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"Our favorite holding period is forever."

- Warren Buffett

Friday Forever Charts

This week saw the worst US inflation print in a year: The personal consumption expenditures price index (PCE), which has consistently been the most hopeful inflation metric, flipped in January to being the least hopeful one.

The “supercore” components of PCE were to blame. That may be because it has taken this long for pandemic inflation to feed through to services like health care and insurance, in which case we can probably just wait it out.

If not, it might mean inflation isn’t quite as transitory as we had hoped.

Personally, I blame “tipflation” — the post-pandemic societal pressure to tip 25% for everything, including self-serve kiosks. (The data here is admittedly inconclusive.)

Whatever the reason, macro sentiment is shifting.

In January, the market was looking forward to enjoying six rate cuts from the Fed this year — after this week’s data, the market is starting to wonder if we will get any at all.

Some even think the next move could be up: Larry Summers warned last week that there’s a “meaningful chance” the Fed could soon be raising rates again.

(Dallas Fed president Laurie Logan suggested the same in January.) 

Normally, rates up would mean stocks down, but the stock market appeared to take no notice of the data: The S&P 500 finished higher for an 18th straight week, without drama. 

(Below the surface, however, there has been some furious paddling.)

Why the sanguine reaction? 

It might be that we continue to be ensorcelled by all the AI news.

In addition to Dell trading up 30% today on AI-related sales, we learned earlier this week that Klara, a payments processor, has deployed an LLM that’s doing the job of 700 humans — which bodes well for inflation, profit margins, productivity and stock prices (less so for employment).

Or, it could be that we’re finally taking Warren Buffett’s advice to think long-term.

“I can’t remember a period since March 11, 1942 — the date of my first stock purchase — that I have not had a majority of my net worth in equities,” he noted in his investor letter this week. “And so far, so good.”

Not many of us can think as long-term as Buffett — but a select few are thinking even longer: Billionaires are lobbying for the right to leave their money in trust for themselves after being cryogenically preserved. (Like Captain America. Or, depending on the billionaire, Austin Powers.)

I can’t blame them — what’s the point of heroically coming back from the dead if you’d then have to get a job???

But the point is that maybe you can take it with you, after all — in which case, the best holding period for investments really would be “forever.”  

Probably not, though.

So let’s check the charts to see what’s up right now. 

Inflation is up:

January PCE has raised fears of a second wave of inflation — the lagged effect of housing data isn’t yet evident, goods disinflation has bottomed out and services inflation is re-accelerating. 

Inflation is down:

The same PCE data looks much friendlier when viewed on a year-over-year basis — January may prove to be a statistical outlier distracting us from the underlying trend.

We’re still buying stuff:

The biggest remaining question from the pandemic economy may be why consumption has been so slow to revert back in favor of services. Go outside, people!

Rates are getting more real:

Real rates (Fed Funds minus PCE) have rocketed from -7% to +3%. Econ 101 tells us this should be a major headwind for the economy, but it’s yet to have any noticeable effect.

The Fed is feeling the effects, however:

Volunteering to pay 5.5% on reserves now has the Fed $154 billion in the hole.

The stock market feels nothing:

The S&P 500 closed higher for the 18th straight week — the longest such run since at least the 1980s.

What could stop it?

The Economist is doing their best to jinx it with this week’s magazine cover. The Economist itself admits that the cover indicator works as a contrarian signal (sort of).

Going for a 19th straight week of higher equities might be too much to ask, especially if inflation is picking back up.

But 19 straight decades — or centuries??? — is looking increasingly plausible. 

Have a great weekend, immortal readers.

― Byron Gilliam

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