— Media fright fest … This week they turned up the volume on old news, sawing sawdust again.

— Inflation … Should it really be making us and the market crazy?

— War in Eastern Europe … What’s the impact on iPhone demand?

Media Fright fest

If I were the head of a major media empire last week I would have told myself that, finally, I have reached a state of perfect happiness, nirvana. What could be better … blow-out CPI numbers and concomitant fear of the Fed, the dogs of war about to be released in Eastern Europe and the continuing nagging concern about a pandemic going endemic. Bad news sells! 

The news seemed to grab everyone’s attention Friday with the bond market taking the US Treasury 10-year yield up to 2.063% after a so-called hot CPI number (up 7.5% year-over-year). Then there were reports of the the United States, UK and Israel warning their citizenry to leave the Ukraine immediately in fear of an imminent Russian invasion.

Of course when things get a bit dicey on the street the media will always trot  out the ‘perennially wrong’. They speak with great authority and conviction but are seldom right in their assertions. One such wonk is Jeffrey Gundlach, who said, “the Fed is ‘obviously behind the curve,’ will raise rates more than expected.”

To this assertion I respond, ‘maybe’.

Everybody wanted to get into the act, especially on the inflation front. Two well-know economists, Joy Reid and Tucker Carlson gave us the bad news. Reid’s take, “prices will keep going higher and higher until the consumer says ‘enough!’” She also blames corporate greed. Carlson’s point of view is “the reality of inflation is much worse than the Consumer Price Index suggests.” He lays the blame at the feet of a certain political party. Of course, all of the above is opinion and not necessarily based on a strong grasp of (or desire to state) the underlying causes of our current inflation dilemma.

Should inflation really be making us and the market crazy?

No … it should not. I’ve discussed this many times before in kortsessions.com. We are coming out of a secular period of low inflation driven by globalization (moving production to lower cost markets) into a period of increasing inflation driven by newly-minted consumer classes around the world, shifting of supply chains to more secure venues, underinvestment in commodity production and significant money printing. This is also likely to be secular.

However, the current spike in prices comes from a different source supply chain disruptions caused by the pandemic that are still not resolved. One of my favorite reads is the work of Steve Wells (aka–The Fear and Greed Trader). Steve sees the problem differently than many who advocate for tightening on the part of the Fed. He believes and I think correctly,

“The markets dilemma; rising interest rates don’t fix the supply chain and labor shortage issues nor rising energy costs.”

Another really good source that I have used over the years is Scott Grannis (aka Califia Beach Pundit), chief economist 1979-2007 at Western Asset Management (Wamco). Scott’s take may give you the opportunity to breath a little easier after last week’s broadside of negativity. He believes that a “Fed tightening is not a near-term threat.”

“It’s no secret that an aggressive tightening of monetary policy can be a real threat to the health of the economy. But even if the Fed surprises us with a 50 bps hike in short-term rates next month and even 4-5 more hikes by year end, policy will still be extremely accommodative. It’s going to take a long time for Fed policy to become “tight,” much less too tight.” Scott does caution that too easy too long will exacerbate our future inflation problems.

I continue to ask, where’s the emergency that requires this much accommodation? 

When you take this thought process in the context of the economic breaking effects of high oil prices and geopolitical concerns it is hard to imagine drastic movement by the Fed, even if the choir, led by Gundlach continues to sing at peak volume. The attached article from CNBC, although the headline suffers from significant negative hyperbole, gives a good accounting of where the inflation we saw last year came from. It is worth a look.

A war in Eastern Europe

When considering market impact on hefty issues like this I like to ask myself “What’s the worst thing that can happen with the Russo-Ukrainian conflict?” The worst case is that it boils down to a nuclear conflagration. If that’s the case, it will not matter if you pull money off the table now or later. Either way the money will be of little use in the aftermath. In terms of the worst thing that could happen to Vladimir Putin, he could end up like “Le Petit Corporal”(Napoleon) or the “Bohemian corporal” (Adolph Hitler). My sense is that the Ukrainians (backed by Western arms and sanctions) will not make the Russians army or the Russian people feel very comfortable.

My question to investors is how will this impact the sale of Apple's (AAPL) iPhones, Ford's (F) F150s or Boeing (BA) (supplier to many militaries of the tools of the trade)? There are about 7.8 billion potential customers for these goods on planet Earth. The entire population of both Russia and Ukraine would represent only 2% of this total. Can we grow and prosper while they are at each other? Methinks yes.

Friday afternoon the market seemed to disagree with the above assessment on news that the Brits and Israelis were warning their nationals to leave Ukraine. The S&P 500 was down 1.9% and Nasdaq off nearly 2.7%. The bond market went into flight-to-safety mode as the yield on the 10-year UST, seen as high as 2.06% earlier in the day (on inflation fears), closed with the note yielding 1.918%, down 11 basis points on day (with a peak to trough swing of 15 basis points). I am still not sure what any of this has to do with iPhone demand. Apple closed down 2%.

Final thoughts

If I did not make myself clear above, much of the 7.5% year-over-year inflation we have experienced is due to supply chain disruption. Auto prices were the largest component in last year’s inflation rate. New car prices were up 12.2%. Because new vehicles were in short supply due to chip shortages, used vehicles went through the roof, up 40.5% year-over-year. When people were using the word “transient” to describe the spike it was thought these disruptions would have left us by now. They have not. Ford just closed their F150 production line in Kansas City due to chip shortages.

Ford is not alone in its supply issues. Importantly, this has been a big part of the 2021 inflation picture. This does not mean that we are heading back to pre-pandemic inflation numbers. We will still have to deal with wage inflation, which I believe to be a positive and not going away, and commodity inflation. The numbers just won’t be as alarming or eye-popping. The media and pundits continue to do the impossible, sawing sawdust, repackaging the same old stories and marketing them as new information. Don’t let them scare you out of your stocks.

What do you think?