WC-11/07: Look Out for 11/10, We Wrote Too Much on Inflation
The inflation report on 11/10 will likely move the market. Otherwise, we mostly went on a rant regarding inflation.
Watchlist
We’re giving out watchlist a break this week. Stay tuned for something completely different next week though. We’re thinking about giving you our short-term trades/plays … but we’ll see.
Catalyst Calendar
11/09 - MoM Producer Price Index (PPI) Report
(9:30am) This is an inflation indicator -- if this is too high (>1.0%), the market will very likely sell off.
The Producer Price Index (PPI) measures a change in input prices of raw, semi-finished or finished goods and services. If input costs rise, some will be absorbed by the producer and some passed on to the consumer. Conversely, if input costs fall, some of the decline will be enjoyed as wider profit margins by the producer and some will be passed on to the consumer in the form of lower prices. Because PPI impacts consumer prices and is watched by central bankers .
The Bureau of Labor Statistics forecasts a 0.5% change in PPI, consistent with the narrative that inflation is reaching a peak. You can see their data and forecast here: https://www.bls.gov/news.release/ppi.nr0.htm.
11/10 - Inflation Rate Report
This is the rate at which prices change- if this is above 5.8%, I would expect the market to sell o a little, but anything above 6.2% will likely sell off severely . Expectations about inflation are always shaky and oftentimes not well-formulated.
From tradingeconomics.com, we have a not-so-brief recap of previous inflation data:
“The annual inflation rate in the US edged up to a 13-year high of 5.4% in September of 2021 from 5.3% in August and above market expectations of 5.3%. Main upward pressure came from cost of shelter (3.2% vs 2.8% in August); food (4.6% vs 3.7%, the highest since December of 2011), namely food at home (4.5% vs 3%); new vehicles (8.7% vs 7.6%); and energy (24.8% vs 25%).
On the other hand, prices eased for used cars and trucks (24.4% percent vs 31.9%); transportation services (4.4% vs 4.6%); apparel (3.4% vs 4.2%); and medical care services (0.9% vs 1%). On a monthly basis, consumer prices advanced 0.4%, above forecasts of 0.3%, with the indexes for food and shelter contributing more than half of the monthly increase. The core index which excludes food and energy went up 0.2% MoM and 4% YoY, the same as in August and in line with forecasts. source: U.S. Bureau of Labor Statistics.”
Inflation: What On Earth is Going On Right Now?
Loose Definition: Inflation is the general rise in prices. Deflation is the general decline in prices.
Many analysts, economists, and people on the news might also say something along the lines of “Inflation is the decline in purchasing power of a currency.”. Holy shh…. it’s basically the same thing for most intents and purposes. The point is that inflation is phenomena of things costing more units of currency to buy.
Whether that results from the value of a currency declining or the general price of goods rising isn’t relevant unless you want to discuss nitty-gritty economics.
Just Our Opinion
“Transitory” means temporary. It is this buzzword that’s been used by the Fed, and now the media, to describe the components of inflation we’re experiencing that will go away within the next year or so. In our opinion, we’re experiencing some transitory inflation, but not any extreme inflation that we should be afraid of; wages are slowly rising after prices rise, as always.
The notion that all the inflation (rise in prices) we’re seeing is transitory doesn’t make any sense. It’s true that many aspects of what causes any amount of inflation are transitory in the sense that the word is being used, like supply chain issues and demand spikes for pandemic-related items like soap. These demand and price spikes can cascade through other markets and change prices of other things.
But things like population growth, the fact that the Fed just printed over 20% of the world’s USD, and the resultant rise in wages are likely non-transitory though. Here, we’ll go over other things that the news may not have mentioned.
Jordan 1’s used to be $80 now they’re $110. Why?
Inflation is WAY more complicated than “transitory” vs “long-term”. Take a pair of J’s for example.
This is probably on the cheaper side too, unless you buy them used from postmark or eBay. I remember when these used to be like $80. In fact, we can use the wayback machine to find footlocker.com’s old page in 2004, and find that we’re listed at $79.99 back then.
The “SE” on nike.com’s page stands for Special Edition, and it doesn’t mean too much nowadays. Same with the “Retro” on footlocker.com’s page. The point here is that these are basically the same shoe. So why’d their price go up?
There’s no one explanation for the inflation of prices in everything. Everything inflates for different reasons.
1. Hype
One explanation for Jordans might be hype. If we believe that Google search trends are a good indicator of demand, then their metric of “Interest” over time, which is based on how often something is searched, might make us believe that Jordans have been increasing in demand.
Classical or mainstream economics holds that this would make the price go up. Obviously we haven’t seen an exponential price increase in Jordan 1’s since 2014, but definitely a large jump in the price rare sneakers since then.
On the other hand, Breakfast Cereal has been increasing in price some steadily, very similar to it’s Google search trend.
So a big part of any general rise in prices is demand, or just the hype surrounding certain things. For things like soap, the hype is likely due to the pandemic. For other things… it could just be the hype.
Additionally, many things may have been increasing in price likely as a result of the population increasing over time albeit at a decreasing rate.
More people means more demand.
2. Cascading Price Increases: Everything’s been inflating for a while, and if the price of tomatoes increases, ketchup likely will also.
For the record, Men’s Jordan 1’s aren’t special. If the Consumer Price Index for All Urban Consumers (CPI-U) is a good indicator of inflation, then the prices of things that “Urban” consumers buy have been on borderline linear trajectory upward for a while now.
Right now, so-called “supply chain issues” are causing some longer “transitory” inflation. Population growth doesn’t seem super transitory, but also the price increases can cascade across markets and time.
There are tons of studies on how the price of food will effect food choices, like this one. Also, just logically, if the price of the materials of an item goes up, the firm creating that item has a very large incentive to raise the price of that item.
Now we’re not discrediting the attribution of inflation to supply chain issues, but we at Weekly Catalysts would feel bad letting everyone just read “supply chain” on the news and let their ideas of what that means inform their economic reality.
3. Supply Chains and Inflation
When you think of supply chain issues and inflation, you might think of containers of stuff being stuck in places. As a result, this would cause a lack of supply of those goods and, in turn, a price increase. This logic is valid. But is it sound (i.e. are we actually experiencing this?)?
In general, yes, we may as well believe this to be the case. The NY Times is saying that ships are stuck at certain ports. The Suez Canal ordeal in fact was a very big issue, and has prices change, so do consumer decisions causing something called the bullwhip effect which can make things even messier on the supply side of things.
M&A, IPOs, and Deals
Nothing groundbreaking going on here.