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05.13.2022 by David Robinson

April Inflation Report Not Encouraging

Inflation Runs Hot Again in April: The Consumer Price Index climbed 8.3% from a year ago in April. That was a slight decrease from the 8.5% gain in March but was marginally higher than estimates. Excluding the more volatile energy and food prices, core inflation rose 6.2% in April. CNBC

FAI 05.12

  • Inflation Data Keeps Pressure on Fed: When the Fed raises short term interest rates, it is tapping the economic brakes. While the Fed will comb through the April data, it is unlikely that it will see any data so encouraging that it will back off its goal of getting short term rates to the 2.5-2.75% range by year end. Wall Street Journal
  • Magnitude of the Inflation Problem: Focusing on the 6.2% core inflation rate and the rate of compensation growth (see below), which is the biggest driver of inflation, we think that the underlying inflation is in the 6% range or roughly 3.5-4% higher than the Fed believes is healthy for the economy. That is a big number to bring down without increasing unemployment which will reduce demand. The odds of an economic soft landing may not be that favorable. MarketWatch
  • Wages Are Up But Not Keeping Pace With Inflation: Compensation has been going up, but many are losing ground to inflation. Average hourly earnings are up 5.5% year over year, but real earnings (i.e., net of inflation) are a negative 2.6% for hourly workers. Wall Street Journal CNBC
  • What Is Your Inflation Rate? The CPI and core inflation rate are broad general indexes and are not as useful to individuals and families. We know that the cost of our food and gas have gone up, but does that mean our costs have gone up more or less than 8% over the past year? Lifestyle makes a big difference, for better or worse. Try this NYT interactive calculator with a series of questions to hone in on your personal inflation rate. New York Times

Russian Invasion of Ukraine-No End in Sight: Putin miscalculated badly when he launched an attack on Ukraine, but there is no current path to a peaceful resolution. In the face of forceful Ukrainian resistance, supported by massive U.S. and European aid, Russia stands no chance of conquering the entirety of Ukraine. Putin’s downsized objective is to seize and hold strategic territory in southern and eastern Ukraine. CNN Washington Post Anything less will be a defeat for Russia and a material threat to Putin’s power. Ukraine is emboldened and has less incentive to concede anything. Putin does not have a face saving out and must be in it for the long haul. Washington Post The massive human suffering will escalate. The conflict will weigh on the global political order and economy. For investors, it means at a minimum significant pressure on energy and food prices for the foreseeable future. We hope this pessimistic take turns out to be wrong. Professor Jeffrey Sachs, one thoughtful voice, argues that Ukraine and Russia should resume negotiations based on a prior framework that collapsed when Russian atrocities surfaced. Project Syndicate

Rich Strike Wins Kentucky Derby in Massive Upset: Some patience may be in order for this one. Following the above notes with comments on a horse race must seem odd at best. Having grown up in the heart of Kentucky’s Bluegrass, the Derby is a significant event. With friends who were partial owners of one the leading contenders, this was a year to engage and prepare in advance. The clear consensus was that 6 or 7 horses stood a reasonable chance of winning. Fast forward to the race itself. Rich Strike came charging down the stretch from the back of the field of 20 horses and won in one of the great sports upsets of the ages, paying off at 80-1 odds. Not one “expert” ever mentioned Rich Strike prior to the race except to note that it was a late entrant. My biggest takeaway? Our ability to predict the future is limited at best. It may seem that this is too much of an extrapolation from a sporting event, but there may be a reminder of an important insight here. If all the racing experts in the world are totally blindsided by an event as simple as a two-minute horse race, how can we possibly predict global economies, wars, etc.? Watch the replay here if interested. It was a thriller. YouTube

Roth Conversion in 2022? We are not halfway through the year, but it is not too soon to think about how to capitalize on the current situation. Or as we like to ask, is there a way to make lemonade out of lemons? One strategy that many investors will want to evaluate carefully is a Roth conversion. CNBC With asset values down, will it make sense to convert a portion or all of a traditional IRA to a Roth? The taxpayer will incur income tax on the amount converted but this might turn out to be a deal if those assets rebound to former values post-conversion. For an excellent primer on Roth IRAs, including conversion thoughts, see David Smith’s blog. Robinson Smith Wealth

Short Takes:

  • Optimal Sleep As You Age: A new study concludes that seven hours may be a good amount of sleep for those in middle age or older. SciTechDaily
  • Huberman’s 10 Life-Changing Wellness Tips: Stanford Professor Andrew Huberman is a gifted distiller and communicator of complex health information. See this article for a summary of his top tips. Medium To view his podcast topics. Huberman Lab
  • Don Winslow, City on Fire (A Book Recommendation): Don Winslow is as good as it gets when it comes to crime thrillers. City on Fire is his latest and is up to standard. Set in Providence, it explores the ethnic family wars to control pieces of the crime pie. Washington Post
  • Turning Anxiety into a Superpower: Anxiety may be getting a bad rap. To the extent we take the information it gives us and turn it into constructive action, it may be much more positive than we ever thought. Medium Professor Wendy Suzuki, an author of a book on this topic, explains it in an interview. YouTube
  • Eat Your Walnuts: A recent study touts the benefit of walnut oil for protections from Alzheimer’s. And nuts are easy to incorporate into most diets with a small amount of effort. Eat This
  • 10 Japanese Concepts for a Better Life: Interesting foreign concepts without an exact correlation in English have always seemed like fertile grounds for new insights. See this one on Japanese concepts with their approximate English translations. Better Humans

A Quote to Consider: “Sooner or later, you realize that everything comes down to mindset.” Shane Parrish

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