What’s wrong with these inflation charts?

This is a serious question actually. I just typed in a google search for “St Louis Fed CPI”, brought up the consumer price which looked like a hockey-stick inflecting around 1973, then changed it to % change year over year. Here’s the result:

It figured it must be screwy because it dwarfs every YOY change from the past. Here it is with the fed’s favored PCE index:

As you can see, it still dwarfs any prior measures. Here’s a chart which excludes food and energy:

Now we’re beginning to see the charts we’re used to. No meaningful inflation since the 1970’s if you exclude food and energy I suppose.

Here’s the latest consumer sentiment chart, which was also kind of a surprise considering all of the lowest reading ever articles I saw on it:

The chart low is 51.7 in May 1980. The latest here is Apr 2022 at 65.2, which is indeed low, but on par with 1990 and 2008-2009 readings. Apparently ycharts.com includes two more data points though – 58.4 in May and 50.2 in June which would beat 1980 for an all-time low. I’m not sure how they get a monthly reading for June when we’re barely over a week into the month so far though.

Well, what can I say. I just pulled up CPI and consumer sentiment charts because they’re the big numbers this week, and I’m actually quite surprised by what I saw here. I’m going to rewrite my overall narrative and see what I think about it.

My overall narrative is as follows:

  1. People are struggling with the rising costs of food and energy while wages go nowhere
  2. QE is not money-printing, but psychological operations to encourage a bullish investor bias
  3. The money that went out to ordinary people in the 2020 and 2021 stimulus packages was a pittance compared to the total spent.
  4. The demand shock had a big effect in late 2020 and 2021 was mainly driven by a big shift from services spending to goods spending, that the demand shock has already worked through as evidenced by the rapidly rising inventories in consumer goods which started in October 2021.
  5. The supply shock is very real, as the world economy is coming close to the levels of early 2020 yet the US produces a lot less oil, the US and EU have shuttered nuclear plants with no replacements since then, we are desperately short a number of critical metals as well, and we are coming into a major man-made food shortage which our leaders are ignoring or making worse.
  6. The supply shortages are so bad that we will be stuck at depressionary levels of economic activity unless we start to invest in natural resources as well as food and energy production, and we still aren’t doing that.

I am clearly biased to the side that the inflation we’re seeing is driven much more to the side of supply shortages than to the side of monetary excess, and I believe that is why Gold and Silver aren’t just rocketing higher. At the same time, I believe the sentiment has been lousy and the gold and silver mining stocks provide compelling values. I also like to acknowledge the idea that perhaps the inflation is partly monetary, even though that money mainly went to the top and not the average consumer, and clearly any monetary inflation would end up being good for precious metals.

Here’s the commitment of traders chart for gold, where I put circles showing where the Large Spec long interest has bottomed, where the corresponding low in commercial shorts have bottomed, and where they fit in the price chart of gold below. The latest readings are on par with the levels at those previous lows, but I put a ? instead of a circle because I don’t know if they’ve bottomed yet.

Here’s the same exercise for silver. It doesn’t seem as effective, except to say that when large speculators turn bullish price goes up. Still, they’re not very bullish now so they have plenty of room to rise.

My ending portfolio:

  • HEDGES (10.7%)
    • 10.2% TLT Calls
    • 0.5% XOM Puts
  • PRECIOUS METALS (36.4%)
    • 4.5% AG
    • 4.4% SILV
    • 3.6% MTA
    • 2.7% SLVRF
    • 3.1% EQX
    • 3.2% LGDTF
    • 2.6% SAND
    • 2.0% RSNVF
    • 2.2% SSVFF
    • 2.5% MGMLF
    • 1.8% HAMRF
    • 1.4% DSVSF
    • 1.4% MMNGF
    • 1.0% BKRRF
  • URANIUM (23.5%)
    • 4.7% CCJ
    • 3.4% DNN shares & calls
    • 3.2% BQSSF
    • 3.0% UROY
    • 2.8% UUUU
    • 2.9% UEC
    • 1.9% ENCUF
    • 1.6% LTBR
  • US CANNABIS (15.4%)
    • 1.9% AYRWF
    • 1.6% CCHWF
    • 1.5% CRLBF
    • 2.3% CURLF
    • 1.7% GTBIF
    • 2.2% TCNNF
    • 1.6% TRSSF
    • 2.5% VRNOF
  • BATTERY METALS (10.6%)
    • 5.3% NOVRF
    • 3.7% SBSW
    • 1.6% PGEZF
  • CRYPTO (2.0%)
    • 2.0% XRP
  • OTHER (3.5%)
    • 2.6% DOCN (cloud computing)
    • 0.6% OGZPY
    • 0.2% TWTR call
    • 0.1% ATCO calls
  • CASH (-2.2%)

My cash is down as I couldn’t resist making a couple of plays. I bought a bit more UEC of Friday’s dip because there’s still a decent chance all of my $4 covered calls on it expire in the money at the end of next week. I also entered some 1-month puts in XOM on Tuesday, as I looked at this chart and figured it’s due for a pullback to the 50 DMA, and the week of June options expirations and the fed hike meeting seemed as good a catalyst as any.

I still think it’s a pretty decent bet that the chart above pulls back to at least the 20-day moving average at 96 if not the 50 day. Its clearly a bullish chart, but also clearly over-extended as everyone frets over the Federal Reserve withdrawing liquidity from the system and crashing the economy.

The Twitter call was a reaction to an article suggesting that Elon Musk will likely have to complete his transaction to purchase Twitter at a cash value of $54.20 per share, as he signed an iron-clad deal to just that, which acknowledged all of the concerns with bots and such. The jurisdiction would be in business-friendly Deleware which is known for quick judgements on such contracts. TWTR trades at $39/share so I have until August to at least see a jump that will allow me a profitable exit.

Anyway, good luck with your trading. Next week should be interesting, and it will be especially interesting for me as I see where my covered calls land. Last week I was hoping my DOCN would be called, but now it looks like it will expire out of the money. Next week I’ll know for sure on that and on all those out-of-the-money calls I sold on Uranium mining shares a couple weeks back.

Afterward:

I just posted my blog and started messing around with the St Louis Fed charts again, and I found the problem. When I clicked on the index, and clicked “Edit Graph,” I was choosing “Change from a Year Ago, Index 1982-1984=100” with the results you saw above.

Apparently that is the wrong choice. If you choose “Percent Change from a Year Ago,” then you get the correct CPI chart like this:

Now that looks correct. I’m not re-writing by blog though.

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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2 Responses to What’s wrong with these inflation charts?

  1. phusg says:

    Hi again,

    Do you still read Richter Wolf? What do you make of his take on the Fed’s massive ‘money printing’?

    I’m trying to figure out whether your nr 2 assertion that QE is not money-printing, but psychological operations to encourage a bullish investor bias, makes any difference when it and adjacent policies I barely understand have undoubtedly inflated asset prices through the roof. Does it make a difference to reversing the policy and tightening?

    https://wolfstreet.com/2022/04/03/my-wealth-disparity-monitor-of-the-feds-money-printer-era-holy-moly-april-update-of-the-greatest-economic-injustice-in-recent-history/

    • johnonstocks says:

      I haven’t been reading Wolff for a while actually, mainly because so much is happening in the markets to read about.
      If you’re interested in my take on inflation, I agree with Jeff Snider and Emil Kalinowski. Look up Emil on YouTube and check out his Eurodollar University podcasts.
      The difference between “money printing” leading to inflation vs supply and demand shocks is huge in terms of durability. 1970’s inflation was durable, whereas the 1980’s asset bubble inflation was not.
      Supply shocks in oil cause demand to plummet elsewhere as spending shifts, hence the huge inventory builds in Walmart and Target.
      We’re about to hit a major deflationary bust in much of the economy while critical supplies in oil, energy, food, commodities are short enough to keep costs of living high.
      I really think we’ll be stuck in depressionary conditions until we can get some serious investment in oil and natural resources, but the politicians are blocking for environmental reasons while the private sector is reluctant to make a 5-10 year commitment to investing in the infrastructure needed.

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