Thursday, February 10, 2022

Morning Note: What to Expect on "Reported" Inflation Going Forward -- And -- One "Well Known Casualty" of the Fed's "Success"

So, we could get deep into today's CPI number and separate the components -- food's up X, used cars Y, household furnishings, energy, services and so on -- but suffice to say that nothing's getting any cheaper these days.

The headline number was +7.5% year-on-year, ex-out food and energy and it was +6%. And while CPI entirely misses the mark on things like rental housing increases (get that right and inflation's notably higher), we're looking at 1982 inflation even by way of the reported numbers.

And while stocks sold off notably on the news, as you'll see below (if they hold right here), no big deal so far this morning. I.e., they're rallying off the lows as I type...

You see, the market these days sees things in a very narrow time window. And, surely, if "it" looks out just to mid-year, it fully well knows that, say, March-on, year-on-year inflation prints should come notably off the boil.

For example, last January CPI was up 1.4%, by March it was up 2.6%, by April 4.2%, by May 5.0% and by June 5.4%. So, barring an even huger ramp up in the rate of price increases than we've seen of late, headline CPI is set to moderate going forward. 

And, one might expect, barring oodles of other risks -- geopolitics, mid-term election angst, the Fed tightening policy (and tighten they will [till they crack the markets]) amid weakening data, crazy high tech-sector valuations, and so on -- hitting the tape, that stocks will have a decent go of it as the reported inflation numbers abate a bit. 

That said, one should in no way take those oodles of other risks the least bit lightly!

Keep in mind, we're only talking reported numbers going forward; there's, tragically, little relief on the near-term horizon for the folks who truly suffer from real-world inflation.

Asian equities were mixed overnight, with 7 of the 16 markets we track closing lower.

Same for Europe this morning, with 11 of the 19 bourses we follow in the red as I type.

With banks, materials and energy the only sectors so far in the green, US stocks are, albeit to a small degree among the major averages (save for the tech-heavy Nasdaq), mostly in the red to start the session: Dow down 52 points (0.11%), SP500 down 0.34%, SP500 Equal Weight down 0.09%, Nasdaq 100 down 0.75%, Nasdaq Comp down 0.58%, Russell 2000 up 0.11%.

The VIX sits at 20.64, up 3.41%.

Oil futures are up 1.68%, gold's flat, silver's up 0.79%, copper futures are up 1.75% and the ag complex (DBA) is up 0.73%.

The 10-year treasury is down (yield up) and the dollar is up 0.06%. 

Among our 39 core positions (excluding cash and short-term bond ETF), 19 -- led by Disney, metals miners, Viacom/CBS, oil services stocks and ALB (lithium miner) -- are in the green so far this morning. The 20 losers are led lower by Sweden equities, AMD (chip maker), carbon credits, tech stocks and Indian equities.

In yesterday's close I noted the gall of a former Fed chairman to extol the virtues of "creative destruction,"  i.e., the importance of letting failed enterprises fail.

Here's part of that Greenspan quote:
"A market economy will incessantly revitalize itself from within by scrapping old and failing businesses and then reallocating resources to newer, more productive ones."

Coincidentally, yesterday afternoon I came across a Project Syndicate article titled The New Crisis of Central Banking:

Here's a snippet:   emphasis mine...
"For the past few decades, central banks have been at the vanguard of a successful campaign to ward off recessions. But even when effective, such efforts frequently involve new and untested instruments with unwanted side effects and hidden costs, some of which could be significant and long-lasting. One well-known casualty is lost productivity, a problem that has probably recurred in the current crisis, as large-scale asset purchases and government subsidies and guarantees propped up companies that otherwise would have failed."
I'll just leave it there...

Have a great day!

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