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Don't Panic. Inflation Is Coming Down

Market Activity

Don't Panic. Inflation Is Coming Down

Buying Opportunity In Stocks

September 23, 2022

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The tax cuts announced in the UK this morning probably won't help inflation, but looking at the bigger picture- it's a different story.

Don't panic. Inflation is falling.

The world tends to follow the lead of the US market. Currently, the equity market in America is watching inflation very closely for signs that it may cool. The good news is, it is cooling, and it might speed up.

A multitude of empirical data points to peak inflation in the US, and ultimately elsewhere. Hedge fund manager Bill Ackman recently noted that there are “indications” that inflation is cooling, and Fed Chairman Jerome Powell has vowed to raise rates until the job is done.

Nevertheless, the drumbeat about accelerating inflationary trends persists, even in the face of mounting evidence that inflation – starting with the August consumer price index report – is about to plummet this autumn.

Falling prices:
The forecasts suggest August CPI dropped slightly on a monthly basis.

Gasoline prices are down for 87 days in a row, according to Bank of America. Oil prices have tumbled to $82 this week.

Gasoline prices and CPI track very closely over time.

Commodity prices – from lumber to copper to agricultural goods – continue to slide. This has yet to show up in the retail inflation numbers.

The prices paid component of the most recent ISM Manufacturing report dropped. It suggests that pipeline inflation will decline, as inflation expectations among both bond market investors and consumers continue to crash.

Even larger sectors of the economy are facing outright deflation as Fed policy and credit conditions tighten even further.

Roughly 16% of home purchase contracts on existing dwellings were cancelled in July, Redfin found. That same month, about 17% of builder contracts fell through, according to John Burns Real Estate Consulting.

The inventory of unsold homes is building, and sellers are lowering asking prices in once red-hot real estate markets even as rents stay unusually high.

Mortgage applications, pending home sales, new and existing home sales continue to decline as rates on 30-year loans pop as high as 5.89%.

Rising recession risk:
More fundamentally, the supply chain disruptions that have dogged the global economy have finally eased considerably.

Shipping rates have plunged, and the volume of global trade has also declined.

This points not only to falling inflation but also the rising risk of recession, both abroad and at home.

China’s economy is, effectively, imploding as its strict “Zero Covid Policy” is again forcing lockdowns in major cities, slowing consumer spending and restraining overall growth.

Worse, China’s property market continues to slide, raising the risk of a systemic financial shock in the world’s second largest economy.

The dollar’s strength is also putting downward pressure on “imported inflation.” That’s because a stronger dollar increases the purchasing power of American businesses and consumers when buying foreign components or foreign-made goods.

The dollar index is up about 18% over the past year.

However, there is a downside to that, as a surging greenback raises the costs of U.S. exports overseas and cuts into the value of repatriated profits among U.S. multi-national corporations. Not only is this disinflationary, but it’s also recessionary.

The speculative excesses in financial markets have been wrung out of the system. The economy is slowing. A soft landing is in sight.

That has not deterred the Fed and other observers from suggesting that rates need to be higher and stay that way for some time to drive inflation back down.

I’m not screaming yet, I’m just pointing out the facts on the printed page, but the FED and other central banks need to be a little softer with their touch than they are currently suggesting.

Historically, central banks have always gone to far in both directions in their fight to control prices. It takes a while for the changes to feed into the economy, by which time, it’s too late and they need to move the other way. The Fed need to stop raising rates, sooner rather than later before they do too much damage.

UK Recession:
We pointed out in Q2 that a recession was/is inevitable. But it isn’t something that needs to be feared. The very word sends people running for the hills, but the fact is they are temporary, and this one should be shallow.

When the media and opposition benches bang the drums of recession, it can feel like the four horsemen of the apocalypse have arrived. Contrary to tabloid clickbait recessions are survivable.

The average business can expect to see less demand and less revenue which impacts cash flow, profitability and jobs. A recession is part of the Business Cycle that we are all subject to namely expansion, peak, contraction, and trough.

The main difference between a standard recession and the current one, is that unemployment is at an all time low. This would have most economists argue that it’s not a recession at all, but whether it’s labelled as such or not isn’t really much comfort.

We don’t live in a world compliant with Marxian economics where governments control the heights of the economy and dictate how fast GDP grows. Our capitalist society allows private companies to ride the wave of market economics, fluctuating prices based on supply and demand. We are all part of the global economy.

No matter how much Keep Calm and Don’t Panic thinking you apply; mass hysteria in society, markets and media can make recession a self-fulfilling prophecy.

The former boss of GE Jack Welch said, never miss out on an opportunity like a good recession.

No recession in history has not ended. During recessions, opportunities arise even if it doesn’t feel like the right time to take risks. This is very true of the stock market. During recessions stocks fall, as they are now. But every recession has a bottom; you won’t be able to guess it, so you are stuck with the concept of buying in, and sitting, and waiting, as are we.

If often feels like an eternity, much like lockdown did, but all economic cycles come to an end or they wouldn’t be cycles. Seize the opportunity and ride out the storm. Inflation is slowing, and the key is to predict the change before it comes.

The numbers are telling us that the time is coming. If the FED even so much as hints that it might slow rate rises, stocks will fly, and they won’t come back to these levels. Until then, there really is nothing that can be done. Short term sell positions are an option, as long as you aren’t short when the tide turns – as it will turn very quickly.

Many of our traders were short in August, but calling a short is even harder than deciding when to buy into a falling market. Profits were taken quickly, sadly too quickly but that is with the benefit of hindsight.

At times like this, the buy in and hold strategy is really the only strategy.

Recessions are the amalgamation of events, decisions, and policies. Our global and predominantly capitalist society is innately predisposed to the expansion, peak, contraction, and trough cycle.

The wealth, health and happiness of society rides the same cycle. Whilst humanity stands to thrive with prosperity and suffer in contraction, GDP is ultimately a non-sentient statistic. By default, recession is inevitable and for that reason they and all that comes with them are necessary.

This one should not devastate too much as long as the price of Gas can somehow be reduced. We’ve said so many times that when the price of gas starts to drop for households and businesses, sentiment will SLOWLY start to change and money will start to come back into the market.

Recessions and market retracements create opportunity. As we write this today the FTSE 100 has dropped below 7000 on the back of this morning's dramatic tax cuts. It's hard to argue that over the mid term- buying and holding the FTSE at these prices isn't great value. If you would like to discuss building a TPP inspired portfolio that aims to yield 2-4 x market performance per annum contact our team.

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