JD Straight Up - 26Oct26 - Inflation Situation
Inflation Situation
Drulard Family Capital Fund
Fortnightly Macro View
JD Straight Up:
S&P 500 at 7681 – down 2% from 7799 two weeks ago
VIX at 18 – up 17% from 15 two weeks ago
10yr Treasury yielding 4.99% (down 5% from 5.24% two weeks ago)
Agg (US Aggregate Bond Index) at 96.03 – up 2% from 94.61 two weeks ago
Gold at 4025 per oz (down 4% from 4193 two weeks ago)
Silver at 53.99 per ounce (down 12% from 60.44 two weeks ago)
Crude Oil (WTI) at 102 per barrel (up 8% from 94 two weeks ago)
Bitcoin at 80k (down 4% from 83k two weeks ago)
JPM shares at 335 (flat from 334 two weeks ago)
Deutsche Bank shares at 31.92 (down 6% from 33.69 two weeks ago)
Truist shares at 48.83 (up 5% from 46.60 two weeks ago)
Blackstone shares at 118.70 (up 4% from 114.22 two weeks ago)
Magnificent 7 Index at 454.86 (down 5% from 477.06 two weeks ago)
US unemployment: at 194,000 in latest claims – down 2% from 197,000 two weeks ago - lowest since December '25
EUR at 1.12 USD (flat from 1.12 two weeks ago)
GBP at 1.34 USD (up 1% from 1.32 two weeks ago)
Macro Environment
US inflation is running at 3.7% with energy and shelter contributing to the excess over the Fed target of 2%. US GDP growth is 2.2%. US Fed meets this week and Fed Funds target is currently 3.75-4. EU inflation is 3.8% and GDP growth is expected to be 1.4%. ECB reports on rate determination this week. ECB currently has a deposit facility rate of 2.5%. French 10yr yield hit 5% for the first time since 2002 while spread over German Bunds reached 150bps. French GDP is stagnant to slightly down and deficit is running at 5.4%. Riots and looting were widespread in France and curfews were implemented. Ratings downgrade is likely. Inflation and housing related unrest also occurred in Spain and Belgium.
War persists in Ukraine. No deal has been reached between US and Iran on Hormuz. US midterm elections approach next week.
Macro View
Inflation is persistent and it keeps compounding. It is a tax on everyone and it is not a graduated tax. It is easiest to blame it entirely on energy and tie that blame completely to Hormuz and back to the US initiating a war with Iran. This is vastly over-simplifying things and asserting complete causation where more factors than one are at work. The deeper root of inflation remains the loose money pumped into the system over a long period of time and reaching peak flow during the pandemic. Tens of trillions were pumped in. This is the core cause of inflation. Perhaps it would have dissolved into the economic system by now, but that is doubtful. Parties like France's Macron have made the case that ongoing inflation is down to the US and its actions in Iran.
Relevance
It is also easy to attribute all current unrest to frustration with inflation. Wages are not keeping pace with consumer goods prices so it is increasingly difficult for many to live. This is again an oversimplification. The root of the unrest is far deeper than inflation. Increasing inequality is certainly exacerbated by inflation and social media heightens its visibility, but root causes include a failure of governments to invest in and legislate effectively for housing and education and further failure to agree and apply intelligent immigration and naturalization policies. There are many factors at work here and it is not as simple as doing a Paul Volcker and cranking rates up high enough for long enough to slay the inflation dragon.
Head Scratchers
1 - Will 5% yields turn out to be the magic number to draw capital away from equities and into fixed income? If equities trade at 20x earnings to yield 5%, is the 'risk-free' rate providing 5% inevitably more attractive?
2 - At what point will investors recognize there is no such thing as a 'risk-free' rate and concede that everything is relative?
Drulard Family Capital Fund
Drulard Family Charitable Fund
#54 - 26Oct26
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