US inflation cooled in June for the 12th straight month
cnn.com
cnn.com
Stock market reaction to inflation cooling: a little out of touch with reality at this point, and unfortunately only continuing to go in that direction.
Slightly related:
> The concentration risk in the S&P 500 is currently higher than it was at the peak of the dot com bubble in 2000, with the top five stocks representing 23% of total market capitalisation. The combined market cap of Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN) and Nvidia (NVDA) now sits at $9.5trn, equivalent to 23% of the S&P 500's market cap. At the 2000 peak, the Microsoft, Cisco (CSCO), General Electric (GE), Walmart (WMT) and Intel (INTC) reached a combined market cap of $2.3trn, which represented 19% of the S&P 500 market cap.
> The average price to sales ratio of the big 5 today is 6.8x, even higher than the 6.2x seen at the 2000 peak.
> While earnings multiples are less extreme, with the big 5 trading at a collective PE ratio of 40x versus almost 60x for the big 5 in 2000. However, relative to the overall market the overvaluation is similar, with the big 5 today trading at a 100% premium to the S&P 500 as was the case in 2000.
https://seekingalpha.com/article/4616549-spy-concentration-r...
Don't get me wrong, I'm not a SeekingAlpha article type of person and I'm sorry for the link/slightly off-topic-ness but, man... those stats are so interesting to me. Not from a "oh my God, doomsday is here, bubble 2.0" but...
How many Americans have a 401k/IRA with Nasdaq/S&P500/Dow Jones exposure where the top 5 stocks are trading at 6.8x sales and 40x P/E? That's like... unsustainable and scary, right?
https://www.gurufocus.com/economic_indicators/6061/sp-500-pe...
Current market level: 4500
Current forward P/E ratio: ~19.9x
Previous market level: 3600 (October 2022)
Previous forward P/E ratio then: ~19.9x
So in 2022-10, EPS were $180
Now in 2023-06, EPS are $226
An increase in 25%, which basically matches the growth we've seen past 9 months
This actually matches pretty well with anecdotal complaints from people, about them getting 4% raises while inflation ran at 10%. All those price increases have to go somewhere, and in this case they went to corporate profits, particularly of the largest (S&P 500) firms. Which is exactly what people complain about when they say inflation is driven by corporate profits, except they get the causality wrong.
Problem is that it's inconsistent with today's stats. If inflation is now 3% but wages are going up 4% and unemployment remains the same, that means corporate profits are shrinking. It has to, by an identity - every dollar the company pays out in wages is a dollar it's not making in profit. So again the market response makes no sense - investors are assuming a future that looks like the past, while the stats indicate the near future is different from the past.
I guess you could make up for it with productivity - if a workers output 1% more goods for their efforts, prices rise by 3%, and their wages go up 4%, that just implies workers capture all the price surplus from companies, and earnings growth should be roughly flat. But the long-term trend for productivity is down (though the short-term one is up, coming off pandemic lows), so this doesn't seem like a durable explanation for being able to pay out 4% more in wages while only raising prices by 3%.
To me that describes "Apple keeps their product line the same and charges 25% more" instead of (the more likely in my opinion) "they charge the same for their existing products, keep their margins the same, but grow revenue", no?
Or for them to charge the same but grow revenue, that implies they ship more iPhones. This again implies a shift in spending from other goods to iPhones, which comes out of some other firm's revenues.
The macro environment doesn't work like that. Every dollar that someone spends on iPhone is something they don't spend on Coke, or snack foods, or Home Depot. When you aggregate across all firms, you have very few free variables. If everybody is raising their prices, that's inflation, which we saw a lot of before but the stats now say that it's coming down. If they're shipping more product in total, that's an increase in output (real GDP). Within all the total revenues that all companies take in, some goes to other firms (payments), some goes to labor (wages), some goes to land (rents), some goes to the government (taxes), some goes to debt holders (interest), and some goes to equity holders (profits), and the sum of all of these has to equal the total revenues.
The past ~20 years has seen marked declines in the share of income that goes to labor (real wages), the share going to the government (taxes), and the share going to debt holders (interest), with rents remaining roughly constant nationwide (but skyrocketing in certain municipalities like the Bay Area) and the balance of the gains largely going to profits. It looks like the macro environment has changed within the last year so that labor has more bargaining power, the government is ceasing several stimulus payments and may be raising taxes, and interest rates are going way up. Those will all increase the share of national income going to labor, government, and debt holders significantly, and so the balance has to come from landlords or equities. There's currently a tug-of-war going on for who's going to be the bagholder, will it be real estate or stock owners, and that hasn't fully played out. But if current trends continue it's going to be one of them, and yet this hasn't been priced into the price of those assets.
Ironically, all of the forces behind this are wildly politically popular, which is perhaps why they're starting to get traction. People want to get paid more, and see their fellow workers get paid more. People want the government to collect more taxes from corporations and rich people. People want their savings account to earn more. They just haven't made the connection that the other side of the trade is their 401(k) and brokerage account.
Don’t forget HSA
Lol this struck a chord. Maybe folks here need to explain why generative AI isn’t a several trillion dollar industry and why it won’t positively impact stock prices for a ton of companies rather than just downvote.
It is already.
I am not saying that you're wrong, but I think there is more uncertainty with AI than there is certainty. If you claim to be certain about something then the burden of proof is on you.
A laptop with a LLC and a vague plan to build a LLM can get you investment with a valuation of a billion at the moment.
I do think a very large part of the 9-month S&P500 run from 3600 -> 4500 has to do with NVIDIA + Microsoft, for what it's worth.
Fed causes massive problem, and then eventually stops it from getting worse... Hooray?
Inflation is still twice the target rate at 4%.
Every dollar has lost about 18% of it's buying power since 2020. If you haven't received an 18% salary increase in that time, the Fed printed you into a pay cut.
Garden-hose of money aimed at poor people? Wailing, gnashing of teeth, pearl clutching, hand wringing.
Fire-hose of money aimed at rich people? Complete silence. On the few occasions it was reported, it was dropped like a boring but inevitable fact without any accompanying inflation rhetoric, despite the much larger dollar amounts.
Most of the inflation appeared to come from a mix of massive fiscal stimulus and supply chains that got blown up by the pandemic, so large increases in demand coupled with decreased capacity to supply, driving up pricing for capacity.
Arguably increases in some asset prices could be attributed to QE, but the story doesn't really hold water for CPI ex-housing.
As an aside, I don't even think this course of events was a mistake. It was much better to have some inflation from huge stimulus but avert economic disaster, and then deal with the inflation through the relief valve of higher interest rates. There is no relief valve for total demand destruction.
The bar for getting something passed in congress is much higher. Powell was also publicly requesting congress to pass a second (or was it third?) massive stimulus after the economy was already on a strong path to recovery. Since then he's declined to comment on fiscal policy, even when it was clear that fiscal policy was driving inflation.
https://rooseveltinstitute.org/2021/02/25/fed-chair-powell-m...
So, when Covid shutdowns hit the US, it could react (with its largest balance sheet ever), but it also could have reacted to valuation increases, it could have reacted to first and second round stimulus packages by reducing its equity holdings, it could have reacted to positivity rates and vaccine uptake.
Though the lack of the legislative and executive acting in the US can be blamed as well; That could mean, incentivizing baby boomers to stay in the workforce, increasing immigration (where food, lawn maintenance, retail industries are having worker shortages as workers have moved to warehouses, technology, and delivery), or the child tax care credit helping parents stay in the workforce (possibly with more linkage to employment), and lastly temporary tariffs where possible to reduce consumer demand for imports (via ~ taxes).
https://www.macrotrends.net/2500/crude-oil-vs-natural-gas-ch...
People who think quantitative easing is "money printing" haven't looked at how reserves work (and how circulating money is created through loans) or at the correlation of QE/QT on either inflation or deflation in the US, the EU, or Japan. Now it does increase liquidity and that may increase asset prices slowly.
https://research.stlouisfed.org/publications/economic-synops...
The Fed did keep rates a bit low for a while, they will also keep them a bit high for a while since they are "data driven" and the data always lags. We seem to be lucky this time that delayed infrastructure stimulus (not the pandemic business handouts) is offsetting decrease in credit, but it's unlikely "this time is different" so we'll almost certainly have a recession to kill inflation expectations and a "banking event" that causes Fed rates to fall.
Interestingly, the treasury spend down caused by debt ceiling shenanigans seems to have lowered long term rates for a few months which also helped loans/spending in the short term.
Some data here: https://www.ecb.europa.eu/pub/economic-bulletin/focus/2022/h...
Why is the narrative everywhere still that prices are higher because of the war in Ukraine?
https://www.nytimes.com/2021/12/23/us/politics/russia-ukrain...
"European prices skyrocketed when the dominant external supplier, Gazprom, started to withhold supplies in Q4 2021."
I really appreciate your Chart A where one can see that prices went back down until the war started and then spiked 1.5x higher and that only because of a couple of quite mild winters. It's certainly reasonable to make the case that investment in Oil and Gas fell quite a bit from 2019 (economists were expecting a recession in 2020 before COVID), but that didn't drive rapid reductions in supply and historically high prices... a war did.
When we were all shaking about electricity prices mid year 2021 no one ever mentioned anything about Russia, Ukraine or Gazprom as being the sole contributor.
"The rise in costs has been put down to a number of factors, including a cold winter earlier this year which left gas stocks depleted, as well as refineries in the US being shut down by Category 4 Hurricane Ida, according to industry analysts.
High demand for liquefied natural gas from Asia and a drop in supplies from Russia have also contributed to the price rise."
https://news.sky.com/story/why-is-a-rise-in-gas-prices-pushi...
You weren't going to get to %150 higher prices for gas (which drives marginal electricity prices) in Dec 21 or %200 higher prices for gas in Feb 22 without Gazprom supplies being cut. The winter before was plenty cold in 2021 (coldest since 2010) and it only caused a %60 higher price for electricity and 30% higher for gas for a month. We're over a year into Ukraine and gas is stable at 50% higher than it's start which was the previous temporary winter peak. It'll go crazy again this winter if it's cold, but that will also be transitory and probably come back down to a 50-60% higher new normal barring "events".
If pandemic-related supply chain issues are really a major factor in the inflation we're seeing, with time we'd expect most prices to be returning to pre-pandemic levels, or at least close. I don't think I've heard anyone seriously suggest that could happen. Instead, we're celebrating a small reduction in the slope of a line that has been and continues to be moving up at an alarmingly steep angle.
And while you could argue that fiscal stimulus isn't a direct action from the fed, it's certainly related and can ultimately be attributed to the same group of delusional people in the driver's seat.
Under-stimulating is what happened in 2008+ thanks to Republican obstruction and fear of electoral "anger", and we got years of extra suffering as a result.
Was it the Fed or was it Congress through policy? Congress needed to do something in the response to the pandemic for the people, right? Therefore, why does Congress deserve blame? They helped people out, didn't they?
First of all, the article says inflation is at 3%.
Sounds like you're over-reacting here. 4% may be "double" (if that's the number you want to go with), but it's not a huge difference. Some economists even think the target is too low, and 3% would be completely fine. On top of that 1) it takes time for all these interest rate hikes to give their full effect, 2) inflation is currently going down, 3) killing jobs just to get slightly closer to a magic number no one really knows is essential to achieve is odd.
Inflation is already low and under control. Being alarmist about (not actually) 4% is odd.
That was the big realization of the late 70s and early 80s. When the 70s inflation first got going in the late 60s, people thought "Eh, a little inflation is preferable to mass unemployment." By the end of the 70s, they'd learned that if you choose inflation, you get both, because people can't make prudent investments in the future if prices are not stable.
Inflation is under control, and there is no expectation of high inflation, so we do not have the same trade off as in the 70s at all.
These headlines are really starting to get on my nerves. When NPR was talking about it last night they threw a line in there about core inflation but the rest the few minutes was celebratory about hitting 3%.
Poor people do live paycheck to paycheck, and often their paychecks lag inflation. And that's why inflation usually hurts the poor first and foremost.
There is a correlation between the amount easing and inflation, but it is very low, making it quite clear that the Fed was not the primary cause.
If you double the number of dollars floating around compared to Euros, the dollar:euro exchange rate adjusts accordingly, so anything priced in dollars would now be ~50% cheaper in Europe.
Aren't neoclassicals supposed to deny the influence of money on the economy?
.82 x 1.22 ~= 1
Or did I read that wrong?
Also, payers of state/county/city taxes which eventually pay government employees with defined benefit pensions and retiree healthcare are also directly effected by lack of public equity performance since the savings for those deferred compensation plans are in the markets, and without the assumed investment returns, taxes would have to increase to make up the difference (and/or cuts to benefits).
Bottom line, assume the purchasing power of the USD will be trashed as much as needed/possible, so not being invested in the US public equity markets is a dicey proposition in my opinion.
Does that justify there current valuation? Again, maybe, maybe not, I’m not a stock analyst, but if you are just looking at a trailing P/E I don’t think that’s telling the whole story.
And the US market and economy is just structurally different from Europe and other economies. Massive energy abundance now to start with, and also work attitudes/culture. On the positive sides dynamism, willing to tolerate failure, new business formation, and on the (arguably I guess) negative side prioritization of work/profits over personal life and social welfare.
S&P 500 P/E is actually a stat that is tracked, and currently stands at about 26. I agree this makes no sense in the current interest rate environment. Investors are betting that rates are going to drop while corporate profits remain unchanged or corporate profits rise while rates remain unchanged, which also makes no sense, but at least the numbers are more reasonable than FAANG P/Es.
Check my comment here and tell me what you think.
I agree with you, if I saw "current P/E 26x", I'd think "overbought, investing deemed risky" but if you check forward P/E instead of current P/E, it's unchanged in the past 9 months despite the 25% runup in SP500 price...
The risk now is more inflation and further rate increases. Inflation has cooled not mainly from intervention but market restoration.
An engineered bust is pretty much the only way to prevent revolution. The existing and incoming inflation is really pushing the wealth divide and not just from the 1% to the 99%. But from those who hold assets to those who don't.
Right now, currently, the economic opportunities that were available as little as 10 years ago simply do not exist.
A median income job does not put you on a path to meaningful asset acquisition and may not even be enough to get most people out of student loan debt.
The other side of the equation with asset prices is household debt and it's sky high and these are generally opposite ends of the spectrum.
Can you expand on this please?
There is still 1.7 trillion in Reverse Repos. The increased rates have been able to draw some of that out into long term treasury products. Which is great. But it's still astronomically high.
Getting increasingly expensive to be poor in this country.
That would be deflation.
Inflation of 10% means something that was $100 goes to $110, if inflation goes back to 1% for the next year that $100 thing will be $111.10 next year.
It always goes up ... and it compounds.
A costco sized bag of potato chips is now $11. Systemic economic factors only account for a fraction of that price hike in my appraisal.
The idea that them dropping their price to a more reasonable $7 would be 'deflation' is overapplying economic theory terms. Pruning branches on one tree isn't deforestation.
I feel like there is a certain breed of capitalist who took econ 101 and is deluded into thinking any backpressure of corporate greed is risking a 'deflationary spiral'.
It would not make sense to drop the price to $7 if they're selling out at $11, business just doesn't work that way, and frankly neither do people. Would you offer to take a lower salary despite being offered more?
Heating vs cooling of inflation is the acceleration, not the velocity of prices.
Corporate greed is mathematically synonymous with corporate non-competitiveness. Rather than dismissing this possibility a priori, maybe there are reasons why companies used to be more aggressive with their price competition, but aren't anymore?
One possibility that comes to my mind is a concentration of ownership in index funds, possibly interacting with rising interest rates at high stock valuations. If 40% of your voting shares are controlled by a fund manager who also controls 40% of your competitor (as well as the rest of the index), that will be a loud voice on your board pushing against cut-throat competition. He'll tell you, and your competitors across the index, that you all need to get your earnings up to protect your stock price because P/E ratios are falling amidst rising bond yields, and that the way to do this is for the whole index to increase prices until consumption starts to decline, where profits peak, rather than fighting with each other over market share.
Makes a lot of sense to me.
You wouldn’t buy it because you’d decide your money could be better spent on another snack. It’s not like competition suddenly stopped existing the last couple of years and of Hydrox could swoop in from the grave and start taking that sweet sweet Oreo money they would.
But inflation allows numbers to keep going up while hiding the fact that you can get less with those bigger numbers. People will be glad they're finally making $15/hr or $20/hr without realizing that it may not be as good as what they had before just because everything is more expensive.
Meanwhile, politicians can blame "greed" while ignoring that it's caused by them printing money as a way to deflect blame for the stealth taxes.
You can argue about being below trends or whatever, fine. But it's factually wrong to say Americans are worse off today than they were in the past.
This chart demonstrates the inaccuracy concisely: [0].
According to FRED, the median worker should be living much more comfortably now than at previous times in recent history, when a median worker could, you know, buy a house with a yard, support a family, and retire. All because of some fundamental errors in how CPI is calculated that the government has no incentive to fix (combined with fundamental errors in how (un)employment is measured, but that's a different issue).
There is no evidence for this other than vague gut feelings
And I agree with this. When we talk about "inflation adjusted", we need a benchmark to compare the value of dollars across time. Typically CPI is used, but it has major issues. One major issue for the "median worker" is that real estate values are not included. Obviously many workers want to buy a house to live in so this is a glaring omission. Similarly, things like stock values are not included, even though the value of equities has a massive impact on a dollar's buying power. E.g. if consumer prices at time A and B are the same, but the value of GOOG is X at time A and 2X at time B, doesn't the dollar at time A has more buying power than at time B? Finally, CPI heavily weights things like consumer electronics and automobile. These are important, but people buy these things once in a blue moon and movement in these prices generally doesn't impact people that much.
The only reason why college attendance is slightly lower today is because the college wage premium is lower today. It's not cost, which has slightly decreased recently. Housing is the only thing getting more expensive because we don't build enough but yet the median American is still a homeowner.
To me, this seems like a misleading framing. When you say "consumer prices at time A and B are the same", you can point at a basket of concrete goods which we can agree are the same (a dozen eggs, a gallon of gas, etc). But if the value of GOOG is 2X at time B ... are shares the same? How would you know? Does GOOG at time B have more revenue or a different revenue growth trajectory, or is the competitive landscape different at time B, or did they buy a bunch of other firms? Absolute vs relative is not quite the right distinction, but a share is a portion of a whole whose value can change, and so not a clear unit for evaluating purchasing power. Perhaps slightly more concrete, shares of a REIT are going to change over time, but that can be because the stuff being held changed (they bought more property) or because the value of the stuff they already held changed.
One way of thinking of share ownership is the price being paid for a share of future cash flows. That’s already kind of normalized across time.
Since there is other evidence against the accuracy of CPI, and also evidence that Americans are not enjoying a higher standard of living, I'm confident that the first one is not true (CPI does NOT accurately represent inflation).
I don't have as strong of an opinion about living standards as I do about inaccurate inflation because I haven't been around long enough to run a household and buy groceries in the 80's, but from someone who talks about facts and feelings a lot, I was hoping for some more facts.
As for CPI, there are two fundamental issues that all result in lower-than-actual reported CPI.
1. If a household spends all of its money, and prices at the grocery store rise, it has to change which items it buys, likely switching to items which experienced lower inflation during that period. The BLS weights are determined by a survey of what median households bought, not what they bought last year before prices rose. That's a mistake that leads to lower reported inflation numbers.
2. Hedonic adjustments are free rein for arbitrary adjustments. For example, new vehicles did not go up in hedonic-adjusted price from 1997 to 2020 according to the BLS [0]. An automatic Toyota Corolla was $12373 brand new in 1997. It was $19700 in 2020. While operating expenses have decreased somewhat (due to better fuel economy), does that cover the 60% price spike to the median purchaser? No, fuel economy only improved 35%, and meanwhile gas prices have tripled so absolute operating expenses have increased. They throw in a bunch of other nonsense justifications like that new cars have bluetooth and other features that counter-act the price change. Our inflation numbers over those years did not incorporate a price increase AT ALL, so it's a fair assessment that real inflation was higher based on that alone. The Big Mac index has probably always been the most accurate assessment, free of political pressures.
I know this is an unpopular proposal even though mathematically it works and is simple to implement.
Side note, congress should be banned from adding biased names or acryonyms to bills. Just explain it. If the acronym spells something cute, try again.
A massive spending bill to fight inflation nonsense. Increasing taxes would have helped. Stopping the student loan pause would have helped. Injecting more money into the economy? Not so much.
My gut says that the Fed interest rates and natural cooling of the demand curve post-Covid-lockdown is more impactful. But I would love to learn more.