Signal From Noise
- Inflation has risen to multi-decade levels and is one of the leading forces vexing equities in what has been the worst first half since 1970.
- The Federal Reserve severely underestimated inflation and set an Adjustable Inflation Targeting regime that allowed inflation to run hotter for longer than previous periods.
- There may be some relief as many of the COVID-era supply chain issues ease. But sticky parts of CPI are still persistently rising.
- While inflation can be problematic for many different types of assets, we believe stocks are one of the better places to put your money, even in the event of persistent inflation. We go through some names that we think will work if inflation continues its persistence.
"I like to compare the Fed's problem to the challenge of adjusting the shower in an old hotel, where there's a lag of 20 to 30 seconds between the time you turn the faucet and the time the water temperature changes. It's very hard to avoid scalding yourself or freezing yourself." - Larry Summers
This morning’s Core Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge, came in 0.2% lower than last month. However, it is still at levels not seen since Paul Volcker walked the halls of the Eccles Building in Washington DC. Mr. Volcker has been invoked lately as the Fed is dealing with inflation comparable to what Mr. Volcker saw during his tenure. He is best known for conquering inflation with massive rate hikes and taking the poison pill of a Fed-induced recession. During his tenure, the Fed Funds rate eclipsed the level (unthinkable today) of 20%. Construction workers used to send him 2x 4x’s with notes inscribed since his unpopular but ultimately successful policy devastated housing demand which hurt construction as well.
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