With all eyes on tomorrow’s CPI print (and Friday’s Nasdaq rebalance), what was left for traders but to bugger about in Small Caps, squeezing shorts, and playing gamma-grab-ass.

‘Most Shorted’ stocks have exploded 11.5% higher from Thursday’s lows – far outpacing the 10%-in-5-days into June’s month-end…

Source: Bloomberg

Small Caps benefited most from this squeeze-gasm, but all the majors ended green as FOMO struck in the last few minutes…

Small Caps underperformed Nasdaq once again as the ratio breaks interim support…

Under the hood, 0-DTE traders pushed aggressively against the uptrend in Small Caps early on… but that failed and they were forced to cover – juicing Russell 2000 in the afternoon…

Source: SpotGamma

Treasuries were mixed (and quiet) today with the short-end underperforming (2Y +3bps, 30Y -1bps), but the whole curve remains lower on the week…

Source: Bloomberg

The dollar pushed back to its mid-June lows (this was the lowest Dollar Index close since 5/10/23)…

Source: Bloomberg

Bitcoin spiked up to $31,000 last night and then puked back but has been slowly bid all day, never breaking down to $30,000…

Source: Bloomberg

Gold managed to hold on to gains today – but do you notice pattern…

Oil surged to the upper-end of its recent trading range with WTI testing $75…

Finally, Bloomberg notes that 3-mo bill yields are back at the highs of late May in anticipation of another Federal Reserve rate hike. You can lend to the US government for three months at 5.44%, which is exactly what you’d get from lending to single A rated corporates for more than 10 years (the average maturity of the Bloomberg US Agg A index).

Additionally, the spread between the earnings yield on the S&P 500 and three-month bills, already the worst since the dot-com bust, has fallen to a fresh low…

Source: Bloomberg

On that basis, the most expensive sectors are info tech and consumer discretionary, which have earnings yields more than 200 bps lower than the yield on bills. For info tech, that’s comparable to the end of 2000.

Traders anxiously await Wednesday morning’s US consumer price index inflation report. Economists forecast that June figures will come in at the slowest rate in over two years as the effects of interest rate hikes by the Federal Reserve hinder economic activity. Despite this, inflation has yet to reach the Federal Reserve’s 2% goal. However, Bloomberg cited new data from Adobe Inc. that shows promising signs pandemic inflation of goods sold online is cratering.

Data from Adobe indicates that the prices of goods sold on e-commerce websites fell 2.6% in June compared to the same month last year. This represents the sharpest decline since May 2020 and marks the tenth consecutive month of year-on-year declines. Of the 18 product categories monitored by Adobe, half experienced a year-on-year decline, with the most significant decreases in electronics and computers plunged by 12.9% and 16.9%, respectively. Additionally, the price of appliances slid by 8.3%.

Even though laptops and washer machines saw substantial price declines, there were price increases for online groceries, but they slowed to 7.6% in June, down from 8.2% the previous month and 10.3% in March.

The slowdown in online buying is due to a cash-strapped consumer blasted by the inflation storm. Two years of negative real wage growth, forcing many to draw down on personal savings while ramping up credit card debt, has been a toxic combination. The latest consumer credit report noted Monday that those who are using credit cards to make ends meet with high borrowing costs are abruptly hitting a brick wall. Wait until student loan repayments restart in September, and a much more significant discretionary spending pullback will be seen. 

Ahead of Wednesday’s CPI print, Wall Street forecasts suggest a headline print of 3.1% for June, compared to the four-decade high of 9.1% recorded last year at this time and the 4% rate in May. 

There was more good news on Monday when used cars tumbled the most since the start of the pandemic. 

Inflation has peaked, but numerous Fed members have called for at least two more rate hikes. “Inflation is our No. 1 problem,” San Francisco Federal Reserve President Mary Daly on Monday. 

This is bad news for Amazon Prime Day.

Authored by Matt Taibbi via Racket News,

Ford Fischer’s News2Share crew has put together a neat time-travel compilation, showing flag-burning demonstrations through the years, held by the Revolutionary Communist Party, or “RevComs.” As captured here, these events sometimes inspired outraged reactions by conservative counter-protesters, including Proud Boys.

There’s a historical through-line to these demonstrations. In 1984, at the Republican Convention in Dallas, it was a Revolutionary Communist leader named Gregory Lee Johnson whose decision to burn a flag led to his being a defendant in the landmark Supreme Court Case, Texas v. Johnson. With William Brennan writing the majority opinion, this case affirmed, by a slim 5-4 vote, that the act of burning the flag was “sufficiently imbued” with expressive speech to “implicate the First Amendment.”

Ford does his usual great job of simply filming the events and capturing what the RevComs believe to be the point they’re making in these demonstrations. I’m not going to lie, however: this video is frustrating for me to watch, since it captures how far almost everyone on the political spectrum has drifted from the embrace of the free speech idea since that 1989 Supreme Court ruling.

Both Donald Trump and Hillary Clinton expressed support for criminal penalties for flag-burning (although no action has been taken), and even the RevComs don’t seem to understand that Texas v. Johnson was just one of a series of rulings that explicitly rolled back attempts to outlaw not just flag-burning, but revolutionary ideologies in general. The ruling in the Johnson case was only possible because of the 1969 case Brandenburg v. Ohio, which essentially struck down prior rulings banning the advocacy of the “necessity, desirability, or propriety of overthrowing” the U.S. government. After Brandenburg, the new standard became incitement to “imminent” lawless action.

In a dissent to Texas v. Johnson, Justice John Paul Stevens — normally a speech advocate — wrote that the flag held unique value as a symbol of unity and the national idea, and though “the creation of a federal right to post bulletin boards and graffiti on the Washington Monument might enlarge the market for free expression,” that was “a cost I would not pay.” Brennan’s contra perspective, that allowing flag burning represented the essence of the American idea, was at the time a dominant belief among liberals. Brennan wrote that to uphold a ruling outlawing flag-burning would “eviscerate our holding in Brandenburg,” and the majority wasn’t willing to go there.

Brandenburg was a ruling upholding speech rights of a Klan member that ironically had the effect of ending decades of attempts to outlaw communist speech. Today, through cases like the J6 “seditious conspiracy” prosecutions (including of Proud Boys), the federal government is attempting to re-expand the definition of incitement in a way that almost certainly will end up having ramifications for leftist revolutionaries like the RevComs. Judges are again trying to wind the clock back to the twenties, thirties, forties, and fifties, when being a revolutionary at all was dangerous, let alone a flag-burning one.

Either way, it’s interesting to see how peoples’ reactions have changed over the years, and for this, we should be glad Ford and his crew were there to capture these demonstrations. What’s your take on flag-burning?

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In a recent letter addressed to the head of the Environmental Protection Agency, Toyota Motor North America, Inc. criticized the agency’s proposed new tailpipe emission standards, deeming them “unrealistic” and warning that they could spark a shortage of critical minerals.

Toyota sent a letter to EPA administrator Michael Regan with comments on the agency’s tailpipe emission limits for vehicles produced in 2027 and beyond. The proposed rule calls for more electric vehicles to be sold, accounting for 67% of new light-duty vehicle sales and 46% of new medium-duty vehicle sales in model year 2032. Currently, EVs and plug-in hybrids are approximately 10% of the market. 

Toyota said explosive growth in EV vehicle production to meet new government standards would spark many “challenges, including the scarcity of minerals to make batteries, the fact that these minerals are not mined or refined in the US, the inadequate infrastructure and the high cost of battery-electric vehicles.” 

The carmaker stressed that it shares the Biden administration’s goal to decarbonize transportation and is committed to vehicle electrification in America. “Our environmental track record speaks for itself. We have sold over 20 million electrified vehicles globally since the introduction of the Prius in 1997,” it said. 

Toyota said it will produce a new EV SUV at Toyota Motor Manufacturing Kentucky in 2025, with batteries sourced from the Toyota Battery Manufacturing North Carolina plant. And it added it was “committed” to achieving carbon neutrality in 2050 over the entire life cycle of our vehicles.

Toyota provides further concerns about the EPA’s proposed tailpipe emission rule: 

The proposed standards are expected to result in a new vehicle sales mix of 67% BEV by 32MY. Achieving such a high penetration is almost entirely dependent on factors outside our control. As discussed in more detail in our attached comments, hundreds of new mines are needed globally to produce enough critical minerals to support so many BEVs. The sources for those minerals are almost exclusively outside the US, as is most of the mineral processing to turn the ore into usable battery-grade material. And the charging infrastructure (both in-home and public) needed to support that level of electrification is far from where it needs to be. Recent legislation and incentives are directionally supportive but appear far short of what is needed. EPA should adjust the standards in the proposed rule to account for these major uncertainties over which automakers have little control, but for which we face significant compliance and brand/reputation ramifications should they not come to bear. Compliance cannot be based on factors over which we have no control.

Read more here:

If there were some concerns that the week’s first coupon auction would be a disappointment due to today’s risk-on sentiment and lack of concessions into the 1pm auction block, they were promptly blown away moments ago when the Treasury announced results from today’s sale of $40BN in three year paper, which were nothing short of stellar.

Stopping at a high yield of 4.534%, this was more than 30bps higher than last month’s 4.202% and not far below the current cycle high of 4.641% reached in March (just before yields collapsed following the March banking crisis). The auction also stopped through the When Issued 4.536% by 0.2bps, the 4th stop through in the past five auctions (last month the auction tailed by 0.2bps).

The Bid to Cover jumped to 2.882 from 2.696, and was also above the 6-auction average of 2.686.

The internals were also solid, with Indirects awarded 69.4%, up from 61.5% in June, and not just well above the recent average of 64.5% but just shy of the all time high. And with Directs awarded 19.8%, below last month’s 21.7% but above the 6-auction average of 18.6%, that left Dealers holding on to 10.8%, which was the lowest on record.

Overall, this was another stellar Treasury auction, and positions the market nicely for tomorrow’s benchmark sale of 10Y paper just as yields trade back below 4.0%.

Authored by Helen Partz via CoinTelegraph.com,

While the cryptocurrency community is actively discussing the upcoming Bitcoin halving in 2024, another potentially big market event is happening this year.

The trustee of the hacked Bitcoin exchange, Mt. Gox, is set to finally repay the exchange’s creditors by the end of October 2023. If that happens, the cryptocurrency market could be significantly affected in several ways, some industry observers agree.

Founded in 2010, Mt. Gox was once the biggest Bitcoin exchange in the world, estimated to facilitate around 70% of all BTC transactions before its implosion.

The now-defunct exchange lost 850,000 BTC — 4% of all Bitcoin to be issued — in a security breach in 2014. The event made Mt. Gox one of the biggest cryptocurrency bankruptcies of all time, with creditors yet to be repaid nine years later.

As the current Mt. Gox repayment deadline is scheduled to occur in roughly three months, Cointelegraph has reached out to some crypto executives to find out what to expect from the anticipated Mt. Gox repayment.

What will the investors do once they get their Bitcoin back?

The repayment of Mt. Gox will be a unique event, which is certain to have a significant impact on the market, WhaleWire founder and CEO Jacob King believes.

After losing all their Bitcoin almost 10 years ago, most creditors are likely to sell at least part of their BTC once they finally get it back, King told Cointelegraph.

“This influx of sell orders could create a downward pressure on prices and potentially lead to a market downturn,” he said. King also mentioned multiple prolonged delays in the Mt. Gox repayment process, which has already caused a sense of “disillusionment among investors, eroding their confidence in the market.”

The WhaleWire CEO continued:

“It’s a simple question of, what will the investors do? Over the last year, we’ve seen more sells than buys, and many of those who lost on Mt. Gox have moved on past crypto. The chances they hold for more years, after everything that happened, is highly unlikely.”

Some of the Mt. Gox creditors themselves admit that the Bitcoin market may face some selling pressure once the repayment is done. However, many claimants are likely to continue to hodl, as one trader who described himself as a Mt. Gox creditor told Cointelegraph. He stated:

“When we get our coins, I think we’re all going to hold. But when the news hits the world that these coins are going to be released, people who have coins but who are not the claimants are going to sell for fear of the price going down.”

How much will be repaid?

Mt. Gox expects to repay a total of more than 10,000 crypto creditors from all over the world by the end of October. Despite the exchange losing 850,000 BTC, Mt. Gox will only repay part of the total losses from the hack because the firm could only recover some of the funds.

According to online reports, Mt. Gox will reimburse its creditors 142,000 BTC ($4.3 billion) and 143,000 in forked cryptocurrency, Bitcoin Cash, worth roughly $40 million. The bankrupt exchange will also reportedly pay out 69 billion Japanese yen ($510 million). Payments will be made using a combination of fiat currency and cryptocurrencies, with each payout coordinated individually with each investor.

The repayment of Mt. Gox funds will be a massive event, Whale Alert co-founder Frank Weert agrees. But the way it influences the market will depend much on how the funds are released and how the media report it, the exec told Cointelegraph.

“We are sure some will be glad to be able to finally cash out, but we doubt it will cause a massive sell-off,” he stated. When asked whether the crypto industry has ever seen a similar event, Weert said that there hasn’t ever been an event on such a scale so far.

Some major creditors, including Bitcoinica and MtGox Investment Funds, reportedly chose to have their bankruptcy recovery funds paid out in Bitcoin.

According to data from the Mt. Gox balance bot on Twitter, the Mt. Gox trustee holds 135,890 BTC on all known addresses at the time of writing.

Total current balance on all known addresses* of the MtGox Trustee: 135890.98002134 BTC.

-0.00043187 BTC have been moved away from these addresses since 2018/05/10. $BTC #bitcoin #mtgox mt.gox mt gox

2023-07-11T09:19:03.239Z UTC

— MtGoxBalanceBot (@MtGoxBalanceBot) July 11, 2023

Mt. Gox Bitcoin repayment amount is close to Michael Saylor’s BTC holdings

While many crypto enthusiasts believe that Mt. Gox repayment will be a massive event, some skeptics are confident that any potential effects will likely subside quickly.

The amount of Bitcoin that is to be handed back to Mt. Gox creditors is comparable to the holdings of Bitcoin advocate Michael Saylor, who holds at least 152,333 BTC ($4.52 billion).

“Either way, it doesn’t seem like a lot,” Quantum Economics founder Mati Greenspan told Cointelegraph. Referring to the current worth of Bitcoin to be repaid, Greenspan emphasized that the current daily on-chain volumes are much bigger.

“Daily on-chain volumes are at an average of $12 billion, exchange volumes are reportedly in the neighborhood of $18 billion per day,” he noted, adding:

“So this is certainly something the market can absorb in a relatively short time frame. I would assume there may be some sell pressure due to the speculation around this event. Many people don’t know basic math.”

Greenspan also stressed that Mt. Gox’s Bitcoin will be distributed to lots of people, which could be very good for the network as a “mass-distribution event.”

“That’s a lot of OGs that will be reactivated. Some of them will sell and wash their hands, but I bet many will be staunch advocates of self-custody,” he added.

The exec also expressed optimism about the potential repayment, stating that Mt. Gox-related FUD has been “plaguing the market” for many years, and it will be “good to see it finally put to bed.”

Buffett’s Berkshire Hathaway Energy has agreed to buy Dominion Energy’s 50% stake in the Cove Point liquefied natural gas (LNG) export project in Lusby, Maryland – a one-train terminal with an annual export capacity of 5.25 million tons – for $3.3 billion.

The deal will boost the company’s limited partnership ownership of the terminal from 25% to 75%, with a unit of Brookfield Infrastructure Partners holding the remaining 25%.

The purchase, according to Bloomberg,  will give Berkshire control of one of just seven operational US facilities that can export LNG at a time when the fuel has gained increased economic and geopolitical significance amidst sanctions on Russia over its invasion of Ukraine.

Berkshire Hathaway first bought a stake in Dominion’s gas pipeline and storage assets for $4 billion in 2020. Greg Abel, Berkshire Hathaway Energy’s chairman and former CEO, previously told CNBC the deal in 2020 was made through a strong relationship he had with the prior Dominion CEO Tom Farrell.

Cove Point, which is located in Lusby, Maryland, about 60 miles southeast of Washington DC, is contracted on a long-term basis to companies including Tokyo Gas and Sumitomo.

In a separate statement, Dominion Energy, which has been conducting a business review, said that it will use the proceeds to repay debt.

Robert Blue, Dominion’s chief executive, said the company considers Cove Point a “non-core” business, and selling it would free it to focus on state-regulated utility operations.

While the deal, which was announced Monday, isn’t large in size for Berkshire, it builds on a growing bet on energy infrastructure at the conglomerate as it gains control of one of the rare functional facilities in the U.S. that can export LNG.

“It builds on their long-term theme of energy resources becoming more valuable and ownership of one of only a few US LNG exporters,” said Bill Stone, chief investment officer at Glenview Trust and a Berkshire shareholder.

In 2022, Berkshire proposed spending nearly $4 billion to help generate more wind and solar power in Iowa. At the same time, CNBC notes, the conglomerate has been dramatically increasing its exposure to two traditional energy companies — Occidental Petroleum and Chevron.

“Buffett has liked pipelines for a long time, given their toll bridge-type revenues rather than pure commodity exposure, and this is likely similar,” Stone said. “Natural gas prices are down a ton, but I think most of these exporters work on long-term take or pay contracts.”

Via Common Dreams,

The start of NATO’s annual summit in Vilnius, Lithuania on Tuesday has been dominated by talk of maintaining the flow of weapons to Ukraine and potentially expanding the Western military alliance to include the war-ravaged nation as its conflict with invading Russian forces drags on.

But anti-war campaigners argued that approach is a recipe for a prolonged and possibly larger military conflict, one that could ultimately involve nuclear weapons. Lindsey German, a founding member and convenor of the United Kingdom-based Stop the War Coalition, wrote Monday ahead of the two-day summit that “a ceasefire and peace talks are the only means to end this bloody spiral,” warning a primary focus on weaponry and NATO expansion would signal that “Western powers are preparing for an even greater war.”

The alternative to serious peace negotiations, German wrote, is that the war “grinds on, with battles such as Bakhmut increasingly resembling those of the First World War. And that further ‘red lines’ are crossed—more cruise missiles, more cluster bombs. And then what? Tactical nuclear weapons?“

“While Ukraine has every right to defend itself from the invasion and war with Russia, it does not have the right to demand weapons which even the British government has said it will not send,” German added, referring to cluster munitions—weapons that the U.S. is preparing to send Ukraine. “It does not have the right to encourage escalation of a war where there will be no winners.”

NATO leaders gathered in Lithuania for the 2023 summit are reportedly expected to issue a statement pledging to “extend an invitation” to Ukraine to join the military alliance once “allies agree and conditions are met,” offering no specific timeline. U.S. President Joe Biden endorsed the draft communique on Tuesday.

But Ukrainian President Volodymyr Zelenskyy, who is in attendance at the NATO summit, criticized the available details of the document, saying it “seems there is no readiness neither to invite Ukraine to NATO nor to make it a member of the alliance.”

Ukraine’s push to join NATO was recently backed by dozens of “foreign policy experts,” many of whom work for organizations that receive funding from weapons companies and industry lobbyists.

Eli Clifton of Responsible Statecraft reported that 21 of the 46 signatories to a new open letter supporting Ukraine’s NATO bid “are associated with institutions with financial ties to the weapons industry, an industry that presumably stands to benefit from the policy recommendations laid out in a letter that had a particular focus on providing more Western weapons to Ukraine, a fact not shared with readers.”

👀👀 pic.twitter.com/ItmeKswS5e

— Tom Bevan (@TomBevanRCP) July 11, 2023

Russia’s leadership, for its part, has long made clear that it views any expansion of NATO, a remnant of the Cold War, as a major provocation.

Since Russia invaded Ukraine in late February 2022, Finland—which shares a land border with Russia—has formally joined NATO and Sweden has applied to join the alliance.

On Tuesday, Turkey dropped its year-long opposition to Sweden’s bid, clearing the way for the Nordic country to join the alliance, which vows to collectively defend any member that comes under attack. Sweden shares a maritime border with Russia.

In an appearance on Democracy Now! Tuesday morning, Kerstin Bergeå of the Swedish Peace and Arbitration Society called Sweden’s push for NATO membership a “historic mistake” that won’t “make Sweden more safe.”

But it could spark “greater tensions and contribute… more polarization in an already heavily militarized world,” Bergeå warned.

“It’s just really tough seeing all the world putting so much money into weapons, and also the Swedish weapons industry is making huge profits right now,” she added.

During a press conference kicking off the Lithuania summit on Tuesday, NATO Secretary-General Jens Stoltenberg told reporters that the acceptance of Finland and Sweden into the military alliance “sends a very clear message to Russia, to President Putin, that NATO’s door remains open, and that it is for NATO allies to decide on enlargement.”

“He went to war because he wanted less NATO. He’s getting more NATO,” Stoltenberg declared. “More NATO military presence in the eastern part of the alliance and two new members.”

#Lavrov on #NATO‘s insincere proposals for peace negotiations over #Ukraine. pic.twitter.com/KuAPcUBDAG

— tim anderson (@timand2037) July 11, 2023

On the prospect of Ukraine joining the alliance, Stoltenberg was less definitive, saying the draft text set to be released later Tuesday is “all about moving Ukraine closer to NATO membership.”

Stoltenberg went on to make clear that, NATO member or not, Ukraine will continue to receive massive shipments of weapons from Western powers.

“We all agree that the most imminent task now is to ensure that Ukraine prevails as a sovereign independent nation in Europe,” said the NATO chief. “So the most important thing we can do is to continue to provide weapons, ammunition, military support to Ukraine, because unless Ukraine prevails as a nation, as a democratic nation in Europe, there is no issue to be discussed about security guarantees or membership in NATO at all.”

Absent from Stoltenberg’s remarks was any mention of peace talks, which have been nonexistent for more than a year as the war’s death toll and humanitarian impacts mount.

“A bigger NATO and cluster bombs won’t keep us safe,” the Democracy in Europe Movement 2025 (DiEM25), a campaign co-founded by former Greek Finance Minister Yanis Varoufakis, tweeted Tuesday. “It’s time for Europe to help lead a New Non-Aligned Movement that seeks a route to lasting peace.”

The revived ‘tanker wars’ have continued this summer, as on Tuesday Indonesia seized an Iranian-flagged tanker over allegations it was engaged in an illegal crude oil transfer, according a statement by the Indonesian coast guard. 

Reuters reported based on the source that the vessel is the MT Arman 114, which was carrying over 270,000 barrels of light crude. Authorities say it was planning to transfer its crude to another vessel without permit, which is a common tactic when tankers want to conceal offloading. 

Tehran has long been accused of sanctions-busting activities particularly in southeast Asia, with China in particular as a major buyer, as its crude continues to make its way to international markets.

Reportedly Indonesian coast guard directly caught the MT Arman 114 in the act of transferring its cargo onto a Cameroon-flagged vessel. The Iranian-flagged vessel was also suspected of turning off its transponder, another common tactic of sanctions-evasion.

According to further details, the Iranian tanker briefly attempted to evade the Indonesian coast guard:

When approached, the MT Arman 114 tried to escape before being chased into Malaysia’s EEZ.

Indonesian authorities carried out the seizure with the help of Malaysian authorities, who ‘deployed special maritime troops using helicopters.’

But Indonesia acting to seize an Iranian tanker remains a rare act – as it doesn’t tend to act as a big US sanctions enforcer. 

This could serve to endanger Indonesian ships in the Person Gulf region, as Iran has a tendency to hit back at individual countries’ ships in tit-for-tat fashion when they are found in waters off the Iranian coast. 

Additional interesting insight about the crew of the ARMAN 114; being mostly of Syrian citizenship. The vessel’s flag is that of Iran. The vessel is still registered in Panama, according to public database, Equasis.https://t.co/3qiJlntpxR

— TankerTrackers.com, Inc. (@TankerTrackers) July 11, 2023

In recent months, Iran has seized three foreign tankers in the Gulf region, including one which had been bound for Houston, as it was transporting crude for Chevron. 

Authored by Simon White, Bloomberg macro strategist,

Elevated inflation is poised to limit equity downside in the next recession and the following cycle.

It’s time to get real. Several decades of relatively benign inflationary conditions have led to a blurring of the difference between real and nominal values, with predominant focus on the latter. But their growing divergence as inflation has risen has made it imperative to consider real values in order to successfully navigate and understand financial markets.

Recency bias likely means most investors are working off the recession playbooks from the near past. That means stocks sell off steeply through the downturn, before Federal Reserve easing stabilizes the situation. The next recession, though, is highly likely to be accompanied by elevated inflation, meaning stocks – in nominal terms – may not fare as badly as in recent downturns, and are poised to remain supported after it.

To understand why, we can break down the price of equities as being the product of the P/E multiple, the profit margin, and revenues. This year, the rise in the P/E multiple has driven the market higher (led by AI stocks, but beginning to broaden out), as it did in 2020/21.

But the rise in P/Es is unlikely to last.

Inflation is down but not out, and extremely tight labor markets, weak productivity, rising profit margins and incrementally more easing in China mean that inflation in the US is poised to re-accelerate as soon as by the end of the year. That would mean multiples falling again and, you might suspect, a reason to sell.

But looking at the 1970s, it’s not so simple.

In that decade, the market rallied all through the second half after bottoming in the 1974 recession, but the P/E multiple did not trough until the early 1980s. This seeming paradox is resolved in the world of real-market variables.

The principal issue is that P/Es are nominal variables but, especially in times of high inflation, they should be looked at in real terms.

Specifically, define the real P/E as the price-to-book ratio over the real return on equity. Real RoEs should remain constant with inflation, which is why real P/Es should also be stable (ex the effect of taxes).

Equities therefore managed to be almost flat in real terms through the second half of the 1970s as the impact from relatively stable real P/Es was superseded by increasing profit margins and real revenues, which rose with inflation. In nominal terms, equities delivered a respectable return (38% between 1975 and 1980).

Nominal P/E multiples fell in the 70s as equities faced greater competition from bonds. Stocks are de facto a fixed-coupon (the RoE), infinite-duration asset, whereas bonds offer the opportunity to re-negotiate the coupon on the bond’s maturity date. P/Es thus fell until the real equity yield was sufficiently above real bond yields to make equities attractive again.

Stocks did take a big hit in the 1974 recession. However, they have less formidable headwinds today. In 1974, real rates were much more restrictive. Moreover, inflation was still rising, while in the current cycle the next recession has a good chance of hitting when inflation is lower.

Looked at over the whole cycle, equities are therefore not the obvious sell they usually are in a recession (again, in nominal terms).

And if they experience a milder selloff than average in the slump, history shows they are primed to rally in the following elevated-inflation period.

We have several of the same dynamics today as in the 70s. Profit margins are rising, with the risk of a profit-price-wage spiral developing, and they may be stickier this time due to the influence of more monopolistic/oligopolistic industries. Further, revenues are rising quickly – driven by inflation – with the revenue-weighted S&P recently making a new high ahead of the standard index.

Where things could go seriously awry for stocks is if Powell’s immediate response to re-accelerating inflation is to go “full Volcker”. But I find that unlikely. Volcker was path dependent: we had to go through Arthur Burns and William Miller to get to the point where their successor had a mandate to cause a deep recession to neuter inflation. Powell isn’t there yet. On top of that, next year is an election year, and resisting cutting rates as the economy weakens might be the closest the Fed gets to hiking.

I have emphasized throughout that equities may do better than expected than in a more garden-variety downturn – but only in nominal terms. In real terms, equities are likely to be one of the poorest performing asset classes, as they were in the 1970s overall (although there will be a great variation between different equity sectors).

Still, old habits die hard, and positive nominal returns are likely to be greeted with the same fanfare as those seen in pre-inflationary days. But those living in the real world will know better