[Eternal vigilance is the price of liberty] ~ John Philpot Curran
Be sober, be vigilant; because your adversary, the Devil, as a roaring lion, walketh about, seeking whom he may devour. ~ I Peter 5:8 KJV
The yield on the ten-year Treasury bond was 0.78% in late October of 2020. Since then, it has roared up to 1.77%, a monumental move in such a short time. So, what gives? Why the rapid shift when much of the world remains shuttered or only inching back to normality?
The initial move in rates came in mid-November with the approval of several vaccines, indicating that a light might actually exist somewhere at the end of the coronavirus tunnel. The first little jump in yields indicated that investors expected growth to resume at some point in the near future.
The next leap and subsequent leaps followed after control of the Federal government officially shifted to one side of the aisle with the January run-offs. Additional, larger stimulus measures were immediately expected (and have since passed into law). And now, at least one enormous infrastructure bill is proposed to spend somewhere in the $2.25 trillion range. These more recent increases in interest rates have more to do with investors fearing a return of our inexorable adversary – inflation.
Must we concern ourselves with inflation today or at any time in the near future?
John Philpot Curran was an 18th Century Irish lawyer and politician. A fiery fellow by all accounts, he is famous for having fought in five duels rather than compromise his principles. And his passion extended to his poetry and prose in both the English and native Irish tongues. In a wordier style of his day, he uttered the above quotation in a 1790 speech that lays bare the paranoia required to remain free.
Similarly, the apostle Peter exhorts us to be ever watchful for the great Tempter. The King James Version is not only firm, but rather poetic as it allows us to envision the Devil as a lion prowling the Serengeti for inattentive prey.
Clearly, we are comparing the steadily bleeding effects of inflation to the ensnaring ways of the Devil. But we are also claiming that inflation is like that tyrant who might snatch away liberty. In either case, we must be vigilant, ever alert for signs that the relentless effects of inflation may one day return.
And so, we applaud the market’s quick response and mounting concern. We were born and raised in a highly inflationary environment. Then we were instructed in the ways of finance by those who built careers during the 1970s and ‘80s. As such, we’ve spent our own career manning the watchtower, peering over the wall for a cloud of dust billowing on the horizon that might indicate a return of the inflationary minions.
However, based upon all the evidence we have today, it seems unlikely that 1980-style inflation is in mid-pounce. To be sure, we’ve all seen inflation at the grocery store and at the home improvement stores. Inflation as measured by the CPI spiked briefly for about two months following last year’s stimulus measures in the spring. Since this year’s stimulus spending is larger and timed to coincide with a gradual re-opening, we expect a similar, though perhaps more robust reaction. But absent other structural changes, we don’t expect inflation to be sustained beyond Q2 and/or Q3.
Keep in mind that much of this inflationary spending will occur over the course of several years, not right now. This will dilute its effects on prices. Still inflationary, but to a lesser extent. Also, while global trade appeared to waver early in the coronavirus lockdown, based upon recent foreign investment by large corporations, it appears that the deflationary effects of globalization will continue for the time being.
There are many puts and takes in the inflation ledger. On a net basis, we believe inflation increases from the basement, but does not continue to round the stairs to the attic and rooftop. BUT we promise to take both Curran’s and Peter’s advice. Eternal vigilance.
Stirling Bridge Wealth Partners, LLC is fortunate to count many of you as clients. In the good times and bad, we remain committed to providing customized investment solutions and robust financial planning wrapped in a package of exceptional service. We thank each of you for your dedication to us and for your trust.
Jason Born, CFA