Not since Louis Jordan’s infamous 1943 inquiry of ‘Is You Is, or Is You Ain’t?’ have so many sat on both sides of a question.

Today we are not pondering if the answer is ‘My Baby”, instead (since this is a financial newsletter) our questions relate to inflation. Do we have it? If we do, is it meaningful? Is it ‘transitory”?  Will it hurt?

I think this is a very good time to recall some words of wisdom, once spoken by Yogi Berra: “It is hard to make predictions, especially about the future.” Inflation is probably one of those things most difficult to predict and for a couple of interesting reasons: a) if the general feeling is that if it’s on its way then people will react now. For proof of that, imagine what would happen if investors and traders truly believed that there would be a run on banks – in 6 months. Who would wait six months before moving to protect her assets?  If you said ‘Nobody’, you’re on the right track. b) There really isn’t one ‘inflation’. We should remember that the whole of the economy is made up of sectors and these individual pieces of the pie are quite reluctant to rise and fall like synchronized swimmers. If you start having to pay more for some stuff but pay less for other stuff, the value of your dollar has not changed. As long as your dollar retains a constant purchasing power, there can be no inflation. And that brings us to: c) a rise in prices does not necessarily equate to inflation. If it did, then no asset could ever rise in value.

At the moment, what looks like inflation is dominated by the Durable Goods sector where prices have been advancing like the German army in the early days of Operation Barbarossa. Take a look at automobile prices – especially used cars and trucks, which are up 40+% over last year. Most of that big increase is a knock-on effect from a scarcity of computer chips that the cars must have to operate. No chips for new cars = increased demand for used (already made) cars. Scarcity creates value so are those chip price increases inflationary? Inquiring minds may be confused. Once automobile supply lines have stabilized, will that create a surplus of used cars?

Of course, there are other troublesome areas but most have also been hit by various black swans – mostly Covid-19 related. Take energy for example. Everyone is (rightfully) peeved at rising gasoline costs. But, remember that the pandemic caused the world demand for oil to plunge and while oil is being affected by global political issues, we still have an unbalanced supply system as demand returns to pre-pandemic levels.

Fed Head, Jerome Powell is still the number one cheerleader for arguing: “Yes, but it’s transitory.” That’s his story and he’s sticking to it. As of the moment, we find it difficult to launch a compelling counter argument. On the other hand, our two-handed economist says that if we do encounter meaningful inflation, it likely will be a self-fulfilling prophecy, brought about by enough people having been convinced of its inevitability.

Ron’s Market Minute – A Time for Defense?

You may recall having me speak in the past about sectors and sector rotation in the markets. And so, you probably remember that for the last half of LAST YEAR we were very sure that the Technology sector was one of the best places to be. You probably remember that the ‘aggressive sectors’ are generally the best place to be when markets are positive and rising. (Technology, Industrials, Consumer Discretionary,) but as I checked today’s market status, I find that three of the top four best performing sectors are DEFENSIVE! Here’s the one-week chart today:

I see Real Estate, Consumer Staples and Utilities leading the market higher. We look at the comparative strength to give us a potential view of which areas of the market are likely to be sustainable. That said, I’m not a fan of seeing defensive groups leading during a rally. The defensive groups are typically being bought when markets are weak. So, I’m only using a one-week look, but the looks indicates that Wall Street is leaning defensive, and that means that we should consider the possibility also. This is a very limited sample but I note that as the S&P500 Index* has moved to new highs, it’s done so with 3 defensive sectors in the top 4. Yes, Financials have the top spot, but it’s earnings week, and banks are doing quite well, thank you.

This is just one very short-term signal that makes me scratch my head and wonder – what’s happening here? In days ahead this signal will be either supported or contradicted by others. As always, we’ll keep an eye on that for you.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
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www.denkinvest.com

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Ron Denk is a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Mr. Denk is also an Advisory Representative offering services through Denk Strategic Wealth Partners, a Registered Investment Advisor. Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation.

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