A partial digest of what we learned:

• There is still no forthcoming stimulus package in the United States, prompting some to argue that there will be a stock market selloff if it doesn’t come together, and soon.

• The Fed is changing its approach to inflation. The formulaic specifics are not available, as one of their own has pointed out, but they will now target an average 2% inflation figure over time, meaning inflation will be allowed to run hot at times and cool at others instead of preemptively addressing expected inflation, for instance. What’s more, the Fed will more concretely be turning away from the Phillips Curve model.

  • In short, the Phillips Curve attempts to describe a theorized tradeoff between unemployment and inflation. It is the namesake of A. W. Phillips, a New Zealand economist and fixture at the London School of Economics. He observed a statistically significant inverse correlation between the rate of wage inflation and the unemployment rate in the UK over a near 100-year period (mid-1800s to mid-1900s). His published findings from 1958 were influential, to say the least. However, with the passing of time and new information to be analyzed, the curve eventually became controversial. Ultimately, some decided that there is no tradeoff after all. Jerome Powell specifically mentioned the Phillips Curve twice in his August 27 symposium speech. In no uncertain terms, he refuted the usefulness of the idea that there is such a relationship between unemployment and inflation: “The historically strong labor market [in the United States] did not trigger a significant rise in inflation.”¹

  • If there is inflation in the stock markets now and the Fed is going to give systemic inflation room to run, the shift in policy stance may be a further boon to equity prices.

• Convalescent plasma treatment for COVID-19 received emergency use authorization from the FDA.

• Companies are raising capital in record amounts.

• CEO’s are ramping up their digitizing efforts (remote work tech), downsizing physical offices, and focusing on worker recruitment and retention.

• Different cases for/against inflation are being hotly debated. One issue is that seemingly nobody is bothering to report on siloed inflation. Instead, the preoccupation appears to be with systemic inflation of the variety informed by the CPI, PPI, and GDP deflator. Four of the cases are worth calling out, in two pairings:

  1. Cases for and against: Money supply and velocity

     • This pairing applies to financial goods and services, in particular. Think stock markets: lots of additional money supply, a limited equities universe, and money constantly changing hands. The result is inflation.

  2. Cases for and against: Supply shocks (broken supply chains) and spare capacity

     • This pairing applies especially where household goods and services are considered.

     • Spare capacity may not be so spare if there are enough bankruptcies, or the idled production facilities are lacking the labor force to just pick up where they left off again because those workers were not just furloughed, but let go, for instance.

• Gold remains below its inflation adjusted ceiling set in 1980 and reinforced in 2011. That value is approximately $2,100 in today’s dollars.

• Treasuries may no longer diversify equities risk, says Credit Suisse. However, in exceptional times, it is known that diversification routines can break down, even dependable, long-held ones that we have come to take for granted. This may be temporary. At any rate, Mandy Xu, their derivatives strategist, suggests put credit spreads.

• There are more bets against bond etfs of late, including corporate bond funds backstopped by the Fed. This could be a risk-on indicator.

• White flight continues.

• Confirmed COVID-19 cases on college campuses are already climbing.

• Sovereign matters:

  • Argentina’s soveriegn debt saga is nearing the end, but concern over creditor holdouts remains.

  • Ecuador will restructure bonds on the back of a $6.5b IMF lifeline.

Footnotes

¹ Powell, Jerome H. “New Economic Challenges and the Fed's Monetary Policy Review.” At "Navigating the Decade Ahead: Implications for Monetary Policy," an economic policy symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming (via webcast, August 27, 2020).