Inflation Archives - CMG AdvisorCentral

Charts of the Week

Posted on 02.27.17 |

This week we offer several charts concerning inflation, interest rates, U.S. economic recoveries, equity market performance and equity mutual fund flows.

This chart plots U.S. economic recoveries. Note the blue line. Debt’s a major drag:

Source: Crestmont Research

Keep an eye on inflation (rising):

Year-over-year change in CPI – look at the January numbers in the far right of the chart. The most recent BLS – Bureau of Labor Statistics Annualized Inflation Rate year-over-year equals 2.5%. The Fed’s target has been reached:

Source: Advisor Perspectives

And if you were wondering what inflation looks like by category:

Source: dshort.com

Here is the current probability of a Fed March interest rate hike:

Switching to equities, Ned Davis Research has something they call “Top Watch Indicators”… meaning indicators that help them spot a probable market top.

Here’s how you view the next chart:

When the green bars in the lower section rise above the horizontal dotted line (50), a market top is indicated.
The vertical dotted lines and shaded area indicates the times that more than 50% of their top watch indicators signaled a market top.
Percentage declines are indicated.
Green bar on the far right shows where we are as of 2-14-17.

Source: Ned Davis Research

Chalk one little dot up for the active fund managers. All the money has been flowing into passive index funds and ETFs:

And all that money that chased into “high dividend papers?” In a few short months, they’ve given up six years of excess returns. I continue to be cautious on high dividend stocks due to over popularity, low interest rates and the risk of rising rates.

Diversification has been under pressure the last few years. The average university endowment lost 1.90% in 2016. However, it is best viewed over the long term and designed to achieve a certain return relative to an acceptable amount of risk. 100% allocation to stocks is for a different investor risk profile. Not wise to compare one asset class to a diversified investment plan. With that said, in case you were wondering… this is how the 10 richest universities invested their money in 2016:

Rising Inflation Pressures and What it Means to Your Bond Allocations

Posted on 02.06.17 |

Below is my “go to” inflation chart. The Ned Davis Research Inflation Timing Model consists of 22 indicators that primarily measure the various rates of change of such indicators as commodity prices, consumer prices, producer prices, and industrial production. The model totals all the indicator readings and provides a score ranging from +22 (strong inflationary pressures) to -22 (strong disinflationary pressures). High inflationary pressures are signaled when the model rises to +6 or above. Low inflationary pressures are indicated when the model falls to zero or less.

0203-13

Source: Ned Davis Research

Bonds, bond funds and bond ETFs lose money when rates rise. I posted this next chart just a few days before Treasury yields hit a 35-year yield low of 1.37%. What it shows is how much money is lost when rates rise.

If your starting point was a yield of 1.40% (top half of chart), as it was on 7/11/2016, and rates rose to 2.40% (which they did) your loss would be -8.84% if you were invested in 10-year Treasury Notes and -19.07% (bottom section of chart) if yields on the 30-year Treasury Bond rose to 3.25% (which it nearly did). Further, note the risk of loss if the 10-year rises to 5.40%. Note the -53.90% loss on the 30-year if yields rise to 6.25%.

A number of pundits are calling for a 5% yield in the 10-year within a few short years. I’m not in that camp but really… I don’t know. I’m more in the “one more big recession” camp that will properly reset equity valuations and if so then rates should gap lower.

What I do believe is most important, is that investors should see this chart and size up the potential risk-reward for themselves. With rates just coming off 5,000-year lows, my best advice is to think about your bond exposure as if your retirement wealth is dependent on it… and it is.

2.45% Treasury yields suck (as a good friend reminds me is a technical term) and rising inflation will eat into the net real yield and further cause interest rates to spike higher. Treasury yields were north of 5% in 2007.

Be tactical with your bond exposure. Don’t look at the last 35 years, as many people do, and project it forward. The great bond bull market yield low is likely in. Think differently about how you position that 40% of the traditional 60% equity / 40% bond portfolio.

Inflation Risk is High

Posted on 01.17.17 |

Monitoring inflation is critical since turning points in inflation often determine turning points in the financial markets.

The Ned Davis Research Inflation Timing Model consists of 22 indicators that primarily measure the various rates of change of such indicators as commodity prices, consumer prices, producer prices, and industrial production. The model totals all the indicator readings and provides a score ranging from +22 (strong inflationary pressures) to -22 (strong disinflationary pressures).
That data is plotted in red in the lower section of the chart.
High Inflationary Pressures are signaled when the model rises to +6 or above. Low Inflationary Pressures are indicated when the model falls to zero or less.
Current reading is “High Inflationary Pressures.”
Signals in the upper section – up and down arrows.
Correct signals 73% of the time. Pretty good historical record.

Source: Ned Davis Research (includes disclosure)

Rising inflation is bad for bond investors and generally bad for stocks but is bonds I worry about most today.

Inflation and Leadership

Posted on 03.03.14 |

Within our CMG Tactical Rotation Strategy we allocate monthly to the top two out of the following six ETFs: SPY (S&P 500 Index), EFA (Developed Market Stocks), VNQ (Vanguard REIT), BND (Treasury Bonds), DBC (Commodity ETF) and Cash. We look to identify and lock onto leadership. Positions are then held for at least one month. Since price momentum tends to do a good job at identifying market leadership, the positions are typically held for a number of months.

The point to note here is that noticeably absent from the strategy has been an allocation to DBC. The last meaningful and consistent exposure to commodities was in 2007 and 2008. I’m watching carefully for a change and will post if a trend towards higher commodity prices develops. In hindsight, and appropriately, the strategy has been largely SPY, EFA and VNQ.