What’s Fueling the Rise in Stocks? Inflation Whipsaw Coming?

By Victor Sperandeo with the Curmudgeon


We examine the cause of the recent rise in stocks and commodities, with the caveat that it’s not supported by either corporate insiders or the public.

Next, we provide an inflation outlook predicated on unsustainable U.S. budget deficits and national debt as a percent of GDP.  An inflation whipsaw may occur in 2024.

Review of Stock and Commodity Markets:

With a 25 bps Fed Funds rate hike virtually guaranteed at the conclusion of this week’s FOMC meeting on Wednesday, the Dow Jones Industrials (DJI) mocked the Fed by rising 10 consecutive days ending Friday July 21st!  

The DJI rally has spread to other equity indexes and markets. From 6/30/23 to Friday 7/21/23: the Dow Jones Transportation (DJT) is +4.52%, S&P 500 +4.32%, Russell 2000 +3.79%, S&P Midcap 400 +3.18,  NYSE Net Breadth (A/D) was +5001, the CRB Commodity index + 5.53% (no interest included) and Crude Oil near term futures +6.66%. 

What’s behind the resurgence in risk assets?

We think it’s due to money managers, especially hedge funds, buying stocks and depressed commodities to catch up to benchmark index performance so they don’t lose clients.

A calmer financial-sector backdrop and declining inflation in the U.S. and abroad have combined to lift major equity indexes to solid gains so far in the 3rd quarter, extending a first-half rally that defied many investors’ gloomy outlook at the start of 2023.

Nonetheless, BofA’s July Global Fund Manager Survey (FMS) remains bearish with 60% of institutional investors expecting weaker global growth, the biggest underweight of commodities since May 2020 and cash levels back up to 5.3%.  BofA’s Michael Hartnett explains that fear is still greater than greed, and therefore “fearflation” remains a positive for risk assets.

Conversely, insiders have been net sellers. As of July 2023, the current Overall Market Insider Buy/Sell ratio is 0.28. The previous monthly ratio was 0.32. This means insiders' buying activity is lower, indicating they may be less optimistic about the market than last month.

The public isn’t buying either.  On July 19th, the Investment Company Institute reported that “total estimated outflows from long-term mutual funds1 were $6.82 billion for the week ended Wednesday, July 12.” 

Astonishingly, the last five weeks have seen NEGATIVE stock fund outflows despite the rally! Total equity fund flows: -7,011, -17,243, -9,465, -5,220, and -9,131. 

Here’s a long-term chart of total and domestic mutual fund flows:

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Source:  Yardeni Research

Meanwhile, total money market fund assets increased by $4.22 billion to $5.46 trillion for the week ended Wednesday, July 19th. That shows individual investors prefer cash equivalents to stocks.

Finally, corporate earnings have declined for three consecutive quarters. According to FactSet, Wall Street analysts expect S&P 500 earnings to shrink by more than 6% in the latest quarter compared with a year ago.

Consumer Price Whipsaw Coming in 2024?

The CPI rose 0.2% in June and was up 3% from a year ago, the lowest level since March 2021. Excluding food and energy, core CPI increased 0.2% and 4.8%, respectively.

Bloomberg reported this week that economists have slightly lowered their U.S. inflation forecasts.  The Personal Consumption Expenditures (PCE) price index — the Fed’s preferred inflation metric — is seen rising +3.7%, +3.3%, +3.1% (YoY) in the 2nd, 3rd, and 4th quarters of 2023.  The core PCE (YoY) is forecast to rise +4.5%, +4.1%, +3.7% during that same time period.

The problem is that inflation might rise again (i.e., whipsaw) next year, as the U.S. government (Treasury or the Fed) may be forced to “print” money to cover the ever-increasing budget deficit.

Fiscal Dominance Explained:

While most economists don’t forecast that, a new concept called “Fiscal Dominance” makes the case for higher inflation.  It’s described in an article titled, “Fiscal Dominance and the Return of Zero-Interest Bank Reserves,” by  Charles W. Calomiris, Henry Kaufman Professor of Financial Institutions Emeritus at Columbia Business School, and Dean of the Center for Economics, Politics and History at UATX. 


As a matter of arithmetic, the trends of U.S. government debt and deficits will eventually result in an outrageously high government debt-to-GDP ratio. But when exactly will the United States hit the constraint of infeasibility and how exactly will policy adjust to it?

This article considers fiscal dominance, which is the possibility that accumulating government debt and deficits can produce increases in inflation that "dominate" central bank intentions to keep inflation low. Is it a serious possibility for the United States in the near future? And how might various policies change (especially those related to the banking system) if fiscal dominance became a reality?


To reiterate, fiscal dominance is the possibility that accumulating government debt and deficits can produce increases in inflation that "dominate" central bank intentions to keep inflation low.

“Under current policy and based on this report's assumptions, [government debt relative to GDP] is projected to reach 566 percent by 2097. The projected continuous rise of the debt-to-GDP ratio indicates that current policy is unsustainable."

—Financial Report of the United States Government, February 16, 2023


Basically, the theory postulates that the U.S. will not be able to cover future fiscal deficits with tax revenues (or borrowing) and therefore will have to “print” money to cover budget deficits. Forecasts for deficits as a percent of GDP support that thesis.

CBO Budget Deficit Gloomy Outlook:

The U.S. budget deficit is set to soar in the coming years with the rise of spending on health care programs and Social Security as well as interest costs, the Congressional Budget Office (CBO) forecast last month.

Note:  The U.S. government ran a cumulative deficit of $1.39 trillion through June ($1.37 trillion when adjusted for timing shifts, $852 billion more than during the same period last year.


The U.S. government is set to run a budget deficit of 5.8% of GDP this fiscal year, the agency said — a period in which the unemployment rate has averaged a mere 3.6% so far. The deficit exceeded that level in only seven years since 1962, all of which coincided with rebounds: 1983 (aftermath of severe recession); 2009-2012 (global financial crisis); and 2020-2021 (pandemic).

The CBO said that by the end of 2023, federal debt held by the public would be 98% of GDP. Debt then rises in relation to GDP to surpass its historical high in 2029, when it will be 107% of GDP, before climbing to 181% of GDP by 2053.

Such high and rising debt would slow economic growth, push up interest payments on U.S. debt, increase inflation, and pose significant risks to the fiscal and economic outlook, the CBO warned.

"There would be an elevated risk of a fiscal crisis—that is, a situation in which investors lose confidence in the U.S. government’s ability to service and repay its debt," the report said, causing a steep rise in interest rates and an upward spiral in inflation.

Victor: This is the definition of inflation (it’s a monetary phenomenon), as the production of goods and services won’t be able to keep up with the quantity of money printing. Hence, I expect the CPI to rise starting sometime next year.


Will a day arrive when Congress ever seriously cuts government spending?  If not, U.S. budget deficits and debt will spiral out of control.  The Fed will act like a puppet in order to supply as much paper money as needed to prevent a financial crisis. 

As we’ve stated so many times in the past 10 years, excessive money “printing” will eventually lead to a crash in the U.S. dollar and the start of hyperinflation.

Cartoon of the Week:

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End Quote:

Why Thomas Jefferson preferred gold and silver to paper currency:

“The trifling economy of paper, as a cheaper medium, or its convenience for transmission, weighs nothing in opposition to the advantages of the precious metals… it is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted.”      

                          Thomas Jefferson


Be well, stay safe, good luck and till next time………………………  

The Curmudgeon

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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