Inflation indicators are creeping higher, here is direction on how to trade it from Landon Whaley.
Making decisions based on an investment philosophy of remaining data-dependent, process-driven and risk-conscious helps cut through the increasing amount of noise in financial markets and gives us the clarity to see shifts in both the economic and financial market data before the vast majority of investors.
Embracing this philosophy and consistently applying our Gravitational Framework is how we’ve managed to successfully call every inflection in U.S. inflation over the last year and a half beforeit occurred. We nailed the change in the direction of inflation in July 2018, March 2019, May 2019, and the latest shift back on Oct. 21, 2019.
Headline and Old Institution Risk
Transitions from one Fundamental Gravity environment to another are not points; they are processes, and in the U.S., that process is complete. The U.S. economy has shifted from Winter into a Fall Fundamental Gravity, catalyzed by an acceleration in inflation.
After trading sideways for the prior two months at +1.7%, October’s reading of consumer inflation accelerated to +1.8%, and November’s measurement ramped to +2.1%, the highest pace of inflation since mid-2018.
In typical fashion, the media provided no value in evaluating the latest inflation numbers, and no “news source” did a worse job covering this latest economic data point than Bloomberg.
Rather than discuss the current inflationary impulse, Bloomberg chose to focus on the stagnation in core inflation and find all manner with which to describe the current state of U.S. inflation, such as: “U.S. core inflation modest in November,” or “A key measure of U.S. consumer prices remained subdued in November…,” or “The contained pace of inflation supports forecasts…”
This kind of labeling drives me absolutely bonkers. A data point can’t be “modest,” but you can be when someone compliments you.
A data point can’t be “subdued,” but you may be after your favorite Cockapoo dies of old age (R.I.P. Midnight).
A data point can’t be “contained,” that’s something NBA players hoped for when facing Kobe Bryant. You can’t stop him; you can only hope to contain him!
CNBC may not have abused a thesaurus for their analysis of U.S. inflation, but they were far more interested in how November’s CPI reading did when compared to Wall Street estimates. For the life of me, I won’t ever understand why the media and the Old Institution react to data based on where it lands relative to always faulty, sure to be wrong, forecasts.
The inflationary bottom line is that multiple data sets have been pointing to higher inflation for months, and now CPI has confirmed the inflationary impulse is taking hold in the United States for the second straight month.
The Bottom Line
When we teased our newest macro theme back on Oct. 24, we laid out the exact playbook for profitably navigating a rising inflation environment.
Specifically, we said, “While there are other markets we are considering on the bullish and bearish side of the U.S. market for the “Reflation Elation” macro theme, these are the four horses we’ll ride coming out of the gates: Energy stocks, crude oil, broad-based commodities Treasury Inflation Protected Securities (TIPS).” Since then, crude oil has ripped +11.2%, energy stocks have rallied +3.9%, commodities have gained +4.2%, and TIPS have delivered a respectable +1.2% gain. Not bad work for seven weeks.
The Old Institution, the media, and The Economist have left inflation for dead. Heck, even Jerome Powell and the rest of the Federal Reserve Governors believe inflation is in a bottle like Barbara Eden, which is the primary reason the Fed is forecasting no rate cuts for the entirety of 2020.
Once again, we’ll gladly fade the crowd because inflation will accelerate for at least the next four months. The Playbook remains to buy the dip in energy stocks, broad-based commodities, and TIPS, while waiting for the right entry point into the crude oil market.
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