I won’t ever understand why the media and the Old Institution react to data based on where it lands relative to faulty forecasts, writes Landon Whaley.
This week’s “Headline Risk” focuses on the risk embedded in the Old Institution’s obsession with economists’ forecasts and the straight-line extrapolation of the most recent string of data far into the future.
For the last year and a half, we have successfully called every inflection in U.S. inflation, before it occurred.
The Track Record
In July 2018, all three primary gauges of U.S. inflation (consumer, core, and producer prices) had been accelerating for six to 24 months, depending on the indicator. Based on that trend, the Old Institution and its followers were calling for inflation to ramp even higher for the remainder of 2018 and well into 2019. They looked at what inflation had been doing and extrapolated that trend forward.
In the Gravitational Edge “Playbook” on July 16, 2018, we said, “Despite everyone’s belief that inflation is pulling a Superman and going up, up, and away, inflation — along with growth — will begin to slow towards the end of 2018 and heading into 2019.”
Rather than use the highly scientific technique of straight-line extrapolation, we had evaluated U.S. inflation using our models, which consider factors like base effects and the non-periodicity of economic data sets. We realized that inflation was likely to peak and alerted clients accordingly. We were right, and the June-July 2018 period marked the cyclical high in all three primary inflation gauges.
On March 11, 2019, we made the call that “U.S. inflation is bottoming, will begin accelerating, and will exert its influence on U.S. asset classes in the months ahead.” Right on cue, both consumer and producer price inflation accelerated for the first time in eight months.
We then nailed the pivot back to slowing inflation in the Gravitational Edge “Playbook” on May 27, citing that our models were indicating inflation was going to head south once again. We were right, as consumer inflation slowed for an additional four months, and producer prices declined for another five months.
Dating back to last year, we are three-for-three calling inflation’s trajectory, and as of our Oct. 21 call for inflation to begin accelerating, our win streak remains intact.
The Data
After trading sideways for the prior two months at +1.7%, October’s reading of consumer inflation accelerated to +1.8% and looks poised for more upside. Bloomberg didn’t even bother to mention this rate-of-change reality in its headline and instead focused on a one-month decline in the pace of core inflation. While Bloomberg was more than happy to call out the slowing data point, it failed to mention that core services prices accelerated for the fifth consecutive month, and while core goods prices did, in fact, slow, they are coming off of a seven-year high! CNBC and Reuters were far more interested in how October’s CPI reading did when compared to Wall Street estimates. For the life of me, I won’t ever understand why the media and the Old Institution react to data based on where it lands relative to faulty forecasts!
The inflationary bottom line is that multiple data sets have been pointing to higher inflation, and now CPI is confirming that the bottom is officially in for U.S. inflation. Let the multi-month inflationary impulse begin!
The Call, Reiterated
As I signed off the Gravitational Edge “Playbook” on Oct. 21, “You can time stamp it, take a picture of it, or a Snapchat it, if you’re into that kind of thing. We’re doing our best Babe Ruth impersonation and calling our shot; the U.S. is going to get an inflationary impulse that lasts for months and significantly changes the Playbook for U.S.-based assets.” Since that proclamation, energy stocks are up +2.7%, crude oil is up +6.0%, and broad-based commodities have rallied +1.8%, not bad for three weeks!
No doubt, the vast majority of Wall Streeters and media gurus will call October’s CPI reading a “one-off” and continue to believe that the inflationary downtrend that began in July 2018 will continue forever. Once again, we’ll gladly fade the crowd because inflation will accelerate for at least the next three months, you can book it!
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