Englander: “If You Take Today’s Data Literally, We Are At The End Of The Business Cycle”

Wednesday, February 14, 2018
By Paul Martin

by Steven Englander of Rafiki Capital Management,
Wed, 02/14/2018

If you take today’s data literally we are at the end of the business cycle. Core inflation is picking up, the Fed’s hand are tied, and demand seems to be slowing. The flattening of the yield curve suggests a inevitable sad ending, with the Fed unwilling and unable to provide stimulus and the US economy inexorably slows down. (For those of you who desperately need silver linings, it looks as the US savings rate is likely to be revised up.)

It is hard to read the inflation numbers as soft, despite all the noise in the components that pushed it up. So investors have to live with the view that price inflation may finally be moving up.

We would argue that the view of an impending business cycle end is wrong. If we are correct that retail sales provides a distorted view of activity then we are more likely to be in a 1994 scenario than a typical end of cycle. We don’t expect anything like the Fed hawkishness of 1994, but the key point is that the economy did well and even equities were pretty stable, despite the rates move. In other words activity and Fed rate hikes can coexist peacefully. If that is the case, the business cycle is not doomed to fail soon. You may want to apply a higher discount factor to future equity earnings but you do not necessarily want to adjust the profits path sharply downward to reflect a cyclical downturn in profitability. In rates terms, the cycle end story is a flattener, the peaceful coexistence of tightening and activity is a steepener.

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