and the inability to strike a deal quickly will likely lead to further worsening economic data for this month. Even if an agreement is cemented tomorrow, it could take months for the money to be distributed.
This month's economic data shows rising prices for consumers and producers, along with a runup in gold and oil. The key driver for consumer price increases this month was clothing and cars. Additionally, import prices increased, likely due to a weak dollar, and producer prices increased as well.
This seems like a clear sign of inflation. However, we don't believe inflation is a near term risk. One month of rising prices off over already depressed levels is no indicator of inflation. Gold is viewed as a safe haven asset, and oil producers still have production cuts in place.
Longer-term, we believe that stagflation is a risk, which happens when prices increase and economic output declines.
Over the last two weeks, from the trough to the peak, the 10-year US government yield is up about 40%. While a movement from 0.5% to 0.7% may not seem drastic, we saw bonds across the credit spectrum sell-off this week.
Bonds that are viewed as safe-havens lose value as interest rates rise, and gain value when interest rates fall. Lately, we've seen higher credit quality bonds, like Municipal bonds, sell-off as interest rates have been rising quite sharply.
Bonds that are viewed as riskier, like high-yield bonds, are less sensitive to interest rate fluctuations. Even these bonds sold off this week, but this is due to investors requiring additional compensation for taking risk as a lender.
The consumer drives the US economy, and retail sales are an excellent barometer for understanding consumers.
US retail sales missed estimates this month, with travel and entertainment continuing to drag on spending. Consumer sentiment is also deteriorating and may get worse with Capitol Hill struggling to put together a stimulus deal.
Hedge Funds Selling Tech
Many large hedge funds have been selling tech names. Viking Global, Coatue Management, D1 Capital, and Renaissance Technologies have all sold positions in some of the largest tech names. Positions were reduced in Amazon, Facebook, Google, Netflix, etc.
More disconnects remain present in the markets, and they continue to mount. Investor enthusiasm is boiling down to nothing more than being an ostrich with its head in the sand.
Most of the hopeful assumptions from March have still not come true. We are far from a V-shaped economic recovery, yet the stock market has had the fastest recovery in history.
The only rallies that we can draw comparisons to were during the great depression. Unemployment remains at record levels, and the only thing keeping the population afloat is the delayed stimulus package.
We maintain our view that by year-end, we will see the markets suffer a significant decline.
See you next week,
-Saul & The Round Team
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