Inflation, Math and How many rate hikes?

By Jeff Kelly on April 1, 2022

“Fear always makes you an accomplice”

President Zelensky

He’s talking about countries fearing helping the Ukraine with the weapons they need. He’s right. Fear makes us cowards. It keeps us from saying what we think, doing what is right and achieving what is great. If you let the fear in, you don’t act. You don’t take that chance. You don’t quit that job. You don’t voice that opinion. You go the safe, easy way. No getting up early to workout. No making the tough choice to work a little harder, run a little further, lift a little more. Last week I mentioned the saying from Ted Lasso- “It’s the hope that kills you” it’s not…it’s the fear.  

We’ve come to the point where we fear too much. In the political world we see fear of speaking out against the extremes. It’s hard for politicians to talk about their “record” when they spend all their time pandering to their base. They fear that base more than they care about achievement. In the financial world the current fear is not forecasting enough interest rate hikes. We now have several firms expecting 9 hikes. Another fear is not forecasting high enough oil prices. I saw one analyst today forecasting 260.00 a barrel. In today’s world I suppose anything is possible.

Inflation’s another area where they can’t spare any heights in making forecasts. Soon we will need wheelbarrows full of dollars just to fill the car with gas, at least that’s what the doomsayers preach.

We can listen to the fear and the wild prognostications, or we can look at the math. The math of inflation is interesting. In some charts below we look at how the numbers might shake out in a few months. The math can lead us higher in the very short term (next month) and then lower, maybe by a lot. But there is little glory to be gained in reasoned, math-oriented analysis. Better to just wing it and predict the moon. We know there’s no penalty for being wrong. Strategists never get fired they just change firms.

It’s worth noting lumber is about 36% down from its recent high and down 50% from May of 2021. Oil is down 24% from recent high. These prices have had wild fluctuations but despite a very favorable environment for commodities, they are below recent highs. Another question is why banks trade so poorly if rates are to continue to head higher. They benefit from higher rates but are well off highs also.

Alfie is very concerned about inflation as we head into a new month and quarter.

CHARTS FROM THE WEEK PAST

Fed Funds vs. CPI at the widest it’s ever been.

Crude oil Total Inventory still below 5-year range.

We have been saying we believe Inflation may be peaking.

Doesn’t mean it’s going away, or we will return to a 1% rate anytime soon. What it does mean is the rate of change will slow and Math takes over. The next few slides contextualize this thought. 1^st, disinflations isn’t unusual. There have been 14 periods since 1948.

Inflation comes from three main areas, food (15%), shelter (32%) and transportation (41%).

Transportation Costs are driven by shipping costs.

The rate-of-change peaked in July 2021. It declined modestly last month.

Shipping’s contribution to core inflation will likely be .5% through July but then we can see a 1.5% decline contribution monthly from July 2022 to February 2023.

Vehicle prices have contributed 1.8% of the 7.8% CPI in February.

Used car prices alone contributed 1.13% or 15% of the CPI. Used car prices are beginning to decline.

If used vehicle prices stay flat, they are declining right now, the rate-of-change would slow to -6% by December.

This would wipe out 15% of CPI.

The big elephant in the room is oil.

Here’s the rate-of-change of oil. It’s still high. But check out the slide below to see what happens if it stays at 108.00.

If we stay at 108.00 per barrel, 29% of the CPI would be wiped out by Q1 2023.

To hold the rate of change at its current 118% level, oil would need to rise to 237.25 by Q1 of 2023.

After the rally on Monday, we saw the best 20-day high readings in 11 months.

Why care about expanding new highs – because returns after these periods are very good.

RevPAR – revenue per available room is ahead of 2019 levels.

Very good news for travel.

The charts below show oil inventory deficit to the 4-year average, Crude, Gas & Distillers Inventory to the 4-year average and Global Oil Surplus to 2017-2019 average.

Many states are cutting taxes.

The markets now see 9 rate increases by early 2023.

Not likely in my view. There seems to be a competition to see who can predict the most!

Potential head and shoulders top in the NASDAQ measures to around 12,200.

Cyclicals doing better than defensives.

Lower container shipping prices.

Good news.

This is a reason higher rates could have less impact than in the past.

Financial conditions have tightened but remain accommodative relative to pre-Covid levels.

Very few insider sales over the past few months.

New job postings on Indeed are declining.

The supply chain is showing new signs of stress.

Junk Bonds have moved back into a more positive position after a brief fall below support.

Is it able to hold? We’ll learn more soon.

When I was a kid we drove to Mexico to buy gas.

Until one of my friend’s cars blew up because there was water in the gas. Just sayin!

You can be a foolish idiot even if you were the CEO of Goldman Sachs.

WEEKEND HOMEWORK

Farmers are having a very tough time. Read the link below.

FarmersOntheBrink

Careful about Hedge Funds investing in illiquid securities. Read below.

Coatue’s Hedge Fund Investors Try to Redeem $250 Million, But Can’t Cash Out in Full

Drinking Less, Drinking Better
Lindsell Train’s insightful examination of the global changes in alcohol consumption and what the shift to premium branded spirits means for corporate P&Ls and investor ROIs.

The VXX plot thickens with Barclays’ £450m structured notes loss

Maybe, maybe not.

Love Tony Robbins or hate him, the book is interesting.

Life Force: How New Breakthroughs in Precision Medicine Can Transform the Quality of Your Life & Those You Love

What if there were scientific solutions that could wipe out your deepest fears of falling ill, receiving a life-threatening diagnosis, or feeling the effects of aging? What if you had access to the same cutting-edge tools and technology used by peak performers and the world’s greatest athletes?

In a world full of fear and uncertainty about our health, it can be difficult to know where to turn for actionable advice you can trust. Today, leading scientists and doctors in the field of regenerative medicine are developing diagnostic tools and safe and effective therapies that can free you from fear.

In this book, Tony Robbins, the world’s number one life and business strategist who has coached more than 50 million people, brings you more than 100 of the world’s top medical minds and the latest research, inspiring comeback stories, and amazing advancements in precision medicine that you can apply today to help extend the length and quality of your life.

Have a terrific weekend.