Before I become truly convinced of an investment idea… I make sure it can stand against the opposing view.
I start looking for another angle, something to challenge my thought process and reassess if I missed something.
It’s like a version of Jeff Clark’s moron buy signal.
But that other angle has to be data-driven, with proof points that take into account many variables…
That’s because investing is nuanced, so there’s always that fine line between cheap opinions and hardcore reasoning…
Two Schools of Thought
Right now, everyone’s talking about inflation… up and down Wall Street, at the dinner table, even in line at the coffee shop – everyone is worried about the noticeable uptick in prices.
No one knows for sure, but a recent essay from Guggenheim caught my eye…
It illustrates how the latest consumer price index (CPI) report on Wednesday validates the “transitory nature of inflation spikes.”
The essay took a deep dive into the report and showed that consumer prices have decelerated from previous multi-decade highs.
It’s funny how closely the CPI is watched these days.
But I still ignore it.
In fact, I ignore all headline economic indicators. Price reactions to these types of reports are just opportunities for hedge funds to make quick money by going the opposite way.
In the latest CPI, the focus was on used car sales. I was in disbelief. Have used car sales now become a market barometer?
Used car sales?
The report showed a big deceleration in used car prices after averaging about a 10% increase over the last three months.
And, it also mentioned “outright declines” among airfares. Well, data is data. So, I started thinking maybe inflation is transitory.
But then came another data point in the essay that flips the whole argument on its head:
“New car prices continue to be affected by low inventories amid the semiconductor shortage… That shortage has been trending in the right direction, as seen in recent PMI data, but recent COVID outbreaks in Asia threaten to delay supply chain normalization.”
Well then, shouldn’t we simply ignore used car sales and instead focus on supply chains?
On Tuesday, I discussed how the delta variant in China was an event risk that could come at a vulnerable time in the economy.
After all, supply chains are already strained, and inflation is running hot. If the virus develops further, the rate of price increases for used car sales will jump right back into overdrive.
Maybe our politicians could carve out a couple of billion to ensure we start producing chips here in the U.S.?
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As for declining airfare… we mentioned that as well. Air traffic has decreased significantly due to the delta variant in China. But, this isn’t an indication of inflation suddenly going back to pre-pandemic levels… this is an indication that event risk is brewing.
And then there are other data points to consider that weren’t mentioned, like…
- Commodities (a leading indicator of the CPI) are up 30% this year.
- Today’s World Agricultural Supply and Demand Estimates (WASDE) report showed declining agricultural yields/acre with declining supplies for soybeans, corn, and wheat.
- Shipping rates continue to make all-time highs.
- The real rate continues to be deep in negative territory – which means inflation is outpacing growth.
- And a $3.5 trillion infrastructure bill was just passed in the Senate.
Since the infrastructure bill will build more bridges and roads – requiring raw materials – inflation will soar even higher as demand for commodities will naturally skyrocket… adding extra fuel to the self-fulfilling cycle of inflation.
Demand is a good thing for the economy, but it’s also a component of rising prices.
As long as the rate of economic growth outpaces the rate of inflation – extra demand is good.
Consider it like a net credit to the economy’s hypothetical bank account…
Inflation, on the other hand, is the cost of doing business
To make money, revenue needs to outpace expenses.
A slowdown in car prices seems like just a drop in the bucket in the grand scheme of things. And, the school of thought that using just one data point from a lagging CPI report to invalidate inflation is not enough… especially given the opposing mountain of evidence…
Regards,
Eric Shamilov
Contributing Editor, Market Minute
Eoin’s Insights
Happy Friday Market Minute readers. I have a few things I want to cover in another brand-new presentation on what’s been going on in the markets.
Today, I’ll be covering the delta variant, the dip in gold, and cryptocurrency. Click below to start watching.
Reader Mailbag
In today’s mailbag, Jeff Clark Trader member Richard P. shares his experience with one of the stocks in Jeff’s 3-Stock Retirement Blueprint (to learn more, click here)…
Jeff, good evening. I was very interested in the three stocks you gave out the other day. In fact, I bought options on one of them and made a 105% profit and doubled my money. I liked your presentation.
– Richard P.
And, Lifetime member Richard H. comments on Jeff’s recent essay about the action in gold…
Yes, there’s an answer to why the gold market suffered a crash on Sunday night – with little trading activity and little to no previous market activity to justify such a move. Some entity dumped an estimated $4 billion in paper and unallocated gold into illiquid conditions as soon as the market opened. This kind of not-for-profit activity is usually by central banks in an effort to suppress the gold price and support their fiat currencies.
However, there’s never any acknowledgment by the actors in this arena, such as the Bureau of Industry and Security or the New York Fed’s trading desk. And, there’s no media, and few investment advisors, honest enough to report it.
– Richard H.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming – and send us any questions – at [email protected].