It has been a fascinating week to be a market observer.
In a funny way, it actually reminded me of the way a child anxiously awaits Christmas morning.
Every investor was nervous in excitement to see whether Santa would bring them the gifts they wanted or a more unwelcome surprise…
The buildup was more intense than the actual result.
As a result, we got dramatic headlines like this:
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| Source: Australian Financial Review |
I hate to break it to Alex, but shares have been facing wild swings all year due to inflation and interest rates.
OK, that is obviously a cheap shot, but come on. You don’t need to have an incredible intellect to know that the market is going to react strongly to this week’s developments.
Which got me wondering, should something as trivial as the CPI really have this much sway?
Have we reached a point where the market is overanalysing inflation and interest rates? Perhaps even to the detriment of a well-functioning free market?
More than just one metric
See, the irony in the fixation on CPI to me is that the Fed doesn’t even use it as their preferred metric.
They elect to rely more on the PCE Index: the personal consumption expenditure price index. This is mainly because the data is derived from business surveys rather than consumers. And despite what we’d all like to think, individuals are often far less reliable than groups for providing accurate data.
That’s not to say that CPI is wrong, just that it can tend to be a little more skewed than the PCE.
On top of this, the way these metrics are even calculated leads to an advantage for the PCE:
‘The CPI formula is more likely to be affected by categories with wide price swings such as computers and gasoline. The PCE calculations smooth out these price swings, which makes the PCE less volatile than the CPI.’
So, given these differences and the fact that the most recent PCE data was released two weeks ago, why is everyone still going crazy over CPI?
I wish I had a good answer for you, but I simply have to assume that it is largely because it has long been this way. More than anything else, tradition seems to be the reason we’re fixated on the CPI.
Oh, and if you’re curious, the PCE data was lower than forecast. On an annualised basis, headline PCE dropped from 6.3% to 6% from September to October:
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| Source: Trading economics |
The best investment opportunities don’t care about inflation
At this point, I’d like to suggest that you, as an investor, should move beyond the inflation babble.
You can still keep tabs on it, understand its influence on markets, and plan around it — but don’t let it dictate your every decision. We are past the point of that now, with the worst almost certainly behind us.
Instead, if you’re looking to make money over the long term, it’s time to start hunting for potential.
As Ryan Dinse explained in Monday’s Money Morning:
‘People are blind to a number of hidden risks including but not limited to the risk of exponential change.
‘This means the pain of any losses is magnified as they weren’t expected.
‘Surprisingly (to me anyway), this idea — that investors underestimate the effect of rapid change on their investing models — isn’t a popular view in my industry.
‘But the contrarian in me thinks this probably means it has more chance of being right!’
I couldn’t agree more.
Because while everyone has spent this week fretting about inflation and the Fed, they’ve ignored more important long-term developments…
For example, earlier this week, US nuclear fusion researchers produced a net gain in energy for the first time ever! While it has certainly attracted some headlines, it is merely a footnote in the minds of those fixated on markets.
And that’s the entire point I’m trying to highlight.
Investors are so caught up in the ‘now’ that they’re ignoring the ‘next’.
Energy has been such a huge part of this inflation issue that we can hardly separate the two. Yet here we have a team of scientists that is proving a source of nearly limitless energy is more feasible than many imagined.
Perhaps if we all spent a little more time focusing on developments like that rather than the ‘wild swings of US inflation’ we’d see the market appreciate the disruption that is coming.
But if the market won’t, at least you can. Because no matter how long it takes the mainstream to see what we see, early investors can always profit from identifying big changes before they happen.
You just won’t hear about it by reading about CPI for the 10th time in one day.
Regards,
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Ryan Clarkson-Ledward,
Editor, Money Morning
Ryan is also co-editor of Exponential Stock Investor, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.
