Over the last few months, I’ve become progressively more bullish about the likely economic recovery. But I realize that my optimism is increasingly a consensus view – which opens me to the charge of groupthink. Or alternatively, I could simply be guilty of overexuberance i.e I’m estimating too big a bounce back in the real economy. I’m not the only one who is maybe having second thoughts. The excellent newsletter Variant Perception had a blog out this week on this exact subject – “While we don’t want to be contrarian for contrarian’s sake when we observe the prevalence of news stories about reflation, it does suggest extreme sentiment and scope for a short-term reversal in reflation trades. The reflationary price action itself looks extreme. Our standardized score of reflation relationships has stretched to almost two standard deviations above the mean”.
Variant Perception also reported that the Bank of International Settlements has created a retail investor sentiment proxy using Google Trends data. “They average trends from indices (S&P, Nasdaq), financial news outlets (CNBC, Yahoo) and discount brokerages (Schwab and Ameritrade). 100 indicates maximum popularity, telling us that retail sentiment today is still frothy.” The chart is below.
You can read the longer Variant Perception blog entry here: https://www.variantperception.com/2021/04/15/reflation-sensation/
Analysts at Deutsche Bank also track these trends and then turn them into their own proprietary equity positioning index. IN their report from today they observe that this index is now “close to record highs (98th percentile). There remains a notable divide between the positioning of discretionary investors, which has moved up to a new peak (100th percentile), while systematic strategies exposure has also risen, but remains near historical median levels (46th percentile).” Again, the chart is below.
All of which brings me to the elephant in the room or more accurately the one number that could end the party. The Inflation number. If these numbers start rising too aggressively, markets will start to fear that the US Fed will turn hawkish, rates expectations will creep up, taper tantrums will ensue and the real economy might start to become more fragile.
This brings us nicely to a term I hadn’t heard before – sticky-price indices. This was introduced last week in an NYT Online column by Paul Krugman. The longish piece established that there is a big difference between “goods, notably things like oil and wheat, [which ] have constantly changing prices” and other goods where changes in the base price is very rare i.e we see intermittent price adjustment. Those ordinary base goods will almost certainly increase in price in a reflationary environment but it’s the sticky goods that we need to watch – if they start rising in price sharply, then we know we have a problem. There’s a good summary of the economic literature on the subject of price rigidity here : summary
Unsurprisingly the US central bank watches these numbers using a measure called the “Sticky Price Consumer Price Index” which tries to sort out goods and services by how frequently their prices change. You can see the live feed here: https://fred.stlouisfed.org/series/STICKCPIM157SFRBATL?campaign_id=116&emc=edit_pk_20210416&instance_id=29323&nl=paul-krugman®i_id=69865830&segment_id=55712&te=1&user_id=5b64077126642094b9a935054fcb677f#0
The current chart is below – my amateur reading of it suggests that there are some warning signs but that there’s currently zero evidence of a bigger problem. Maybe all that exuberance is in the stockmarket is warranted!