My predictions on inflation and the market bottom; Elon Musk to Participate in Twitter All-Hands Meeting Thursday; Here's What You Need to Know About America's Super-Hot Inflation; The bear case on inflation; Update on the Celtics
1) In yesterday's e-mail, I updated readers on my (so far) highly accurate prediction last month that cryptocurrencies were going to keep crashing.
As for my other recent prediction on May 12 and May 13 – that inflation had peaked and therefore the market had bottomed – well, that hasn't proven to be as accurate so far...
After initially rallying on some positive data points about inflation, the dreadful inflation numbers on Friday have sent stocks tumbling again and, as of yesterday's close, the S&P 500 and Nasdaq are down 4% and 5%, respectively, since May 12.
The 10 stocks I added to my personal account in the past month, taking my cash balance from 24% to 10%, are down 8.7%.
My reaction to all of this: Yawn.
I have a remarkable track record, dating back to the Internet bubble more than two decades ago, of nailing numerous market, sector, and stock tops and bottoms – sometimes to the day or even the hour – but it's far from perfect.
That's OK – it doesn't need to be. As economist John Maynard Keynes said, "It is better to be roughly right than precisely wrong."
While the talking heads are losing their minds and predicting gloom and doom, I feel very comfortable that in one, three, five, and 10 years from now, I'll be very glad about the purchases I made in the past month.
2) One stock that I've written about previously is Twitter (TWTR)...
This news gives me even more confidence that Elon Musk is going to buy the company – likely at or very close to the $54.20 he's agreed to (the stock closed yesterday at $37.03): Elon Musk to Participate in Twitter All-Hands Meeting Thursday. Excerpt:
Elon Musk is set to participate in an all-hands meeting with Twitter employees on Thursday, marking the first time the billionaire will have spoken directly with the company's workforce since he began his courtship of it in April.
Twitter Chief Executive Parag Agrawal announced the meeting in an email to staffers on Monday, saying they could submit questions for Mr. Musk in advance, a spokesman said. The company's marketing chief, Leslie Berland, will moderate the event, he said.
3) While I've predicted that inflation is likely to decline over the course of this year and will end the year around 4%, I've always acknowledged that there's a very high degree of uncertainty here – even more so after last Friday's report for May.
Here are some New York Times articles on the topic that I found illuminating...
Here's What You Need to Know About America's Super-Hot Inflation. Excerpt:
The government reported on Friday that consumer prices climbed 8.6% over the year through May, the fastest rate of increase in four decades.
Americans are confronting more expensive food, fuel, and housing, and some are grasping for answers about what is causing the price burst, how long it might last and what can be done to resolve it.
There are few easy answers or painless solutions when it comes to inflation, which has jumped around the world as supply shortages collide with hot consumer demand. It is difficult to predict how long today's price surge will drag on, and the main tool for fighting it is interest rate increases, which cool inflation by slowing the economy – potentially sharply.
Here's a guide to understanding what's happening with inflation and how to think about price gains when navigating this complicated moment in the U.S. and world economy.
Wonking Out: Why monetary policy has gotten so hard (Paul Krugman). Excerpt:
The good news is both the Fed and the E.C.B. are aware of their past sins, and they came into the pandemic determined to be less conservative and to take more risks on behalf of a strong economy. The bad news is that their timing was unfortunate: The risk of inflation did, in fact, materialize. But I'm willing to cut them a lot of, um, slack. If it never turns out that monetary policy was too loose, that means that it was consistently too tight.
And the Fed is, I'd argue, responding appropriately: In the face of evidence that the economy is overheated, it's raising rates to cool the economy down, and despite this morning's number, I, for one, am pretty sure we've reached peak inflation.
4) Whenever I'm uncertain about something, I like to present the other side of the argument for readers to consider...
For example, on May 18 I shared Bill Ackman's 17-slide presentation he gave to the New York Fed on April 13 about why inflation was going to remain high.
Along those same lines, below is an e-mail my old friend Joe G. sent me recently, in response to my comment:
The reality is nobody can predict what inflation will be, so I view my gut as more helpful than all the analysis in the world.
I think you're failing to appreciate the supply chain easing up, rapidly falling prices for many goods like lumber, the impact of rising rates to date, etc.
Joe replied:
I certainly appreciate that prices are very volatile on many things right now, including to the downside (i.e., lumber). It wouldn't surprise me at all if oil fell to $80/barrel within three months (i.e., Putin's war on Ukraine could end). There are also some persistent headwinds adding to spending such as seniors getting big positive Consumer Price Index ("CPI," which measures inflation) adjustments to Social Security income. There are way too many factors to analyze precisely.
This is why I am not even attempting to make a prediction on what will happen to the 2/3 of CPI that is hard to predict.
But the other 1/3, shelter (which accounts for 32.77% of CPI, of which 7.8% is rent and 23.68% is private housing), is SUPER EASY to predict. Here's why...
The shelter CPI component is based on actual rent paid. Leases typically last at least one year, sometimes two, before rents rise to something closer to market rates. Therefore, the CPI component lags what is actually happening in the rental market by 12-24 months. You can use the Zillow Observed Rent Index to understand current market rates and what has happened over the last 24 months. All this is clearly laid out in this Fed study, and also explained in this non-Fed source.
With the shelter 1/3 of CPI already known in advance to be climbing to the 7%-8% range for the next 12 months at least, there would have to be substantial deflation in most of the remaining 2/3 for inflation to decline to your target of 4% by December. Even if there's zero inflation in the other 2/3 between now and December, this implies a December CPI of 6.3%.
In response to my comment about "my gut," Joe added:
Your gut is based on intuition developed as an investor during a 25-year deflationary period that began in the mid-1990s and ended early 2021. Your intuition does not apply to a world where many of the long-term trends of the last 25 years that allowed for rates and inflation to keep going lower are now working in reverse.
I suggest you do some historical reading on the 1965-1982 period to understand how everyone was caught by surprise when inflation kept coming back. They had all developed intuition over decades when inflation wasn't ever more than a minor issue.
If you intend to explore inflation in depth, I STRONGLY recommend you read up on what I think is the most comparable time period since World War II, the 1960s and 1970s. I suggest both of these:
Joe concluded:
I continue to be befuddled as to why so many people keep comparing out-of-control 7%+ inflation with times of the last 20 years when inflation briefly increased beyond 3% and was easily brought back under control. At no time in the last 20 years has inflation exceeded 5%.
For those trying to argue that the current period of inflation is "transitory," it's important to explain how 2022 is different from 1969. I do see some differences, but if anything it makes the current situation even more alarming than 1969 – namely that monetary policy is far more accommodative than it was in 1969 (not just rates, but the Fed's balance sheet tricks).
Thanks, Joe!
5) After last night's loss, my favorite NBA team, the Boston Celtics, are on the brink of elimination – they're trailing the Golden State Warriors 3-2 in the best-of-seven series. So to win the championship, they need to sweep the next two games – not an impossible task, but the odds are against them.
As I explained in my June 3 e-mail, I made a few bets, both before and during the playoffs, on the Celtics to win it all when the computers at FiveThirtyEight gave them a much better chance – at least 20 percentage points – of winning versus the odds on the betting sites.
So might there be another opportunity today to add to my wager?
No.
According to the two methodologies used by FiveThirtyEight, the Celtics have a 28% or 38% chance of winning the championship, whereas bettors (reflected in the current +320 odds on betting sites) give them only a 24% chance.
That's not a big enough spread – in investing terms, not enough "margin of safety" – for me to wager anything more...
So I'm sitting tight and rooting hard for the Celtics!
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.