Morning Comment: If Inflation is Only Transitory, Default is the Only Outcome. (Thus it Won't be Transitory.)

Well, we sure are glad that we made fun of the NY Yankees a couple of weeks ago when we had the chance…because they are on a MAJOR roll…and we’re barely one month into the season. Thank God they came up with the “Wild Card” format years ago. Otherwise, the Red Sox wouldn’t have a chance! However, with the Wild Card format, all the Sox have to do is get into the playoffs…and wait for the Yankees fold. (😊)

Speaking of the SOX, the semiconductor stocks bounced back nicely after their sharp early morning decline…and finished the day in positive territory (albeit only very slight positive territory). That 3.5% bounce off of the opening lows was not enough to help the SMH regain its 100 DMA (which had provided strong support in recent months), but it kept it close enough to that moving average to keep the breakdown in this all-important group from becoming a meaningful one…and raising the yellow flag on the chips stocks even higher than it already is right now.

Of course, the Nasdaq saw similar bounce. Yes, it still closed (very slightly) in negative territory, but it was still able to bounce over 2%...and it was also able to close within a whisker of its own 100 DMA. Remember, the 100 DMA has been even stronger support for the Nasdaq…as that line has stopped declines for an even longer period of time (the past 8 months). (Two charts attached below.)

We’re afraid that the futures are pointing to another lower opening today, so we’ll see how things playout. If it ends up being yet another “head fake”…and the tech stocks bounce back strongly once again, it should signal that the recently decline in the tech sector has already run its course…and that the worst is already behind them. If, however, it holds…especially if the SMH and Nasdaq Composite fall below their intraday lows from yesterday at any time in the coming days…it should signal that another material leg lower for the tech sector is in the offing.

Of course, this morning’s inflation related CPI number could play an important role in this outcome. Of course, there’s no guarantee that it will. However, if it becomes the catalyst for a big move in the yield on the 10yr note, it could/should have an impact on the tech stocks as well.

For us, we believe interest rates are headed higher eventually either way. Some Fed officials (both current and former) are telling us just that. So is the Treasury Secretary…and thus there is little question in our minds that long-term interest rates are headed higher over the coming months…even if it does not happen immediately.

However, the number one reason we think rates are headed higher is because we believe that the only way out of our current situation is through inflation…(and the Fed knows this). Do you remember when people were talking about a debt bubble BEFORE the pandemic? Well, since that time, the level of debt in the U.S. and around the global…which was already at record levels…has exploded much higher to the upside. So if we were in a bubble in late 2019, we’re in a HUGE one right now.

The problem is that there are only two ways out of a debt bubble. You either default…or inflate your way out. As painful as inflation can become, it’s MUCH LESS painful than a default. Therefore, the only way out of this situation is to inflate our way out. With this in mind, we believe that anybody who thinks that inflation is going to be transitory is not thinking about the current situation in the correct manner. (Of course, there is one other reason to SAY that it will be transitory. For a very small group of people, they need to say it will be transitory…so that the market reacts in a gradual way…and does not price-in the upcoming extended period of inflation all at once.)

In other words, today’s CPI number might cause long-term rates to move lower. Also, since many commodities have become extremely overbought, we might get the feeling that inflation has subsided soon if/when the commodity sector sees a correction. HOWEVER, as former NY Fed President Dudley wrote this week, interest rates are headed higher over the longer-term…and investors need to adjust their thinking to this inevitable outcome.

Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on May 12, 2021 — 8:05 AM
Comments ({[comments.length]})
Sort By:
Loading Comments
No comments. Break the ice and be the first!
Error loading comments Click here to retry
No comments found matching this filter
Want to add a comment? Take me to the new comment box!