- Yes, inflation has peaked (But that’s not the point)
- The issue that will overshadow inflation in 2023
- SBF’s suspiciously timed arrest
- Jim Rickards on the fine art of tax-loss selling
- A reader’s Baileys coffee-fueled rage… “To be America’s friend is fatal”… And more!
Yes, inflation has peaked. But no, that’s not the point.
“U.S. consumer prices rose 7.1% in November from a year earlier,” Bloomberg reported breathlessly this morning — “a sign inflation is easing that sent stock futures surging.”
The month-over-month change came in less than expected at 0.1%. And the year-over-year change was also lower than expected.
Indeed, that 7.1% annual inflation rate is the lowest in nearly a year, and down from 9.1% in June.
Food was up 0.5% month-over-month, shelter up 0.6%. Easing the sting was energy, down 1.6%.
➢ Even the real-world inflation rate is climbing down. According to Shadow Government Statistics — which uses the methodology the government used over 40 years ago — inflation is running 15.2% year-over-year. That’s the lowest since last December. Yay?
The immediate market reaction was to bid up nearly every asset class.
The major U.S. stock indexes are adding to yesterday’s big gains: At last check, the Dow is up three-quarters of a percent, back above 34,000. The S&P 500 is up 1.6%, sailing past 4,000 again. The Nasdaq is up strongest, 2.3%, cresting 11,400.
Bonds are rallying hard, sending yields down: The yield on a 10-year Treasury note sits under 3.47%, the lowest in nearly three months. But the yield curve remains steeply inverted, with a 3-month T-bill yielding 4.38%.
Gold has rallied past $1,800 and silver is within 20 cents of $24.
Heck, even cryptos are joining the party, Bitcoin at $17,804 and Ethereum over $1,300. (More about the arrest of Sam Bankman-Fried shortly…)
Crude is up another 3%, over $75 a barrel — but that’s more likely a reaction to the Keystone Pipeline outage. The leak in Kansas has been contained, but there’s no word when Keystone will be back online.
By and large, the sentiment behind the “everything rally” is summed up in this sentence from Econoday: “Today’s lower-than-expected CPI data show a slowing inflation that reinforces the belief the peak is behind us, calling for the Federal Reserve to slow down its pace of tightening.”
Which might be true… but is also irrelevant.
For one thing, the “experts” had every expectation a year ago that inflation had peaked. In a rare moment of Establishment candor, today’s New York Times says as much on its front page…
The web version of the article is even more direct: “Inflation Forecasts Were Wrong Last Year. Should We Believe Them Now?”
Every month, Bloomberg polls a bunch of economists and asks them for their guesses at “core PCE” — the Federal Reserve’s preferred measure of inflation. A year ago, those economists expected it to fall to 2.5% by year-end 2022. Oops, it’s running at twice that pace, 5%.
“This year,” says the Times, “forecasters expect inflation to fade to 3% by the end of 2023.”
Nah, we can’t say 2.5% again! What sounds more believable? Let’s say 3%!
As we’ve mentioned before, the groupthink on Wall Street is that sooner or later the Fed will get inflation back to its 2% target — in other words, the pre-pandemic normal — even if it doesn’t happen until 2024.
But the bigger issue is 2023 — and how far the Fed will have to raise interest rates to feel as if inflation is truly “under control.”
As Paradigm’s macro maven Jim Rickards has been saying for weeks now, the key is to get the fed funds rate higher than core PCE inflation.
Again, core PCE is running 5%. The fed funds rate is currently 4%. The Fed will almost surely raise it to 4.5% at the conclusion of its two-day meeting tomorrow.
The Fed will also issue its quarterly forecasts of how high it expects to raise the fed funds rate next year. And Fed chair Jerome Powell will elaborate on those forecasts during a press conference.
The potential for surprises tomorrow is considerable. The market reaction could be ugly. And even if it’s not, Wall Street is still expecting the Fed to “pivot” toward lower interest rates early next year — expectations that will be dashed.
So as we said yesterday… it’s either a bad market reaction now, or a bad market reaction later.
Either way, Jim Rickards has you covered with the trade he described in our exclusive briefing yesterday.
It could make you 10 times your money in the midst of a market crash. And in a first, Jim is putting down $10,000 of his own money on this trade.
And with the Fed making its move tomorrow, the time to act is today. Check out Jim’s 10X crash trade right now at this link.
As noted earlier, crypto prices are holding firm amid the arrest of FTX co-founder Sam Bankman-Fried.
SBF was hauled into custody last night at his penthouse in the Bahamas. The Justice Department unsealed an indictment this morning charging him with fraud and conspiracy. In addition, the Securities and Exchange Commission has filed an eye-opening complaint against SBF, FTX and its affiliated firm Alameda Research.
The SEC alleges that not only did SBF raid customer funds at FTX to make risky bets at Alameda… he also “commingled FTX customers’ funds at Alameda to make undisclosed venture investments, lavish real estate purchases and large political donations.” [Emphasis ours]
Unlike a lot of other folks who’d been wondering why he hadn’t been arrested already, we figured it would take a little time for prosecutors to build a credible case. But geez, for the arrest to go down the day before he was set to testify via remote link to the House Financial Services Committee? We can’t help invoking another late-‘80s Saturday Night Live reference…
Meanwhile, what about the mysterious co-founder at FTX Gary Wang? If that’s even his real name?
For as sketchy a background as SBF had, Wang’s background is even more of a black box. But that will have to wait for another day…
“Going into the holiday season, small-business owners are seeing a slight ease in inflation pressures, but prices remain high,” says Bill Dunkelberg, chief economist with the National Federation of Independent Business.
The NFIB is out this morning with its monthly Small Business Optimism Index. The headline number ticked up from 91.3 in October to 91.9 in November. But the number has been mired all year below the index’s long-run average.
As was the case the previous month, roughly one-third of survey respondents — 32% — cited inflation as their single most important problem.
Nothing else comes close. “Quality of labor” was cited by 21% — so good help is still somewhat hard to find. Taxes were cited by 11%.
If there’s any year in which to think about the fine art of tax-loss selling, 2022 is it — with stocks, bonds and crypto registering big losses.
(For now, gold is back to breakeven for the year!)
In a recent dispatch to his Top 1% Advisory subscribers, Paradigm’s James Altucher laid out the basics of tax-loss selling — mindful that you should consult a tax professional for any guidance specific to your situation.
“Here’s how tax-loss harvesting typically works,” he says:
- “You sell an investment that’s underperforming, losing money and unlikely to make a dramatic turnaround in the immediate future.
- “You apply that loss to reduce your taxable capital gains, and if your losses are larger than your capital gains, you can offset up to $3,000 of your ordinary income.
“The best part of tax-loss selling is that a loss can be carried forward indefinitely. So if you don’t have a lot of gains for this year that losses can offset, you can potentially offset $3,000 of your ordinary income and then carry the losses forward and apply them to gains in 2023, 2024 and so on.”
Yes, there’s a catch. A couple of them, actually.
“It’s important to remember that tax-loss harvesting doesn’t work in tax-deferred retirement accounts, such as 401(k)s or IRAs,” says James. “So when you’re considering tax-loss selling, you’ll want to consider it around your traditional investment accounts.”
And beware wash sales: “The wash-sale rule states that if you sell a stock at a loss and repurchase it or a ‘substantially identical’ stock within 30 days before or after the sale, the loss is typically disallowed for current income tax purposes.
“Restrictions around the wash-sale rules are precisely why we only harvest losses in stocks we don’t expect to make a material move higher in the near term.”
Note that the wash-sale rules apply to stocks — but not cryptos. For the time being, the law classifies cryptos as property and not as securities. But again, consult a tax pro before you act.
➢ Worth mentioning: The $3,000 offset on tax-loss selling amounts to another “gotcha tax” like the ones we described two weeks ago. Under the Tax Reform Act of 1976, this $3,000 cap took effect way back in 1978 — and has never been adjusted for inflation. If it were, it would be over $13,500 now.
“Can’t remember an instance when I have been as upset (pissed) as I am this evening,” says a reader email that arrived last week and that we can finally make time for today. “And I have had way too much Baileys and coffee prior to submitting this reply.
“As a side note the last time I recall submitting a retort (quite cynical, as I recall — the NY Times printed it) was during the candlelight marches during the Vietnam War.
“First, to give you an idea that I am totally nonpolitical:
- voted for Perot – twice
- voted for Bush 2nd in ’04 and Obama in ’08′. Regretted both votes. Bush was the first time I voted for the winner
- presidents I respected/liked — Eisenhower, Ford, Carter, Bush 1st — none really since
- voted for Gary Johnson in ’12 and ’16
- figured better to have Trump win in ’16 than Clinton — at least he could be defeated in ’20
- did vote for Biden in ’20. Am very sorry today but better than the alternative — not by much.
“I simply do not understand how we could trade a basketball player — who probably doesn’t believe the rules of international travel apply to her — for an arms dealer, when a much more maligned Marine (Whelan) is left behind. Don’t care what the narrative is that he will ‘not be left behind’; he has been left behind.
“I traveled internationally a ‘bunch’ in the ’70s and ’80s, and sat in a bar in Lima listening to a ‘judge advocate’ taking into account – ‘Never forget that what you do in this country has no effect of you being a U.S. citizen.’ You live by their laws — not the U.S.’. We may trade you for one of their prisoners in our jails, but you will serve out your sentence — will Griner?”
“Don’t mind/care that Griner is coming home — good on her. But don’t leave a Marine behind for one minute later. Additionally, there are plenty of other ‘druggies’ in prison that have been there longer than Griner. Glad for her that she is home — but as usual this is way too political — and again money and fame win.”
The 5: Hmmm… Try as we might, we can’t get as exercised about this case as you are. But for what it’s worth, you’re hardly alone — one of my most valued former colleagues shared the same outrage with me over lunch last week.
What we will point out — since Establishment media won’t — is that Viktor Bout was more or less on the U.S. payroll at one time. His planes flew U.S. supply missions in Iraq.
It’s right there in a letter to Congress, dated January 2005, from none other than Paul Wolfowitz — then the infamous No. 2 at the Pentagon. He conceded the Defense Department “did conduct business with companies that, in turn, subcontracted work to second-tier providers who leased aircraft owned by companies associated with Mr. Bout.”
Those companies pulled in about $60 million in revenue for their services to Uncle Sam, according to the book Merchant of Death: Money, Guns, Plans and the Man Who Makes War Possible. Co-author Douglas Farah believes Bout might have been working on behalf of the U.S. government as late as 2007 — the year before his arrest.
So Bout is right up there in the pantheon of bad hombres who did Washington’s bidding before Washington turned against them — Muammar Gaddafi, Saddam Hussein, ol’ pineapple-face Manuel Noriega.
As Henry Kissinger quipped, “It may be dangerous to be America’s enemy, but to be America’s friend is fatal.”
Although, come to think of it, Bout has fared much better than those other three…
Best regards,
Dave Gonigam
The 5 Min. Forecast
