Concluding that a high-speed car crash was caused by high speed is a bit simplistic. The high speed was just a symptom of too much pressure on the accelerator or gas pedal.
Concluding that the current stock market correction was caused by rising interest rates is also a bit simplistic. True, rising interest expense decreases net income, thereby making the stock less valuable. But there is more to that.
Productivity can be defined as output per unit of input or the number of widgets produced per hour, for example. Everyone knows that increasing productivity must be a good thing but why? Here is the general rule: Inflationary pressure tends to increase when wage gains or other expenses rise faster than productivity increases. The low productivity increases since the financial crisis of 2008/9 haven’t really matter because wage gains were minimal.
In the past two weeks, the latest economic data shows productivity actually decreased 0.1% last month, while wage gains have been 2.9% on a year-over-year basis. Long dormant, inflation may be rising. In 1981, Fed Chairman Paul Volcker proved the only way to control inflation is to raise interest rates. While the Fed was already increasing interest rates slowly, the latest data suggests the Fed may “hit the brakes” on inflation by raising rates higher and faster than the market expected.
Compounding this fear is the realization that the fiscal stimulus of the tax cut will come at exactly the wrong time, when inflation is breaking out. This tax cut increases the urgency to increase interest rates.
A month ago, the stock market was enjoying certainty. It does not like nor tolerate uncertainty very well! How bad will inflation get, and how high will interest rates get ....... and when?
Concluding that the current stock market correction was caused by rising interest rates is also a bit simplistic. True, rising interest expense decreases net income, thereby making the stock less valuable. But there is more to that.
Productivity can be defined as output per unit of input or the number of widgets produced per hour, for example. Everyone knows that increasing productivity must be a good thing but why? Here is the general rule: Inflationary pressure tends to increase when wage gains or other expenses rise faster than productivity increases. The low productivity increases since the financial crisis of 2008/9 haven’t really matter because wage gains were minimal.
In the past two weeks, the latest economic data shows productivity actually decreased 0.1% last month, while wage gains have been 2.9% on a year-over-year basis. Long dormant, inflation may be rising. In 1981, Fed Chairman Paul Volcker proved the only way to control inflation is to raise interest rates. While the Fed was already increasing interest rates slowly, the latest data suggests the Fed may “hit the brakes” on inflation by raising rates higher and faster than the market expected.
Compounding this fear is the realization that the fiscal stimulus of the tax cut will come at exactly the wrong time, when inflation is breaking out. This tax cut increases the urgency to increase interest rates.
A month ago, the stock market was enjoying certainty. It does not like nor tolerate uncertainty very well! How bad will inflation get, and how high will interest rates get ....... and when?
