Back in late January as oil was bottoming, your morning notes suggested that with all the experts now espousing the mortal risk of deflationary clutches, we should be on the lookout for the new inflationary rebirth. I further suggested at the time that as soon as oil had a 4 or 5 in the price again, we would here how bad that was for us as well.
So here we are – inflationary pressures are the new chatter amongst experts and the talking heads. Heck, some of your favorite talking heads have as recently as yesterday covered the “new price pressures in crude now that it is approaching $50” again. Odd, I did not hear anything about inflationary pressures when the same crude oil price was reached on the way down.
So where is inflation really? Where it has been for many years:
Ignoring Oil for a Moment…..
The chart inserted above for you shows the “Ex-Energy version” of the CPI. One can see there has been a trendline in place for a fairly lengthy period of years, averaging about 2% per year over this time-frame….right on the Fed’s stated target.
The only blip which was outside that norm can be seen in the 2006-2008 period, when core inflation reached almost 3% and ex-energy inflation slightly exceeded 3%.
Even with the known massive increases in bank reserves, inflation has been remarkably stable and relatively low. Hinting once again there was a misunderstanding of QE all along. QE was an answer to soak up a massive amount of fear as the demand for “safety” during the 2008-2009 crisis hit generational records.
While we can be confident the Fed is well aware of these dynamics around the ebb and flow of oil shocks (positive and negative over the years), the new chatter topic is clear. So far, the Fed has not panicked over the low rates of headline inflation we have seen over the past year or so – which we noted ini January is now likely to shift.
What worries them and investors across the land I suspect it the continued “sluggish economy.” They most certainly also know that the market is skittish over the next rate hike as a trigger to weaken the economy further.
Lots of Rocks and a Hard Place
Hampered by the desire to not appear political in the election year environment, I can see how the Fed would like to continue on a planned pathway with another hike but at the same time feel confined. We have seen this before. Oddly, as stated many times in these notes, I don’t think another quarter-point hike would do much harm to the economy.
But, it’s also hard to make a compelling argument for doing so as fiscal policy changes are now the real important culprit holding back a more powerful showing in our country’s economic results.
Keep in mind again: It is not what we are doing that makes things look “weak” – it is what has been done to the economy which is causing the appearance.
On this topic, we likely need to recognize we will have to settle in for a summer of mush – with the action focused the media-driven election dynamics.
The reality is this is not really about a rate hike. Instead this is a dance where the course of needed fiscal policy adjustments can and will make a world of difference to the economic outlook in coming years.
Patience will be of high value in the next few months. I have a hunch the Fed is more likely to reach the same conclusion at the June FOMC meeting. That will not change the pace at which we will have to hear about every 15 seconds on air between now and then.
Issues Are Driving Fears Higher
Right on time, with the sell in May crowd acting in concert, the “earnings recession” getting plenty of coverage, the summer doldrums weeks away and the Wall Street houses joining in on the tune (Goldman being the latest to “shun equities”), fear levels in the investment crowd are again reaching levels rarely seen.
While this is good for the long-term investor, it is never fun to witness in the near-term.
We stand by the same idea as we have had for the last few summer swoons: they provide a solid opportunity to be the patient hand. Let’s review a few snapshots of current data readings on the issue:
Fear is the New Black
The latest BAML fund managers survey shows near record levels of cash held by managers. The two charts above show you the long and short view of AAII bullish readings.
They are nearing lows again seen only one other time in decades. The latest week is a mere one percent above readings seen in March 2009.
Patience and discipline – surprises are set to be to the upside as the world hedges against the downside and a flock of Black Swans.
Another Perspective on “Earnings Recession”
The current version of our “pause in earnings” which has the crowd running from equities is not much different than previous events seen in history:
The perspective we may want to view however is this: Those points where corporate profits dipped YOY for a reset in the past were more often buy regions – not sell regions – for long-term investors.
Something to consider as the summer boredom approaches.
Let’s stay focused on long-term demographics (see inside) while too many others get lost in the near-term economics.