The Real Cost of Inflation

I just paid over $80 to fill up my Jeep.

Now, I see that on the pump, and I think “wow that sucks”. And I bet that’s all the thought you give it when you fill up too.

But for some Americans (probably most) that doesn’t just suck. That’s a problem.

Paying twice as much for gasoline than you did during the last several years means tough decisions. Because while gasoline has been nearly this expensive over the last decade — a problem ultimately cured by the Saudis flooding the market with oil to undercut the booming U.S. shale sector — it was an isolated cost increase.

Back then, only the price of gasoline shot up. Everything else plodded along normally.

This time around everything is up. It’s a full-scale assault on consumption. And that means a lot of tough decisions across the U.S. on what to stop doing or what to stop eating, drinking, streaming, subscribing, whatever.

When costs rise, you, a business — everyone and everything (except the government) — can do one of two things. Cut spending or grow your income.

And for most Americans and businesses, growing income is no longer an option…

The State of the American Consumer

That’s because, with the Fed pushing the cost of money higher, there are far fewer opportunities to fund that growth in income.

Cash out mortgage refis are dead. The cost to finance any project just went up, so fewer projects get financed at lower projected profitability. Sales are down and costs are up which means corporate earnings will take it on the chin.

That leaves consumers with two survival strategies for boosting cash flow — working more and credit card debt.

Yesterday, big box retail showed us all how deeply inflation is starting to cut.

Walmart undershot earnings estimates by 10% and Target by 27%, sending their stocks down 18% and 30%, respectively. That scare took the rest of retail — and the market — with it.

And the Fed has barely begun its assault on inflation.

Two weeks ago, I was ambivalent towards the stock market and decided to make a small bet on big volatility.

Then last week, every trade I saw told me to sell so I leaned onto the short side.

And between yesterday and today…well, here’s what I told my subscribers:

“The market tried to rally three times and failed, ending the day with a high-volume sell-off. Tomorrow is a big expiration, and anything can happen, but today’s trading action and yesterday’s reaction to massive earnings misses by Target and Walmart makes me glad to be short.”

But while Americans cut back, elsewhere the increased cost of living has driven the masses into the streets.

Direction Is One Thing, Path Another

By my count we’ve seen food riots in Iraq, Lebanon, and Sri Lanka so far in 2022. And there’s very little chance that riots won’t spread this summer.

This is basically set in stone. Nothing can reverse that trend in time.  And while the economy and stock market don’t necessarily move in tandem, the direction of both look clear.

I am bearish on the economy because we’re sure as shooting headed into recession. I’m bearish on stocks not only because I think the panic setting into markets can take it down another 25% but also because the consumer is already feeling the cut of inflation regardless of what happens on the growth front.

But experience has taught me that markets don’t fall in a straight line. Many of the biggest single day rallies happen in bear markets. And you either need to be in front of them or wait for them to pass because the only other option, chasing them, is a guaranteed loser.

So, I’m playing under the assumption we’re in a bear market. And unless the Fed steps in to bail out stocks again by stepping out of the inflation fight, I bet this bear bias will be with us for a while.