October 13, 2022

Hot or Not

Yesterday and today current data for the Producer Price Index (PPI) and the Consumer Price Index (CPI) was released, the outcome year over year showed 8.5% vs 8.7% for the previous month and 8.2% vs 8.3% respectively. So why all the fuss? Unfortunately, the financial narrative is broken, no longer engaged with a strategy to inform, but instead with a motive to influence.

The consensus numbers, namely the expected outcome of the inflation data, were too optimistic and easily beat by the actual data. This has been surprising given the recent track record, but the focus unfortunately was on the consensus rather than the difference between the current level of inflation and the past data levels. In my opinion, the focus is missing the point, namely, that inflation may not be going down, but it’s also not going up. What does that mean?

 Well, it doesn’t mean the Federal reserve isn’t going to stop raising rates. In fact, the Chairman has doubled down on the goal to beat inflation, which can only be accomplished if the economy goes into recession. Moving forward the likelihood of some softer employment data and the ongoing rise in the dollar, which is economically unfavorable to inflation are the only positives in our focus. The strong dollar also bringing up the thought that there has been a strong increase, post pandemic of course, in international tourism. Afterall, with comparatively weak local currencies buying strong dollars, the incentive is to travel and spend. So, one asks, inflation is the outcome of consumption versus demand, but is there a difference if that consumption isn’t coming from here, but rather from over there? Either way, the aggressiveness of the Fed and the likelihood of another .75% increase in rates on Nov 2nd and another .75% by year end will increase the realization of economic slowing and should set the new year up as a when, not an if the economy goes into recession. What does that mean?

 Well, today the broad indexes have moved from a frightening drop to a respectable rally. And with the exception of the technical conditions that have been slightly oversold there has been no other reason than perhaps investors have come to their senses. Today, that may be true, but the idea that this morning’s inflation was called out to be hot, but as described above, that wasn’t actually true. Also, the idea that inflation is going away anytime soon is also an uncertainty that can’t be ignored. The Fed will keep on being aggressive until they reach their goal and that’s a good reason to be cautious. Adding to existing positions when the market is down makes sense to me, because there is a reason and we all know it, and when the market is up it pays to look for a reason before acting. The broad indexes have come down a lot this year, balance sheets have been rattled, familiar measures and ratios have compressed and there will be a time when the Fed begins to play nice. When that happens the markets will rally for what I call the first stage. What I prefer to focus on as well are the longer dated technical conditions that persist and until those conditions are reversed, we remain in a bear market. But when the reversal happens, we begin to experience stage two and there is plenty of time to be prepared. And as experience has taught me, being prepared for the future is better than playing pinball with the present. 

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