Update - December 13, 2022

Portfolio Update: The Truth Behind Today’s Inflation Figures

All hail the Fed…

Our saviors have kept us from damnation once again (never mind that they created this mess). Inflation came in “lighter than expected” this morning. Prices are now just 7.1% higher than they were this time last year.

Yippee!

The big money thought the reading would be higher.

Goldman Sachs expected 7.2%.

JPMorgan Chase was looking for 7.3%.

And those pessimists at Société Générale expected 7.4%.

Compared with last month, prices are just 0.1% higher.

Four weeks from now, we could actually see things getting cheaper across the board.

Good news, right? Jay Powell should get a standing ovation at tomorrow’s press conference.

Investors sure seem to think so. The major indexes are soaring on the news. Our portfolio is having another grand day.

Unsurprisingly, crypto is leading the charge. Bitcoin jumped nearly 6% on the news.

It makes sense. I’ve said many times that once interest rates began to fall, crypto would once again catch a bid.

But does this morning’s news give us the “all clear” signal? Is inflation on a beeline toward the Fed’s 2% goal? Is Powell going to come out tomorrow and stand in front of a “Mission Accomplished” banner?

We sure hope not.

Slow Down

While the market is celebrating the “good” news, I want to remind you why prices are falling.

It’s because the economy is slowing. If inflation is slowing quicker than expected… it means the economy is slowing quicker than expected.

There’s less money to go around – perhaps far less.

It’s an idea that ties heavily to our “Big Prediction” issue, which will be hitting your mailbox within the next few weeks. I won’t spoil it here… but I’ve got lots of data that proves the Fed hasn’t led us out of trouble yet.

In fact, I have evidence that just the opposite could be true. The real pain could be just starting for this economy, which has been addicted to cheap money.

Let’s not forget that cheap money is what the markets are really celebrating today. Stocks aren’t rising because sales are booming higher or because consumers are feeling giddy.

They’re jumping because there’s more proof that “normal” interest rates aren’t coming back. The reign of artificially low rates will continue.

That’s no good.

Take a look at real interest rates, for example. They’re still quite anemic.

The real rate on the 10-year Treasury has been as low as 1.08% this month. Given today’s news and the plunging yield on the benchmark bond, we’ll almost certainly start the year with a real yield below 1%.

If we play it right, it is good news. Our Modern Asset Portfolio is perfectly set up right now to play rates in this range.

But it is not a time to let our guard down and think things are back to normal. They’re not.

The economy is slowing faster than expected… and the data is starting to show it.

Volatility will surge as more investors begin to figure it out.

We’re set up quite well for the situation. Our portfolio is loaded with strong companies that have strong balance sheets. Many are actively engaged in very bullish share buyback programs.

If we stick to what we know works when real rates are in this range, we’ll be on the right track.

Things are upside-down on Wall Street. But we’ve got it figured out.