Iron Capital Insights

  • Iron Capital Insights
  • May 13, 2021
  • Chuck Osborne

That’s Disappointing.

Wednesday the Consumer Price Index (CPI) came out +4.2 percent over the past year. Thursday morning the Producer Price Index (PPI), which measures wholesale inflation, was announced to be 6.2 percent. More concerning is the reaction of Richard Clarida, the Federal Reserve vice-chair, who said he was, “surprised.” The Fed, a leading contributor to this explosion of inflation, continues to believe this is just “transitory.” It feels like a scene from “The Princess Bride” when Vizzini keeps using the word “inconceivable,” and finally Inigo Montoya says, “You keep using that word. I do not think it means what you think it means.”

The problem at the Fed is the same problem they have had for a long time: There is no voice in the room that has real-world experience. We, along with many others, have written about inflation; Warren Buffett has warned about inflation; and the financial media outlets have been beating the inflation drums, yet the Fed is still “surprised” and still insists that it is only “transitory.”

As we mentioned in a recent Insight, we are set up for disappointment on the economic data front and for inflation. Since then, GDP came out at 6.4 percent growth, which in absolute terms is fantastic. The market was expecting more and thus up only slightly that day. and down significantly the next day. Then we received the employment report: The economy created 266,000 jobs compared to an expectation of 974,000 jobs. The unemployment rate rose even as we are still recovering from the reaction to the pandemic.

The initial response that day from President Biden was, “The recovery is going faster than expected.” Really? Expectations were missed by more than 700,000 jobs. This is precisely what happens when government policy is to pay people not to work. We know this and we have known it for a long time, which is why Bill Clinton reformed our welfare system.

However, we live in a world where facts no longer seem to matter. This is a symptom of the criminal enterprise that is our higher education system, which we will discuss further in our next Perspective. In the meantime, the Administration and the Fed are suffering from a very human condition that John Meynard Keynes described when he said, “The difficulty lies not so much in developing new ideas as in escaping old ones.”

To add insult to injury, we have a self-induced energy crisis, which in fairness actually is transitory. Within a five-minute window on Wednesday I received a text from my sister saying she had to wait in line for an hour to get gas, but fortunately was able to get some; then a text from my cousin, who said she had to go to several gas stations before finding one that still had gas. I then read in The New York Times that there were no gas lines. That is disappointing.

The old ideas that previously gave us the economic malaise of the 1970s are doing the same thing now, and thanks to a lack of cyber security a pipeline shutdown really put us back in the mood for some disco. At least when my sister waited for an hour for gas this time, her legs weren’t burning on the vinyl seats of the pea-green Pontiac Ventura we had to sit in back in the days of the original energy crisis.

How is this trip down memory lane going to impact the stock market? As of now it has simply stalled; down one day and up the next, but caution is certainly in order, at least until the economic data – and reactions from policy-makers – stop disappointing.

Warm regards,

Chuck Osborne, CFA
Managing Director