The Buzz on Business for May 16th, 2024

At the Buzz on Business, we are fans of free markets. We do not hold that markets are perfect by any means, just that they are better than all of the alternatives.

Markets not only function as a mode of price discovery and exchange, there is a collective wisdom in a free market. A market is a place where all the market participants, with their diverging knowledge, contexts, biases, and beliefs about the past, present, and future, come together and put their money where their mouth is. Where they act upon those beliefs and that knowledge.

To say that “The market is wrong” is nonsensical. It is, in a manner of speaking, to say, “Up is not up,” or “Blue is green.”

Based upon our study of economics and observation of markets over the course of decades, we believe this with all of our hearts and minds. We believe it.

We also believe that, after staring into the abyss of the Giant Quote Machine in recent weeks and over the last two days, in particular, that the market is wrong.

Stocks rallied to new all-time highs and yields fell to near-term lows in celebration of the end of inflation and, we guess, that Happy Days are Here Again.

We hope we’re wrong; indeed, we often are, but from where we sit, inflation is accelerating, and dangerously so, especially compared to where it stood in the fourth quarter of last year.

Contrary to the consensus that rates are coming down, we think they need to go up. They should have gone up six months ago.

Interest rates are not, at the end of the day, strictly a political matter. Jerome Powell doesn’t determine interest rates; reality does. If inflation spikes to ten percent and stays there for any length of time, interest rates could go even higher than that—they probably would go higher than that. The trajectory of the inflation numbers in recent months suggests that ten percent is not out of the question, at least not to us.

If that happens, we could be looking at a very different stock and bond market than the one we’ve seen over the last six months and two days.

So, would that market be wrong?

Stock Market Report

The major indexes all soared to new all-time highs on soaring volume.

• The Dow Jones Industrial Average was up 350 points. That's nine-tenths of 1%, and it closed within striking distance of 40,000 at 39,908.
• The S&P 500 was up 1.2%. That's 61 points, and it closed at 5,308.
• The NASDAQ Composite was up a stout 1.4%. That's over 231 points and it closed at 16,742.
• The Russell 2000 had a good day but did not close at a new all-time high, it was up 1.1%, or 24 points and closed above 2100 and 2109.

Bond Market Report

Interest rates were down and down sharply all up and down the yield curve on Wednesday.

• The yield on the 2-year treasury was off nine basis points, and it closed at 4.726%.
• The 20-year was down ten ticks, and it closed at 4.600%.

Oil, Gold, and Bitcoin

• Oil was up $0.42. And closed at $78.79.
• Rates were down, so gold must be up. And it was. It closed at $2,391.90, up $29.80 a troy ounce.
• And Bitcoin had its best day in over a month. It was up $4,439.32 and at 4:00 PM Eastern Time stood at $66,030.80.

Why We Are Worried About Inflation?

So, what’s going on with inflation?

Well, first of all, let’s talk about yesterday's Consumer Price Index report. The public-facing CPI report has four numbers. Yesterday, all of them hit their numbers except the month-over-month increase in prices for April, which came in at 0.3% versus expectations of 0.4%.

Let's be clear: 0.3% month over month is not the end of inflation. That's nearly double the Fed's target, and quite frankly, the Fed's target is way too high.

Now it is true that the 0.3% number is a tick below what it was in March and April, and therein lies the cause for the celebration. We guess.

But in November, just six months ago, it wasn’t 0.3%, it was 0.1%. In June of last year, it was 0.1%. In January of last year, it was 0.1%. In absolute terms, 3.6% inflation is probably not the end of the world. But only if it were trending down from 9% annual inflation, not moving up from 1% inflation.

And this is what troubles us here at the Ministry of Truth—not the absolute level of inflation but the trend.

Inflation numbers are notoriously volatile. We'll post a chart in the show notes of monthly inflation over the last 30 years or so, and you can see they move around a lot.

But our concern about inflation neither begins nor ends with its effect on the stock market. Inflation makes life immeasurably more difficult for people who work for wages and who consume most of what they earn. Inflation is a tax, an insidious tax, on people who work for wages, especially the working poor. It pushes down the people we should most want to pull up. And it distorts all of the incentives that lead to successful economies and to a successful financial life for regular folks. And let’s face it. Most of us are regular folks.

It's also really bad for the stock market.