This comes in response to yesterday’s government report on domestic inflation, which came in somewhat higher than expected at 7%+. That’s a startlingly high number, expected or not. The bond market response during the trading day was, to my mind, heartening. The yield on the 10-year rose by 9 basis points, from 1.94% to 2.03%–above the psychologically important 2% level. I interpret this as meaning the bond market is finally getting on with the important business of getting rates into the 2.5% or so range needed to deal with the threat of continuing high rates of price increases. Once we get there, the stock market can get on with the task of going up.

I happened to be eating breakfast and watching the crawl on CNBC when the inflation number came in. There were three cast members commentating–the old curmudgeon, the pugnacious guy from the other side of the tracks who knows almost nothing but rants about everything anyway, and the regular-old reporter who actually knows stuff but the others make fun of because of that. It could have been a bad Shakespeare play, except no audience throwing vegetables. The three were joined by professional investor Jim Paulsen, who is quite good.

The “drama” consisted in the reporter trying to explain to the ranter (who was pretending to be an expert on fixed income) about how the Fed gets interest rates to rise. This is something economist Ed Yardeni made explicit in the 1980s, when he coin the term bond vigilantes. The process: the Fed announces its intention to tighten. It waits for bond market participants to boost rates in actual trading. The Fed then confirms the move–and signals verbally any need for more–with a corresponding move in the Fed Funds rate.

Paulsen reinforced the reporter’s analysis, adding that in his view today’s high level of inflation is a result of supply shortages. These are taking much longer than initially expected to be put behind us but, if I understand him correctly, he thinks they’ll be gone by late in the year. In other words, there’s a risk to having rates go up too fast.

This morning I heard a radio commentator say he went into a store to buy an everyday item, saw the price was higher than he expected and left without buying. I found myself doing the same thing a couple of days ago. In a truly inflationary environment, we would have each bought 3x what we needed and hoarded the rest, on the idea that prices could only go up. This is the strongest evidence I can think of that we’re not in a late-1970s, inflation-spiral environment.

another random-ish thing

I read yesterday about an AI-driven US stock investment strategy, operating with real money and trading real stocks, that has been underperforming its benchmark by almost a percentage point a week. In a sense, this is hilarious. Assuming they didn’t own the investment firm, a human wouldn’t have lasted this long. Presumably the AI is acting on information in the financial press and on price/volume and other technical indicators from daily trading and not simply banking on being able to trade faster than fellow computers. Why don’t I find this lack of success surprising?