More Turmoil in Markets – US CPI Tonight

The signs this tangled web of stagflationary high and increasingly sticky looking inflation, tumbling growth, and hawkish (tightening) central banks is fast approaching a second big capitulation in shares and property are growing. It was another heavy night of sharemarket falls across the board with the global MSCI down nearly 2% and the biggest, the S&P500, down 2.4%.

US Jobless Claims confirmed the rollover in the employment market with the biggest jump in nearly a year and hitting a 5 month high.  We also saw the release of the US Fed’s so called ‘Flow of Funds Report’ which showed both American households and corporates have never been deeper in debt and household net losses (with equities nearly a third of their net worth) buffered largely by house values (being just over a quarter of their net worth) with data taken before what looks certain to be declining house prices on record rate rising mortgage stress.  If you look at the historic correlation between investor allocation to stocks over debt and the subsequent equity returns, the decade ahead terrible. As the Bloomberg author notes, with levels similar to the peek of the dot.com bubble, it points to sub-zero returns for the next decade.  He rightly concludes "brace for a lost decade."

There is also considerable nervousness about tonight’s latest US CPI print.  Will the print show an improvement or deterioration of last months 40 year high 8.3%?  From Bloomberg:

“Mohamed El-Erian, who almost a year ago accurately forecast that elevated US inflation would be persistent, says it hasn’t peaked.

The closely followed bond-market strategist agrees with monthly consensus estimates for May’s consumer price index to be reported on Friday, but told Bloomberg Television’s The Open on Thursday that “what worries me is that the June month-on-month print will be worse than the May month-on-month print. Those who boldly said inflation has peaked and is coming down may have to change their minds.””

The other big news contributing to the global route was the ECB confirmed they are ending QE and hiking rates in July.  This was tempered somewhat by their seeming capitulation to the mounting concern of ‘fragmentation’ of the struggling countries on ECB life support lead by Italy.  ECB chief Lagarde acknowledged “we need to make sure there is no fragmentation.” as fears of a Brexit type ITALEAVE mount.

And in a Draghi type ‘whatever it takes moment’ conceded “And if it is necessary, as we have amply demonstrated in the past, we will deploy either existing or new instruments that will be made available.”

The ECB, like the Fed and all other central banks have read the recently commissioned report that concluded, against their stance to date that QE doesn’t pump equity markets, that indeed QE has seen a 5X inflation of equities on printed money.  More concerningly now as they are removing the juice, is that it concluded the downside could be a 10X multiple which would see a dot.com order of magnitude drop in sharemarkets.

There is clearly huge downside risk still present in equities all around the world and likewise mounting pressure on property too.  Those staying in ‘cash’ are seeing that eroded by an average of 9% globally as we reported yesterday.  Whilst chopping sideways of late, gold is generally holding its own amid these heavy losses in most other markets, and that is despite the traditional headwinds of a stronger (for now) USD.  Ray Dalio reiterated recently that ‘cash is trash’.  He also famously once said “If You Don't Own Gold, You Know Neither History Nor Economics”…