Weekly Points – 5 Things To Know In Investing This Week

The Un-Disinflation Issue

Lots of interesting news this week where we address these important questions:

• With the CPI rising again, is disinflation dead for now?

• With the PPI above expectations, is disinflation dead for now?

• Is the Fed responsible for our “terrible” economy? Have they overtightened?

• Should the new ARM ARM IPO price ABOVE $NVDA? NVDA

• Powell has raised rates. Why do we still have a strong economy and persistent inflation?

Ready for the week? Let’s dive in:

• CPI Up - Oil Prices Are Killing Disinflation:

The Consumer Price Index (CPI) has started to increase again. Much of the disinflation (a reduction in the rate of inflation) of the last year has been annualizing last year’s high inflation numbers. Much of it has also been a huge decrease in the price of oil and energy vs last year’s highs. With the White House struggling to refill the strategic petroleum reserve, and both Saudi Arabia and Russia decreasing supply, oil prices are heading back up again and taking the CPI with it.

Oil prices now above $90 a barrel and the CPI is increasing again.

DKI Takeaway:  Energy and shelter prices are still increasing, and the employment-driven Core CPI remains sticky and above the target. The Fed probably won’t raise rates this meeting, but this is the exact scenario Chairman Powell has worried about for the last year. Say it with me:  “Higher for longer”.

• The PPI Comes in Above Expectations:

After more than a year of decreases, the producer price index (PPI) and the Core PPI (excluding food and energy) are both increasing. The PPI came in well above expectations and above last month’s price increases primarily due to higher energy prices. That also led to an interesting anomaly where higher energy prices led to inflation in goods outpacing services, a reversal from what we’ve seen over the past year.

The Fed didn’t want to see that blue line ticking up again.

DKI Takeaway: This week’s PPI report is a reminder that much of the inflation we’re experiencing is sticky and won’t respond quickly to Federal Reserve actions. We don’t think this will be enough to cause the Fed to raise rates at the September meeting, but investors should rethink expectations for meaningful interest rate decreases in 2024. If it happens, it would most likely be due to a recession which also wouldn’t be a positive for stock prices. Is your portfolio hedged for that potential outcome?

• Unpopular Opinion – The Fed Hasn’t Overtightened:

A popular FinTwit (financial Twitter) pastime this year has been complaining that the Federal Reserve has engaged in “historic” “draconian” interest rate increases that will destroy the economy. Prominent people have been calling for lower rates for well over a year now claiming the Fed is “breaking things”. Let’s take a look at whether they’ve been correct.

Real interest rates (fed funds rate less inflation) are now below 2%.

DKI Takeaway: The economy isn’t in recession. The employment market has weakened, but is still very strong with 1.5 jobs available for each job seeker. The consumer is still spending more, especially on experiences. And the banks that failed engaged in criminal mismanagement of their bond portfolios. The Fed’s interest rate hikes were faster than usual, but also came from a zero base and after a decade and a half of near-zero rates. Lowering rates again leads to long-term inflation and asset bubbles which will continue to warp investment and spending incentives while a sub-2% real interest rates seems on the low side to us.

• Arm Holdings IPO Trading Above $NVDA Valuation:

Arm Holdings plc went public this week and promptly traded at a $66 billion valuation. Arm’s expertise is in designing power-efficient chips which is attractive to cell phone companies and for cloud computing applications. These designs permit better battery life in your cell phone and lower electric costs for massive data centers.

Nice image from pymnts.com.

DKI Takeaway: Cell phones and cloud computing are excellent end markets, but the primary reason for Arm’s massive valuation is the company has been labeled an AI beneficiary. We’re skeptical. While the company’s end markets are certainly users of AI applications, there’s nothing specific about Arm chips that enable AI advancements. The biggest “picks and shovels” name in AI this year has been $NVDA which designs chips that have direct AI applications. Arm is trading at a premium valuation to Nvidia. $ARM is a good company with an insane valuation.

• After “Draconian” Rate Hikes, How Do We Still Have Inflation?:

The Federal Reserve has been accused of over-tightening by increasing interest rates. Yet, we still have a growing economy and newly increasing inflation. What’s going on and is there anything the Fed can do?

No one is blaming Congress. They should.

DKI Takeaway: The Federal Reserve makes expansion of the money supply possible. Congressional overspending makes it necessary. We have continuing inflation despite Fed rate hikes. We have a growing economy too. That’s because Congressional debt-fueled spending is pulling demand forward. Powell can’t stop this and Congress won’t. This spending will continue until the Fed will need to increase the money supply and raise rates to deal with consistent currency debasement. US spending policies are driving the country in the direction of Argentina while Argentina is trying to spend itself into becoming Venezuela. The Federal Reserve deserves a great deal of blame, but “it’s not all Jerome’s fault”.

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