Chief Investment Strategist, The Freeport Society
Well, that’s that then.
Inflation is done.
Mission accomplished.
The Federal Reserve slew the dragon.
It’s nothing but smooth sailing ahead.
Ahem…
There’s nothing like sarcasm to drive a point home.
Consumer price inflation declined in April, dropping to 3.4% from 3.5%. Core inflation, which excludes food and energy, dropped to “only” 3.6%.
That was enough to get Wall Street excited… and reignite hope that the Fed will start cutting rates by the end of summer.
But don’t break out that Champagne yet.
For starters, core inflation – read your weekly grocery bill – is still stuck at 3.6% and isn’t trending lower.
Pick any way you want to measure inflation, and it’s going to tell you the same story. Inflation stopped falling late last year and has been grinding sideways ever since. Getting excited about a decline of a whopping tenth of percent is truly ridiculous.
A 3.6% core inflation rate is also nearly double the Fed’s stated target of 2%. It’s enough to lead to a doubling of prices every 20 years.
And yet…
Every major stock index is now hitting new all-time highs in the belief that this ever-so-modest decline in inflation will be just enough to convince Fed Chair Jerome Powell to cut rates in September instead of November or December.
This is a case of desperate investors so intent on seeing if they could that they don’t stop to think if they should!
I don’t see inflation trending lower while our government is running a budget deficit of over 6% of GDP and retiring Baby Boomers are creating a labor shortage.
The Fed would be wildly irresponsible to cut rates with inflation still running this hot. (But hey, when has responsibility ever been their thing?)
Still, that’s just the tip of the iceberg.
Let’s go more fundamental. If your investment strategy depends on guessing the precise date the Fed lowers interest rates by that all-important 0.25%, you’re doing it wrong.
That’s not a game you can win. You have no edge.
Even if you had Powell’s office bugged, I don’t know how useful it would be, because I don’t believe the man himself knows what he’s going to do next… or when he’s going to do it. It’s been obvious for two years now that he’s just making it up as he goes.
Instead, stick with investment themes that actually make sense and that have a longer runway: artificial intelligence, infrastructure, energy… I could list out half a dozen investment themes that will continue to run regardless of what the Fed does.
Let Wall Street do what it’s going to do – which, for now, means handicapping the Fed’s next move – while we focus on investing to ensure our financial security.
In short, stay the course and keep reading The Freeport Navigator.
Here’s what we discussed this week…
The Next Recession Is a Self-Fulfilling Doomsday Prophecy
America’s largest companies have rediscovered the virtue of thrift… and expectations were already so bad that beating them was a cakewalk! But their fear of recession could very well bring about what they fear. What’s going on here? Read here to find out.
The Destructive Power of the “Right” Man for the Job
It wasn’t that long ago that the sun never set on the British Empire… Every empire falls… eventually. It looks like the U.S. Empire’s time has come. Read on for the details.
Meme Stock Trading Tip of the Week
As utterly obnoxious as meme-stock culture is, with diamond-handed bros trading the “stonkmarket,” it’s fun to trade… if you do it right. Here’s what you need to know.
Looking Ahead
Buckle in because next week has the potential to be a wild ride. Nvidia (NVDA) – the most popular play on AI – reports quarterly earnings on Wednesday.
There’s a lot of bullish sentiment priced into Nvidia’s shares. At a price/earnings ratio of 79, the stock is priced for perfection. So, anything short of that – any indication that the AI arms race isn’t accelerating at quite the breakneck speed it was – could be bad news for Nvidia and for the broader market.
Long term, I’m wildly bullish on AI. We need AI to alleviate the worker shortage brought on by the retirement of the Baby Boomers. This intersects two of my favorite long-term investment themes in The Freeport Investor: Exponential Progress and the Rebuilding of the American Industrial Empire.
That said, there is a price at which even the best growth story no longer makes sense. So, I’ll be picking through Nvidia’s earnings release with a fine-tooth comb.
I also expect the usual dull roar from the Fed. We have at least eight scheduled speeches by Fed board members, and the minutes of the May meeting will be released.
So, in a market in which every wink and nod by a Fed board member seems to correspond to multiple hundred point moves in the Dow, I expect next week to be a wild ride.
To life, liberty, and the pursuit of wealth.