ARTICLES

US Inflation

The S&P500 has continued to make new record highs one after another. It recently recorded its 200^th straight trading day without a correction of 5% or more. This is not a record, but it shows that the upward trend is becoming more exponential. A few months ago, we drew your attention to the fact that since the low point of COVID-19 in March 2020, the S&P had gone through a series of “mini-corrections”, (read article here). That pattern has continued – to the point where investors have become almost blasé about these short downward trends like the 3-day sell off that we had last week. Consider the chart:

For some time now we have been warning that rising inflation in the US would inevitably result in a more hawkish stance by the Monetary Policy Committee (MPC) of the Federal Reserve Bank (Fed).

The rise in the US consumer price index (CPI) in July (last month) was 5,4%, a 13-year high – and just about the same as the figure for June – but much higher than economists’ expectations. Economists generally, together with the Fed and President Joe Biden have been saying that the June inflation was high due to “base effects” and would soon decline. But that has not happened – at least not yet.

At the same time the MPC has now said that they intend to commence “tapering” the level of quantitative easing (QE) sooner than previously expected – maybe even before the end of this year.

Both the UK and the US have become politically addicted to Q/E. It is the solution to their budgetary problems. If they run out of money, they simply manufacture more. Q/E is perhaps appropriate during times of extreme economic collapse – such as immediately after the 2008 sub-prime crisis or the initial lockdown impact of COVID-19, but it is hardly appropriate now with the US economy growing rapidly.

Money is just a symbol of the goods and services in the economy. If the money supply rises more quickly than the real growth of the economy, then the surplus must sooner or later be reflected in rising inflation. In effect, you have more and more money chasing the same basket of goods and services – so the price of everything has to go up.

This idea of increasing the money supply to pay for government expenses was originated by the Romans. Periodically they would call in all the gold coins in the realm usually on the pretext of having them re-minted with the new Caesar’s image. They took the opportunity to add 20% of lead when the coins were melted down and so were left with 20% in the bottom of the pot when everyone had been given their re-minted coins back. This enabled them to finance the next Punic war. In those days this was called “debasement”. Today, we call it “inflation” – but it is the same thing – a subtle, undisclosed form of taxation. The government creates the money and the purchasing power of the cash in your pocket goes down.

In 2008, before the advent of Q/E, the value of the Fed’s balance sheet was under $1 trillion. This rose quickly with Q/E and by 2009 it was over $2 trillion. It reached $4 trillion in 2014 and stayed there until 2020 and the impact of COVID-19. Since July 2020 the Fed has been creating and injecting about $120bn a month into the US economy. Its balance sheet is now worth just under $8 trillion.

Due to the fall in oil prices and the hoarding of cash following the sub-prime crisis, inflation has been relatively low since 2008 – so the Fed could get away with printing money. But now that the US economy is growing at break-neck speed Q/E can only result in rising inflation – which is exactly what appears to be happening.  It is noteworthy that new car prices surged 6,4% in July (YOY) while used car prices rose 30% between March and June 2021. By the beginning of July 2021, fuel prices in the USA, were the highest they had been in 7 years.

On the fiscal side, Joe Biden has recently managed to get a $1,2 trillion infrastructure spending package through both the House and Senate with bi-partisan support. He is working on a new $3,5 trillion “tax and spend” bill which he is hoping to pass through both Houses soon. One of the senators involved has described these bills as an “inflation bomb” which is being dropped on the US economy.

Q/E is like cocaine. It is highly addictive. It enables politicians to spend as much as they want to without the irritating necessity of sticking to the budget. At the same time, debt levels in America have reached extraordinary levels. The national debt is at $28,7 trillion and rising fast (https://www.usdebtclock.org). Obviously, this is not a number that can ever be repaid by the conventional methods of raising taxes or reducing government spending.

As we have previously indicated, the growing fear of inflation in the US is likely to precipitate a 10% to 20% correction in the S&P500 fairly soon – and that will result in South African listed blue-chip shares coming off quite sharply. Our view is that this correction, when it happens, will not be the start of a bear trend (although it will be touted as such by the bears at the time). We believe that the bull trend will continue until it becomes apparent that a new phase of rising interest rates in the US is hurting economic growth. And that is unlikely until at least 2024.

So, the correction will almost certainly be a buying opportunity, but you should monitor the rising levels of inflation in America and choose your moment to get out of this market and into cash – because eventually, inevitably, this great bull trend will come to an end. Remember the stock market truism:

The further up the trend you are, the closer you are to the top.

DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.

PDSNET ARTICLES

Hulamin - Insider Trading

In our opinion on Hulamin, last updated on 3^rd September 2021, we noted “What is noteworthy about this share is that it has a net asset value (NAV) which is more than 3 times its current share price making it a possible takeover target”.

On Thursday last week the company issued a bland “cautionary” notice

Calgro-M3

Calgro used to be the darling of the institutional investors. Every fund manager in South Africa was buying the share and it rose dramatically from as little at 50c in February 2011 to an intraday high of 2275c on 11^th August 2015. At this point it had a market capitalisation of R2,8bn and was trading on a price:earnings (P:E) ratio of

The Confidential Report - October 2021

America

The S&P500 is in a correction which began after 2^nd September 2021 when it made an all-time record high of 4537. Since then, it has fallen by as much as 249 points to an intra-day low of 4288 on Friday (1/10/21). This correction has taken 20 trading days and amounted to 5,4% at its worst. There are a variety

Context

The context within which a chart is viewed is vital to your understanding of it. In this article we will attempt to show the broader context within which we view the market action which took place last Friday.

INTRADAY

Let us focus our attention on the S&P500 index, which is a weighted average of the

Human Behaviour

Investing in shares is about predicting the future. When buying a share the buyer is saying that he expects its price to rise, while the seller, by his sale, clearly has the expectation that it will fall. Of course, only one of them can be right and whomever is right will take money away from whomever is wrong. And the outcome depends entirely on the accuracy of their predictions

Windfall!

THE RAND

The current account surplus on the Balance of Payments in the second quarter came in at R343bn – considerably higher than the first quarter’s substantial surplus of R261bn. Obviously, this massive and on-going influx of cash is largely due to the worldwide boom in commodities which is benefiting South Africa despite the

Our Club Portfolio

Last year, on the 14^th December 2020  we wrote an article about our Investment Club software and our in-house company portfolio which we run on that software. As we said in that article, running this portfolio has proved to be a highly motivating exercise for our staff. The diagram below shows where we were on 11^th December 2020

The Confidential Report - September 2021

America

The suggestion by the Federal Reserve Bank (Fed) that it may begin to reduce its monthly asset buying program from $120bn per month before the end of 2021 sent markets into a new mini-correction. The process of reducing this type of quantitative easing (Q/E) has become known as “tapering” and the Fed’s consideration

Italtile

Following the impact of COVID-19 and the recent civil unrest, the hunt is on for high quality listed shares which have the potential to rise as the South African economy recovers. Obviously, service companies, which do not require significant working capital (i.e., stock levels or debtors’ books), tend to be more highly rated

Reshuffle

The announcement by President Ramaphosa of his cabinet reshuffle has received a mixed response from investors. On the one hand, it is clear that he has moved to consolidate his position within the government which should mean that his reform process should be less impeded than it has been. On the other he appears to have been obliged to lose Finance Minister Tito Mboweni either because Mboweni