To The Moon

In early 2021, inflation was something written about in history books. Unless you remembered the late 1970s, you had never really experienced inflation.

At the end of 2021, inflation was a very real problem for real people, but the market thought it was a short-term event. Stocks rose nearly 30% during the year, and there was reason to be optimistic as jobs opened up and the pandemic subsided.

But that euphoria only lasted so long. Inflation caused very real changes in how people spent money and prompted a major response from the Federal Reserve. When the market finally woke up, it wiped out all of 2021’s gains and, in the case of the Nasdaq, then some.

Are we in the same place today?

It may be worse. But more on that in a moment.

What’s Up With Inflation?

April inflation data — known as the consumer price index (CPI) — came out last week, and prices rose 3.8% from a year earlier, driven by energy and food costs.

This shouldn’t be a huge shock. Crude oil $Micro WTI Crude Oil - main 2607(MCLmain)$ prices have jumped since the U.S. started bombing Iran.

And the price of gasoline has more than doubled since the start of the year.

But it may be worse than that. The producer price index (PPI) was up 6%, the highest level since early 2023. It could continue to rise as energy price increases flow through the system.

What’s different today versus in 2021?

Everything!

In 2021, the world was full of all kinds of weird shortages from electronics to commodities, which sent prices higher as people went back to living more “normal” lives as the pandemic came to an end. The entire year was an odd mix of supply and demand imbalances that took until the end of 2022 to work through.

We also went from a 0% interest rate environment to a more normal 5.25%.

The market didn’t like what it saw in 2022.

Stocks fell over 20% from peak to trough despite a booming jobs market and no recession.

Will this time be the same or different?

I think the reasons to be concerned outweigh the reasons to be optimistic.

Why Inflation Could Be Sticky

• Rising oil prices act like a tax on consumers and nearly every business (ex. plastics, lubricants, etc)

• Supply shortages take months to move through the system, and we haven’t really seen the impact of the Straight of Hormuz shutdowns

• Higher food prices are second behind energy in the impact on CPI, and there’s no sign that prices are going down

Why a Recession Is Likely

• The consumer is showing signs of breaking

  • Restaurants are struggling

  • Retailers are struggling

  • Now, energy and food will eat more of their paycheck

• Debt is up, and interest rates may be next

  • During the pandemic, consumers paid down debt, but credit card and other revolving debt are now at all-time highs again

  • If inflation continues to be a problem, the Fed will be forced to raise rates, slowing the economy further

• AI gives job cuts an excuse

  • The unemployment rate is still low, but that may not be true for long if predictions of job cuts come true

  • Management can now use “efficiency” and “AI” as an excuse to cut more jobs

Add it all up, and I think there’s reason to be worried about the economy and the market as the year goes on.

I’m not changing how I invest in the Asymmetric Portfolio because I’m happy to buy compounders at a long-term discount today. But I’m aware that the AI buildout is propping up big chunks of the market, and an economic downturn may cause cracks in the tech spending-fueled euphoria.

The market is being greedy, and I think it’s time to be fearful.

But it looks like I’m the only one who feels that way right now.

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