Reality

I have somewhat of an unhealthy obsession with the Inflation conversation going on in our country, and our media & economists are doing little to help paint a clear picture of the situation. The past 4 years have been brutally challenging for many businesses, families and even people named Jerome Powell. Try as he might, he’s basically been parachuted into Saigon, 1975 without a weapon.

Gripe #1: Inflation is not temperature, so I’m baffled as to why CNBC “experts” and other Twitter mini-celebrities continue to talk in this context. When my wife turns the temp in our house down, our house gets cooler. When Jim Cramer says inflation “is going down”, he actually means the rate of the increase is declining…but the overall price is still going up. This is why it’s hard for so many people & businesses to get their heads around the dynamic of sudden price shocks of 10-50% on their input costs, then watch as those prices continue to rise by 3-5% a year while pundits claim Inflation is Dead. Sure, the rate of inflation is declining (from a bad level to a less-bad level), but the fact remains we are a far cry from deflation, which is what ultimately helps your personal checking account at the end of the month.

Gripe #2: Inflation reports are an untamed beast. You have consumer measures like CPI and you have business measures like PCE. There’s a constant push-pull as to what cost increases businesses can pass through to the customer. You can look at CPI as a whole, or you can cherry pick the data by excluding food & energy (you know, those things we need to stay alive?). But don’t forget you’ve also got PPI, with its multiple variations as well as RPI and CPIH! If all these measures weren’t confusing enough, they also come in at a lag. For instance, the Department of Labor can release January statistics to us now…and then send us revisions on that number for months and months. As you can see, the whole process is quite messy.

Gripe #3: Inflation reports measure increases by weighted averages, meaning the big stuff like housing, labor and food/energy receive higher weightings to the overall component. Health insurance and tuition (which make up 2 of my largest annual spends) impact me differently than empty nesters or someone right out of college. Then there are all of the “little things” that not only start to add up over time, but wear on our psyche about our willingness to be active consumers. Whether it’s a 3% credit card surcharge or a 30% increase in the cost of checking luggage, the constant nickel & dime torture we endure as consumers could eventually come to a head.

Spreading the message of controlled inflation is obviously critical to our economic health but as the son & brother of bankers I couldn’t help but wonder “What would happen if inflation suddenly spiked again?”

A spike inflation could re-ignite the “Cash is Trash” argument, potentially sucking more dollars out of bank depository accounts and into money market funds. This could prove extremely challenging for small & regional banks who are deftly trying to manage their own balance sheets as they face a wave of Commercial RE refinancings in the next 24 months.

While I’m not claiming that this outcome will occur, there are people smarter than me who believe we’re not out of the woods. Larry Summers thinks there’s a chance the Fed will have to raise rates to battle a resurgence of inflation.

In closing, inflation is very, very difficult to control especially when we must course-correct after a period of legendary monetary stimulus & spending. To get inflation back to a target rate (say 2%) it first must get below that rate, because when you release the downward pressure there’s usually a small bounce back. Visualize dropping a tennis ball into a pool; it briefly submerges below the surface before rising back to the surface. If our long term rate is 2% then the Fed will have to get it below that for a moment….think of what kind of policies will be utilized if that’s the case.

Finally, here is what’s on my radar:

stocks

The allure of dividend investing is the hope of consistent cash flows while participating in the equity upside. Well, the No Free Lunch crowd is here to remind you that can be a double edged sword once the dividend goes on the chopping block. Two recent examples are New York Community Bank cutting its dividend by 70% in the face of increasing loan losses to its real estate portfolio, while drug stalwart Bayer AG slashed its dividend by 90% to account for rising debt and litigation costs..

macro

Game of Trades is out with a new chart highlighting the rise in Fed Funds rates. We are now butting up against resistance levels we saw during the Dot Com crash and GFC.. As history reminds us, the 1970’s in the USA saw raging inflation of around 8% annually…. so naturally lots of eyes are fixated on this situation.

To me the most interesting aspect to the 1970’s era was the degree of wild swings in the Fed Funds rate as the battle vs inflation raged on for a decade, truly remarkable…

“ai”

I won’t claim to be a thought leader in all of the things going on with artificial intelligence, but the incredible pace at which investors have poured capital into the industry is breathtaking. Obviously lots of industries want to capitalize on this opportunity.

For brokerage / banks like Merrill Lynch, JP Morgan and Morgan Stanley, cross selling bank products (credit cards, loans, etc) to their wealth management clients is a huge revenue center for them. That means incessant referrals and product pitches to the clients.

Morgan Stanley is experimenting with AI by listening in on phone calls between clients & advisors to uncover more opportunities for product cross-selling. I don’t know whether to be impressed by their ingenuity, or extremely terrified…

And finally…

Companies often fall victim to the assumption that their customers care deeply about the product or service being provided. Most of the time, we’re just not that interested. Well, the folks running the Orlando Airport must think we love the process of flying commercial because they’re offering a VIP pass that allows people the ability to dine & shop within the concourse even when they’re not traveling. Apparently it’s not enough to merely drop your friends at the airport, now you’ll need to go through TSA-Pre and have a beer with them.

Clark Gaines focuses on alternative investment strategies at Almanack Investment Partners, and is based in Charleston, SC.

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