Today’s inflation report is a reason why I don’t trust the mainstream financial press.
The October Consumer Price Index (CPI) came in at 7.7% year over year. The media celebrated the news by stating that inflation is “cooling.” The White House said this CPI report is proof its efforts are working to tame inflation.
Is it too early to have a drink before noon?
Because we’ve heard this before… In October, inflation rose 7.7% year over year.
But last year, inflation increased by roughly 6.3% year over year…
Inflation compounds. Add the numbers up, and you’ll see that the CPI is up 14.3% in the past two years combined. Does this sound like inflation is under control? Does this sound like “cooling” to you?
But there’s much more to this situation… so I want to explain why this feels like a trap.
Breaking Down the Report
It’s clear that our mainstream economists live in a different galaxy.
Thursday’s report showed a decline in used car sales, consumer apparel and travel.
Cars and clothes? That’s just a sign that companies are clearing inventory.
And travel? We have two of the busiest travel holidays of the year approaching.
It’s a blip. It’s likely… a trap.
Everything else surged. Month-over-month inflation — what matters most — increased by 0.4%.
Year over year — another number that matters — also showed an ugly round of gains, including food (up 0.6%), energy (up 1.8%) and shelter (up 0.8%).
Rent jumped… Hotel costs increased…
What on earth are they talking about? This is just “transitory” nonsense all over again.
Is an Error Coming?
The markets are celebrating because the probability that interest rates increase by “only” 50 basis points in December just surged. And, if this market is silly enough to believe that inflation is tamed, we could see the S&P 500 scream to its 200-day moving average.
But let’s take a step back…
Economist Larry Summers — one of the few mainstream people who has been right about this inflationary crisis — isn’t letting the White House or the Federal Reserve off the hook. And he’s now in line with my assessment that the Fed must raise interest rates higher to crush inflation.
“It would not surprise me if the terminal rate reached 6% or more,” Summers said this week.
The reality is, the estimates for “crushed inflation” are simply too optimistic. We’ve never brought inflation down without bringing the Fed funds rate above the CPI level.
We’ve never seen inflation surge to 8%, and suddenly turn around and drop to 2%.
This is all manic groupthink that will ultimately be proven wrong in the end.
Speaking of Groupthink…
Finally, I wanted to conclude with a simple thought…
The markets took a beating over the past two days due to concerns around the cryptocurrency sector. Crypto exchange FTX — which a week ago was one of the largest advertisers of the World Series — has collapsed after a run on its assets and a multi-billion-dollar hole in its balance sheet.
Outlets, including Bloomberg and Reuters, claim its CEO allegedly misappropriated funds.
El Salvador is calling for the extradition and arrest of its founder, Sam Bankman-Fried, whose net worth cratered a record 94% in one day, according to Bloomberg.
And we just witnessed another MASSIVE liquidity event in this troubled sector.
Some are saying this company was a fraud. I’ll need to assess that view in the coming weeks.
With that said, in April, I attended the FTX-SALT Conference in the Bahamas.
I was surrounded by financial, social and political royalty… author Michael Lewis… fund manager Cathie Wood… former President Bill Clinton… former Prime Minister Tony Blair… hedge fund managers… political leaders.
It was a first-class affair…
And it now looks like it might have all been an illusion.
I have never been a large proponent of crypto, but I understood the allure. The political and economic arguments remain compelling. Bankman-Fried was viewed as the savior of this sector, helping legitimize the industry in the eyes of the institutional audience.
Now, companies like Softbank and Tiger Global face massive losses for investing in FTX. The same goes for NFL superstar Tom Brady and his ex-wife, super model Giselle Bündchen, who had large stakes in the company.
What went wrong?
We wanted to believe.
The collapse of FTX is no different than any other mass delusion of the past 400 years in finance.
Whether it was tulip bulbs, the Poyais scheme of Sir Gregor MacGregor, the Rumanium Money Box scam, Bernie Madoff or anything else you research — we can’t help ourselves.
If this market goes south again in 2023, expect to see even more distress in places you thought you knew.
Sunshine is always the best disinfectant for these markets.
We’ll speak soon,
Garrett
