”Formulating a false story to justify your fears may make you feel better, but it isn't a successful investment strategy.”— Coleen T. Sol
Stocks rallied this morning. Again.
Before you read ahead, or just shake your own, we have good reason to be skeptical of this November rally.
First, the news.
Wall Street “cheered” new Consumer Price Index (CPI) numbers that show inflation was flat in October, instantly raising hopes the Federal Reserve is done hiking the overnight bank rate.
A fair number of traders polled by Bloomberg have even moved up their bets the Fed will start cuttingrates again as early as March of 2024.
On release of the report, the Dow leapt up 565 points for its second 500-point gain in November.
The S&P 500 briefly traded above the key breakthrough level of 4,500 level. The Nasdaq Composite traded two and half percent higher.
All of these gains added to an already “stellar” performance for stocks since the “bond vigilantes” stepped in to support the Treasury market in late October.
In November, the S&P 500 and Dow are up over 7% and 5% respectively. The Nasdaq, still huffed on AI fumes, is up nearly 10% this month alone.
Conflating the stock market with the economy, comme d’habitude, financial journalists are falling all over themselves, claiming a ‘soft landing’ victory and an early arrival of Santa Clause.
So, there’s that.
“But if the economy is doing so great,” we are getting asked on podcasts and seeing repeated in online polls, “why are people feeling so poor?”
The analyst Charlie Delillo, whom we follow on X, provides at least the beginning of an answer. This morning, in anticipation of the inflation data, he posted actual prices increases for goods and services people need and use over last 3 years:
CPI Medical Care: +5.1%
CPI Apparel: +11.9%
US Wages: +15.1%
CPI Shelter: +18.1%
CPI Used Cars: +19.8%
CPI Food away from home: +20.5%
CPI Food at home: +21.0%
CPI New Cars: +21.3%
Actual Rents: +22.4%
CPI Electricity: +24.3%
CPI Gas Utilities: +29.5%
CPI Transportation: +31.7%
Actual Home Prices: +39.0%
CPI Gasoline: +66.7%
CPI Fuel Oil: +77.3%
We see evidence here of “the end of cheap” in more ways than one.
These prices are already baked into the economy moving forward. Once prices rise, even a little, they tend to stick.
As Paul Volcker told me glibly when I was interviewing him for I.O.U.S.A: “Once it gets started inflation is very hard to beat.”
We have yet to feel the real long-term impact of “actual” cost of living increases reflected above.
In a study from the International Monetary Fund, research was conducted on 100 inflation shock episodes across 56 countries since the 1970s. Inflation was only “resolved” within 5 years in 60% of episodes. In the most successful cases it took an average of 3 years. According to the IMF paper:
Most unresolved episodes involved ‘premature celebrations’, where inflation declined initially, only to plateau at an elevated level or re-accelerate. Сountries that resolved inflation had tighter monetary policy that was maintained more consistently over time, lower nominal wage growth, and less currency depreciation, compared to unresolved cases
In other words, to really beat inflation, things need to get worse before they get better. That’s if the Fed sticks to its resolve.
There’s a lot of reason to believe the “unknown unknowns” are going to start testing JPow’s resolve in a significant way.
Ken Griffin, founder of 2022’s highest performing hedge fund Citadel, told Bloomberg last week he believes the “peace dividend” Western markets have enjoyed since the end of the Cold War is over, and expects the world is facing higher baseline inflation now which may last “for decades.”
Echoing the theme, the economic historian Niall Ferguson has outlined rather explicitly how the conflict in Gaza will make that decades-long fight against inflation even more fraught than the bond vigilantes are giving it credit for.
Not that you would know it from media celebrations of the CPI results or the platforms of current political candidates, but inflation remains the #1 voter concern for Americans leading into the presidential primaries.
And yet, in a chimeric data set all its own, American consumers continue to, well, consume.
High credit card balances and rapidly increasing interest on those balances be damned. In Q3 of this year, credit card balances in the US spiked to over $1 trillion dollars. Credit card defaults were already on the rise in 2022, which saw a record-high $130 billion in interest and fees charged by credit card companies.
What could go wrong from here?
Of course a slowing inflation read is a good thing. But as an individual investor there’s a real danger of getting caught up prematurely in the headlines, feeling the momentum on Wall Street, and then assuming you can make a buck in the short term alongside Wall Street banks.
The financial media is, by its very nature, complicit in crafting the story that helps make you feel better.
The Wiggin Sessions
P.S. As we observe in The Great American Shell Game presentation, consumers getting tapped out and getting high on an irrational stock market are part and parcel of one trend that historically speaking can not have a happy ending.
With the uncertainty of both global and domestic politics, 2024 is going to be a year for the history books.
If you haven’t already watched Shell Game, I strongly urge you to take a few minutes and do so now.
If you have, share it with your friends. And comment your own thoughts by clicking here.