On Wednesday of this week, the U.S. Bureau of Labor Statistics released its latest update on the closely watched Consumer Price Index. Politicians and pundits along with economists and investors had been lookin’ and hopin’ for that INFLATION number to be 8.8. An ugly number for sure but not what would encourage mass self-defenestration.

When the print came, and it said “9.1” , everybody started looking at each other. Some pointed fingers. But here at the office we are stoic, so we were reminded of Johnny Cash. If you’re old enough, you might remember this song: (edited for length)

How high’s the water, mama?
Two feet high and risin’
She said it’s two feet high and risin’

We can make it to the road in a homemade boat
That’s the only thing we got left that’ll float
It’s already over all the wheat and oats,

How high’s the water, mama?
Three feet high and risin’

Well, the hives are gone,
I lost my bees
The chickens are sleepin’
In the willow trees
Cow’s in water up past her knees,
Three feet high and risin’

How high’s the water, mama?
She said it’s four feet high and risin’

Hey, come look through the window pane,
The bus is comin’, gonna take us to the train
Looks like we’ll be blessed with a little more rain,
Four feet high and risin’

Now, before you start thinking that it’s all bad news, there’s something to be mindful of. The CPI number is important because it shows the rate at which prices being paid by consumers is changing, or has changed, from the prior reading. In other words, it’s what we call a trailing indicator. Trailing indicators are good because they focus on factual things: stuff that has already happened. On the other hand, if you look only at indexes based on trailing data you will not have a very good view of the future. Imagine driving your car down the road but you are only allowed to look in the rear-view mirror.

OK, back to that 9.1 CPI.

If you guessed that the biggest single contributor to the rising prices was gasoline, you would be right. If you’ve been to a grocery store recently, you know that food was also a big contributor. But guess what? Since early June, the futures price of RBOB has fallen about 27%! (From $4.27 to $3.17.)  RBOB, by the way, is what refineries use to make unleaded gasoline! Now, all of that drop will not show up at the pump immediately. But a lot of it will not too far in the future. Remember, we are talking about futures but the settlement date on that $3.17 stuff is just around the corner: 7/29/2022. And other commodities have been showing similar slides in prices (futures). Copper, aluminum, lumber ($992 in May, now ~$640), wheat all have been trading down. Gee, so everything’s OK, right? Well, not exactly. As we hear so often, it’s complicated.

Let’s say that a whole bunch of stuff that the CPI is based on actually HAS, or IS IN THE PROCESS OF, falling by something like 30% — since the peak point of the problem. Will that be enough to get the Fed to back off on the rising Fed Funds rate? The answer is ‘not very likely’, and here’s why: Take that 9.1 number and then take 30% out of it. What do you get? Here’s the math: 9.1 – 2.7 (30%) = 5.6. Sadly, 5.6 is still more than 100% higher than the Fed target of 2.5%.

Ron’s Market Minute -– A Picture Is Now Only Worth 200 Words

It’s a bit difficult to ignore today’s early market action which fortunately is looking quite happy. It is a refreshing change from the clouds of negativity which have been the dominant players in recent days. to see that there are some consumers out there buying. Of course, that’s what we all do best: Buy (something!). 

 However, as Tony says, one day does not make a trend so let’s zoom out and have a look at this year so far. In particular, let’s have a comparative look at the S&P Index* (as represented by the ticker SPY) vs the general commodity complex (as represented by the ticker GSG). Let’s go to the chart:


In past bear markets (with the exception of 2020 — which was too short to include) the sectors of Commodities and especially Energy, managed to hold up while general stocks crashed. This has been the case this year as well. Note that GSG did a very good job of outperforming the broader stock market from the beginning of this year — up until about the second week in June. Short story version: The more commodities an investor held, the better performance she received — up until June. However, you’ll note that since June the commodity complex has fallen along with general stocks. 


As of this writing stocks (year-to-date) are down about 20% while Commodities are still in positive territory. Since the June peak, Commodities have fallen 20% while stocks have ‘only’ fallen about 8%. And Commodities are now significantly underperforming stocks.


So, why is this important? I’m glad you asked: In past bear markets, once the commodities have fallen apart, it has been a signal that there has been nowhere to hide (not a good sign) in the general markets. There are a few inverse mutual funds bucking the downtrend – a possible ray of hope. So, while most things have yet to break their downward trend, I note that historically this effect occurs later on in a typical bear market and THAT may possibly be signifying that we’re closer to the ‘real’ bottom.

 I’m not making a prediction, at least not today. But I am noting correlations from past bear markets.

 Oh, and regarding the title today- with inflation running so high, a picture is no longer worth 1000 words.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk


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