This week’s charts
There have never been more job openings in the US before
Who has the real pricing power?
Investors willing to take on higher risk debt while losing money relative to inflation
Investors in European junk bonds have begun accepting interest payments that are lower than eurozone inflation levels for the first time ever. Analysts said investors’ willingness to extend credit to the riskiest borrowers while losing money in real terms reflected the scarcity of other opportunities to earn returns in debt markets.
Some investors may be inspired to buy junk bonds because they believe some issuers’ fortunes could improve to the point they would obtain investment-grade ratings.
Credit rating agencies have been upgrading bonds from junk status at an unusual rate with €7bn of European high-yield issues having been pushed up to investment grade in the past 12 months. This stands in contrast to the average €7bn worth of bonds that had been downgraded in each of the past five years, on average.
This chart shows the correlation between the 12-month real equity return and the 12-month change in the inflation rate, for quintiles formed by the starting inflation rate. Only in the lowest quintile (starting inflation rate less than 1.0%) is the correlation positive at 0.4. In all other cases, there is a negative relationship between the real equity return and inflation changes, and more so for higher starting levels of inflation. The trend suggests that equities actually benefit from rising inflation if the starting level is low, but are hurt by rising inflation if it is above median (increased risk of inflation escalating).
The Case for a longer-term oil and gas bull market
Back in mid-2020, folks were pronouncing the energy sector dead. Now, oil and gas companies in the US shale industry, and more broadly among publicly-traded independent oil companies, are on track to make record free cash flows in 2021:
Historically for two centuries now, whenever humanity finds a better energy source, we add it onto the previous energy sources, rather than replace them. The previous energy sources remain flat or even continue to grow in absolute terms, while the new one grows faster and becomes more important:
