Inflation Hits 3-YEAR HIGH! Will This End The Bull Run?

0:00The United States of America is at war with Iran and gas prices have exploded higher. And now the inflation numbers came in this morning. And those inflation numbers are way higher than people expected. Lydia DeFillis at the New York Times writes, The consumer price index rose 3.8 % in April from a year earlier. That's up from a 2.4 % annual increase before the conflict started in February. 3.3 % increase was in March, and now we are at 3.8%. The increase was driven largely by energy prices, but the core index stripping out volatile food and energy prices that rose to only 2.8 % over the year in April.

0:38Now, as the heat from President Trump's tariffs has faded away, the inflation readings now are all focused on the shortages of commodities that are blocked from transitioning through the Stratto Hermos as taking its place as a pressure on prices. The average gasoline price in this country is now above$4.50 per gallon, and diesel prices have nearly doubled. Now, Ben Castleman points out that over the past three months, prices have been rising at an annual rate of 7.3%. So if you take just the last 90 days and you extrapolate it out over a year, it's over 7 % inflation, and that would be a major problem.

1:15You have to remember that for the last four years, we have been above the Fed's target inflation rate of 2%. As both under President Biden and under President Trump, we continue to be at elevated levels of inflation. Now, Mike Zaccardi shows that if we go back to January 2021 and we look at cumulative inflation, so not year over year, but total inflation since January of 21, that has now been over 26 % in the United States of America. It's obviously horrible, but the UK, they're even worse. They're at nearly 30%. But Americans don't care what's going on in the United Kingdom. They care about what's happening here at home.

1:51And if the U.S. dollar has lost 26 % of its purchasing power since January of 2021, that is a massive problem. Now, Heather Long over at Navy Federal Credit Union says that this is painful for Americans, especially moderate income households. With inflation rising 0.6 % in the month of April, that was all due to soaring gas prices that accounted for over 40 % of the increase. Gas prices go up and the CPI number goes up right with it. We also see rising shelter and food prices that are pushing inflation higher as well. Heather goes on to explain that inflation is now eating up all wage gains for the first time in about three years.

2:31And this is painful for Americans and a true financial squeeze. CPI inflation in the past year is 3.8%. Wage gains in the past year is 3.6%. Anytime that inflation is higher than wage gains, that means the average American is losing. Now, economist Mohamed El-Iran, he warned earlier this week of potential demand destruction if we saw core inflation come in higher than expected. And that's exactly what we saw happen this morning. Take a listen to what Mohamed had to say earlier this week as to why this could be a cause for concern. We may not like what's going on, but relative to the rest of the world, the U.S.

3:08will continuously outperform. Well, I was going to say the U.S. economy is pretty strong, at least based on what we saw from Friday's jobs report. It is. Now, I think the second most important thing this week is inflation numbers. The inflation numbers are going to be absolutely critical. The market is very calm about core inflation. If you look at what the market is assuming about core inflation, we go from 2.6 to 2.7, while headline continues to jump up. So focus on core. If that doesn't come in where it is and comes in higher, then the market is going to have to ask the question, will we get demand destruction?

3:42The reason why we are not worried so much about the economy is because we have concentrated inflation, but we're not getting demand destruction. Now, do we actually get the demand destruction that Mohammed is talking about? I'm not sure. I don't have a crystal ball. I tend to be more of an optimist, but we have to pay attention to this. But the question now is, what does all of this mean for investors? We have higher inflation. And so what should you do with your portfolio? Alexandra Simonov, she says that the S &P 500's 16 % jump over the past six weeks marks one of the strongest rallies in history.

4:15That's going all the way back to 1950, 70 plus years. It is outshined only by a 30 % jump over the same exact time frame at the end of the global financial crisis. Now, if we go and we look at what Americans are saying, there's a recent Gallup poll that points to 38 % of Americans are now saying real estate is the best long-term investment. It's usually an inflation hedge. They are putting it ahead of stocks or mutual funds, which I say is at 20 % and gold, which is at 18%. Kathy Wood, she had a great point earlier in an interview where she points out that money supply is rising faster than inflation as well.

4:51And she thinks that's not a warning sign, but a green light for investors. Money supply growing faster than inflation. Take a listen to why Kathy thinks that's so important. Just looking back over time, when has money growth been higher than the CPI? And are there sustained periods where that is so? And the answer is yes. And it's usually in the early stages of a recovery and then expansion. You can see here in the 80s, coming out of the back-to-back recessions in early 1980. We had money growth well above inflation. And then again, you can see it before and after the tech and telecom bubble and bust.

5:39Again, there, it was well above. And then you can see it after the 08-09 crisis. So here we are, money above CPI, but we haven't been through a recession, or have we? As you know, we've been saying we had for three years, two and a half to three years, we have been in a rolling recession. Certainly manufacturing has, housing has, low and middle income earners are feeling like we're going through something more than a recession. And so I think we're in the same kind of environment as we were post those recessions. It is when And consumers are cautious and optimism is low. So that is where we are right now.

6:27So we don't think M2 growth, which is at 4.9%, is a harbinger of 5 % inflation, for example. Now, I tend to agree with Kathy. If the money supply is increasing faster than inflation, that tends to create asset inflation. That's why we've seen the stock market explode higher. The AI trade plus the concern that we are going to get more and more money supply is going to be chasing fewer assets. Now, the question not only is what is going on with investors and are investors doing well? They're a part of the U.S. economy, but there are lots of other Americans. Some of them don't have any investments.

7:04So the question is what's going on with the broader U.S. economy and the American consumer? Ed Yardini recently went on CNBC, and he claims that the economy and the consumer are much more resilient than many think. He says do not bet against their strength. Take a listen to Ed here. I've been bullish, but not bullish enough, as it turns out. The earnings estimates of analysts have been phenomenal. I've never seen anything like it. The first quarter earnings season that we're finishing up now has turned out to be gangbusters. Not only that, but the analysts are actually raising their estimates for the second, third and fourth quarters.

7:41And the year as a whole, they're talking about something like 23 percent, which is an extraordinary increase in an economy that's been growing all along. But I think the key to all this is, and I've been I've been saying this for some time, that don't underestimate the resilience of the economy, the resilience of the consumer. And if that's continues to be the case, then the same goes for earnings. Now, it's interesting to hear Ed because he was freaking out during the tariffs for a little bit, but he's now coming back and he says he believes the economy and the consumer are more resilient than people think.

8:15I tend to agree with him. But the great debate now is the following. We have higher inflation in the short term on the CPI metric, yet we have structural deflation that is happening in a number of different areas because of tariffs, deportations, artificial intelligence and robotics. So the question becomes, are the short-term price pressures from oil and energy prices actually going to be enough to overwhelm the deflationary structural issues? Or will those deflationary structural issues overwhelm the short-term oil prices? I don't know. It's very hard to figure this out. But what I do understand is that if we did not have those deflationary forces in the U.S.

8:56economy and we had oil prices where they are today, then gas would be significantly higher and inflation would likely be over five plus percent. And so in a weird way, we have complexity in the American economy right now. We have very high energy prices, but we have deflationary forces coming from AI, robotics, et cetera. And so the question now is what is the duration of the shock to the energy market? If all of a sudden we get a peace deal in the Middle East and energy prices start to come back down, then we'll look back and we'll say that this inflationary spike, it was short-lived. But if for some reason there's actual structural damage to the energy market, or the war continues to rage on and energy prices remain elevated, maybe they've even found a new equilibrium at these higher rates, then that would lead to higher levels of inflation and it would put the Fed in a very, very interesting scenario.

9:51Because the Fed's not going to be able to cut rates aggressively if they're worried that inflation is still going to be here in a year or two. So now the Fed's got to figure out with all the moving pieces on the chessboard, I have higher energy prices, I have the government inflation metrics going higher, and I've got these deflationary trends in the U.S. economy. What's going to happen? Well, that's why they're frozen. That's why they're doing nothing. And they're simply kicking the can down the road. And they're essentially saying, I need more data. With more data, I will gain confidence in what I should do.

10:22I'd love to hear what you think they should do. Should they cut rates or should they raise them? Do you think inflation is going to stick around for longer or not? I'm trying to figure this out live right alongside all of you. I tend to think that the inflation is here, but it's going to be shorter lived. And the deflationary trends of AI, robotics, tariffs, and deportations are going to be much more important. But let's see. I've been wrong before. Doesn't mean I'm going to be right this time either.