So, we talked about two things this past Wednesday, 1) are we looking at a “melt up” into year end and 2) what were we going to get with the CPI.
My feeling was simple. This is what I said: “So, the median call is for the CPI to come in +7.9%. The question is, what happens if it's higher or lower? If we get a lower reading of say 7.6 this market will rally hard. Maybe it would be short lived, but up we would go. “
Well I missed by a tenth, the report came in at +7.7%. And what happened? The market went nuts. We had the futures trading up 1000 points on the DOW before the open and we put in a 1,200 point DOW day.
Why? The current theory is that inflation has peaked, and this will give the Feds the green light to just do maybe one more 50 basis point hike and then go into pause mode. They thought the concept was just marvelous and they ran with it. Bigly so to speak.
First off let’s get a few things straight. The inflation we’re suffering from wasn’t because of overheated buying by us peon’s. It has TWO root causes. 1) the insane money printing/QE baloney the feds have been hammering us with for 12 years and 2) the insane supply chain disruptions resulting from them unleashing their bioweapon bullshit on us.
The money creation IS the very textbook definition of inflation. You don’t have to be a fellow of Lucasion mathematics to understand that. In fact if you go to dictionary.com and look up the word inflation, this is what you find:
Noun.
Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency
And there you have it. An increase in the volume (amount/printing) resulting in the loss of value of the existing currency. Bingo, give the dictionary a big cigar.
So, we talked about two things this past Wednesday, 1) are we looking at a “melt up” into year end and 2) what were we going to get with the CPI.
My feeling was simple. This is what I said: “So, the median call is for the CPI to come in +7.9%. The question is, what happens if it's higher or lower? If we get a lower reading of say 7.6 this market will rally hard. Maybe it would be short lived, but up we would go. “
Well I missed by a tenth, the report came in at +7.7%. And what happened? The market went nuts. We had the futures trading up 1000 points on the DOW before the open and we put in a 1,200 point DOW day.
Why? The current theory is that inflation has peaked, and this will give the Feds the green light to just do maybe one more 50 basis point hike and then go into pause mode. They thought the concept was just marvelous and they ran with it. Bigly so to speak.
First off let’s get a few things straight. The inflation we’re suffering from wasn’t because of overheated buying by us peon’s. It has TWO root causes. 1) the insane money printing/QE baloney the feds have been hammering us with for 12 years and 2) the insane supply chain disruptions resulting from them unleashing their bioweapon bullshit on us.
The money creation IS the very textbook definition of inflation. You don’t have to be a fellow of Lucasion mathematics to understand that. In fact if you go to dictionary.com and look up the word inflation, this is what you find:
Noun.
Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency
And there you have it. An increase in the volume (amount/printing) resulting in the loss of value of the existing currency. Bingo, give the dictionary a big cigar.
The feds have been increasing the volume ( amount) of “money” (cough, read currency instead) for over a decade. Rampant outrageous printing and “quantitative easing” schemes.
Now, you toss on top of all that money- value destructing printing, lockdowns that shut down factories, rail lines, air lines, transport ships, ports, truckers, warehouses, retail stores, etc.
When you have a relatively steady demand, but a lack of supply the most common outcome is a rise in the cost of that product. You’ve all heard it a zillion times “supply and demand.” The combination of relentless fed incompetence and the corona scam, resulted in run away inflation.
The feds supposed weapon to fight off this evil inflation is to hike rates to destroy the demand side of the ledger to equal the supply side. Certainly, if they were to hike rates to 15% it would indeed reduce the demand side of things, because we’d be in 1930’s style depression.
But hiking rates to say 5% or even 6%, isn’t going to cut it. But the CPI monkeys are screaming that since it came out better than expected, that inflation is being conquered and it’s all rainbows and unicorns from here.
Except no. There was some interesting funny business in this CPI report that won’t be there for the December report. Oh and that report lands just a few days ahead of the next fed meeting.
What am I talking about? Gordon J. and I have some questions about all this. Follow along and maybe you’ll come to the same conclusion we have:
What if I told you the CPI surprise was partially due to a periodic adjustment, that won't be reflected in the Fed-favored "core PCE" that comes out right ahead of the Dec. Fed meeting? Well, that's JUST what happened.
That is, the CPI for health insurance (which...accounts for 0.9% of overall CPI and 1.1% of core CPI), due to a "periodic adjustment", PLUNGED -4.0% Oct.-to-Sep., or an aggregate +6.1% SWING from Sep's +2.1% figure. And, this was BY FAR, the largest MoM fall in the BLS data going all the way back to 2005.
However,...we all know HEALTH CARE COSTS DIDN'T MAGICALLY COLLAPSE IN OCT. from SEPT! In fact, had health care costs stayed constant, Oct. CPI would have been ~5bps HIGHER vs. Sep. (i.e., 6.1% swing * 0.9% of total CPI = 5bps impact to Oct. CPI, offsetting some of the 20bps surprise). And, while the health care cost adjustment helped services (excl. energy) CPI, it still jumped +6.7% YoY, unchanged from last month, and the worst since the August 1982.
Oh, and with energy inflation in the Oct. CPI data taking off again, rising a whopping +1.8% MoM (GAS PRICES ALONE WERE UP +4.0% MoM, and +17.5% YoY), let's just say those assuming the "inflation beast is conquered" may be (very) wrong - i.e., those assuming this = the ENTIRE US STOCK MARKET.
For all the new market bulls out there, the question you must ask yourself is: "Does the Fed not know all of this already, and fear the coming re-inflation of the energy space given the Strategic Petroleum Reserve ("SPR") drawn-down will likely end soon given the elections are OVER"? Hmmmm...
The market reaction to the CPI was in my opinion just a pent up “we’ll jump an anything that even remotely seems to be good” and they did just that. But to me, it is nothing more than a good old fashion bear market bounce. Consider this:
Thursday’s 7.4% gain for NASDAQ puts it in top 20 days going back to 1971 … and of those largest moves, 16 were during bear markets
Does that mean that next week we puke up all those big gains? Not necessarily. They’ve got huge momentum, and we’ve got seasonality and stock buybacks as wind in their sails. I could see them push this thing right up through Thanksgiving.
But then I’d be awful concerned about that December CPI. The market is pricing in a 50 basis point hike, but if the CPI comes in hotter again, you can bet Powell is going to stick to 75.
But Bob, wouldn’t running all the way into Thanksgiving be more than a bear market bounce? Heck no. From the 2000 – 2003 plunge we had 6 20% bounces and each one faded to new lows. It’s the nature of the beast.
So, if they continue to push this thing, fine, get what you can get while the gettin’s good. Just remember what I said above. The next CPI will NOT in my opinion be lower than the one we just got and that could drive a stake into the heart of this market. Good luck out there!