Big Macro Discusses QE2 Impact On Pricing Power, Corporate Margins And Exporting Inflation Via The Renminbi Peg
Our friends over at Big Macro have put together the latest issue of their periodic newsletter. In this issue they look at the at seemingly inexplicable divergence between the VIX and the EURUSD 3 month implied correlation (never a good sign), the increasing delinquency rates across all consumer loan classes (as in buying but not paying, leading to companies like Netflix which made $7 million in cash in the quarter to have a market cap of over $8 billion), but most notably at the differential between commodity prices and the CPI, superimposed against inflation. What is uncovered is that while when unemployment is below 6% companies can increase prices faster than commodity prices can go up, at current levels of joblessness, it will be impossible to pass through surging input costs (whether these be in wheat, cotton, or rare earth minerals). This leads to the conclusion: "What does this mean for the inflation/deflation debate? If the FEDs QE program will continue to push up prices, companies can only squeeze their margins so much. The reason we are not seeing inflation today is that there is a lag in the feed trough from commodity prices to consumer prices, partly because companies have been able to temporarily save their margins by aggressive cost cutting. I think we are potentially set up for a big decline in returns for equity investors." The last statement has a linear severity with the amount of free money that Bernanke floods in the market in two weeks.
Full Big Macro observations (pdf)