Moving On Up? Inflation and Your Weekly Update

This week, we return solidly to the financial world, where the last week brought some fascinating (if not disturbing) news on the inflation front: the most recent update of the Producer Price Index (PPI).

For those of us who remember the 80s, including 13% inflation, 12% money market interest rates and 14% mortgage rates, this most recent report was a bit unsettling. Though we’re nowhere near that kind of inflation and interest rate trend at this time, “oak trees from acorns grow.”

We think you’ll find the attached enlightening… What’s your take?

Best always,
Lee and Jeremy

P.S. Jeremy just returned from an important investment conference in Orlando, Florida and we are glad to have him back! L& J


This Week’s Quote:
“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”
― Ronald Reagan


JL Davis Thoughts This Week:

In January, 1980 when Ronald Reagan took office as the 40th President of the United States, the inflation rate stood at 13.91%. For non-math majors (including your author), at that rate the price of goods and services doubles every five years. High inflation disproportionately hammers the poor and middle class who use a larger percentage of their income for basic living needs than do the wealthy. Suffice it to say those were tough times for the middle class and excruciating for the poor.

In terms of interest rates, the 1980 Prime Rate (the rate of interest charged by banks to the best borrowers) stood at 15.26%. Mortgage rates were 12-13%, or higher. Those with cash could earn taxable money market fund yields of over 12%. Your author remembers these times well; it was our fourth year in business.

So last week when reports came in that the Producer Price Index (PPI) jumped 0.6% in April, which was the biggest rise since September 2012, we were paying attention. So-called “core” PPI that excludes food and energy increased 0.5% which is more than double the average recent forecast of many economists. For those of us who like to eat, meat prices surged 8.4%, the biggest increase since 2003. Egg prices are up 44.3% over twelve months ago. Pork prices jumped 21% in just over a month. We could go on.

One report does not a trend make, but there are a number of factors that point to continued inflation on the horizon. Those who want to see the data for themselves can find it online at http://www.bls.gov/news.release/ppi.nr0.htm (a nighttime read to be sure).

From an investment standpoint, inflation by itself isn’t necessarily the end of the world. Many types of investments actually perform quite well in inflationary markets. The 1980s saw incredible appreciation in real estate, for example, as well as many other types of investments. But from an economic standpoint, inflation can be extremely problematic, slowing the economy and negatively impacting corporate earnings in the process—ultimately affecting markets.

Whether this most recent report signals an ongoing rise in prices or is just a “blip” remains to be seen. Rest assured we will be watching closely and adjusting appropriately.**

Lee and Jeremy

http://www.inflationdata.com/inflation/inflation_rate/HistoricalInflation.aspx?dsInflation_currentPage=2
http://www.fedprimerate.com/wall_street_journal_prime_rate_history.htm
http://www.infoplease.com/ipa/A0908373.html
http://www.reuters.com/article/2014/05/19/us-usa-fed-fisher-idUSBREA4I0J520140519


Market Week: May 19, 2014

The Markets

Equities were very much a mixed bag last week. After the Dow and S&P 500 set fresh all-time closing records early in the week, a strong downdraft on Thursday flattened out the S&P for the week and took the Dow back into negative territory year-to-date. The Nasdaq, which has suffered in recent months, saw a positive week, while the small-cap Russell 2000 ended the week down almost 9% from its March high. The pain in domestic equities left the Global Dow the year-to-date leader. Meanwhile, a rally in the 10-year Treasury sent the yield to its lowest level since last October

Last Week's Headlines

• After a strong surge in March, retail sales flattened out in April, rising just 0.1%. The Commerce Department said online sales, sales of electronics/appliances, and those at restaurants and bars all declined, while clothing, auto, and department store sales saw gains.
• Wholesale prices saw a sharp increase last month, rising at their fastest pace since September 2012. The Bureau of Labor Statistics said April's 0.6% increase followed a 0.5% jump in March, and was evenly distributed between goods and services. April's increase put wholesale inflation for the last 12 months at 2.1%.
• Consumer prices also increased in April at a rapid pace; the 0.3% increase was the biggest monthly jump since last June. A 2.3% increase in the cost of gas and a 0.4% increase in food (beef alone was 2.9% higher) were key. April's increase put the consumer inflation rate for the last 12 months at 2%, which is the level the Federal Reserve has informally targeted as appropriate.
• The Federal Reserve's manufacturing indexes were both positive in May. The reading on the Empire State index rebounded 18 points from a weak March, while the Philly Fed reading declined slightly but had its third consecutive positive month.
• U.S. industrial production fell 0.6% in April after a 1% gain in both February and March. The Federal Reserve said milder weather cut the need for heat, which led to a 5.3% decline in utilities output, while mining production rose 1.4%. Use of total capacity at the nation's factories slid 0.7% and was 1.5% below its average over the last 40 years.
• Housing starts rose strongly in April, with a nearly 43% increase in apartment construction responsible for most of the gain. The Commerce Department said new starts were up 13.2% for the month, and were more than 26% higher than in April 2013. Building permits--an indicator of future activity--were up 8% from March and were almost 4% higher than a year earlier.
• The eurozone economy grew 0.2% during Q1, roughly the same pace as the previous quarter, while the 0.3% growth in the 28-member European Union was slightly less than the 0.4% of Q4 2013. The strongest growth was in Germany, Hungary, Poland, and the United Kingdom. The Q1 figure meant that the eurozone grew 0.9% (1.4% for the EU) compared to the same quarter a year earlier. Meanwhile, the official EU statistical office said the inflation rate rose slightly in both areas, to 0.7% in the eurozone and 0.8% for the EU. Though both inflation rates were an improvement, they were still far below those of the previous year, and the annualized rate for seven countries was negative.

Eye on the Week Ahead

In a week that's light on economic data, minutes of the most recent Fed meeting, a report on Chinese manufacturing, and housing market statistics could receive more-than-usual interest.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Key Dates/Data Releases
5/21: FOMC minutes
5/22: Home resales, start of European Union parliamentary elections
5/23: New home sales


Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2014