Bizarr-o World

A pretty extraordinary thing has been happening in capital markets:

In recent months there has been a torrent of anecdotal evidence about inflation coming down the pike - inflation induced by robust aggregate demand (fueled by hyper-stimulating governments around the world) coinciding with congested supply chains as a result of Covid.

Then, last week, the anecdotal observations were confirmed by official data in the US, where latest monthly inflation figures implied an annualised rate of 5% (a 13-year high), while core inflation (which strips out certain volatile factors such certain foods and fuels) was 3.8% (itself the highest level for something like 30 years):




The response to this from the bond market?

Nada.  
Zilch.


[*]  Coincides with the release of latest US CPI figures


So, real bond yields are today the most negative they have been since as far back as I am able to find data (which is over 60 years), with the sole, brief exception being during the mid-1970s, when inflation was running rampant (it hit almost 20% in the US at one point in the wake of the 1970's oil crisis).

I have great respect for the collective wisdom of bond investors (I think they are inordinately smarter than equity investors) and in this case bond investors are totally ignoring the latest inflation numbers.

And if the bond market is, in fact, correct and that inflation we are currently seeing is merely transient, then this time next year those negative real yields will normalise without any need for bond yields to rise.

Which would continue to underpin equity valuations, including the very elevated valuations of long-duration growth stocks such as ARB.


But if the bond market ends up being wrong and the latest inflation numbers are not merely a temporary head-fake, but reflect something  more structurally entrenched, then the bond market has absolutely no spare wiggle room left.

Events of the past few days have left bond yields even more tightly coiled than they already were; any deviating from the current position of "Inflation?  Meh.", as implied by the current record negative real yields, will see the bond market get crunched.

In the meantime, the Premium P/E Party rocks happily on.

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