Someone had recently asked me:

It is that time of the year, summer is coming to an end, the bonfire pits are raging, the margarita mix is flowing and all of the uncles have gathered around discussing geopolitics, fiscal policy, and the name and preferences of your future wife and kids all during the same plate of Baskin Robbins ice cream cake. There you are minding your own business pushing away the diabetes that is the icing in those cakes, and your uncle lobs one of these your way.. “What stock should I invest in?”

*puts fork down

Oh yeah sure thing I wasn’t eating cake or anything. This question should give any market participant rapid onset of anxiety, just because of the loaded nature of the question. Especially this year.. this year that question is like a powder keg waiting to go off. Answering on a whim would be a discount to the market as a whole. So let this be the inaugural edition to the newsletter and pseudo reply to the fam that asked and any new friends that join to read. Welcome to Powell’s world let’s begin..

The Anniversary

Writing this a week after this year’s Jackson Hole symposium and thus far we have not plunged under the moving averages nor seen bloody -3% days like we grew so accustomed to last year after the Wyoming retreat from Powell and the gang. Last year the S&P 500 fell more than 3% the day of Powell’s speech and crashed a staggering 13% a month after Jackson Hole, as stocks hit their lowest levels since 2020. I’d like to think this is a notable point as at this point last year we knew that he was bringing the pain and that we the consumers would bare the full force of the Fed’s monetary policy.

So far SPY (+3.45%) a week after the symposium and the market is showing signs of resilience. Safe to say that so far he hasn’t brought any more pain than quite honestly he’s already projected into the markets. For months he has not changed his wording in his FOMC speeches, only to slightly adjust to account for any black swan events (banking crisis in march), and/or credit ratings that we recently encountered. Even then we can say that Powell was pretty calm in his speech this year and by the looks of it.. the bulls ran with it.

Key Data from the Fed

• Headline PCE inflation peaked at 7% in June 2022 and declined to 3.3% as of July.

  • *A note on this from me: If you didn’t know since 2000, the Fed has used PCE to target inflation instead of CPI because it provides a broader coverage of the economy, and is a more accurate representation of “real time” data.

• Core PCE peaked at 5.4% in Feb 2022, and declined gradually to 4.3% in July.

  • *Another note on this from me: Headline inflation accounts for every good or service included in the index; core inflation is ex food and energy prices due to the very volatile nature and global factors that come into play.

• The Fed Chair also alluded that although two months of good data is very welcoming they cannot base policy decisions based off just that, “two months of good data”

Understanding the “long way” ahead

Goods Inflation

Core goods inflation fell sharply over the first half of this year as supply demand dislocations have eased particularly for durable goods. As the Fed chair noted in his speech which I will summarize: the pandemic caused habits to change, ways of living to change and demand side shocks that led to supply side constrains popping up left and right. Think back to last year when we had a shortage of cars, used car prices were up dramatically and there were no new cars being bought due to the supply related issues in the semiconductor industry. As the pandemic and it’s related effects have now since worn away; production and inventories have grown and supply chains globally have improved. At the same time higher interest rates have weighed heavy on that demand. Interest rates on auto loans have nearly doubled since last year, the consumer is starting to sweat..

We the consumer bare the front of all fiscal and monetary changes so we should be able to reflect on goods inflation very closely as it affects direct habits and everyday shopping decisions. Let’s take a temperature check shall we? How’s the grocery store been recently? Everything still $5? Check. Alright moving on..

Core goods prices fell the past two months - but on a twelve month basis core goods inflation remains well above it’s pre pandemic levels. Soooo things are still more expensive than they used to be, the retailers know it, the consumer knows it, is anyone going to do anything about it? Hope someone does.. tick tock..

We are spending money like we have a new stimmy on the way in a week but prices for all things on a relative basis are still higher than they were before Covid and even though we can all see it.. they’re getting away with charging it. With average savings dropping that fast and student loan debt restarting in October, the consumer is about to finally feel what I think is what the Fed was saying the entire year which was that “we have yet to see the full effect of monetary tightening as it usually lags” - paraphrasing here but you get the point. Hopefully we see the full effects of QT taking its’ full course otherwise some of these Acai bowls down by the water in La Jolla Shores are going to start hitting the $30 price point and no amount of good vibes are gonna keep that going.

Services Inflation

Non housing services accounts for over half of the PCE index and includes a broad range of services which include, healthcare, food services, transportation and accommodations. Services inflation is something that I believe is being very stubborn and something that Powell was not really expecting especially in the face of 300 basis points of interest rate hikes. That was Powell’s flat serve his most powerful tool in the toolbox and we batted that shit back like we were Carlos Alcaraz in the Grand Slam final.

We’ve seen the CPI print and every time the folks on CNBC talk about how services inflation is being sticky and how this time its different. Folks on Bloomberg radio start talking about higher for longer and the soft landing narrative goes away, of course shortly after the initial pop from the release of the data. I mean hey someone has to pay the 0tde gamblers..

I’m starting to think that this soft landing scenario is out of play and that there will be some sort of landing just not soft. This area of the inflation print has been less sensitive to interest rates + less affected by supply chains. Combine that with the excess money that we HAD; consumers have been getting out and about and are craving experiences. Literally we just seem to want to do something… anything.

Some say the proof is in the pudding and well… introducing the Snack Pack of “experience” stocks:

The Target

Last year was the Fed’s playbook was to watch and then act and this year the policy seems to have changed to do a lot upfront and then gauge the effects of it as most of their tools come with a lagging timeline. Yet most if not every member of the Fed resumes to their commonly shared line: “Restrictive monetary policy over time”. All things considered we should take this at face value and say that this points to the higher for longer narrative that the market is trying to price in estimates but is struggling to find a price point to settle on.

Well this is awkward… BUSINESS IS BOOMIN - Shoutout to AB

This seems like a game that Powell set himself up for, he and his members of the Fed board printed trillions and gave it to us in the form of fiscal stimulus and then fast forward 2-3 years when the economy is ripping and GDP is printing like this, of course the consumer is going to be strong you did to us what Michael did to the Tune Squad with the “Michael’s Secret Stuff”.

The Fed seems to have turned cautious in first half of this year following their transitory debacle that got us in this mess. They keep reiterating that it will be a challenge to know in real time when such a stance has been achieved (referring to the 2% inflation target).

How can we trust the Federal Reserve after they were incapable of deeming inflation a real issue and deemed it transitory for months? What caused tech stocks to plummet and valuations to reset if not that? Troughs were created on so many charts due to the uncertainty that the Fed put into the markets. How can you price in forward earnings, or estimate growth rate for a company for 1y, 5y and even 10 year timelines when we were essentially flying blind? Seems like this “over time” phrase they use is just a catch all net to save their behinds and so the higher for longer narrative makes even more sense to me and it should to you as well. But we should never be complacent. Why was the inflation target set at 2% anyways? Is 1 too low? 3 too high? 2 sounds just right doesn’t it?

Complacency with the 2% target

Why 2%? Have you ever wondered? To me it seems like 1% is just not enough inflation for their to be money made on any side. Remember always follow the money regardless of the noise. Inflation high or low, someone somewhere wants to make money off you. 1% sounds like not enough, 3% sounds like inflation is running rampant implying no one is doing enough about it - so does 2 just sound right? We cannot be complacent and I think we have to be proactive in gauging the probability of that inflation target being adjusted. Everything we lived through this year has been historic, why not keep the theme going right? This is starting to sound toppy… someone remind me about this article in 6 months.

Mohamed El-Erian says that “We came from a world where it was all about the demand, and what did they do? QE, 0 rates, fiscal expansion. Now we are in a world where it is all about the supply side”. I want you to think about this, for some reason it really stuck with me. I’m thinking supply chain onshoring, AI chip exports that are being curtailed to not let other adversarial countries get ahead, and the strong labor market that is not budging. Keep note on if papa Powell keeps his 2% commentary in the limelight or if he backs off it. Keep an eye on him..

Outlook and Uncertainties Ahead

Let’s face it, whether you’ve been bullish or bearish, this has been a hard market to try and time. It’s been a tough market unless you bought every dip and stayed long. The old adage hits home when I’m writing this as we are entering a historically and seasonally bearish month. This became a stock pickers market, because as things got dislocated it presented opportunities on the long and short side. For the first time in a while you had companies that were exposed to an environment in which they have to manage their business knowing that debt is no longer free and that borrowing from the bank is not going to be as easy as it once was.

So to the people asking what stocks to buy? All of them, and none of them. Keep paying yourself first, 10% of every $ you earn goes a long way. Keep DCA’ing into your positions and adding high quality companies that you know and use everyday into your Lootbag. You’ll be fine, and if not come check back here from time to time and maybe you’ll learn a thing or two!

What I read/watched this week?

• Our Favorite Monthly Charts | The Morning Show - StockMarketTV

• The 60/40 Portfolio is Alive & Well | A Wealth of Common Sense - Ben Carlson

• Grayscale Decision & Bitcoin | ITK with Cathie Wood