Today I'll share some economic analysis on the CPI report and what to look for in order to tell if inflation will get worse. Lastly, I'll cover some ways that you can make an investment play on inflation.
The Consumer Price Index report for September 2021 was published on October 12, 2021. Prices increased for urban consumers by 0.4 percent in September on a seasonally adjusted basis. This is slightly higher than August which came in at 0.3 percent. On a 12 month basis, the CPI is up 5.4% from September 2020.
You have likely seen your gas prices so I don't need to tell you that prices are up, but it's worth noting how much. All major energy indexes are up this month. The entire energy index increased by 24.8% on a12 month seasonally adjusted basis. Gasoline is up 42.1% and Natural Gas is up 20.6% over the same period. Electricity also increased by 5.2%.
The index for food was up 4.5% over the past 12 months. The largest movers in the food index were meat products. Meat, fish, poultry, and eggs increased 10.5% and the index for beef is up 12.6% in the last year.
We've all heard someone in the last few months say something to the effect of : "40% of all dollars were printed in the last year" with an ominous reference to potential inflation. This is more or less correct as the US government has printed a ton of new dollars, but printing more money doesn't directly lead to inflation. If we look at the velocity theory of money we can understand why. The velocity of money is essentially a way of measuring how fast money changes hands, given the price level, GDP and money supply.
Rearranging this, we can see that the speed at which money changes hands is a function of the price of goods, the GDP and the Money supply. Price levels and GDP haven't shifted much, but the M money supply increased a lot. This means that the Velocity of money should be low. And velocity is very low.
This means that inflation hasn't hit us hard yet.. If inflation really starts to pick up, the velocity of money should see a noticeable increase as more dollars start to change hands to pay for the increased price of goods. This is demand inflation. Prices have increased in specific areas, but we have yet to see large scale inflation.
The Federal reserve has shown that it is hesitant to drastically increase interest rates from their near 0 levels, and are more than willing to increase the amount of assets on it's books. As a result the the amount of dollars in the system increases. Under normal circumstances, low interest rates and an increase in the money supply increases the demand for goods and services. But we haven't seen this. Why?
Individuals and businesses have thus far used PPE loans and government stimulus to pay off debts and cover their bases during the pandemic. Since these individuals and businesses can pay for the goods and services that they need, they don't demand more. There is no pressure for a demand shock at this time. The money generated by Fed is sitting idle in bank accounts, investments and institutions.
We are currently in a supply shock in the U.S., increasing in the price of select goods, but we haven't seen a drastic increase in demand or a change in velocity of money. This doesn't eliminate the possibility of future inflation though. That money is still in the system, and we could still be sitting on a powder keg.
Currently, I am looking at stocks and asset classes that I think will rise in the event of inflation. Ill share my methodology for my search and give some stocks that I think fit into this criteria. Ill try and explain why I think some industries will do well and why others will not. This is not advice, I am only sharing my opinion and observations.
Oil and Natural Gas Producers: Natural gas is up in price by 20.6% and Fuel Oil is up 41.7% since last year. Winter is coming in the United States and Europe and the prices for these commodities are already increasing. Couple this with inflation and supply problems, producers will benefit immensely from this. These guys find the material, and sell it. they only get more money if the price of the commodity goes up and people still need to full up their gas tanks and heat. their homes. The risk is that shipping problems could cause issues.
Coffee Producers and Futures : America has an addiction to coffee, this is no secret. An article from yahoo finance, described how Caribou Coffee is buying tons of Coffee beans in anticipation of supply shortages. This commodity shows robust demand despite price increases. One difficulty I see with this is finding the right way to invest in this commodity. I'm trying to avoid companies like Starbucks, Nestle and Keurig that sell coffee directly to consumers as they may not be able to pass on as the price increase. It seems like that is the only option aside from directly purchasing futures. One possibility is $JO, which is an ETF that tracks monthly coffee futures contracts.
Refiners and Pipelines: Avoid these like the plague if oil and gas prices go up. These companies take a hit when prices increase because they cannot pass prices onto their consumers quickly, yet they still have to meet the demand of consumers to stay in business.
Beef and Pork: If inflation hits this sector Americans will substitute out the expensive red meats for cheaper alternatives like chicken. This is due to the fact that most Americans have a predetermined budget for grocery shopping and will maximize the amount of food they get.
For questions and comments, you can reach me at firstname.lastname@example.org or through the A1Trading discord at smstreb97
Hey everybody, this is a breakdown of some of the macro trends around Gold and some of the pressures it is facing from inflation and the Fed's potential rate hikes.
As of 09/26/2021, the Gold Continuous Contract is down -0.75% this week, and -3.79% for the month. Gold is currently caught in a limbo between rising inflation and rate hikes from the Federal Reserve. Inflation is positively correlated with the price of Gold, but there isn't much inflation despite all the liquidity introduced by the Fed.
Bank of America/Merrill Lynch theorizes that Chairmen Powell will announce that QE tapering on November 3rd. The first rate hike to occur in 3Q23 and continue on a quarterly basis. The Fed currently wants inflation as it will juice the economy. If inflation pushes beyond that zone, they may decide to increase rates. Short term inflation is a large concern because of supply line disruptions in the market. If the supply chain cannot meet the demand, then the prices of goods could kick off a bout of inflation that shoots us past the 'Troublesome Zone'.
The key variable is time. If inflation rapidly increases, the fed will move up their 3Q23 plan. If this occurs, the market could react by buying Gold to hedge against a sudden inflationary episode that grew out of the Fed’s control.
The Gold Mining sector is trading below the 10 year Net Asset Valuation, which indicates that the miners themselves are currently undervalued, particularly the Jr. mining stocks. If the price of gold were to swing in favor of the miners, there is more pressure to revert to the mean
After a little digging, I found a Bloomberg Index fund that tracks the price of Gold with incredible accuracy. The following chart shows the top 7 major market indices with the strongest correlation to gold.
SOURCE: World Gold Council
The index with the highest correlation is the Bloomberg Barclays Global Treasury Index, which is pegged to the Global bond market, excluding US bonds and other treasuries. Both foreign bonds and Gold have an inverse relationship with the dollar, but the BBG Global Index is useful for forecasting the overall trend of gold as it offers a less volatile perspective. Due to its high correlation to gold and it’s relatively low volatility, one can chart the overall direction of gold with near 70% correlation. This correlation holds back to 2015.
The benefit of having only a .70 correlation coefficient as opposed to 100% correlation, is that it allows us to see through the "static" of Gold's volatility. The best example is near the end of the chart: GLD moves up near 6.00%, but eventually corrects down to conform with the overall downtrend signal given by the index fund.