The big story in the markets this week was about how hard it is to complete the “last mile” of disinflation. Monthly CPI was 3.2% in February and we just got the March number: 3.5%. We’re going the wrong way.

You’ve probably read a lot about how auto insurance (up 20%+) was a large contributor to CPI this month or how health care costs and shelter continue to demonstrate “stickiness” of high prices. There was also an upside surprise this month in the apparel category, although no one thinks that’s likely to persist.

If you’d like to get really granular, enjoy this chart from CNBC.com:

The key takeaway for me is that the economy is too good to expect a rapid cooling off anytime soon. The faster disinflationary fall we’d been enjoying since the middle of 2023 has now trampolined on us and the data is coming in warmer and warmer. When people are working, people are spending. Almost everyone is working. That’s it. It doesn’t have to be more complicated than that.

You can engage in the mental gymnastics of pulling out this or that measure (CORE! No, SUPER-CORE!) if you’d like, but the headline numbers actually do a better job of capturing the national mood. People do not like this and they’re going to hate it even more so long as it doesn’t wind down.

They don’t want to hear about how much interest they’re earning or be reminded of the fact that their wages have gone up. They want the price rises to stop. They probably also would prefer a price rollback, though of course that is highly unlikely to happen.

My friend Callie Cox reminded me of this yesterday when she said something to the effect of “These are the lowest prices you’re ever going to see - in the future you’ll be begging for today’s prices to come back.”

It reminded me of this classic Homer Simpson meme:

Anyway, this process is messy. We should consider ourselves fortunate that headline inflation has fallen from 9% to nearly 3% without the need for some sort of cataclysmic event happening in the economy or the labor market. Both are still strong. There was a moment in 2022 where it seemed like a foregone conclusion that the only way out of the sort of systemic, spiraling inflation we were facing was a recession. Even Federal Reserve Chair Jay Powell had seemingly resigned himself to this inevitability. Despite the Fed’s best efforts to slam on the brakes, we skirted an economic recession and continued to add hundreds of thousands of jobs each month. Almost no one thought we could disinflate and job-create at the same time. And yet…

So did our luck run out at 3% CPI? Is that the floor now, below which we cannot get so long as unemployment has a 4-handle? Do we need to entertain the idea of even tighter financial conditions to get from the 3’s to the 2’s on inflation rate?

This is the new conversation we’re going to have on Wall Street and it will not be a pleasant one.

Callie and Dion Rabouin joined us for an all new episode of The Compound and Friends this week. The inflation conversation here is an important one, even if we did have a lot of fun in the process. You can listen to it here or watch it below.

Oil and Gold

Adding to the angst surrounding the latest CPI report is all the geopolitical stuff happening around the world. Especially the Iran vs Israel talk. Oil stocks have been rallying hard for the last four weeks and with good reason. An oil price spike would be the trigger for a true inflation panic in the stock market. Energy might be the only sector people want to buy in this scenario. It certainly feels as though lots of players are positioning for this.

The only thing that’s down on this chart since March 1st is the S&P 500, which had just gone negative for the period. The S&P 500 Energy Sector SPDR (XLE) has done great. So has the IEO (US energy producers and refiners) as well as gold (GLD) and the dollar (UUP). These are your stock market-traded hedges for instability and inflationary commodity price spikes. They’re all higher.

You Don’t Know What Is Going To Happen

One of the key ideas we share with clients during times like these, when the threat of war is in the wind, is that it rarely pays off to make portfolio changes in reaction to this sort of thing.

The first thing to remember is that you don’t know what’s going to happen. Another thing to keep in mind is that the more you read about a brewing crisis, the more your mind goes to worst-case scenarios. You can become obsessed with every detail and keep refreshing the Twitter timeline because you think the information will protect you and bring additional security, but it will not. Lastly, there is the problem of being right about your own prediction but wrong about the reaction in the stock and bond markets.

My colleague Ben Carlson did a piece for Bloomberg View a few years back demonstrating how inconsistently the markets have reacted to major geopolitical events. In many cases, the context during which these events occurred ended up being a more powerful force than the reaction to the events themselves.

For example, stocks fell 15% within two weeks after the 9/11 attacks in New York and Washington. But within a few months we had already recovered those losses. Why? Probably because by the time 9/11 had happened, we were already knee-deep in a recession and a brutal bear market with stocks already more than 20% off their old highs. The Dow Jones only lost 1% and remained surprisingly calm during the 13 day period of the Cuban Missile Crisis in October, 1962. The following year, stocks traded higher by 4.5% the day after John F. Kennedy was assassinated in Dallas.

So, yes, like you, I am watching the Hezbollah rocket attacks on Israel’s Iron Dome defense system and Israel’s retaliatory jet strikes in southern Lebanon and thinking the same thing you’re thinking: This could get bad. Iran wouldn’t hesitate to do something more aggressive. This is one of those cases where we should probably believe the rhetoric. Other neighboring countries may also feel emboldened. Israel might use any provocation as an opportunity to degrade Iran’s nuclear efforts. The US might allow them to. Ships are moving toward the region. It’s unsettling.

But again, repeat these three things to yourself:

1. You don’t know what’s going to happen.

2. You are more prone to imagine worst-case scenarios.

3. Even if you guess right, you still don’t know how the markets will react.

Is this somewhat unsatisfying? Would you prefer a take where I tell you how much of your stock portfolio you should liquidate and swing to cash? Would you prefer an options trading idea to hedge away all the uncertainty you’re feeling right now? Would you rather hear an oil price prediction or a big macro call or hear a military prediction about who is going to strike first and where?

Those might be more immediately satisfying, but they won’t help you. The thing I am telling you will. It’s not a great message to sell. Those other things above would sell like hotcakes because they appear to be solutions. I could sell those to people all day. $19.99 a month.

The three things I gave you to remember are not as sexy, but they are the truth. The way you know that what I am saying is true is by how utterly unsatisfying it is. The truth often appears that way. It’s frumpy. Annoyingly simple. We hate its frumpiness, especially when presented alongside more appealing alternatives.

The mirage is that there’s some sort of magical way out of this uncertainty if you’d only buy my alerts product or subscribe to my hedging service. The truth is there isn’t. If you want to opt for the mirage and instantly feel better, I would understand.

Many will and suffer later.

California, California, here we coooommmmmmme

This week we announced our special guest for the live podcast taping and investor networking event we’re doing in Los Angeles on Tuesday, April 30th. We’re bringing out Matt Belloni of The Ringer and Puck to talk about some of the most important storylines in the stock market, from Disney to Netflix, Apple to Amazon and everything in between. Matt’s podcast, The Town, has become wildly popular and with good reason. He talks to some of the most connected and powerful figures in Hollywood each week and relays what he’s hearing to you, the listener.

At the end of this month, Matt is coming to talk to us about what’s really going on. If you’re in the Los Angeles area, we want to see you there. Tickets are on sale today. It’s going to be a one-of-a-kind event for investors, traders, stock market enthusiasts, financial advisors, wealth management and anyone who has an interest in coming to meet us.

Learn more and get your tickets here:

The Compound and Friends Los Angeles Taping

Read up on Matt and why we’re so excited to have him on stage right here:

Okay that’s it from me today. I hope you have a great weekend. Talk soon! - Josh