Deflated by inflated prices

Stocks edged higher as tempers landed on the side of cautious optimism ahead of Powell’s Jackson Hole speech. Mortgage applications fell for another week, likely the result of the Fed’s good work as inflation fighter.

Be an investor. I was considering a different tagline, something like “you can’t always get what you want,” but I thought it was, perhaps, too negative. Let me explain. Here is the problem. Inflation is really bad, and it has not let up. If you have not personally experienced inflation yet, then, by all means, skip to the next section to read about yesterday’s markets. Ok, so you’re still here.

My regular readers know that I am somewhat obsessed with food prices. In my household, I am principally in charge of grocery shopping, so naturally, whether I like it or not, I must pay attention to the price of food, if at least cursorily. My wife gives me a budget…I think, though it is more like a target. I go to the grocery store every day after work, so I have a really granular view of things. I am also a creature of habit, generally purchasing within a range of, let’s say, 10 different baskets. So, yes, I have a pretty good idea of what that final number on the screen will be at check out. If that number is significantly higher than what I expect, I will audit the paper tape as I exit the store, otherwise the tape goes in the trash can conveniently placed by the exit. I am sure that you are not surprised to learn that I have been doing lots of auditing lately. You see, my daily bill has been edging higher and higher for the past year or so. I would say that, on average, my bill is some +20% higher than it was a year ago. Now, you know I have a rather taxing job, which starts out each morning at 4:00 AM, SO I CAN WRITE THIS NOTE FOR YOU. When I get home at around 7:00 PM at night, I require a nourishing meal so that I can get up the next morning and start my routine all over again. So, I really don’t have much of a choice when it comes to food. In other words, I must bear that +20% jump in my daily budget. When I whisk up and down the aisles and throw my spoils into the basket, I generally don’t look at the prices on the shelf…yet, but if that total daily spend continues to climb, I will be forced to make choices. First brands, then even ultimately products themselves. Why? Because like most of you, my income has not gone up as fast as inflation. That is a problem for most Americans… strike that, inflation is now a global problem.

So yes, it is taxing on us, and it will likely lead to many of us choosing to forego purchases of other non-essential items so that we can eat. Good for food manufacturers, but not so good for clothing or microwave oven producers (who are also raising prices). While we are on it, microwave ovens are considered a durable good. Durable goods make up some 60% of all US production output, so if consumers cut back on those, it can leave a mark on GDP growth. That is why economists follow Durable Goods Orders closely. Oh, that number came in below expectations yesterday, flat, for the month of July. Is it because consumers are having to spend more on necessities like food, is it because those items are more costly, or is it because financing costs have risen (many durables are typically purchased using credit)…or all three? I would say, the best answer is D: all the above. What if all of consumers begin to expect that inflation will simply never go away? That is referred to as anchored, sticky, or entrenched inflation. The result is that we will force employers to pay higher wages which will ultimately lead to those employers charging more for their products. That is referred to as negative feedback spiral and it is feared by economists, central bankers, and all the rest of us…because it means that inflation could get even worse. Let’s just agree that inflation is bad in many ways.

The Fed’s primary job is to fight inflation for you, me, and that microwave oven producer. The Fed MUST fight inflation with everything and anything it can. It has been doing so since last November, starting with threats, but ultimately by hiking interest rates. The Fed’s job is far from over, despite the slightest hints that its efforts are working – you can see it clearly in the housing numbers as well as business investment. That means the Fed must continue to hike interest rates and CONTINUE TO THREATEN TO HIKE INTEREST RATES until inflation is vanquished. Many traders are focused on what Chairman Powell says tomorrow when he takes the podium at the Jackson Hole Symposium. Traders are concerned that Powell may say something hawkish like, “inflation is bad, and the Fed must hit it hard until it gets back to normal.” Don’t we expect this already? All that hawk talk and rate hiking has indeed caused some pain to our stock portfolios over the past 9 months, but unfortunately, that is simply the cost we must bear today to ensure longer-term steady returns once inflation does return back to normal. Let’s call it an investment into the future returns of our investments.

YESTERDAY’S MARKETS

Stocks inched higher yesterday as traders hunkered down ahead of Powell’s speech tomorrow. The S&P5000 gained +0.29%, the Dow Jones Industrial Average climbed by +0.18%, the Nasdaq Composite Index traded higher by +0.41%, and the Russell 2000 Index rose by +0.84%. Bonds slipped and 10-year Treasury Note yields gained +5 basis points to 3.10%. Cryptos added +1.32% and Bitcoin advanced by +1.0%.

NXT UP

1. Initial Jobless Claims (August 20) is expected to come in at 252k, slightly higher than last week’s 250k claims.
2. Annualized Quarterly GDP (Q2) may be revised upward to -0.7% from -0.9%.
3. Kansas City Fed Manufacturing Activity (August) is expected to have fallen to 10 from 13.