CPI Reading / Peak Inflation? / Gold

Good Morning Ladies and Gentlemen

The Other Day

The other day I wrote to one of my readers: “The state cannot possibly regulate everything, get involved everywhere and try to regulate the most diverse lifestyles, yet this is precisely what some political leaders are proposing, and as it looks, some voters seem to hope for.”

CPI Reading

If we assume that this year’s bear market can be attributed to skyrocketing inflation fears and, as a consequence, rising interest rates and the resulting “money crunch”, then we can perhaps slowly but surely hope for an easing of the situation. Last week’s reading of the U.S. CPI (Consumer Price Index) may seem scary since the change in that consumer price index compared to the previous year was a whopping 8.5%. However, not only was this 8.5% slightly below market expectations of 8.7%, but we must not forget that it represented the price increase of the previous year.

Peak Inflation?

Moreover, looking at the actual level of the July 2022 CPI versus the June 2022 number, we find it even fell slightly. So it is fair to say that actual inflation last month was zero. Now, a single month does not make a trend, and as many market participants, analysts and journalists quickly point out, the Federal Reserve does not set policy based on one month’s change in the CPI. This is undoubtedly correct, and yet I dare say the possibility is rising that we are in the process of forming a preliminary inflation summit in at least some of the leading G20 countries. In this context, it is unsurprising that the Chinese central bank this week adjusted its interest rates slightly to signal to the market that it wants to avoid a slide into recession. Now, I believe a rethink of the “Zero COVID” strategy would have a better chance of success than a ten basis point cut in the key interest rates, but then I also believe the Chinese government will not care much about my opinion, which is fair enough.

Outlook

Almost no market participant, analyst or journalist is optimistic about financial markets. I understand this and share specific fears. But on the other hand, very few people consider that inflation concerns could cool down and thus positively impact the leading central banks’ rate hike path, which could lead to a less steep rate hike. I am considering such a scenario and always stick to our investment approach because we weigh long-term cash flows higher than potential short-term dislocations.

Our Friend Barry

Some roughly two weeks ago, I wrote to our friend Barry that I thought the market participant’s eyes would be on the Fed, and dovish or hawkish would make the difference. But, of course, Yellen and Powell know the importance of financial asset prices to the U.S. economy, and while they certainly want to fight inflation, they probably would not want the U.S. to fall into a depression. A recession they have already achieved, even if they deny it. Technically the economy was shrinking for the second quarter.

Gold

As to gold, I am receiving many emails regarding its disappointing performance this year. Quite frankly, I am slightly frustrated as well. Even if I was not a massive bull at the beginning of the year, this year’s performance is not in line with what I had expected for the current geopolitical and geoeconomic environment. But, never forget, gold in physical form may protect you from the dire effects of economic dislocation; thus, I keep some of it.

Ladies and Gentlemen   

As always, please share your opinion with me, but please do not forget (instead of hitting the reply button) to send your messages to: smk@incrementum.li

Many thanks, indeed!

I wish you an excellent start to the day, a great weekend, and above all and still, peace!

Yours truly,

Stefan M. Kremeth

Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li