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What Happened:
Inflation numbers came out on Wednesday morning and they were much hotter than expected—so hot even Paris Hilton noticed.
<0 days without a dad joke>
The most overused buzzword on the Street when it comes to higher inflation—or any unexpected event that skews data for that matter—is “transitory”. Whether or not this high inflation remains transitory will depend on the next few months as the economy starts reopening. By definition, for something to be transitory, it can only last for a brief moment or isn’t permanent.
I do find myself in the transitory camp for a couple of reasons: 1) The Fed has access to way more data and they are much smarter than any of us would ever admit to and 2) The numbers from the most recent print are higher partly because of the base effect from a year ago when we were all panicking in our homes and shutting down businesses.
It doesn’t take a genius to understand that prices on consumer goods have been increasing all around us. Raw materials and parts have spiked in price as demand has outstripped the ability of suppliers and shippers to keep up. As everyone continues to say “we live in unprecedented times”.
Just go out and try to buy anything without feeling like you got taken advantage of. I purchased my first flight in 18 months and paid nearly $500/ticket for a flight that should have been less than $300. The rental car was over $1000 for 5 days. A 2x4x8 piece of lumber from Home Depot is $8, which used to be about $2.50 a year ago. National gas prices are at the highest levels since 2014, hitting a national average of $3. Used cars are now an appreciating asset. The list goes on.
Just recently, companies like P&G, Honeywell, Whirlpool, and 3M have mentioned they plan to raise prices to offset the cost of more expensive supplies. Consumers should be praying that these costs are transitory, especially if and when raw material costs drop again. Otherwise you may be buying their stock to offset your purchases.
After seeing some of the headline inflation numbers, we jokingly made a comment on Twitter saying the Fed should consider tapering its purchase of bonds or raising interest rates. The Fed has essentially stripped this tool from their toolbelt. But even Powell mentioned in the most recent FOMC meeting that “an episode of one-time price increases as the economy reopens is not likely to lead to persistent year-over-year inflation into the future.” He expects the clogged supply chains to resolve themselves. And they very much could do just that but we have to give it time.
As noted by AP, once expectations for inflation do rise, they can be self-fulfilling: Workers start demanding higher pay to offset expected price gains, and retailers begin raising prices to offset increased wages and supply costs. This has already happened in an indirect way as a response to the psychological warfare and working from home shifts caused by COVID. I’ve seen many small businesses shutting down because they can’t get enough help. The answer is higher wages and lower margins.
Even though everything seems expensive right now, let’s not freak out over a single data point. After all, it’s just transitory.
Discussion:
Now let’s see how the People’s Portfolio did this week…
We were down again for the 4th week in a row as tech stocks continue to be abused like an overpriced rental car—thanks to the most recent CPI data.
On Friday, we voted Exxon Mobil (XOM) to remain in the portfolio for another 10 weeks—edging out CVS, Honeywell, and Trex.
XOM has essentially traded flat over the past 10 weeks but has rallied recently on the Colonial pipeline ransomware attack and reopening trade.
Roundhill Esports ETF (NERD) is on the chopping block next week. We’re currently holding onto an 8% loss as some of the larger holdings of the ETF have been hit on the reopening trade.
We’re currently -10.70% on the year and now underperforming the S&P 500 by 2182 bps and the Nasdaq 100 by 1462 bps.
Keep an eye out for the new Twitter poll every Friday. It’s your democratic duty to vote each week. Follow along in real-time with nearly 300,000 others on Public.
Portfolio News Highlights:
The biggest stories affecting our portfolio this week:
Oil Prices Rebound As Global Oil Glut Drains (Yahoo)
Twitter Picks Up Acquisition Pace, Driven by New Product Push (Yahoo)
Square Has ‘No Plans’ to Buy More Bitcoin After $20 Million Loss (Barron’s)
Seagate and Western Digital Shares Take Off as Crypto ‘Farmers’ Snap Up Drives (Barron’s)
There's Been No Shortage Of Growth Recently For Caterpillar's Returns On Capital (Yahoo)
Coinbase Reports Strong Q1 Earnings After IPO (Yahoo)
Penn National Gaming to Launch Barstool Sportsbook Mobile App in Indiana (BusinessWire)
Charts:
The following charts cover WeRamp Twitter polls Weeks 9 through 18 from the time period they entered the portfolio. Our stock is highlighted in thick green in each poll. Data courtesy of Ycharts.
Oil stocks traded flat/up on the week, Schlumberger continues to break out above the rest.
Square (Week 12) has now officially given up all of the gains we enjoyed after the first few weeks of purchasing the stock. What was once a ~28% gain has now morphed into a -2.89% loss—most likely due to tech cooling off substantially as well as Bitcoin taking a breather in the past month. Thanks Elon!
The Costco to Coinbase flip on Week 15 continues to be a terrible trade. Unfortunately we got in too early on this name. Chalk it up to bad timing. I’ve been accumulating shares in my personal accounts. Maybe this was just a big boomer trap.
We still made some good trades on losers like MELI, BMBL, and TDOC. Just when you think those stocks can’t go any lower, they drop another 20% in a few weeks. Pain.
What Else We’re Reading:
Blogs/Articles:
How $1 Billion in Investor Money Was Wiped Out By a Property Pitch - Emily Cadman, Karin Matussek, Youkyung Lee (Bloomberg)
Play Your Own Game - Morgan Housel (Collab Fund)
Housing May Be Inflation’s Hidden Danger - Brian Chappatta (Bloomberg)
Are We Following the Science or Our Tribes? - Carrie McKean (NY Times)
Let’s Talk About Inflation - Cullen Roche (Pragmatic Capitalism)
3 Explanations for the Vaccine Slowdown - Derek Thompson (The Atlantic)
Best to Worst - Michael Batnick (Irrelevant Investor)
Books:
The Premonition: A Pandemic Story - Michael Lewis
Need new reading material? Visit my Amazon page for my most purchased book recommendations.