A lot of zombie corporations were being kept alive by extremely low borrowing costs. Now that interest rates are rising, many of those zombies will die. From MN Gordon at economicprism.com:
On Thursday, the Bureau of Labor Statistics reported that consumer prices, as measured by the consumer price index (CPI), inflated at an annual rate of 7.7 percent in October. Investors went bananas on this apparent pullback in the headline CPI.
The stock market responded with one of its biggest single day rallies in history. The S&P 500 jumped over 5.5 percent. The NASDAQ jumped over 7.3 percent. Of greater note, the yield on the 10-Year Treasury note dropped to just 3.81 percent – its lowest yield in over a month.
So, is raging consumer price inflation no longer a concern? Has the ugly storm come and gone? Can Powell now pivot?
Probably not. More than likely, consumer price inflation will rage throughout the decade. Regardless, now’s not the time to go all in on stocks. We’ll explain why in just a moment. But first several words on consumer price inflation.
Consumer price inflation, remember, is an effect of money supply inflation. The Federal Reserve inflated its balance sheet with upwards of $5 trillion in digital monetary units – created out of thin air – between September 2019 and April 2022.
Since then, the Fed has contracted its balance sheet by about $300 billion – or by about 6 percent of the preceding inflation. Clearly, there’s still plenty more inflation to be reckoned with.
And while the Fed, in concert with the Treasury and Congress, was busy spewing reams of printing press money into the economy between fall-2019 and spring-2022, other mistakes were also being made.