Do we think US inflation will come down to 3%< by end of year?
Crystal ball question though I'd be keen to hear your rationales and thoughts. Inflation decelerated to 4% in May 2023 (might accelerate next 2 months because of low base effect but that's not structural) from a high of 9.1% in Jun 2022 -- see chart below. Do you think inflation will go under 3% by end of year? Why or why not?
We dodged a couple bullets from federal govt incl 1) Biden's hyper-inflationary build back better plan was killed and 2) student loan forgiveness was killed (interest will resume in Sept and payments will resume in October so those effects should start setting in nicely in the fall).
Deflationary drivers include 1) layoffs as macro gets shakier, 2) supply chain normalization (most of which has happened, so maybe just last 10% we're filtering through), 3) slowdown in China + Europe (should reduce their demand), 4) 2 more anticipated rate hikes by the Fed slowing economic activity, and 5) AI (arguably more mid-long term though than in next 6-12 months)
Inflationary drivers include 1) continued tit-for-tat with China (chips, raw materials, etc), 2) companies dual sourcing vs sole sourcing from China, and 3) structural services shortages (though arguably if macro continues slowing from factors above this will become less of a near-term issue)
It's a complicated set of drivers (though at least the Dems have been rendered toothless vs. ridiculous spending that would be inflationary which makes the Fed's job easier) so hard to call. That said I thought late last year that we wouldn't get below 4% inflation until end of year and we've already gotten there so seems there is some progress made on this front. We can also argue whether PCE is really the better measure or core inflation as well. Any thoughts?
God I hope so. A soft landing would be fantastic, or even just a mildly hard landing
Tamping down in Fed spending is key, though Biden is trying to sabotage our recovery in every possible way he can. Tried with his spending packages and loan forgiveness but let's not forget crushing Keystone and pissing off Saudi -- which destroys our control over energy costs. Then the cherry on top is this idiotic dick swinging contest with China that appears to be escalating and supporting the Ukraine war. Literally everything he does is massively inflationary
When you put it that way, makes more sense that Biden is the puppet for our adversaries rather than Trump
I don’t think he’s a puppet, just bad at his job and senile
How does a rivalry with China, which Biden inherited from Trump, and supporting Ukraine against Russia make Biden a puppet of these two countries as opposed to Trump?
If anything, massive Republican tax cuts are a national security issue. For example in the midst of an economic boom, right before COVID hit, Trump decided to increase our deficit by 50% for his tax cuts. These crazy hikes to the debt in times where there is no urgent crisis at all make it much harder to take on legitimate crises. The standard Republican fiscal policy (more tax cuts, more military spending, but too afraid to piss off voters by cutting Obamacare, medicare, etc.) just doesn't add up and can only end up blowing up the debt.
It's actually amazing how the GOP + Joe Manchin are bailing out the Biden presidency. If left to his own devices, Joe Biden would spend relentlessly, causing the Fed to raise rates by even more, crushing the economy while also incurring high inflation. The most cynical political approach by the Republicans was to let Biden do whatever he desired on the economy as it would have spiraled into the abyss. Instead, the Republicans bail out Biden by controlling his worst instincts while also nominating Donald Trump, the Republican least likely to defeat Biden in 2024.
You couldn't be more wrong:
The Build Back Better/Inflation Reduction act was fully paid for. So was Obamacare.
The other bills in Biden's agenda like infrastructure reform were only unpaid for because Joe Manchin required it be 'bipartisan' and no Republican would vote for any kind of tax cuts.
The Bush tax cuts and the Trump tax cuts were not paid for at all, nor were they offset by any decrease in spending. They are the main contributors to the US deficit over the years.
So basically, you have one party that's willing to raise spending and taxes, and another who is willing to cut taxes but not cut spending because they are afraid to piss off their constituents.
https://www.crfb.org/blogs/whats-inflation-reduction-act
https://itep.org/budget-deficit-revenue-shortfall-caused-by-tax-cuts-fo…
Isn’t YoY PPI well within target range (actually 1.1% as of June)? This should mean that inflation is mostly a demand side problem, and not a supply one.
Hence, the main question should be on the Fed side in regards when will the monetary lag kick in and how sticky the demand side inflation is.
preamble - it is near impossible to predict the direction of inflation and as episodes of the 1970s show, just because it's trending down doesn't mean it cannot reverse in ugly ways
Do you think inflation will go under 3% by end of year? Why or why not?
these things take time. even the great paul volcker took time to break the back of inflation
in closing, since one of my mantras is to never tell someone what I think without telling them how I'm invested, here it goes. still 100% equities, value bias, underweight (rel. to SPY) the top names (I own 4 of the 7 top performers, but not in the % of SPY), and building up a cash reserve on the side. for clients, we're carrying largest cash balances we have in a decade (albeit earning >5%), and have cut down on bonds significantly, but not cut equity. I think it's equally likely that we've seen the bottom in 2022 (ergo no cut to equity) as it is likely that we enter stagflation and it's going to be a sideways market for 2-5 years (ergo holding cash to pick up bargains)
Nice post thebrofessor.
I also do not think we're going under 3%. And as of June '23, the FOMC does not think we're going under 3% (see Table 1).
Consumers still have a lot of cash. Small - Medium businesses just blew it out of the water on today's ADP print at 495K vs 225K. M2 supply is just now starting to come down.
Jerome Powell and team are doing a pretty damn good job on economic clean up. They have a shot of orchestrate the fabled "soft-landing". I know it's tough for Finance, Information and Professional Services right now, but at least the little guy seems to be doing alright right now.
I am also in equities and cash. I'm interested in scooping up real estate in the Northeast in 2 - 3 years. Hopefully by then, we'll have interest rates at 3 - 4% (see Implied Fed Funds Target Rate) with better supply and maybe a decrease in asset prices?
A boy can dream.
Makes sense in terms of the reasoning. Though I'd ask, do you tactically shift factors around often? I thought you used to recommend growth, now I see it's value though I understand it's a different environment. Do you think one can create significant value by taking these big factor bets or sticking with a factor through cycle?
Maybe another way of asking -- if you're comfortable sharing -- is what are you doing for your own savings (ex the 401k of course)?
I'm not tactical because I've not accumulated the majority of my lifetime wealth yet. Maybe when I have, I'll move to a buffett style portfolio with stocks + 10-30% cash at all times depending upon valuations. I just say value tilt by happenstance, I source bottom up and that's how the cards fell, it's probably 60/40 value growth, so not a huge overweight
And I think it's possible to create value by switching factors, but I've got no clue how to do it so I don't even try
Great stuff -- what % cash balance (as a % of total portfolio value) are you guys building up to? 10% / 20% / 30% / 40% / etc?
I guess qualitatively you need a sizable enough balance to make a difference to invest if things drop 15%+ but not too big to miss out massively if the rally continues. I feel like a 15-25% cash balance is a good sweet spot but then again you're the expert here on WM
I doubt we get there by end of year, but ~46MM Americans owe student loans and assuming an average payment of $250-$300/month that’s going to take a lot of pressure off of services inflation.
Good list of drivers on both sides.
I think Deflationary Driver #1 (layoffs) is going to overwhelm the others.
First, because anecdotally I’m seeing a lot of overconfidence among my white-collar friends, including the unemployed and the ones who are on shaky ground. The unemployed feel very confident they will land the next gig soon. The unemployed-but-shaky group (ie people who I know to not be top performers and/or their industry has been hit) is very confident that they will find work at similar pay if laid off.
All that overconfidence has me thinking that people are not yet altering their spending habits, and eventually will.
The other factor to me is the *co-dependency* of jobs. Like, how many jobs exist because there’s an illusion of demand from other jobs that maybe shouldn’t exist. Like if you’re a sales exec for an essential SaaS company and most of your clients are all VC-backed companies of questionable need . . your SaaS product will continue to exist but your job won’t, because your clients will be gone. That sort of thing always exists but it feels more prominent today . . like we have layers upon layers of co-dependency that can unwind.
So yeah I’ll take the under on inflation.
How is dual sourcing inflationary? Shouldn't the competition help on pricing? Or are you assuming that prices are higher since there are fewer efficiencies compared to single-sourcing and the alternates are costlier?
Claimed inflation, sure. Real inflation, get the fuck out of here.
Labor report today suggests inflation might continue through the next couple of months. Interest rate increase is very likely next meeting, if not the next two. If you want a more surefire answer, calculate the spread between 1 year treasury bonds and 1 year TIPS. That spread will tell you what the market anticipates inflation to be.
Really don't think so. Coming from the perspective that the current interest rate is just extremely unsustainable for the government simply bc the country can't keep issuing debt at this rate. I'm thinking that by the end of this year, or before 2Q24 to be safe, rates have to go down, and the effects of that likely won't help inflation. Jus a kid in school pls tell me if I'm wrong..
Cleveland Fed has an Inflation "NowCasting" which is a daily updated predictor of inflation for the next two months, they have actually been off by an average of over predicting by +0.2 % the past several months, but still a great data point to estimate. Next week, they have a reading estimate of 3.2% CPI and the following month staying at around that. So I think 3.0% by year end is pretty reasonable but getting from 3.0% to 2.0% without breaking the economy is where markets are having trouble balancing.
Well if the Fed can accept 3% is the new normal that wouldn't be so bad. I think 2% is too low a figure to anchor to in a de-globalizing world
Inflation needs to be 10%+ for at least a decade. High inflation drives investment into long term fixed assets, which we absolutely need in a deglobalizing world.
What's their models accuracy going back to 1960? A few months is too small a sample size imo
It is crazy to see how many people on this website don't understand basic economics even though they work in "Finance".Regardless, inflation will continue to ease in YoY terms due to a high base effect. Effective inflation is still very high.Look at core inflation, even though oil prices have come down, core inflation is still steady at over 5%. That is a worry for the Fed and other central banks around the world.Having said that, I do think that a mild recession is possible but not likely. The growth has and will continue to slow but in my opinion we might not see a technical recession.Inflation will only ease to Fed's target of around 2 % by late 2024 or early 2025.Hope that helps.
Core inflation last print was 5.5%...so we need rates to get to 5.75% at least to start breaking the back and then there's the lag effect of course so fair to say it'll take time. I'm not hanging my hat on 2% even by 2024-2025, that's why I said 2.5-3% or so would be totally fine LT. In a world of multi-polarization and low blue collar immigration, 2% feels too ambitious. I hope the Fed isn't putting their heads in the sand and anchoring to a figure that may not be possible long run. Think 3% terminal rates are reasonable though of course I'd love 2%
Incredible, we’re at 3% inflation already — https://www.wsj.com/articles/consumer-price-index-report-june-inflation…
Stunning print honestly, if next month's ends up being range-bound then it's a huge W for the rally
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