Inflationary Growth ‘Transitory’

Federal Reserve System Fed of USA chairman press conference concept. Tribune with symbol and flag of Fedreal Reserve. 3d illustration

Past performance is no guarantee of future results.  Trend signals are proprietary research of Fortunatus Investments, LLC, a Registered Investment Advisor with the Securities and Exchange Commission (SEC). Reference to registration does not imply any particular level of qualification or skill.  Prior to June 2014, Fortunatus Investments was a wholly owned subsidiary of Executive Wealth Management, LLC and they continue to share common ownership and control. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation.  One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.

Quote of the Week

Binance traders around the world have been trying to get their money back. But unlike a more traditional investment platform, Binance is largely unregulated and has no headquarters, making it difficult, the traders say, to figure out whom to petition.

Excerpt from a Wall Street Journal article about problems with trading on Binance – a popular, decentralized cryptocurrency exchange. During the recent decline in the price of the world’s most popular cryptocurrency, Bitcoin, several traders were unable to exit highly leveraged positions and subsequently lost all of their initial investment when Binance’s trading platform crashed during the market volatility.  Afterwards, the users were unable to speak to the manager about the poor service because there is no manager.

Market News

Transitory. That was the word most often used to describe the Chairman of the Federal Reserve Jerome Powell’s view on the inflationary growth facing the U.S. economy.  He reiterated his idea that the recent pricing pressures are temporary during his testimony before Congress last week. His appearance came after the release of the June 2021 reading of the market’s most popular inflation gauge, the Consumer Price Index (CPI), indicated that prices increased 5.4% year-over-year last month, the largest gain since August 2008. This is well above the central bank’s stated target of 2% annual inflation. Other data reports compounded the inflationary concerns, like the University of Michigan Consumer Sentiment Index, which unexpectedly fell to 80.8 in July from 85.5 the prior month (see the chart below). The report’s authors noted that consumers’ complaints about rising prices had reached the highest level in the index’s history.

Does all this mean that Chairman Powell’s opinion is invalid? Not necessarily, there are several ways that the most recent inflation data may have been inflated. The 5.4% headline CPI number includes the volatile food and energy sectors in its basket of goods, which can distort price changes. The Core CPI, which excludes those sectors, is more useful for spotting trends, and its value was 4.5% last month. Now, anybody that has had to deal with paying for gas or groceries may wonder why these items should be removed from any inflation measure, but their extreme fluctuations can distort trends. The chart below comparing the Core CPI versus the CPI Energy Index over the last 20 years demonstrates the difference. The Core CPI averaged a 2% year-over-year gain, while the Energy Index averaged a slightly larger 3% year-over-year gain but with over 25 times the volatility of the Core CPI.

Now, the 4.5% reading for the Core CPI last month was still very high, but many of its main contributors do look transitory. Price increases for used cars and trucks accounted for more than one-third of the overall CPI increase. This is due largely to a Covid-induced microchip shortage that curtails supply alongside booming, pent-up demand for vehicles; and it is likely to dissipate over time. Other lockdown-related contributors to the inflationary data point include lodging costs, airline fares, and concert and movie tickets. All of these costs should slow down as the economy continues to open up. Also, the latest year-over-year inflation numbers are still influenced by the “base effect”, where an abnormally depressed starting point during the Covid-lockdowns in 2020 artificially increases the numbers in 2021.

Obviously, no one knows for certain the future path of inflation, even the Chairman of the Federal Reserve.  However, as inflationary concerns continue to trouble consumers and investors, it is important to understand why the country’s top banker thinks that, as of now, the problem will not persist.

Model Update

There were no trades in the Fortunatus models during the week ending on July 17th, 2021.  The major equity market sectors remain in a long-term favorable trend, and the Fortunatus Asset Allocation models are near their maximum allowable equity exposure with domestic stocks favored over international shares.

On a Lighter Note

Nowadays, it seems that every conversation in the media is peppered with salty language. While many grow weary of listening to sweary speeches, there are still times when creators need their characters to express their anger with a few choice words. But how does one write a profanity without all the vulgarity? With a grawlix, of course.

Named by the creator of the Beetle Bailey comic strip Mort Walker, a grawlix is a string of typographical characters (like the ones in the picture to the left)  used in place of an obscenity. An ampersand (@) has traditionally been the first character in the string because it is notoriously the angriest symbol in all of printing. Walker found great use for the grawlix while writing the dialogue of Beetle Bailey’s superior officer Sergeant Snorkel, as he was constantly frustrated with Bailey’s layabout ways. Now, Walker could have a character curse a blue streak, but still keep his comic strip discreet. The popularity of the grawlix grew, and soon the Sunday funny pages would swear by nothing else.

Eventually, the grawlix was seen as such a powerful way to make a point that several creatures would make it their only means of communicating with the outside world, like 1980s arcade hero Q*bert:

Executive Wealth Management (EWM) is a Registered Investment Advisor with the Securities and Exchange Commission. Reference to registration does not imply any particular level of qualification or skill. Investment Advisor Representatives of Executive Wealth Management, LLC offer Investment Advice and Financial Planning Services to customers located within the United States. Brokerage products and services offered through Private Client Services Member FINRA/SIPC. Private Client Services and Executive Wealth Management are unaffiliated entities.  EWM does not offer tax or legal advice. Please do not transmit orders or instructions regarding your accounts by email.  For your protection, EWM does not accept nor act on such instructions. Please speak directly with your representative if you need to give instructions related to your account. If there have been any changes to your personal or financial situation, please contact your Private Wealth Advisor. 

Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.

1 Week = closing price on July 9, 2021 to closing price on July 16, 2021

 1 Month = closing price on June 16, 2021 to closing price on July 16, 2021

 3 Month = closing price on April 16, 2021 to closing price on July 16, 2021

 YTD = closing price on December 31, 2020 to closing price on July 16, 2021

All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and opinions as well as any prices indicated are current only as of the date of this report, and are subject to change without notice. Material provided is for information purposes only and should not be used or construed as an offer to sell, or solicitation of an offer to buy nor recommend any security. Any commentaries, articles of other opinions herein are intended to be general in nature and for current interest. Some of the material may be supplied by companies not affiliated with EWM and is not guaranteed for accuracy, timeliness, completeness or usefulness and EWM is not liable or responsible for any content advertising products or services.

Copyright © 2021 Executive Wealth Management. All rights reserved.

Check the background of this firm on FINRA’s BrokerCheck.