Inflation

[FireWeatherMet]

One thing I remember vividly from the "Super Recession" of 2008-09 was how long many people stayed negative on stocks going into late 2009 into 2010 and even longer, while we were well into one of the strongest Bull Market runs in history. I suspect a lot had to do with the "Gloom & Doom" media, many of whom were preaching that some imaginary "Other Shoe" was about to fall.

I see the same thing right now. Inflation and the Fed raising rates to fight it, has been the main drag on the market the past 2 years. But people seem too glued to the "Gloom & Doom" media, to understand the 2 main causes of the inflation...Post Pandemic Commerce/Supply Chain shortages...and OPEC/Russian Invasion Oil spike of 2021-22 have sorted themselves out and basically disappeared. Gas at the pumps, that was running $5.39 at my favorite local gas station is now all the way down to $2.69 and still falling. Inflation that peaked at 9.1% summer of 2022 is now all the way down to 3.1%, which is near the long term 20 year avg (see chart). The Fed is no longer hiking rates. Yet when you ask people, like in our poll, 2/3rds believe Inflation is still an issue :scratchchin: Sure there are lagging prices in grocery stores, but we're not paying $10 for a dozen eggs anymore. Used cars are no longer triple their Blue Book value, Median home prices are 10% lower than a year ago. Yet people are slow to react to current news, many live in the past, and are now missing out on a huge market uptick.

I'm actually missing out right now because I stepped aside last week, trying to catch the typical early Dec correction before getting back into equities, even that is looking like a bad move, as this stock market is relentless, esp small caps leading the way. Anyway, I thought our TSPTalk Survey and the reality of the data was interesting (Below).

 

[tsptalk]

Playing devils' advocate, notice that the CPI rises in your chart when the economy is recovering. It's still falling now and 3% is still high as far as prices are going up 3% a year, even after the huge increases over the last year. So, if the CPI continues to drop it probably means the economy is weakening.

The stock market is celebrating the drop in CPI and inflation because the Fed can't raise interest rates anymore, not because the economy is getting better. We still have an inverted 2/10 yield curve, yada, yada, so I think the market is still vulnerable once the Fed's pause and possible rate cuts in 2024 are priced in - whenever that will be. Earnings will get a boost from stabilized rates but the economy may not support the current estimates if the economy does suffer in 2024.

I'm not bullish or bearish for 2024 yet because both cases have merit. But short-term, that rubber band is fraying despite the great looking action.

 

[FireWeatherMet]

Playing devils' advocate, notice that the CPI rises in your chart when the economy is recovering.

True, but in a lot of those we had economic slowdowns or outright Recessions.
The current situation was a unique one, Post Pandemic and Oil Shock together, but since the 9.1% peak CPI in mid 2022 quarterly GDP had averaged 2% for 4 quarters, before surging to 5% last quarter, while CPI continues to fall. And we've been near record low unemployment the whole time, so I don't see anything we would be "recovering from" economically? The fact that the Economy grew at over 5% in the 3rd quarter, while CPI fell from 3.7% down to 3.1% at the same time, seems quite telling IMHO.

 

[FAAM]

Thanks both of you, Tom & FWM, for posting on this - as I see merit in both POVs and have no crystal ball about what will happen to Markets here.

I would add regarding FWM comments on folks holding back after 2009 & all... I was one of those who was skittish then & conservative with my TSP all the way to present, yet you must see the context of this. I didn't even look at the markets until I started reading TSP-Talk commentary & blog posts daily in May 2007; I was in US Army (no TSP options) from '83-'92, then FERS for nearly 30-years. I contributed significantly & increasingly into my TSP - 100% to C-fund from late-'92 till May 2007 (much of that time there was no S, I or L-fund options) without looking at any market information; then looking for 1st time really at S&P500 charts in May 2007, I saw that prices has risen to pre-2000 highs, so I IFT'd about half my TSP out of CSI & that saved me a lot from B&H-strategy when things crashed in 2008-09. THEN - I was very weary for a long time, & recall that a lot of the reason was some of what I read at TSP-Talk; learning of Hindenburg Omens and inverted Treasury Yields and such, predictions that recession was going to happen, that buoyancy of markets due to QE couldn't be sustained, etc. Add to it that I saw NO BODY go to jail or jump off high-rise roofs for being the cause of 2008 crash, and there were few if any Government (of the people's) Strings attached to the Billions given to big banks (and Trickle-Downs went UP instead, & seeing where the huge bulk of GDP-wealth went - esp. from 1970 to present) ... hard to trust such a rigged system and economy... if I thought I might have ever had good reason to trust them & understand them - that was not true anymore. That was certainly the case in 2013 when I stayed mostly in G out of fear while C-fund was up about 23% that year... I think I was up about 3%. Then I add: there was a village idiot who said GW'ing was not true & was (is) a left-wing hoax, and massive WMD's were in Iraq so Colin was sent forth to justify why we must go in (that was the hoax); then someone who is the worst leader and most vain and lying person with no true good credentials - was nominated let alone won office with help of our biggest cold-war enemy, & then almost over-through my Constitution/Country. You see, the world I grew up in & believed in was turning/ turned upside down. IDK what happens next.

 

[FAAM]

... plz excuse the few typos. thx.

 

[tsptalk]

Here’s why bringing down inflation has been different this time, according to Jerome Powell

The Fed has viewed its inflation fight as a two-front battle of trying to weaken the demand in the economy while the “vertical” supply curve normalized, Fed Chair Jerome Powell said.

The supply side of various parts of the economy is now getting closer to where it was pre-pandemic, Powell said.

“So far, so good, although we kind of assume it will get harder from here,” he said.

Why bringing down inflation different this time, according to Powell

 

[tsptalk]

Costco Hotdog Price Since 1984

1984: $1.50
1985: $1.50
1986: $1.50
1987: $1.50
1988: $1.50
1989: $1.50
1990: $1.50
1991: $1.50
1992: $1.50
1993: $1.50
1994: $1.50
1995: $1.50
1996: $1.50
1997: $1.50
1998: $1.50
1999: $1.50
2000: $1.50
2001: $1.50
2002: $1.50
2003: $1.50
2004: $1.50
2005: $1.50
2006: $1.50
2007: $1.50
2008: $1.50
2009: $1.50
2010: $1.50
2011: $1.50
2012: $1.50
2013: $1.50
2014: $1.50
2015: $1.50
2016: $1.50
2017: $1.50
2018: $1.50
2019: $1.50
2020: $1.50
2021: $1.50
2022: $1.50
2023: $1.50
2024: $1.50