Staring in the Rear View Mirror

The one singular characteristic of todays capital market environment that has been the most perplexing and frustrating has been the complete lack of concern for what “might” happen. As we have discussed, low rates and the absolute manic focus on additional yield at whatever cost, has produced an almost universal catatonic state. Nothing is more indicative of this than the markets complete lack of attention to the potential for reflation/inflation. We forgive the equity markets for their lack of focus as they have the attention span of a six year old, but it is curious that the Treasury Market continues to remain oblivious to what are emerging signs that pricing pressures are already upon us. Slack in the labor market, spare capacity, and seasonal one-off factors are only some of the reasons given as to why we should ignore what are clearly clouds on the inflationary horizon. Perception is reality however, and the reality of low long term rates will remain until the broadly held mis-perception on inflation/reflation changes. The argument is also made that inflation/pricing pressure will never come to bear primarily because we would have already seen it if it were going to take hold. Our feeling is that all of the liquidity sloshing around has flowed into the easiest parts of the capital markets (debt and equity markets), next up are the hard asset/commodities markets which will in turn lead to overall broad price increases, which will then  ultimately flow through to wages. We have never seen the kind of uncharted, unfettered Central Bank action that we have most recently experienced, so rest assured that when this inflationary cycle unfolds it will most likely not look like anything we have seen before. Buy Stuff