To The Moon

The latest US CPI data (14 Nov 2023)

The latest MoM inflation is almost zero. Considering shelter which is a lagging indicator, could we be in deflationary mode?

A disinflationary outcome is possible with the Fed hinting at cutting interest rates in 2024. However, here are my considerations:

Strikes and wage increases

With the various strikes resolved through pay increases, the inflation will be passed on. this has spread from Hollywood to healthcare, auto workers, and teachers. will more follow? Port workers have already signalled strikes by Oct 2024.

Minimum wage

California's minimum wage will be $20/hr from 1 Apr (from the current $15.50/hr) This is also inflationary. Following Governor Gavin Newsom’s decision — after some complicated political wrangling between Newsom and a furious fast-food lobby — to impose a $20 hourly minimum wage on the fast-food industry, Chipotle and McDonald’s announced on Q3 earnings calls yesterday that they’ll be raising menu prices in the state.

Home Insurance

For some states, the costs of home insurance have surged: “I’ve seen policies for high-value homes rise 600% or more,” said Robb Lanham of HUB Private Client, which provides home insurance, umbrella policies and other insurance products to high net worth homeowners. Lanham cited one homeowner whose premium went from $12,000 to $72,000 on his south Florida home. But it’s not just states like Florida, California and Louisiana that are experiencing rising insurance rates.

According to a report from HUB Private Client, property insurance rates are likely to rise 25% to 35% across the board in the next year. Additionally, homeowners might see more exclusions in their policies and fewer insurers willing to offer full coverage for high-value homes. Climate extremes have led to a surge in insurance premiums, leading to an increase in the cost of living.

My muse

Inflation hits differently for people in different income brackets and geography. when people need to take to the street to ask for pay adjustment, it may have a cascading impact. 1 industry following another. For me, I am waiting for inflation to visit us again. UAW asked for a 68% pay increase, working hours from 40 to 32 per week, and retirement benefits - though they will not get everything they ask for, they will get some. The additional costs will be passed on to consumers - if there is still demand with the price increase.

A contrary Market trend

S&P500 1 year chart dated 15 Nov 2023

Having said so, the market is on an uptrend, about the halfway mark before confirming a bull run (20% up from its recent S&P500 low of 4100++.). In the technical setup, a 1D death cross awaits for the S&P500, a typically bearish indicator.

Thus, I am expecting inflation to go up again. According to the Fed, 2% is their healthy target. the current 4% is not yet acceptable. Some businesses tag their annual pay adjustment to inflation as a baseline.

Recent news about CRE and debts

Yahoo Finance news article

Fortune article - Morgan Stanley warns about CRE

Watcher Guru article where Ray Dalio raised his concerns about Fiscal debt

This is extracted from a recent news article with Elon Musk raising his concerns:

On economic uncertainty and consumer sentiment:"I think there’s still quite a few shoes to drop on the bad credit situation. Commercial real estate, obviously, is in terrible shape. You know, credit card interest rates are usurious with over 20% interest rates, which, over time becomes extremely punishing."

Some of the leading investors and banks have raised similar concerns like CRE, banking, and debts.

Conclusion

With higher inflation, we can expect a higher interest rate. When the interest rate is high, people may feel safer going to bonds instead of high-growth stocks. When the interest rate is low, people can afford to take on more risks. I think that the days of cheap credit are behind us and thus, people would expect higher returns in lieu of the current interest rates. Things may not be so straightforward coming to the inflation as there are reasons why inflation can get stronger.

My considerations do not mean that inflation MUST go higher. My considerations serve as reminders that the war with inflation is not over. It is wise to be prudent during this time.

@TigerStars

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