Down, Down, Down

Christian DeHaemer

Posted February 13, 2024

Down, Down, Down

All major markets are down today.  The S&P 500 dropped below 5,000 points, the DJIA is off 700 points and even gold fell to $2,007 an ounce.  Bitcoin dropped a bit to $49,071 but oil climbed a few points to $77.99 for a barrel of West Texas Intermediary.

The reason for this carnage is that the CPI number came in hot.  CPI stands for the Consumer Price Index.  It’s a monthly gauge that is a key measure of price movement.  The Federal Reserve watches  it to determine if they should cut or lower interest rates.

The stock market likes it when rates are heading down.  But if you cut rates then you get more inflation (in theory).   January’s CPI was up 0.3% versus a market expectation of 0.2%.  

All items excluding food and energy were up 0.4%.  Year over year CPI was up 3.1% a point higher than expected.  Energy declined 0.9% which is good or the headline number would have been even higher.

The biggest increase in prices came in rent, followed by personal care, restaurant meals and pet products.

Rent is important because people have to live somewhere.  It is inelastic as they say.  Though I admit that I have two young men living with me who despite an inordinate amount of money spent on their higher education cannot be wedged out the door.  I’m considering downsizing just to have leftovers again.  These kids will clear out the fridge in three days.

Falling Prices

Not all prices went up.  The top three items that fell in price were Airfare, Gasoline and Rental Cars.  One wonders if this bodes poorly for travel stocks.  Royal Caribbean (RCL) is down today but Tripadvisor (TRIP) is up 14% on a buyout offer.  The big sector losers today were Real Estate and Consumer Cyclicals which are interest rate and price sensitive respectively.

I expect that after a nice run off a low two weeks ago the market was looking for a reason to take profits.  A small blip in inflation provided the excuse.

Whip Inflation Now

Inflation is coming back for a number of reasons.  Biden has increased regulations and canceled student debt.  Big wins for union wages also increases inflation.  Furthermore, the government is spending on new positions and social programs to help illegal immigrants who have flooded over the border by the millions.

In last month’s jobs data, the government reported that there were 353,000 jobs created in January.  The problem is that 136,000 of them were new government jobs.

All of this largess has to be paid for, so the Treasury just prints up some dollars and tosses it on the stack.  Our national debt is now a vulgar $34 trillion or $101,000 per citizen.

But perhaps the biggest issue is that the money supply (M2) has grown by a factor of 5 since the year 2000.

As the famous economist Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

The more you have of something the less valuable it becomes.

All the best,

Christian DeHaemer
Pro Trader Today