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Volume 10, Edition 42 | December 6 – December 10, 2021

Some Inflation is Easily Avoided

Doug Walters, CFA
This week proved once again that inflation is of big concern to investors. Yet the same investors who complain about the risk of rising prices, are flocking unnecessarily into highly inflated assets.

Contributed by Doug Walters, Max Berkovich

It’s all about inflation these days. With the jobs market strong, the Fed, and by definition, investors have turned their focus squarely to the topic of rising prices. Investors are consumed with the question of whether or not inflation will be transient. Time will tell, and as we often say, the best thing investors can do is prepare with a well-diversified portfolio. But that is not entirely accurate. Equally important is what investors do not do.

Inflation is, in part, a symptom of the supply constraints brought on by the pandemic. Food and energy costs are up, and these pricing pressures are hard for most to avoid. But inflation is also driven by the many forms of stimulus that have been propping up the economy for nearly two years. Low interest rates, stimulus checks, and enhanced unemployment benefits have all contributed to high demand, for… well… everything. There is inflation everywhere, and some of it is very avoidable.

This week, tickets went on sale to Disney’s new contribution to the Marvel Cinematic Universe series, Spider-Man No Way Home. Demand was off the charts, and scalpers were soon selling $20 to opening night for thousands of dollars. Now that is inflation! And, of course, entirely avoidable if you have the patience to wait one day.

The same excess cash that is buying overpriced movie tickets has created a number of bubbles that have the potential to lead investors astray. Meme stocks like Gamestop and AMC, despite significant declines recently, still have hugely inflated prices. Cryptocurrencies have no fundamental value, are driven purely by speculation, and are therefore massively inflated. NFT art, SPACs, etc… the list goes on. The opportunities for reckless speculation in overinflated assets are endless these days. Anyone concerned about inflation should be doubly concerned about this growing list of shiny objects. Luckily, they are easy to avoid for the disciplined investor.

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Headlines This Week

US stocks staged a rebound this week, as investors once again were standing ready to buy the dip. Inflation, Jobs and Omicron dominated headlines and drove sentiment.

Mildly Helpful

This week investors were more optimistic given encouraging initial indications that the Omicron Covid variant produces relatively mild symptoms.

  • Stocks fell by about 4% from November 25th to December 1st as concerns about Omicron spread.
  • By this Wednesday, stocks had rebounded enough to fully close that gap and approach all-time high levels again.

High Expectations

Inflation has been running hot, so all eyes were on the November report released this week.

  • Headline November CPI came in at 0.8%, which was ahead of the 0.7% consensus but below the previous month’s print of 0.9%.
  • Year-on-year inflation came in at 6.8%, above the 6.7% consensus and last month’s 6.2% figure. This is the highest inflation since 1982.
  • Core inflation (ex-food and energy) came in at 4.9%, in line with consensus.
  • Stocks rose on the release implying that investors were expecting worse.

Jobs

With unemployment running low, jobs have taken a backseat to inflation. Yet, the JOLTS report, out this week, is always an interesting angle on employment.

  • The JOLTS report looks at job openings, which were up 595K month-on-month to just over 11 million.
  • Perhaps encouragingly, the quits rate (2.8%) has come off its recent record high (3.0%). Turnover has been a big challenge for employers.
  • The ratio of unemployed workers to job openings is the lowest on record. This is a strong signal of full employment and will give the Federal Reserve more motivation for taking its foot off the economic accelerator at next week’s FOMC meeting.
6.8%

Current Inflation Rate

The Bureau of Labor Statistics reported on Friday that prices for U.S. consumers jumped 6.8% in November compared with a year earlier.

The Week Ahead

Acceleration Time?

The Federal Reserve will be holding its monthly meeting next Wednesday amidst growing concerns about how the central bank will handle inflation.

  • Since Chairman Powell stated that inflation might not be so transitory after all, markets have been hesitant to move past its November high.
  • Concerns that the Fed might have to accelerate the pace of its asset tapering to make room for an interest rate increase in the spring have been growing inside and outside of the bank.
  • Back in September, it looked as if there would only be a single rate increase near the end of next year; now, the market has priced in three hikes, with the earliest coming in May.
  • Along with the potential decision to accelerate tapering, the market will wait patiently for an updated ‘dot plot’ of official interest rate projections.

Tough Decisions

Across the Atlantic, the Bank of England (BoE) and the European Central Bank (ECB) will be meeting on Thursday to determine their respective monetary policies.

  • It had looked likely that the UK’s central bank would raise rates before the end of the year, but now with Omicron forcing stricter measures, that chance has all but disappeared.
  • Market’s have almost entirely priced out a rate increase for December but still expect almost four of them next year.
  • The ECB faces quite a different story as the European economy struggles to get off the ground.
  • The central bank’s emergency asset purchases expire in March, leaving investors wondering if the bank will increase its regular asset purchases at that time.
  • Inflation data for both regions will also be out next week, which will surely gain attention amongst concerns that growing prices are not going away any time soon.

Under Pressure

China’s monthly data dump is next week and will come under scrutiny as the country struggles with concerns over slowing growth.

  • Embattled developer China Evergrande Group has officially defaulted, which is set to trigger cross-defaults of about $19 billion on the group’s international debt.
  • Worries that defaults could spread within the property sector and the broader economy of China are growing.
  • The main items to look at to gauge how China is handling the fallout include retail sales and industrial production on Wednesday.

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