CPI Tomorrow

Thursday, December 9, 2021

Published irregularly, as conditions dictate.

CPI is tomorrow, the consensus is we will go from 6.2% YoY to 6.8-9%. A number above this should absolutely crush the market, though I expect we will see a very tame number, coming in well below 6.8%.

But I’m strapped in for a long fight, at least as long as I can keep going. I’ve even put my own funds (all of which are already in the funds) from the sale of my residence into two of these funds to try to keep them alive, so that the clients catch this — what I see as inevitable drop. (I don’t think anyone has ever done this - there is no road map for doing, no model, no precedent so far as I am aware — that’s how convinced I am it’s inbound and how determined I am to have the clients catch this).

The chart below shows the S&P500 with both YoY CPI and the NY Fed’s “Underlying Inflation Gauge,” published a few hours after CPI. UIG cuts out a lot of the noise in CPI, and as you an see, CPI generally doesn’t change it’s general trend without UIG showing the way. So Ill be looking at UIG seriously tomorrow.

A CPI > 5% YoY is a very timely for calling recessions:

As is YoY Oil > 80% (we have seen that this year) and Job Quits > 2%, which we have blown right through (not to mention that unemployment is finally back down to where it tends to be at market tops):

But the employment story may be too slow for the knee-jerk conditions we are in since early 2020, and the real story now, the real driver is inflation

For example, considering inflation-adjusted retail sales, where we compare the current reported figure to it’s all-time high:

Much has been made about valuations rivalling those in 2000, but by this indicator, all the pieces are in place for a serious selloff here of 50% or more (and recall that NASDAQ, in the bear market of 2000-2002, whose names dominated the runnup, dropped 83% in the bear market of 2000-2002).

Next, consider inflation-adjusted earnings, going back to 1880, Rutherford B. Hayes (the real first mixed-race President) was in office:

Notice when real earnings are <0, post WW2 at least, the market has suffered terribly. Even the Crash of ‘87 was signaled by this with a short spell in August of 87 where real earnings < 0.

Of note as well, the wild swings pre-WW2 caused by what was chronic, wild-swinging YoY inflation, which we may well be seeing at this time. I spent many years working in the configured products industry for very complex products. When the economy was shut down last year, it was entirely evident to me we would encounter severe supply-chain and logistical issues. I believe many things today from automobiles to durable goods to paper products are sold very far forward, and I believe this will result in a “fish tailing” of the supply chain, where we see wild swings in inflation as a consequence of going from shortages to gluts and back again, and I believe the bond market term structure is telling us exactly this.

Next is what I consider to among the most important charts for individual planning, albeit very long-term in nature. In the following chart, the green line represents the S&P500 with dividends reinvested (for total return calculation) adjusted for inflation (the result being inflation-adjusted total return investing in stocks):

When > 12%, you have historically been in long-term tops, and when below -7%, at ideal times to have been acquiring equities. We are currently at +12.4%.

I don’t need to reiterate that we are in the greatest bubble in US history. The length of time this is taking to manifest in a collapse in equities prices I can only take as further indication of the historical magnitude of this thing.

To further get an idea of how delusional people are regarding the current market, how about this idea:

https://www.rcmalternatives.com/2021/09/what-is-return-stacking/

Which I understand to mean leveraging up “uncorrelated” assets. As I wrote in 2007 based on studies I conducted regarding correlations when you get into greater sigma-moves of individual component assets, when the biggest moves come, almost all correlations approach +1.0.

This is the sort of thinking characteristic of market tops.

As to the short-term, we are right in the window for this thing to go. First-off, no one is hearing any bells ringing. The published sentiment numbers aren’t extreme. the news is rife with stories of “reopening” and corporate profits seem to be endlessly optimistic. Everything mentioned in previous letters regarding breadth remains - the supports to this market are gone. Further, with the two year not more than 50 bps above FedFunds, we are in an environment where the Fed has always raised rates in short order. Powell has agreed not to raise rates until tapering is over. Yet, in the four-weeks ending with the most recent reading of Dec 2 (another reading will be posted by the Fed tomorrow) the balance sheet has actually shrunk. We’ll see if this hold tomorrow, but if it does, it indicates an immediate end to this round of QE, with the Fed road testing how the markets might receive this for the past month, and if that is the case, I would look for a rate hike in Dec or Jan.

Other short-term indicators show this thing can completely come apart any day now.

One final note. I’ve always been more than willing to speak with clients, try to explain things, hold people’s hands, or listen to them vent their spleens at how rotten I am. Some have thought it a good idea to threaten me, which doesn’t phase me.

My mother passed away three weeks ago. The little French woman was as straight as they come. I’m just a human being, and I acknowledge the historical moment we are in, and I have a pretty good idea how this is going to end, just not when (though I continue to expect it any day now, as I have for a long time). I not only have whatever money I had in this, but the proceeds of my residence at this point, my wife and I having decided to do this, to keep the clients alive in this.

So I wont be listening to anyone vent their spleen about this any longer. This situation too, is going to end, and its denouement will have appeared all-so-obvious after the fact (and the irresponsibility of being long in this era). But I don’t have the ability to say when.

But we should have a pretty interesting go between now and Monday.