The Latest on Inflation, Oil, and FTX

What the newest CPI report showed... Expect more volatility tomorrow... What to make of oil prices... The 'Biden put'... The latest chapter in the FTX saga... Mailbag: More about inflation...

Prices rose less last month, generally speaking...

At least, that's what I (Corey McLaughlin) made of it when I combed through the latest "official" inflation data published this morning...

The November consumer price index ("CPI") checked in at 7.1% growth, meaning a basket of items rose by $0.07 for every dollar compared with this time last year. That continues a multimonth trend of a slowing annual inflation rate that began in the summer...

And importantly – as I'll detail further in today's mailbag – the month-over-month inflation rate also slowed from September and October, falling from a 0.4% gain in each of those months to just a 0.1% increase in November.

If anything, these numbers are getting closer to deflation than some people might be comfortable with. In fact, certain sectors of the latest CPI showed we are experiencing deflation already, like used cars and trucks, whose prices declined 3.3% year over year.

That's one way to get rid of inflation, but it's not painless. Deflation means lower prices, but it also means declining growth. You can see where things might be headed... and why the Federal Reserve is indicating it's going to pull back on its economic tightening in 2023.

Volatility today and probably tomorrow...

The major U.S. indexes initially soared in this morning's open after the inflation data was published – and were slightly better than Wall Street's expectations. But stocks lost a lot of those gains and fell throughout the day.

Even though "peak inflation" is in the rearview mirror, the question of whether we'll face a recession in the next 12 months – and if we do, what kind of recession we'll see – is squarely on the minds of many folks with money in the markets today.

Specifically, we don't know what the consequences of the Fed hiking rates from near zero at the start of this year to above 4% in roughly nine months will be. But these rapid rate hikes will have an impact in the months and years ahead.

With this in mind, tomorrow could be a similarly volatile day... Wall Street traders – at least those who haven't checked out for the holidays – will be paying close attention to the Fed's next policy decision and Chair Jerome Powell's press conference tomorrow.

We will, too, and I'll have a report in tomorrow's Digest. Bond traders are largely expecting the central bank to raise rates by 50 basis points to between 4.25% and 4.5%. I would be stunned if something different happens, but there could be some other surprises.

First off, as I mentioned last week, this particular Fed meeting is one of the four each year where central bank officials publish their economic projections for inflation, growth metrics, and interest rates for the next few years.

Any changes to the Fed's projected terminal interest rate, particularly in 2023, could move the markets... and Powell has said recently that's exactly what could show up in the latest Fed policy release.

Plus, we expect reporters to mention the word "recession" more than once in questions to Powell, who will likely say something in response that either confuses or scares enough people one way or another...

On a related note, let's cover oil prices...

Typically, economists view oil prices as a reflection of broad expectations of economic activity. But for much of the past year or two, they've also reflected inflation realities, war concerns, and questions about global supply chains.

A barrel of West Texas Intermediate ("WTI") crude oil – the U.S. benchmark – traded near $35 in November 2020 with widespread pandemic-related shutdowns and social distancing still in effect...

It rose over the next year-plus as the world started to reopen and high inflation took hold. After war broke out in Ukraine, the price spiked to around $130 in early March, roughly a 270% gain from November 2020.

The price pulled back, but then climbed back close to $124 in June.

Now, with official inflation data showing signs of easing – and traders more worried about a recession than anything on the table– WTI traded around $76 today, which is just 7% above where it was one year ago... and 37% off its most recent high in June.

But the floor might be in...

First of all, oil prices have come down for six straight months. And as our colleague Chris Igou wrote in today's DailyWealth Trader, prices have hit "oversold" technical conditions we haven't seen since November 2021.

When this has happened in the past 30 years, it's typically been a short-term bullish signal for oil prices. DailyWealth Trader subscribers and Stansberry Alliance members can read all about that in Chris' issue today.

Beyond the technicals, the fundamental picture supports higher – or at least sideways – oil prices, too...

Despite the push for renewable-energy sources and products, the fact is the U.S. still needs oil... and there's more demand than supply. Plus, the U.S. government has essentially guaranteed a floor for the price of oil...

You could call it the 'Biden put'...

As Stansberry Research partner Dr. David "Doc" Eifrig wrote in his latest issue of Retirement Trader, President Joe Biden made a key and rare announcement in October...

He said that the U.S. government would buy WTI crude to replenish the nation's Strategic Petroleum Reserve ("SPR") when prices are at or below a range of $67 to $72 per barrel.

As you probably know, the government has been draining the SPR since spring, when Russian oil became "asset non grata" in many global economies. The limited oil supply sent prices skyrocketing.

In response, Biden ordered the release of a total of 180 million barrels of crude from the SPR. And as Doc wrote in Retirement Trader on Friday, an influx of supply naturally drives down prices...

The problem is that the SPR has become far too depleted today. The SPR is supposed to be available in case something catastrophic happens to our oil supply. Since our country is still dependent on oil, the SPR is the backup plan in a worst-case scenario.

After the largest release of oil reserves in U.S. history, it's clear the SPR needs a restock. The U.S. government knows it, too...

So, on October 18, the White House announced it would buy WTI when prices fell to between $67 and $72... which would obviously disincentivize higher prices while also giving the market a guaranteed buyer should prices keep falling.

In spring 2020, we wrote about how it seemed the only market that wasn't supported by economic stimulus was the oil market. A barrel of WTI briefly fell to negative $37 as markets reacted to economy-wide lockdowns.

On the back end, almost three years later, the oil market is being manipulated at a high level in an effort to stabilize things. As Doc wrote...

Around $70 a barrel is a little higher than breakeven for oil companies. Biden didn't want to promise a higher price because he didn't want to be the reason for Big Oil to make windfall profits.

Still, oil sometimes falls below those prices. So this purchase plan is significant... There's a Fed put on the oil markets.

If recession fears do grow over the next few months, folks may choose to cancel vacation plans and travel less. This would hurt demand for oil, and prices should fall.

But no matter how bad things get, the Biden administration will swoop in and buy oil for around $70 a barrel.

This "Biden oil put" should keep investors confident in the oil market.

Lastly, an update on the FTX saga...

In his recent Friday essays, our colleague Dan Ferris has been offering his take on the story of the collapse and fallout of crypto exchange FTX... I spoke with Dan today, and he's planning to address the latest developments later this week.

What you need to know today is that FTX founder Sam Bankman-Fried was arrested in the Bahamas last night, one day before he was scheduled to appear virtually before the House Financial Services Committee in Washington, D.C.

Bankman-Fried has been charged with multiple counts of wire fraud and conspiracy, and according to officials in the Bahamas, the U.S. is "likely to request his extradition"... The Securities and Exchange Commission also said today that Bankman-Fried "orchestrated a years-long fraud" and hid the fact that customer funds were being used by Alameda Research, his crypto-trading fund.

So, Bankman-Fried did not appear before the committee in D.C. today...

John Ray III, FTX's new CEO who is basically in charge of its Chapter 11 bankruptcy proceedings, spoke instead. He offered details – like how FTX has lost approximately $7 billion of customers funds – and gave insight into just how badly the company was operated.

Ray is a lawyer who specializes in restructuring failed companies. He was part of a group that worked to clean up the Enron mess back in 2011. Regarding FTX, he said he has never seen "such an utter failure of corporate controls at every level of an organization." Ouch.

In response to a question during the hearing about previous audits of FTX, he said...

I don't trust a single piece of paper in this organization.

Ray was also asked about the trigger point or reasons for FTX's bankruptcy. While bemoaning the lack of organization, a small number of people with a lot of power, and margin trading of cryptos, he said...

This is really old-fashioned embezzlement... Not sophisticated at all.

That's quite a different tone than we've heard from Bankman-Fried in his many media appearances the past few weeks, including as recently as yesterday. The jig appears to be up... As I said, Dan will have more on the story and lessons to be gleaned from it later in the week. Look for that on Thursday, as our offices are closed Friday.

It's Destiny... and Doom

In this week's episode of the Stansberry Investor Hour, Dan Ferris and I talk more about the FTX saga. Plus, Dan interviews geopolitical strategist and bestselling author Peter Zeihan, who explains why "we are looking at the end of the world that we understand."

Click here to listen to this episode of the Stansberry Investor Hour right now. And to catch all of the podcasts and videos from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.

New 52-week highs (as of 12/12/22): Novo Nordisk (NVO).

In today's mailbag, we get into some more detail about inflation... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"When you refer to inflation and how it's dropping, I'd appreciate some clarification. For example, you spoke about how inflation has dropped since its high in June. From what base price are you referring to?

"For example, for ease of working with numbers, let's say that inflation in June 2022 was 10%, and let's just use the price of a particular widget in May 2022 was $1.00. As I understand it, at 10% inflation, that same widget would cost $1.10 in June. With 8% inflation in July, that same widget would cost $1.19. In August, at 7%, it's now $1.27. And on, and on, and on.

"So, if that's the case of how the CPI is actually calculated, then while inflation 'appears' to be getting lower, consumer prices are nonetheless continuing to go up. The example I just cited is not a case of 'simple' inflation. It's 'compound' inflation, just as you would differentiate between being paid simple interest or your savings vs compound interest. And I think in the example of the widget's increased prices, it was extremely from a conservative pricing perspective. But I reiterate, it was only used for purposes of illustration and not reflecting the true destructive power of inflation on the consumer's wallet." – Paid-up subscriber Al W.

Corey McLaughlin: Thanks for the great note and questions, Al. You're correct in the idea that "consumer prices are nonetheless continuing to go up" despite how inflation appears to be getting lower. As I wrote yesterday...

Inflation continues to eat away at the dollar's nominal value, even if it's at a slightly slower rate than the record-setting pace of a few months ago.

Though the example you used to make the point reaches the correct conclusion, we need to clarify. This is simply because of the details of the CPI measurement – which in some ways are useful and in other ways are confusing...

The headline CPI number – for example, the 7.1% for November that was released today – is a year-over-year measure. So it's saying inflation is 7.1% higher in November 2022 than it was in November 2021.

If you want the inflation rate to slow, that's good news in context...

That's because 7.1% annual growth is better than the 9%-plus reading it was in June, meaning inflation was running 9% higher back then than in June 2021. Add a few of these months together and it shows a downward trend in inflation growth.

The key word, though, is growth. Even with headline CPI (again, an annual comparison) trending lower, inflation is still present. In the November numbers, for example, the price of an identical basket of items increased 0.1% compared with the month before.

So, yes, despite any headline you might read today, inflation is still eating away at the value of U.S. dollars. It just depends by how much at any given moment...

In my view, it's really more important to look at the month-to-month numbers rather than the headline number, which can be misleading and is subject to "base effects" based on what was happening a year ago.

If you're interested in the current path of inflation, at least according to the CPI data, keep track of the monthly changes. In November, prices rose 0.1%, compared with 0.4% in October and 0.4% in September.

On one hand, that might sound good... That's much less than the headline-like numbers you used in your example (10%, 8% or 7% growth). And it shows the pace of inflation is slowing too. This is the idea that Mr. Market appeared to react to today.

But on the other hand, 0.1% or 0.4% of inflation compounded still adds up over time for real people...

So, as you put it, the headline CPI numbers don't really reflect "the true destructive power of inflation on the consumer's wallet." The monthly ones do a better job of that, but still aren't fully representative.

Everyone's expenses and situations are different and don't fit neatly into one BLS statistic. Someone who uses a lot of gasoline to drive to or during work has different costs than someone who can walk to work, but maybe grabs a sandwich on the way in every day.

I'm definitely not saying inflation is easing for everyone in America right now – it's not that simple. But the stock market, today at least, is looking at this CPI data and is saying that inflation is going down in general.

All the best,

Corey McLaughlin
Baltimore, Maryland
December 13, 2022