My limited personal observation tells me that we are witnessing an inflection point in term of inflation in the US: The obvious: - used car market cooling off with price cut. - Housing market cooling off across the board. - Restaurants and food services started to stop raising price (at least in my area) for the last 1 month. - Lumber, Commodities (steel, alum, copper) started to cool off - Logistic cost started to cool off Neural: - Gas and Oil. I have a mixed bag feeling about this. Not sure the down trend will continue. Demand is still high for limited supply. Not so obvious: - Semiconductors: if China invades Taiwan, I imagine we would witness a collapse of the modern digital economy as we are too dependent on TSMC. It’s like a single point of failure. - New car market: I still see dealers add crazy mark up to MSRP. Conclusion: I think the FED is achieving their goal in term of creating demand destruction. I think we will still see another 100 bps hike as the FED wants to keep their credibility. The US dollar seems doing pretty well right now as the global currency reserve. I predict inflation cooling off by the end of this year. By mid Oct, we might see a bull run in the stock market. This is a complex subject with many unknown variables (war, supply chain disruption, geopolitics) so I would love to hear your counter arguments. TC: 300k
is used car market actually cooling?
yes, I was shopping for a used hybrid car on facebook marketplace. I started to see price cut.
Fed will keep hiking through the year.
Core CPI looks to have peaked. Supply glut as evidenced by Target, Walmart earnings and retailers locked in on 6 month contracts of elevated shipments. Recent data reveals weakness in housing sector, auto sector. Consumer savings at a low with consumer debt at a high. Global recessionary fears have a deflationary effect on oil. I expect headline CPI to remain elevated but likely not higher unless serious military conflicts arise. The Fed can't continue hiking at this rate. Powell has proven himself susceptible to political influence. Elevated inflation is preferable to high unemployment. Market is already pricing in rate cuts by 2023 Q1-Q2.
I think this is a good, nuanced take. I would also add that we’re not going back to the Fed’s stated goal of 2% inflation for a while. I think we can expect 3-5% inflation for as long as COVID and Russia’s invasion of Ukraine remain a concern.
great point about expected inflation rate. I don’t think 3% - 5% is really that bad tbh.
Yes, you should go all in now into the equity markets…once in a lifetime opportunity to make gains over the 1-2 yrs timeframe
Inflation is going to be > 5% at least until 2025
It really depends on how fast the world can re globalize. We been outsource our inflation to China for the last decades. Given to the fact china real estate is crashing hard. They probably want to cling onto export to us to supplement the lose in GDP via devalue yuan against dollar to make their export more attractive. Depends on how willing Biden is willing to reverse trump era Chinese tariff to combat inflation. Inflation could down a lot faster if cheap foreign import prevent domestic manufacturers from rising price. It's going to be a hard political sell to domestic labor voters.
I mean I do agree that FED will continue to hike until inflation cooling off. But to say hiking until inflation below 2% is unrealistic in this environment. I doubt so. Hiking until inflation falls to 3-5% is more realistic imo. and 3% - 5% is not really that bad tbh.
@Bagpacks I'm not sure why people still have confidence in what Powell says. 2019: Bullied by Trump on Twitter to reverse rate hikes and QT. 2021: "Inflation is transitory" as CPI rose to 7%, PPI to 10%. If he truly cared about the inflation issue, he wouldn't have prolonged 0% rates and 120B/mo QE for so long until late 2021. Instead, his reasoning was to "save" the economy by lowering unemployment at all costs. It was apparently acceptable to have above target inflation for some time to make up for past low inflation (??). When the Fed finally admitted the inflation problem in 2021, he said that the Fed would be "nimble" and "data-driven", but didn't pre-emptively hike by 50 bps increments and later publicly stated that 75 bps was off the table, only to hike by 75 bps next FOMC meeting. Do I think now is a good time to buy stocks? No, but I'll nibble at a couple shares here and there that I think are good value. Do I think the Fed will continue to hike past 3.5% - 3.75%? No, we're already seeing signs that consumer demand along with inflation expectations are dropping. Remember, just like how central banks worldwide synchronized rate cuts to 0% and unleashed QE in 2020, they are all now synchronized in hiking rates and performing QT. A good example is Canada recently hiking by a surprising 100 bps. I'm not sure why people are discounting the deflationary pressures that accompany demand destruction and a global recession. Core CPI looks to have peaked. Sure, energy and food will likely make up a larger percentage of lower-middle class purchases in Western countries, but prices for other categories are coming down. Powell can publicly say all he wants that he wants to channel his inner Volcker, but he could have easily proven himself as a true hawk with 50-100 bps rate hikes to begin with.
Inflation and the related fed rate hikes are only one side of the story. The other part is earnings. I expect most of the big names, at least in tech space, to meet or slightly beat their q2 guidance, but future guidance for q3 and rest of the year would look terrible. Direct to consumer companies will suffer by design (demand destruction), and that will imply less ad spend and ad revenue based companies will suffer too. The demand destruction will also have a cascading effect on other companies (platforms, chip makers, etc). When you should invest depends on your risk tolerance, obviously. Personally, while I wish and pray for an early recovery, I am holding off for some more time till I see concrete proof of recovery.
How would you know concrete recovery has started?
For me, when inflation is low enough that the fed starts signaling a freeze on rate hikes “and” companies guidance for future quarters are upbeat/positive. Yes, by then I will lose the market bottom and some of the gains, but I am more comfortable losing 15% hypothetical gain than losing 15% of my money before seeing a gain.
Oil prices? Wait for the Chinese demand to roar back after Covid reopening.
China looks like it'll pursue dynamic zero-COVID at least until Emperor Xi ascends to a 3rd term after the 20th National Congress come this fall. Ad-hoc, intermittent lockdowns don't provide businesses enough stability/predictability for the economy to ramp up until then. Surging oil prices as a result of a comeback in Chinese demand will be eventually met with the OPEC+ cartel finally pumping more oil to lock in higher profit margins. Also, it's way less controversial to spend $$$ in stimulus on 'infrastructure' projects in China. They're going to print their way into prosperity.
The answer is uncertain. There are signs that inflation is beginning to abate, but only time can tell if that comes to be.