Inflation Ebbing = Assets Up

“It isn’t what sum you get, it’s how much you can buy with it.”

Mark Twain

THIS IS NOT INVESTMENT ADVICE.

1. Some parts of the economy are cold, some parts are hot. The cold part is deflationary, the hot part is inflationary for lumber prices but not for labor costs in aggregate.

2. Oil prices jumped this week because the market was short and the White House sanctioned two Russian oil companies. The way this works is traders take positions that benefit from a decline in oil prices. If oil prices suddenly rise, these traders get into a world of hurt and some of them close the positions, producing buying and a sharp move higher in prices. But the sanctions only come into effect next month and Kuwait said they will pump and Trump knows gas prices need to stay low, so this likely fades.

3. As an alert reader pointed out, inflation isn’t just labor and oil, it is also shelter. Yes, the government publishes a wonky estimate of owners equivalent rent, but the Case Shiller US National Home Price index is up … 1.7% over the last 12 months.

4. Government policies matter, but only matter so much in an economy with flexibility. So tariffs jack up prices in imported goods but in a flexible economy there are work arounds (substitution, narrowing margins) and the overall impact is more muted.

5. Net, net, lower labor, oil and almost flat shelter prices = little inflation. The inflation scare we had a few years ago is over, even if electricity prices or some other price is going up or we get a weird number month to month. The “unexpected” decline in recent US and UK inflation reports is notable. We will see more of this.

6. It’s easier to make money on the long side when growth is positive and inflation is falling. When inflation is rising most assets go down. Inflation is terrible for stocks and bonds, which is what 2022 was about. Disinflation the opposite, which is where we are now.

7. You don’t need to hit the ball out of the park every month (though that would be nice) if you avoid losing in the 2022 dynamic (or even making money) and then in periods of time like now accumulate gains. Compounding works. You need to be particularly attentive to when stimulus is being withdrawn. That is not now.

8. Geopolitics, meaning watching bombs pummel Ukraine, is disturbing, but the US and China probably don’t go the way of Russia and the US. Washington and the Kremlin have been disagreeing since 1917. The US and China can perhaps agree to disagree and the significant mutual commercial interest in each other’s economies may help. Listening to quarterly calls of Western companies with business in China, there seems to be room for engagement.

9. Sometimes leaders get lucky. Clinton balanced the budget not just because of bi-partisan spending controls (a far cry from where we are now), but also because China’s entrance into the global labor force depressed global wages at the same time as a stock market bubble formed and boosted tax revenue. The latter two variables were luck. There will be a lot of bond issuance next year but if bond yields grind lower, debt service costs will begin to decline.

10. This year it paid to buy fear. The fear was of a stock bubble and bond debacle and dollar rout, none of which has come to pass. Those fears are still present—the worry about an inflationary spiral and an AI con job. Of course, at some point the 2022 dynamic repeats and investors will be rewarded for going short. Timing is everything.

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