June 12, 2023

As we discussed last month, nothing has had more influence on stocks over the past eighteen months than inflation, and the fears over a draconian Fed response to it.

With that, we get the May inflation report tomorrow.

What should we expect?

As we discussed last month, even if inflation runs at the average monthly rate we’ve seen in this post-pandemic hot/record inflation environment, the year-over-year headline inflation rate will have fallen off a cliff by next month.

It’s because of this …

As you can see, the June 2022 CPI steps significantly higher.  That will come into play in next month’s report (of June prices).  The year-over-year headline inflation calculation, against that higher base, should give us a number that will fall into the mid-3s (percent).

As for tomorrow’s report, it will still calculate against a lower base, but if the consensus view is right (expectation of a 0.2% m/m change in May prices), we may very well get a headline year-over-year inflation number tomorrow in the 3s (like 3.99%).

Keep in mind, a year ago, it was 9.1%.

Now, it may not feel like prices are rapidly cooling.

But remember, the massive monetary and fiscal response to the pandemic (plus the subsequent agenda spending binge) ramped the money supply by 40% in just two years.  That was ten years worth of money supply growth (on an absolute basis), dumped onto the economy over just two years.

With that, the price of everything resets (higher).

What we don’t want to see, at this point, is the level of prices decline (i.e. deflation).

Deflation would kill growth, and leave us with trillions-of-dollars of fiscal bullets fired, with no growth to show for it (only the massive increase in debt, with no growth offset).

So, what matters is rate-of-change in prices.  And that rate-of-change has slowed dramatically.

We now need a period of hot growth, rising wages (to repair the living standard damage), and stable (but higher than average) inflation (to inflate away debt).  Growth solves a lot of problems.

Again, nothing has had more influence on stocks, over the past eighteen months, than inflation, and (related) the Fed.

For the reasons we discussed above, the Fed has given us the signal in the past two weeks, that they may “skip” at Wednesday’s meeting (i.e. end the series of rate hikes).

With all of the above in mind, stocks go into this inflation number and the Fed meeting, sitting on big technical trendlines …

Both the Nasdaq and the S&P broke-out of this bear market trend in Q1.  This set up (given the catalysts ahead) looks very favorable, for some aggressive catch-up in the big blue chip stocks and small caps.

This bodes well for our Billionaire’s Portfolio, which is full of small-cap value.

Add to that, we have the (likely) removal of the monetary policy headwind, which should unlock growth in the economy.  And that comes as a technological revolution is underway, and in the very early stages (generative AI).

If you haven’t joined us in my new AI-Innovation Portfolio, it’s a great time …. Find details here.  I’ll be adding the first two stocks to the portfolio tomorrow.