Inflation Will Be a Pomeranian By Christmas

Pronounced Madam Agatsuma, mistress of wanderlust and vintage clothing.

Back at Floor Forty last night, where I spend too much time with local magnificoes, American inflation came up. I should say came up again, because we can’t seem to escape this topic.

That’s, in fact, how the debate began.

Agatha Agatsuma, mistress of wanderlust and vintage clothing, said almost offhandedly that she’d started the new year with a toast to the end of boring inflation talk. But in the very same month launched by her stem glass, prices rose more than expected. “I dismissed it,” she recalled. Then she dismissed February’s similar result. With the March report’s echo, she wondered if dismissal was still the right reaction or if her toast had been premature. “It ain’t gone, boys.” Inflation, that is.

Not gone, but going, I offered. The only reason any of us cares about inflation data, and by “us” I meant our group of investors and others around the world, in contrast to non-investors who might have other reasons to care, is monetary policy. Nobody gives a hoot about the price of whatever in wherever, beyond what it means to Jerome Powell and posse, which is to say, the Federal Reserve. A cooling in the pace of price appreciation would be welcomed not so much for the resulting receipts from registers as for the resulting rates from Club Fed.

Unstated at this parley of panjandrums, any of whom could tell you the fed funds effective rate as quickly as their birthday, is that if not for owners’ equivalent rent and auto insurance, inflation would already have a fork in it. We’d be discussing the American economy’s new neutral interest rate as the fed funds rate stair-stepped its way from the lifeguard’s chair to the water.

For those not quite as ensconced in the fronds of finance I’ll recap that the fed funds rate fell to nearly zero in the covid crash and stayed there until March 2022, when the Fed decided its assurance that inflation was transitory had been as reliable as a drug-induced love affair with a magic eight ball, and panicked in the other direction. Sayonara zero, hello 5.33% just 16 months later. That’s a hard pull on the joystick.

Then it leveled out and is still 5.33% today. Is that a big deal? Not really.

Historically it’s “non-deleterious,” in lingo that will get you smacked at a biker bar. Good economic reports and stock-market gains have happened at and around 5%. That point was made by another of our compatriots, though, for the record, I could have made it myself had he not cut me off. But I digress.

From his telltale squinched face, our imperially monikered companion, Septimius Moser, spoke through the process of checking between two teeth with his pinky fingernail to offer three accurate bullet points. He’s a lover of succinct lists, frequently concluded with “further detail not required,” which strikes your correspondent as ironic because the more common phrase ’nuff said gets the job done in even less detail. In any event, the following were his points:

“Booming 1980s market, a rate over five, good portion of it over ten. Dot-com boom, a rate over five. Gains ahead of subprime, a rate over five.”

Allow me to translate.

In the 1980s, the S&P 500 rose more than 200% despite the fed funds effective rate beginning the decade at 13.8% and ending it at 8.5%. In the dot-com boom from the end of 1994 to August 2000, the S&P 500 rose more than 200% again, despite the fed rate spending almost the entire time above 5% and some of it above 6%. Ahead of the subprime mortgage crash, the S&P 500 gained 21% from June 2006 to October 2007, when the fed rate was above 5%. His point was that he didn’t see why today’s market obsessively frets over a 5% fed funds rate when history proves stocks can do just fine at that level.

We don’t condone visuals at Floor Forty, unless they involve quality tipple or at most three vacation photos, but to illustrate Mr. Moser’s summation, I offer here the following charts: