Markets Reject “Transitory” Inflation

Well after going with the ‘transitory’ story line on inflation markets have decided this week to reject that story line. Of course, whether it is transitory or not won’t be known for months.

With the hot consumer price index numbers this morning investors decided to ‘run for the hills’ and the mayonnaise jar (to put their money in) in the backyard. Whether it be common stocks, preferreds, baby bonds or government bonds they are being sold nilly willy.

Take a deep breath–walk away from the computer (or the CNBC talking heads) and take the day off. Of course review your portfolio and see if anything has really changed in the investments you hold before taking the day off.

I have sold nothing in the last day or two. I have started buying today on 1 issue I like–the Armour Residential 7% monthly paying preferred (ARR-C). I had owned a bunch, but let it go when it traded in the $25.40 area. Today I bought at $25.10 (too early) and at $24.97–now I wait to see if it goes lower.

While I haven’t bought yet I also like one of my watchlist issues–the Vornado 5.70% perpetual preferred (VNO-K) trading at $25.25–down from a recent $26 (a crazy value). Issue is currently redeemable and anchored to $25–no call risk (there is a risk of a call–but no monetary damage would occur at this price) as it goes ex in about a month.

Like yesterday we are seeing quite a bunch of issues down about 1%. Personally I have taken some modest ‘hits’ the last few days, but not substantial–but I hate any loss so I growl. With super gains through the end of April I guess a month of given back is bound to happen.

47 thoughts on “Markets Reject “Transitory” Inflation”

  1. Yesterday I was complaining about the lack of opportunities despite the big move lower in the PFF index. Today, I’m no longer complaining. We got the action I was looking for. It could continue further but we saw the sort of disorderly market and indiscriminate selling that creates relative values.

    I’m not worried about long term inflation. Higher rates will take care of that. Fixed to floating starting to look attractive and energy looks attractive if it pulled back a tad more. Some good opportunities among pinned to par issues as well.

    So long as the yield curve doesn’t flatten, pullbacks are just buying opportunities in the right issues.

    1. You must have much different standards than myself. I keep a watchlist on my Schwab account of atleast 45 preferreds. Yes, they were down 15 to 20 cents yesterday but are still certainly NOT worth buying even after the small sell down. I watch the call dates very closely and when you factor that in I see no bargains at all. Unless you want to go way out on the risk curve which I will not do at this point in my life. The last thing I bought in a big way was TDS +U. And now its way up there in the stratosphere too. Thank GOD I got in at par.

      1. Chuck, I’m speaking strictly about good relative values — preferreds that are under priced relative to other similar preferreds and relative to the issuers sr bonds. You’re talking about absolute values. That’s a lot more subjective to determine and not that predictive of medium term returns. A situation of tight spreads could continue for years if we are still early in the economic cycle.

        1. That largely is where I reside at, Landlord, the relative values. This is where the grinding it out bucks come from. That being said, I have only done is a few tweaks past few days being out of town. And it looks like the “sell off” is already over as I already recovered today the small losses incurred past two days. Time to complain again that I need another selloff again, ha,

  2. I’m feeling (hoping) a Feb type preferred buying opportunity coming around the corner. The market just needs one more nudge.

  3. I’m really not too concerned right now, but I understand the situation. As it is, there are not really many alternatives to invest in and rates are low. When was 2% high ? I remember trading in 2009 and the 10-yr was much higher back then even going into 2011-foward, so relatively speaking rates are not “high”. Also the data shows an improving economy, so higher rates are to be expected. With that said, the sell off is because right now it is just a liquidity game, and the real situation isn’t inflation, but the money faucet gets turned off and that stops the party.

    All things said, long end unless it seriously spirals out of control, it will probably be volatile in the short term.

    I do think the unemployment enhancement is a problem though. It does not set to lapse until Sept which most of the summer activity has been completed. Before too long, we will be back into winter and then holiday season but that’s about it. The unemployment enhancement also effectively is making business compete against the Government in a monetary sense. Given that more than half of Americans have been vaccinated, and most places open now, it is a problem when a company says they “can’t fill jobs”.

  4. Just so newbies understand the significance of this debate, if and it is a big if, inflation goes up beyond expectations and stays there, to a first approximation all of our preferreds/babys will suffer principal losses. Issues with low coupon yields will suffer the most. If the increase in inflation/interest rates is transitory, then in theory preferreds will have a corresponding transitory drop in value then return to their lofty perch.

    Each investor votes on their inflation expectation with their portfolio. As mentioned in this thread “experts” are split. At the John Mauldin conference last week, two prominent experts (Lacy Hunt and David Rosenberg) voted for transitory and one (Jim Bianco) voted inflation is NOT transitory. You can read a concise summary of their arguments here:

    https://www.advisorperspectives.com/articles/2021/05/08/jim-bianco-we-will-face-non-transitory-inflation

    1. The other big driver is duration. A low coupon won’t fall much if it matures in a few years, but something like a bond that matures in 2056 (or a preferred, with no maturity date) is going to fall in price to a market and not recover for a while.
      that is what makes this era so challenging. The low rates were so low for so long, that the timeframe is out of whack, and any bonds that were maturing in the next few years all have been called early and there is very little debt outstanding that matures in the next few years, most mature 10-50 years from now.
      The economy is being distorted severely in ways that will hit like a brick.
      1. End of the eviction moratorium
      2. the Fed letting off the gas
      3. Supply chain starts functioning again
      In many ways, the reopening is functioning like an area that reopens after a natural disaster, and there is a fairly good parallel to the period at the end of WWII, as two of the same drivers (supply chain disruption because of the shift from Wartime goods to peacetime goods) and the sudden influx of workers into the workforce from the soldiers returning from overseas.
      And that inflation was anything but transitory.
      See wholesale price index line on page 3, from mid-1946 to 1948.
      https://www.nber.org/system/files/chapters/c11389/c11389.pdf

      1. Also to be mentioned the 10 year bond stayed consistently below 2.5% during this time period also. Predicting the future is tough.

      2. Higher yield coupons may fall first because of systemic risk. Lower coupons are safer with less chance of bankruptcy. They fall when investors believe higher rates are likely permanent. Though it’s not a capital loss if you don’t sell you can continue earning 5% forever.

  5. Any thoughts on HTIA and FATBP? HTIA fell below $24 and I’ve been nibbling at it here.

    1. I believe HTI (unlisted) has issued more of this preferred which will drive down the price, hopefully only temporary. Current market also not helping.

    2. FAT Brands just had their earnings call and the revenue numbers on most of their brands are up double digits with a couple of clunkers. CEO talked about using the money they’ve raised to acquire more restaurant brands, international expansion of existing brands and about how they’ve started paying a dividend on their common. FATBP has had a nice ride in the last few months, going from the high teens to almost $25. Its a monthly payer and the dividends qualify for lower tax treatment. I gave it a mention here when it was trading around $20 as a play on the pandemic ending, but I’m a holder not a buyer at these prices.

      1. Citadel, I took a look at FATBP just last week. I realize we were in a very bad place for restaurants, but I just had a real bad feeling with how hard the balance sheet/cash flow statements have been hit by the ugly stick. Maybe it will survive, but the financials gave me as much of a heart attack as these fatburgers do.

  6. Thanks Tim for the VNO-PRK tip – will keep an eye on.

    The need to pretend the market is a market – and not a heavily subsidized gov’t program for investors – forces the pretense of explaining daily market moves.
    The market is going down b/c there are more sellers than buyers.
    Solves the “what do I do with Textainer after I took my 100 b.p.?” question – I just bought it back at $25.30.

    1. Fredson–yes I always like the ‘more sellers than buyers’ position–can’t argue that one.

  7. This is a tug of war between the “market” and the central bank(s). I have learned to stay out of the way of the markets, Fed, ECB, BoJ, etc. rate moves in general. I don’t like to get run over like a “Muppet” (GS term not mine). Just take what the market gives you and don’t reach too far on risk. Always look at what the exit might be before entering “Thunderdome”. Don’t fall in love with your positions. Everything should be for sale at the “right” price.

    If you are really that scared of inflation or higher interest rates then adjust the portfolio to take advantage. I have a barbell approach where I take both sides of the narrative so I can make money on both ends regardless of where things go.

    BTW – Thank you Tim for your website and your thoughts. I did put a miserly limit order on the ARR-C.

    1. Thanks NWGG–I agree with you–you have to make lemonade out of the lemons and just deal with the cards we are dealt.

  8. On a selling spree today. If I’m right I buy cheaper. If I’m wrong I haven’t lost much, not expecting much upside and I won’t be out long.

  9. I sold some stuff still over $25.50 for gains in the last 2 days so I could start buying the stuff near or below $24. Gotta love the panic….best time to flip and/or lock in them yields.

    1. DaddyDollars–yes for those with dry powder or those that do what you are doing there can be great reward–and I think many of us have kept powder available.

    2. DD:

      I’m like a kid in a candy store right now. Have lots of dry powder and even more coming in soon with redemption dollars from DLR+C, AMH+D, and AMH+E.

      This correction in many of the income securities couldn’t have come at a better time. Starting to slowly buy some of the REIT preferreds issued by AGNC and PEB now trading below $25.

      Good luck to all.

  10. Yes, inflation is here but I think it’s worthwhile to listen to those who point out that the base for the current figures uses the prices from the worst of the shut down tied to COVID. Let’s see if the rate of price increases begin to moderate.

  11. I haven’t heard anyone mention this theory.: The unemployment compensation effectively sets a minimum wage of around $15 to $18. At that wage workers would earn the same for working versus staying at home. What is the effective minimum wage going to do hospitality and restaurant industries? That’s a big bump. Can the employer pass on the bump? If so that should be another major source of inflation.

    1. Potter–I think what you mention is something lots of folks are talking about. Will it set off a spiral? We’ll see I guess.

    2. Yup.

      Government shuts down businesses. Then when they are allowed to reopen the employer is competing with the government unemployment checks.
      The best hustle / scam next to dogecoin.

      1. Even though Im in Vegas now, I just read online my local state is shutting down the extra federal unemployment money starting next month. There is a small but ever increasing amount of states trying to “incentivize” people to head back to work.

        1. Vegas again! It has been maybe 20 years since I have been there–how are the crowds (or lack of crowds)?

          1. Tim, I am at the Wynn under a tree by the pool. Took on too much sun (and drink) yesterday. Had to come collect my nice Tennessee Titan over 9.5 season win total bet from last season. Its very crowded down at the cheaper mid south end by Harrahs . Less crowded at the Wynn, but I usually dont come in May. Half the evening restuarants at Wynn still shuttered. Oddly last August when I was last here, all the restuarants were open. Actually had a standing waiting line for cab pick up at airport. Hadnt been that way previous few trips, so its picking back up.
            The mask wearing is alive and well here so I have had to get used to that except by the pool which isnt required.

            1. Sounds like it has a ways to go toward full opening. I’ve just got to get it on the schedule for a few days in the fall. I’m not a giant gambler, but love the desert–mostly Scottsdale area and Palm Springs.

  12. The whole problem with the “transitory” inflation story is that it’s only transitory if prices retreat to their previous levels, if not then we have a new higher base to price off of. While gasoline and food may retreat to prior levels, do you really think housing and wages will?

    1. ChrisW–if we all lived to 200 we would see multiple cycles and know all these answers. All we can do is watch and study. I do know what the 1970’s were like though and it was not fun watching the S&P500 go down around 30% over the course of the decade and ending up with interest rates in the 20% area in early 1980’s.

    2. Here’s an example of someone yelling, “It’s not transitory!” while showing a chart showing many past spikes, all of which were transitory. People see what they want to see.

      https://twitter.com/biancoresearch/status/1392114202530177025

      But ChrisW is correct that prices won’t necessarily go back to any particular prior level. As you can see on the soybean chart, most of the spikes were round trips, but the 2007-2008 spike only retraced about half the way back and resulted in a new, higher trading range. On the other hand, retail gasoline, despite being up a lot today vs a year ago, is still down around 30% compared to the summer of 2008.

      Commodities are highly volatile. Yet every move higher has people going crazy with hyperinflation talk, only to see pricing subside after the spike. It takes a lot more than you think to get runaway inflation.

    3. Chris, the feds view of transitory inflation is not yours. (Hyperbole alert). If gasoline went to $10 a gallon tomorrow and then never increased (or dropped) that would be considered “transitory inflation”. Now try and explain that to your wallet, ha.

  13. If the market recovers these losses by tomorrow, are you going to update this and say investors no longer care about inflation? When you pretend to know why the market is moving one way or the other, but you don’t actually know, it can only lead to confusing yourself.

    1. Weird comment Karma. I don’t invest on 1 number, 1 day or 1 week of market direction.

      I don’t ‘pretend’ anything at all–I don’t make recommendations, nor direct anyone to do anything. I think the impetus for the current sell off is obvious.

      No I won’t update this but I will write about the ‘fickle’ investor movements.

      1. I know you think it’s obvious, but that’s my point – it’s not obvious at all. You are saying that a continuation of a selloff that started two days ago is obviously based on today’s inflation report, even though futures were already down prior to the inflation report. Go ask a technical analyst and they’ll say the market is moving down for reasons that have nothing to do with any particular news item. Sometimes stocks go up on good news; sometimes stocks go up on bad news. You’re fooling yourself if you think you can explain any of it.

        1. Karma–there you go–you have stated your opinion. I’ll let you handle the technical analyst. This could have all been written without what seems like a personal attack—opinions are fine, attacks are not.

        2. Karma, I think the market is fickle because of bad Karma and greed. I am down .02%, and don’t see any buy opportunities other than a couple already posted, which are great pinned to par ones.

  14. It is a 2 headed monster. One is actual inflation and its damage. The other is, the markets don’t believe the Fed. The idea of don’t fight the fed has been hurt.

    Who knows what it means in an overvalued market? It should logically mean a significant correction. But this market has been NOT been logical in a very long time.

    1. SteveA–we have waited for logic since the previous financial crisis (back in the 2008 timeframe)—and we haven’t seen it (at least in my opinion). Not sure we will see true logic for the rest of my life.

      1. A VERY astute observation, Tim.
        Keep up the good work on this site.
        It is very useful to all those who enter.

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