Inflation Isn’t Done With You Yet
A Decade of Inflation (It ’s Just Started)
“Underlying U.S. inflation probably rose in January by the most in a year,” says a Bloomberg dispatch this morning, “as tracked by the Federal Reserve’s preferred metric.”
The Fed’s favorite inflation measure is called “core PCE.” The Commerce Department will update the number on Thursday. The consensus among Wall Street economists is for a 0.4% month-over-month rise — a number that would dissuade the Fed from cutting interest rates anytime before July.
Yes, inflation isn’t as bad as it was two summers ago. But your cost of living is still rising. And on occasion, it’s rising at an accelerating clip.
If you’re a newer reader, you need to wrap your mind around the fact that inflation will rule your life for the rest of the 2020s in a way it simply didn’t during the 2010s.
And even if you’ve been around for a while, I can’t reinforce the research enough: Once inflation races past a certain threshold, it typically takes a decade to bring it back to “normal.”
The official U.S. inflation rate topped out in June 2022 at 9.1%. The most recent figure is 3.1%. It’s been stuck in a range between 3.0–3.7% since last summer.
Again, your cost of living is still rising — just not as fast as it was in 2022.
And it will continue rising. During 2022, researchers from Bank of America’s U.K. division combed through extensive data going back decades from most of the globe’s developed economies.
They found that once inflation pokes its nose over 5%, getting back to 2% — the Fed’s official inflation target — takes an average of 10 years.
Let’s take a closer look…
We’ve shown this chart before. As far as we’re concerned, we can’t show it often enough. Again, it will rule your life for the rest of this decade.
This time we’ll spotlight two instances from the United States…
Look at that gray bar on the right. Inflation peaked at a crazy-high 14.6% in the spring of 1980. It took six years for the Federal Reserve under chairman Paul Volcker to get inflation back to 2%. And he pulled that off only by deliberately engineering a vicious recession in 1981–82 — at that time, the worst recession since the Great Depression.
But then inflation reared its head again in the late ’80s — peaking at 6.4% in the fall of 1990. Look at the other gray bar. As you can see, it took the Alan Greenspan Fed a full eight years to get inflation back to 2%.
Nor is this study unique. A separate 2022 study conducted last year by the firm Research Affiliates arrived at the same broad conclusion: “Above 8% [inflation], reverting to 3% usually takes six–20 years, with a median of over 10 years.”
With “sticky” inflation, the investment strategies that worked in the 2010s won’t work as well in the 2020s. They might even blow up in your face.
As we said on Friday, you need to look at inflation hedges such as gold, Bitcoin, mining shares and oil companies.
But those are longer-term, buy-and-hold propositions. If you need funds to offset your rising cost of living now, you need to consider short-term trading.
Don’t get me wrong. I’m not talking about anything that requires you to be glued to a screen all day. And I’m definitely not talking about lottery-ticket options and cryptos where Gen Z types with decades of life ahead of them aren’t afraid to lose it all.
No, I’m talking about a trading strategy perfected by my longtime colleague Greg Guenthner — a sensible family man who takes the long view.
In his Trading Desk service, he’s outperformed the S&P 500 by a 23-1 margin since last May.
Over two years, his strategy has had the power to grow a $40,000 model portfolio to $266,000. The average recommendation has returned 57% in about two weeks — including the losing trades. And he trades his recommendations in his own account alongside his readers: He wins when they win.
We’re extending a special offer on The Trading Desk — but only through midnight tonight. Click here to give it a look right away.
NVDA: As Good as It Gets?
After Nvidia posted blowout quarterly numbers last week, Paradigm’s tech-investing hound Ray Blanco asks an impertinent question: “Could Q4 2023 be Nvidia’s high-water mark?”
Ray has traded successfully in and out of NVDA for the better part of a decade. And he can’t help wondering if now is as good as it gets.
“Nvidia has been a prime beneficiary of the artificial intelligence boom” he reminds us. “As the only company standing when it hit (and indeed, a key enabler of it on the hardware end of things), Nvidia has enjoyed a near-monopoly for AI implementors needing off-the-shelf hardware to drive their strategy.”
But as Ray warned in December during Paradigm’s exclusive 7 Predictions Summit, NVDA won’t enjoy that near-monopoly indefinitely.
And the latest developments affirm that outlook: “This quarter sees the commercial sales of competing (and competitive from a price and performance standpoint) AI accelerator hardware from Advanced Micro Devices. Later this year, Intel will jump more firmly into the fray with its own competing and competitive AI accelerator.”
Last week, Intel struck a deal to make custom AI chips for Microsoft — part of a strategy to overtake the world’s leading chipmaker, Taiwan Semiconductor, by 2026.
Indeed, Ray says the day might not be far off when Nvidia might acquire some of its chips from… Intel. “Intel will have the designs, the process and the manufacturing capacity to compete as it regains technological dominance as a semi manufacturer.”
As a new week begins, the stock market is taking a breather.
None of the major U.S. indexes has moved more than a tenth of a percent. All of them are at or near all-time highs, the S&P 500 at 5,083.
Precious metals are likewise little moved, gold at $2,027 and silver at $22.47. Crude is up 80 cents to $77.29.
Bitcoin has blown past the $52,000 barrier — indeed past $53,000 at last check. And Ethereum is $35 away from $3,200. [Editor’s note: Congratulations to readers of Altucher’s Early-Stage Crypto Investor — who on Friday took home a staggering 1,788% gain on Render. Missed out? Rest assured, there’s more where that came from.]
An All-American Investment
“Convenience stores are a cultural phenomenon, as American as Mom and apple pie.”
So says Dan Amoss, senior analyst for Paradigm’s macroeconomics authority Jim Rickards.
After readers weighed in during Friday’s edition on convenience stores with a cult following, Dan dropped us a line with the investment angle.
“Convenience stores are remarkable examples of a high return on invested capital (ROIC) that comes from small profit margins on extremely rapid inventory turnover. An old neighbor joked that Rutter’s might as well be on the state flag of Pennsylvania. And you have Sheetz in the west and Wawa in the southeast part of the state.”
As I pointed out Friday, many of these names have been family-owned for decades. Still, Dan says “public convenience store plays are Murphy USA (MUSA) and Casey’s General Stores (CASY). The 10-year performance in these stocks is as good as any in the market.
“The bear case on the stocks has always focused on competition from aggressive, privately owned chains like Wawa’s and Buc-ee’s, but it’s clear that there’s enough business for everyone (if the locations are good).”
For whatever it’s worth, neither of those stocks is pricing in a looming transition to electric vehicles — which would be a major disruption to the business model. (And as perhaps you’ve seen elsewhere, public interest in EVs is waning.)
“Imagining a Buc-ee’s replacing the dispensed energy from their 100-plus gasoline pumps simultaneously (this picture is like parallel energy processing with Nvidia GPUs!) with EV fast-charging stations. One might have to envision a small modular nuclear reactor next door.”
Worse Than Hitler? It Depends…
The fiasco with Google Gemini’s AI platform just gets worse.
Since our write-up on Friday, someone submitted an inquiry to Gemini about… well, just read the following.
Hitler killed 21 million people during 12 years in power — that’s per Professor R.J. Rummel’s estimate in his 1994 book Death by Government — but Musk might be a worse human!
Statistician Nate Silver says he was able to replicate this result. “They need to shut Gemini down,” he tweets. “It is several months away from being ready for prime time. It is astounding that Google released it in this state.”
I have my issues with Silver — articulated here on Election Day 2016 — but I’ve got nothing to argue with in this instance.
The Dems’ Social Security Plan
“I don't think that's true,” a reader writes after I mentioned a plan by the Democrats to overhaul Social Security that by most estimates would shore up the system for the long haul — albeit with some mighty unfair taxes.
“Once the number on Social Security grows too large, no tax rate and/or the retirement age can stay the same and ensure sustainability of the program.
“Currently, we have 62% of the population supporting 38% of the population. Once you account for government employees and those employees of companies that rely solely or largely on taxpayer money/debt, I'm guessing that roughly 50% of the population is supporting the other 50%.
“But that number will get more and more skewed as private-sector employees retire or start taking Social Security. So not only do you have more and more people taking Social Security, you have fewer and fewer people paying Social Security taxes (and no, having all the illegals working at minimum wage won't help). It's an impossible path we are on.
“It's almost impossible to conceive of a solution. We have to cut government, government spending, government bureaucracy, etc., etc. for any chance to survive financially.
“That includes getting real about Social Security and Medicare (and cutting off our grossly inefficient and ineffective military spending).”
Dave responds: It all depends on how you define “sustainability.”
There’s a common trope that Social Security will be “broke” come 2033. But “broke” is a rather different proposition from “the Social Security trust fund being depleted,” which is what we’re actually talking about.
It’s not as if the program suddenly goes away. As long as people continue paying FICA taxes, benefits will continue to be paid out in 2033 — albeit at only 75–80% of previous levels. (Other observers like DoubleLine Capital’s Jeffrey Gundlach expect the day of reckoning to arrive sooner — even before the 2028 election cycle. They’re probably right.)
As for the Democrats’ plan to overhaul Social Security, we’ll have more to say about that later in the week. Suffice to say here that even right-leaning experts like the American Enterprise Institute’s Andrew Biggs say the numbers add up. “It doesn’t just fix Social Security for 75 years,” he told The New York Times in 2019. “It would keep the system permanently solvent.”
But like your editor, Biggs is none too keen on the new taxes that would make the system “permanently solvent.” That’s why he prefers the proposal he worked up recently with Boston College — doing away with the tax advantages of 401(k)s and IRAs, and using the additional revenue to shore up Social Security. (I’m none too keen on that idea, either.)
We’ll have much more to say about the Democrats’ proposal to beef up Social Security later this week, or maybe next. It’s worth a closer look in light of the approaching election…
Best regards,
Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets
P.S. “I still think investors are a little too complacent right now going into this seasonally weak period,” Greg Guenthner writes his Trading Desk readers this morning. “I don’t think we need to worry about a crash. But I do think any substantial pullback will catch folks off guard.”
It’s worth emphasizing that while “Gunner” was racking up one of the best track records in our industry over two years – growing a $40,000 model portfolio to $266,000 – that included periods when the market was skidding lower.
That’s the power of Gunner’s unique “cash line” strategy. See how it works at this link – but be advised the link goes dead at midnight tonight. Watch now while you still can.
