There's No Debate About Inflation
The debate is set... What it might mean... The 'reorder all' indicator... The latest inflation data... The Fed admits 2% is a pipe dream... What you probably won't hear tonight... Speculative thoughts on the AI boom...
We're just a few hours away...
As we go to press tonight, President Joe Biden and former President Donald Trump are just a few hours from starting a made-for-television debate. The ground rules: No live audience. A muted mic for the person not speaking. Hosted by broadcaster CNN in its Atlanta studio.
Other than that, I (Corey McLaughlin) don't know entirely what to expect, nor will I be surprised by much. But from the sounds of it, the economy will be part of the discourse. At least, that is the hope of some. Here's a note from CNN's website today...
Advisers and allies of Trump have privately encouraged him to focus intensely on the economy, crime and inflation during Thursday's debate, citing poll numbers that reflect he has the upper hand on these issues...
Practically, debate about the past and hearing promises about the future shouldn't mean much for the actual future of the economy, businesses, and the markets, though the arguments certainly could influence voters one way or another come November.
After all, higher prices remain on the minds of many Americans. Like this guy... who claims he recently hit the "reorder all" button on a Walmart order from 2022 for a month's worth of groceries and found it cost 4 times more today for the identical items. That's $414.39 instead of $126.67.
As of this morning, there was more inflation...
Even by Uncle Sam's statistical standards, inflation accelerated more in the first quarter of 2024 than previously reported. This morning, the Bureau of Economic Analysis published its third estimate for first-quarter GDP, which includes inflation numbers.
While the report showed a 1.4% annualized GDP, a touch higher than the 1.3% previously estimated, inflation numbers ticked higher as well. The core personal consumption expenditures ("PCE") for the first three months of 2024 was a reported 3.7%, higher than the 3.6% previously reported.
Core PCE is the Federal Reserve's preferred inflation gauge, though I will take this opportunity to stump for the "reorder all" indicator. (In the spirit of alternative measures, you may be interested in Shadowstats.com or Truflation.com as well, the latter of which shows a 25% aggregate price increase since January 2020.)
Whatever numbers you use, you can pin the blame for the 40-year-high inflation pace the country has experienced on multiple sources. And data will back you up as far back as you want.
The Federal Reserve encouraged inflation to run wild for far too long in 2021 and 2022, with near-zero interest rates, while trillions of dollars in economic stimulus were dumped into the U.S. economy amid the pandemic. And Congress, during both the Trump and Biden administrations, green-lit stimulus to begin with, without much of a second thought or consideration for the potential consequences.
Meanwhile, "We the People" were just trying to live, buy things we needed (or wanted), and work or run businesses. Now, years later, some members of the Fed system are finally acknowledging what we've been saying almost from the jump of this inflation nightmare...
Inflation is still not going back to 2% anytime soon...
Here's the start of a press release from the Cleveland branch of the Fed, published rather quietly on May 30...
A model developed by Cleveland Fed researchers suggests that if the extrinsic forces that have been pushing inflation down have run their course, it may take several years for inflation to return to the Federal Open Market Committee's 2 percent target.
According to a new Cleveland Fed report, the model suggests that inflation now appears to be governed by intrinsic forces rather than extrinsic "X factors" including supply chain constraints, which returned to normal levels in the fourth quarter of 2023.
The model, which has proven competitive with hard-to-beat forecasting models, suggests inflation has high intrinsic persistence. It predicts that trimmed-mean PCE inflation will move down gradually, reaching 2.7 percent by the second quarter of 2025, writes Randal Verbrugge, senior research economist at the Cleveland Fed. The model predicts that inflation won't be near 2 percent until mid-2027.
"There are both theoretical and empirical reasons to think that, absent X factors such as continued favorable supply shocks or strong productivity gains, the last half-mile could well take several years," Verbrugge writes.
OK, then. I doubt we'll hear that during tonight's debate. Even less likely: anyone blaming the fiat-currency system for inflation, which is the root of the matter.
Inflation dates back to at least the 10th century. That's when ancient Chinese merchants might have first invented the idea of fiat currency after there weren't enough precious metals to make the coins that they needed to conduct business.
Speaking of, 'Is this time different?'...
In response to yesterday's edition, we received some feedback about Chaikin Analytics founder Marc Chaikin's thoughts on the ongoing AI boom.
As we shared, Marc thinks the mainstream breakthrough of AI is akin to the launch of the Netscape web browser in 1994, and a similar stock market boom could follow this time around.
Marc has thoughts about what stocks to buy to take advantage (and which ones to avoid). He revealed more details about his outlook in a new presentation that he debuted last night. (You can watch a replay here).
This got subscriber Kevin S. thinking about the timeline of all of this, given how AI itself is a technology that can accelerate more innovations. Kevin wrote in...
As new technology innovation increases the speed of new (industrial revolution) cycle onsets or shortens the life-spans of cycles, how does this decreasing cycle life-span affect the onset and life-span of resulting market bubbles: faster cycle onset leading to shorter life of market bubble (apart from government interference)?
Interesting thoughts, Kevin, including the astute point about potential government interference...
The short answer is, I think it's impossible to know what the entirety of the ongoing AI boom – or bubble, depending on your view – will look like, or how long it might last and be reflected in the markets.
But consider previous eras of significant technological advancements – like the mass production of automobiles in the 1920s, the widespread introduction of television and growth of suburban life in the 1950s and '60s, and the Internet in the late 1990s. The associated run-ups in the stock market have been more or less similar in scale.
Here's a chart of the inflation-adjusted S&P 500 Index, noting bubble "peaks." It comes from a San Francisco Fed paper published back in 2008, which cited the work of Yale economist Robert Shiller and his book, Irrational Exuberance...
Plenty more examples of industry-specific bubbles have also occurred over the decades...
A National Bureau of Economic Research paper from 2022 identified 74 such examples between 1962 and 2017. The researchers admitted their methodology was imperfect, and it didn't include any findings about the time or length of bubbles and the technologies involved.
However, some qualities were consistent across all 74 bubbles. An exuberant "overreaction" about an innovation's perceived value sent associated stocks soaring, even when the innovation didn't entirely translate into actual future production.
So, when it comes to bubbles, the type of innovation associated with them may not matter as much as the enthusiasm about the breakthrough. And that comes down to human emotions.
We can't say for sure what form the current run in AI-linked stocks will take. But as Marc told us, there might be more runway ahead for this run-up, given how he expects AI will allow many businesses to increase their profit margins.
As he said in his presentation last night...
That's the AI story that's going to be the fuel on the fire of the [market] broadening...
It's one of the most potent forces I've ever seen in my life for rapidly expanding company profits. Starting now, for the next decade.
And what I want to show you today is the group of companies that, by their very nature, are positioned to leverage that the most.
Check out a replay of Marc's presentation now to get more details about his outlook and how you can access his stock picks, his proprietary Power Guage, and all his research, including a special report he created for Stansberry Research subscribers.
Which brings me to our quote of the week (penned 102 years ago)...
This same paper from the San Francisco Fed ends with this terrific passage noting that speculation is as American as apple pie or anything else. J.E. Meeker, a former New York Stock Exchange economist, wrote in a 1922 book about the history and mechanics of the stock exchange...
Of all the peoples in history, the American people can least afford to condemn speculation... The discovery of America was made possible by a loan based on the collateral of Queen Isabella's crown jewels, and at interest, beside which even the call rates of 1919-1920 look coy and bashful. Financing an unknown foreigner to sail the unknown deep in three cockleshell boats in the hope of discovering a mythical Zipangu [land of gold] cannot, by the widest exercise of language, be called a "conservative investment."
There's some perspective. Christopher Columbus discovered the Americas because of speculation (and the collateral of hard assets)... We wouldn't be here without it, at least not due to the same sequence of history.
This isn't to say that speculation is "right" or "wrong." It just is. More important for investors today is to not get lost in the hype of ongoing bubbles and to realize they will burst. (See the tulip mania in Europe about 150 years after Columbus' expedition.)
You also might not get what you're looking for, either.
Columbus set sail from Spain on his first voyage, seeking a trade route to Asia. He found what's now the Bahamas, Cuba, and Hispaniola, where one of his ships ran aground and was abandoned. He brought back natives of the islands to Spain rather than spices.
Speculative periods, or bets, aren't new. But be careful navigating and making them.
New 52-week highs (as of 6/26/24): Amazon (AMZN), Coca-Cola Consolidated (COKE), Intuitive Surgical (ISRG), Microsoft (MSFT), and Sprouts Farmers Market (SFM).
Given our extended reply above, we'll skip today's mailbag. But please keep your questions and comments coming. As always, e-mail us at feedback@stansberryresearch.com.
All the best,
Corey McLaughlin
Baltimore, Maryland
June 27, 2024