My investing muse (04 Sep 2023) - caution in inflation
My investing muse
The week ended with a drop in CB Consumer Confidence, JOLTs Job Openings, ADP Nonfarm employment change and an increase in unemployment from 3.5% to 3.8%. Manufacturing PMI continues to point to a contractual in domestic manufacturing in the USA.
It is not all bad news as we received a breather in bigger bigger-than-expected drawdown in crude oil inventories (that implies an increase in production).
The market seems sandwiched between good and not-so-good news with the market largely hopeful for a sooner Fed pivot (where interest rates should be cut). The Fed does not think like the market and needs to do its bit to balance employment and inflation with its main tool of interest rate. The jobs, unemployment and inflation data would guide them in their decisions. The latest PCE (YoY) reaches an expected 4.2%. It can be within the expectation but it is also a gain from last month’s 4.1%. This implies that the inflation has remained stubborn despite the recent efforts. It takes time for the interest rate impact to flow into the market. The Fed does not need to overreact but to be slow to react can be equally dangerous.
The US and many parts of the developed world are facing a “Cost of living crisis”. This forced changes in expenditure, credit card leverage and more. So long as their household incomes are unable to catch up with their expenditure, this could lead to a cycle of debts with family turning to credit for their living needs.
Conclusion
From 2020 to 2023, we have an accumulated inflation of 18% as per the inflation calculator above from the Federal Reserve Bank of Minneapolis.
There will be a mix of good and bad news from the market. Despite the GDP (QoQ) has dropped from an initial (first) estimate of 2.4% to 2.1%, this remains a strong indicator of the economy. There is still money to be made from the market. However, there are also signs of weaknesses that should lead us to consider hedging.
Let us continue to exercise caution as we reach the end of the earnings season. While there are exciting developments in AI and in companies like Tesla, there are also cautionary signs of unemployment and inflation. Let us make sure that we have some powder that can be handy should the market turn for the worse.
@TigerStars
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It seems to me, inflation should go down with more people gainfully employed. Of course, if the increase in employed is government jobs, then inflation must rise.
Actually since the GFC and with ted govt still spending $5 billion a day more than they take in via revenues.
On Aug 23 (Reuters) - The interest rate on the most popular U.S. home loan last week shot to the highest since December 2000, helping drive mortgage applications to a 28-year low, a survey showed on Wednesday.
Firms will invest in AI to further increase productivity and reduce hiring. What is the impact on inflation?
If people become unemployed, then welfare expenses go up, so I would expect inflation to rise.
great read, very insightful.
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