How Inflationary Risk Could Corner the Fed (w/ Peter Boockvar and Ed Harrison) | Summary and Q&A

TL;DR

Rising yields and potential inflation pose risks to the stock market, particularly high valuation tech stocks, and may lead to a correction. The Fed may have to take action to prevent yields from rising even further.

Key Insights

• 😮 Rising yields driven by inflation expectations could lead to a correction in high valuation tech stocks.
• 😮 The Fed may intervene if market reactions to rising yields become disruptive.
• 📼 Negative interest rates in Europe can incentivize investors to move away from cash into financial assets, potentially inflating asset prices.
• 😮 The world's bond markets, particularly those with negative yielding securities, are vulnerable to a correction if inflation expectations rise.
• 🤗 Services, rather than goods, are expected to drive pent-up demand in the recovering economy.
• 😮 Rising rents in suburban and second-tier markets may contribute to an increase in services inflation.
• 😮 Central banks may struggle to control rising inflation and its impact on financial markets.

Transcript

it's tuesday january the 12th 2021 this is the real vision daily briefing i'm ed harrison and i'm talking to peter bookvar of bleakley advisors but before we get to peter let's go to haley drazden with the news of the day hey ed market seesawed between small gains and losses on tuesday there's been a short-term tone shift in the markets with the fo... Read More

Questions & Answers

Q: Could rising rates prompt the Fed to take action to prevent further yield increases?

While the Fed has committed to keeping short-term rates low through 2023, rising inflation expectations and market reactions could force them to address rising long-term yields. However, the level at which they would intervene is uncertain.

Q: What could trigger a correction in the tech sector market leaders?

Rising yields and inflation concerns may shift investor focus towards value and cyclical stocks, leading to a correction in high valuation tech stocks. This shift is driven by expectations of an improving economy and the end of lockdowns.

Q: How does the potential rise in inflation affect the world's bond markets?

Higher inflation can disrupt bond markets as it erodes the value of fixed interest payments. The massive amount of debt outstanding and negative yielding securities make bond markets susceptible to a correction if inflation expectations rise significantly.

Q: What are the potential risks associated with negative interest rates in Europe?

Negative interest rates act as a tax on savers, leading to potential capital outflows from banks and increased investments in financial assets. This inflationary effect may impact asset prices but poses risks to the banking sector.

Summary & Key Takeaways

• Market seesawed between gains and losses as focus shifts to growth and inflation due to expectations of increased government spending under the Biden administration.

• Rising yields, driven by investors betting on additional stimulus and higher bond issuance, have overshadowed concerns about inflation for now.

• Tech stocks, which have seen significant gains, may face a correction as rising yields and inflation expectations impact the market.