Hot Air Balloons
Discover more from Grit Capital
Hot Air Balloons
Further Dissecting the CPI Print + Recent Data
Hi Everyone! đ
Welcome to the new subscribers who have climbed aboard the GRIT rocket ship this week. If you're reading this but haven't subscribed, join our community of over 246k smart, fun & edgy, investors đ
*This is sponsored advertising content and the disclaimer at the bottom of this email MUST be read carefully.
Everyone is looking up.
Whether itâs spy balloons, CPI prints, retail sales, or ARKK 0.00%â YTD performance, the start of 2023 looks like it has shiny object syndrome.
While the market continues to do whatever proves the most people wrong, we have more and more calls that âthis rally is too extendedâ, âhigher for longer (both CPI and rates)â, and, âOh look! meme stocks are on a run again, we know how that ends!â
The oracle du jour, Mike Wilson is back at it again with a lengthy piece on how earnings are going to continue to suck big time and the market is way over its skis.
But the path of least resistance still remains to beâŚupâŚ
As economists tinker with their airplane runway analogies from soft landing to hard landing to no landing, letâs look at one of the most important tea leaves in a little more depth now that weâve had more time to digest the figuresâŚ
CPI.
This week, in <5 minutes, weâll cover the CPI print this week:
Going into the Print đ Expectations, Relevant FOMC Comments
Change in Methodology đ OER + Calendar Year Expenditure
By The Numbers đ Breaking it Down
Supplemental Data đ Retail Sales, PPI, NFIB
Letâs get started!
1. Going into the Print đ Expectations, Relevant FOMC Comments
The CPI print has been operating in tandem with the FOMC meetings to be the largest market-moving event. As we know, the two are closely correlated as elevated inflation means more hawkish comments from Powell in order to put a lid on inflation.
However, last week, we had Powell say the word âdisinflationâ 15 times during the FOMC presser. This sent risk assets into party-on mode as many are looking through to a pause in the rapid rate-hiking cycle.
It seemed like deja vu as meme stocks were back on and WallStreetBets somehow became relevant again.
Heading into the print, many were thinking about the mental gymnastics of breaking down the underlying components. Whatâs becoming difficult here is trying to perform a balancing act of what is a leading, coincident, and lagging indicator.
What people are trying to get to the bottom of here is the amount of time it takes for interest rate hikes to ripple through to the real economy.
Some are arguing that the timing impact on traditional lagging indicators like housing is changing. It used to be that prices would have a 12-18 month lag as a less liquid asset was much slower to reflect real changes in prices. For various reasons - people are hesitant to uproot their lives to move, those with fixed rates are locked in and less likely to go back to the market, and the transaction costs are high.
However, there are several net differences this time around: the impact of technology (pricing transparency), lowering transaction costs, and differentiated buyer pool (REITs, Investors, iBuyers, etc..). This may shorten the time that it takes for an increase in rates to reach the housing market.
The free flow of information also changes expectations. Remember back in Econ 101 whenever you drew one of those supply and demand charts, the inflation curve always had an âeâ next to it? This is because inflation expectations largely form consumer behaviour and become self-fulfilling.
If you expect inflation to rise, you will demand more salary from work, which will allow you to pay these higher prices. As more people have more disposable income, the prices of goods will rise. Self-fulfilling.
When everyone jumps on Twitter, all you can see is the rising price of eggs, or the rising price of groceries, or the rising price of every.
Information is now immediately distributed and disseminated. Iâm not saying we have perfect information symmetry, just that these effects are being digested and adjusted to in a much faster translation method than before. Since consumer behaviour drives a lot of these macro trends, this is important to remember.
Before we get to the print, itâs important to note that there was a change in the reporting method that took place.
*This is sponsored advertising content and the disclaimer at the bottom of this email MUST be read carefully.
2. Change in Methodology đ OER + Calendar Year Expenditure
Beginning with January 2023 data, adjusted the weighting method for Ownerâs Equivalent Rent (OER) in the CPI.
The new method will use neighborhood-level information on housing structure types to weigh OERâs unit sample observations. BLS will continue to sample and weigh housing units to be geographically representative.Â
In some neighborhoods, detached houses are underrepresented in survey responses, so additional unit weight will be given to them in the OER index sample.Â
For an in-depth review of the methodology, the BLS released âLocation, Location, Structure Type: Rent Divergence within Neighborhoods.â
TLDR; OER will now account for more than a quarter of the total calculation, while housing overall will account for more than 44 percent. Used car prices have been lowered in importance after a year in which wholesale and retail used car prices fell out of sync with each other.
This is why Iâm stressing the importance of the housing market lag on the figure.
Also starting with January 2023 data, the BLS plans to update weights annually for the Consumer Price Index based on a single calendar year of data, using consumer expenditure data from 2021. This reflects a change from the prior practice of updating weights biennially using two years of expenditure data.
Without further ado, letâs get to the printâŚ
3. By The Numbers đ Breaking it Down
Vehicles
Used vehicles as a portion of CPI continues its MoM decline, now down 11.6% YoY. This is contradictory to the figures that weâre seeing when we look at the Manheim Indexâs uptick at the beginning of the year:
An interesting difference is the gap between new vs. used cars. Used cars are much more a function of disposable income whereas new cars have more to it. New cars are typically financed and these rates are largely pegged to the rest of the interest rate market. With rising rates, the average monthly payment for a new car has soared to $777, which is a new record and nearly a double from late 2019.
Food
When it comes to the grocery store bill - inflation is still looking quite sticky here, up another 0.5% MoM, bringing the YoY increase to 10.1%. This is one of the most core components of inflation that affect consumers daily, eroding their purchasing power.
Who cares about used car prices when you canât afford eggs?
Shelter
Shelted added another 0.7% increase MoM, bringing the YoY figure to 7.9%. Remember - people are still trying to figure out the lagged impact of this. I found this chart to be extremely interesting. Check out the lagged impacts:
Rents have turned a corner in the market, but not in CPI.
Energy
The volatile energy components continue to beâŚvolatile. Utility gas services were up 6.7% MoM, and 26.7% YoY while fuel oil decreased 1.2% MoM, now only up 27.7% YoY. A lot of volatility remains as we continue to have politicization of critical energy infrastructure, but it is good to see some months where energy costs stabilize, as fuel costs generally pass on through the entire goods market.
4. Supplemental Data đ Retail Sales, PPI, NFIB
We also have had a whole bunch of economic data come out over the last little while. Hereâs a recapâŚ
Retail sales
Janâs nominal retail sales were much stronger than expected as the headline reading rose +3.0% MoM. Retail sales ex motor vehicle rose +2.3%. The headline retail sales tally is up +6.4% YoY in Jan.
However, we need to account for inflation. I went on FOX to talk about it:
PPI
The January PPI data was firmer than expected, with the headline rising 0.7% and the core index (ex. food and energy) up 0.5%. While year-ago inflation rates for these aggregates moderated between December and January, the seasonally adjusted monthly changes reported for January were the firmest since about the middle of last year.
NFIB
Wrapping UpâŚ
The economy remains a very elusive puzzle. There are many indicators out there that tell very different stories. Strong retail figures - strong labour numbers are flying in the face of recession.
While company earnings, inverted yield curves, and a âhigher for longerâ Fed point towards the increased probabilities of recession.
In this tug of war, itâs important to be more active in security selection, be more patient with your long-term ideas, and add to any high-conviction stocks in pullbacks.
Buckle up.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S. Have you checked our ALTS and CRYPTO newsletters? Subscribe for free!
What else we Grittinâ On?
INVENTORIES. Inventory gluts could push inflation higher. US storage prices are up ~11% YoY.
HOMEBUILDERS. Homebuilder sentiment jumped by the most in a decade. Slightly lower mortgage rates are sparking demand.
FATIGUE. Survey fatigue is threatening to undermine US economic data. Survey response rates have been declining for years.
CEOs. Big bank CEOs are increasingly expecting a soft landing. Optimistic comments from BofA and Goldman Sachs executives.
BILLS. Twitter has 9 different lawsuits demanding payment for unpaid bills. The complaints total more than $14 million (plus interest).
Sources
https://www.bloomberg.com/news/features/2023-02-14/new-car-prices-are-so-high-only-rich-americans-can-afford-them?sref=1jcHkHmg
https://www.cnbc.com/2023/02/14/heres-the-breakdown-of-the-inflation-report-for-january-in-one-chart.html
Disclaimer: The publisher does not guarantee the accuracy or completeness of the information provided in this page. All statements and expressions herein are the sole opinion of the author or paid advertiser.
Grit Capital Corporation is a publisher of financial information, not an investment advisor. We do not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient. Â
THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF ANY COMPANY MAY TRADE AT ANY TIME. THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION. INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY DISCUSSED HEREIN BASED ON SUCH INVESTORSâ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN.
No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. Â
Any projections, market outlooks or estimates herein are forward looking statements and are inherently unreliable. They are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. The information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the publisher undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional material.
The publisher, its affiliates, and clients of the a publisher or its affiliates may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.
Neither the publisher nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.
By using the Site or any affiliated social media account, you are indicating your consent and agreement to this disclaimer and our terms of use. Unauthorized reproduction of this newsletter or its contents by photocopy, facsimile or any other means is illegal and punishable by law.
For Full Terms of Use Click HERE. For the Privacy Policy Click HERE.
Gritcapital.substack.com (âGritâ) is a website owned and operated by Substack. Grit is paid fees by the companies that make investment offerings on this website. Be aware that payment of these fees may put Grit in a conflict of interest with the investor. By accessing this website or any page thereof, you agree to be bound by the Terms of Use and Privacy Policy, in effect at the time you access this website or any page thereof. The Terms of Use and Privacy Policy may be amended from time to time. Nothing on this website shall constitute an offer to sell, or a solicitation of an offer to buy or subscribe for, any securities to any person in any jurisdiction where such an offer or solicitation is against the law or to anyone to whom it is unlawful to make such offer or solicitation. Grit is not an underwriter, broker-dealer, Title III crowdfunding portal or a valuation service and does not engage in any activities requiring any such registration. Grit does not provide advice on investments or structure transactions. Offerings made under Regulation A under the U.S. Securities Act of 1933, as amended (the "Securities Act") are available to U.S. investors who are âaccredited investorsâ as defined by Rule 501 of Regulation D under the Securities Act well as non-accredited investors, who are subject to certain investment limitations as set forth in Regulation A under the Securities Act. In order to invest in Regulation A offerings, investors may be asked to fill out a certification and provide necessary documentation as proof of your income and/or net worth to verify that you are qualified to invest in offerings posted on this website. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Grit does not verify the adequacy, accuracy or completeness of any information. Neither Grit nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, valuations of securities or completeness of any information on this site or the use of information on this site. Neither Grit nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising from any error or incompleteness of fact, or lack of care in the preparation of, any of the materials posted on this website. Investing in securities, especially those issued by start-up companies, involves substantial risk. investors should be able to bear the loss of their entire investment and should make their own determination of whether or not to make any investment based on their own independent evaluation and analysis.