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Inflation for June came in at 3%, or more specifically, 2.97%. Inflation now has a TWO handle on it lead by slower goods inflation.
Core inflation, which excludes food and energy, came in at 4.8%, down from just over 5% in May, on core services prices slowing down (shelter being the big one).
Neither of these levels have been seen since 2021.
So if we have these levels of inflation, is inflation even something we have to worry about?
I wrote a couple weeks back “The markets today are looking past inflation and looking past the Fed. I don’t believe there is that much that the Fed and inflation can do to materially damage what has positively happened in the market.”
It was also my call at the beginning of the year that inflation and the Fed’s involvement in the market would substantially move to the sidelines and all that would be looked at is economic impact and growth.
But my answer to the question is yes, we do still have to worry about inflation. The reason for that is the labor market is too strong, the economy is too strong, and the markets are maybe too bullish.
These are all great things, but they are reminiscent of the later stages of the economic cycle where inflation starts to pick up and we need a contraction in economic growth and productivity to reset the cycle.
If we just say, “oh inflation is at 3%, the Fed can stop because it’s projected to stay the same or still move lower” that could, I think, just restart inflation and we repeat what we just went through.
It’s the Fed’s ambition to flush out the inflation completely and reset the economic cycle.
When you hear things like interest rates will be higher for long this is what that means.
It means that there will be no stimulus to help pull us out of an economic contraction, unless it becomes a major contraction, and that means that interest rates will remain high, the Fed will do less open market bond purchasing, and the economy will have to fend for itself (sort of like it’s designed too).
There is a real possibility that we had our reset in Q1 and Q2 of 2022, but that feels like it would be way too easy.
However the phrase ”no landing” has been thrown around and that quite literally means that the economy doesn’t stop at all and we just keep going and we get our reset maybe a few years down the line.
So to sum this up. Yes inflation is something to be concerned about (because of the risk it could come back), yes the economy may need to contract to make that not a huge concern, and yes the market might not care about either of those two things.
A big lesson for everybody though. Don’t bet the farm on stuff like this, because of “and yes the market might not care about either of those two things.”
You can be right and wrong. Calling a recession that happens absolutely can mean that the markets don’t fall. Not calling a recession that does happen absolutely can mean that the markets fall.
The hard part about markets is the majority of people have to be on the same side of the boat as you. If you are standing on the other side waiting for others to join you, it can pay out big, but it can also mean that you are stranded for years without getting any reward.
Net exposure, rebalancing, and diversification is all I have to say.
Reads worth reading 📖
First Half Recap, Second Half Outlook - Spilled Coffee
When Will Interest Rates Really Start to Matter - A Wealth of Common Sense
Analysts Project a 9% Increase on the S&P 500 Over the Next Twelve Months - FactSet Research
Three Massive Forces Have Fueled Economic Expansion the Last Three Years - TKer
Smart Things Smart People Said - Morgan Housel
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