📈 Why Is the Stock Market Ignoring Stubborn Inflation?

What’s on the Menu 🍴

Inflation and bitcoin are climbing higher…

And investors don’t seem nervous in the slightest.

Let’s take a look at what’s moving markets this week:Brief 1 🥊 June CPI Versus The Fed

• Why Is the Stock Market Ignoring Stubborn Inflation? 📈

• How This $800M Buy Helped Drive Bitcoin To a New All-Time High ₿

• A New Age Of Risk-Takers Is Changing Asset Management 🪂

Today’s newsletter is a 5 minute read.

Why Is the Stock Market Ignoring
Stubborn Inflation? 📈

On Tuesday the US Consumer Price Index (CPI) data was released, showing a +3.2% year-over-year inflation rate compared with +3.1% in January.

That has some investors concerned that the inflation rate is heading in the wrong direction.

After all, the Federal Reserve has said that it wants to see inflation trending towards their 2% target.

Yet the US stock market traded higher after the release, with the S&P 500 ending the day up over 1% and the Nasdaq index 1.4% higher on the day.

Shouldn’t the market be more concerned that the Fed may need to keep interest rates higher for longer?

After diving into the details of the inflation report, the market’s reaction makes some sense to us.

The reality is that one month does not define the inflation trend, and the most important category of inflation is still cooling.

Here are the major categories within the Consumer Price Index:

It should be obvious that shelter costs are SUPER important in determining inflation levels.

Here is the chart of the year-over-year inflation rate in the shelter component of the CPI over the past 5 years:

According to the CPI, shelter inflation was around +6% in February 2024 but has been on a cooling trend since the peak in March 2023 when it was up over 8%.

The massive increase in shelter costs during 2021 & 2022 appear to be abnormal.

In the five years prior to the pandemic, shelter inflation within the CPI typically ran in the +3-3.5% range:

We still expect CPI’s shelter inflation to continue trending down to the “normal” 3-4% range over the next few months.

How can we be sure?

We’ve talked about it before, but it’s important to note once again that CPI’s shelter measures are heavily lagged by more than a year.

Real time measures such as Zillow’s Observed Rent Index imply that current shelter inflation is already running at a more normal +3.5% level:

The current downward rate of change in CPI shelter along with the real time gauges of shelter costs suggest that shelter inflation should cool to +4% or below by July 2024.

Shelter inflation of +4% versus +6% knocks roughly 0.70% off the current 3.20% inflation rate. That nice tailwind could get us down to +2.5% on the CPI this year (all else equal).

Could inflation in other goods & services derail that progress?

That is certainly a risk…

But right now non-shelter inflation doesn’t look too scary overall:

Energy is always an “x-factor” that can change quickly with geopolitical developments.

And non-shelter services inflation is running hot right now at +4%:

Non-shelter services include things like transportation, car insurance & repair, child care, education, entertainment, pet services, medical services, and financial services.

All of those services added together make up about 25% of the CPI.

Where does that leave us after February’s CPI report?

Stock markets remain bullish because the most important thing, shelter inflation, is still cooling.

Bond markets also remain calm, though we did see yields rise a few basis points on Tuesday.

It will take a lot of unexpected inflation in services or energy this year to derail the disinflation trend.

As always we remain optimistic but vigilant, and we’ll keep you informed here at the Daily Dough!

How This $800M Buy Helped Drive
Bitcoin To a New All-Time High ₿

This week in the crypto sphere, Michael Saylor, the CEO of MicroStrategy, made waves with an $800 million Bitcoin shopping spree.

Saylor's strategic maneuver not only bolstered Bitcoin's market presence but also raised intriguing questions about the future of digital assets.

Here's the scoop on how Saylor's weekend spree is shaping Bitcoin's trajectory:

Saylor's Leverage Play: A Bold Move

Saylor's approach hinges on leveraging unsecured debt to purchase Bitcoin, creating a cycle where volatility fuels performance, drawing in more capital, and enabling further leverage.

This convertible debt strategy has proven to be accretive, enhancing shareholder value by increasing Bitcoin per share.

MicroStrategy: The Bitcoin-Backed Behemoth

MicroStrategy's audacious move has placed a staggering $12-$13 billion worth of Bitcoin on its balance sheet, presenting a unique proposition for investors.

For those enamored with Bitcoin's potential but wary of its notorious peaks and troughs, MicroStrategy offers an over-collateralized entry point into the Bitcoin market, blending the thrill of upside potential with a safety net.

The Appeal to Diverse Investors

Saylor's strategy casts a wide net, attracting a diverse cohort of investors. From Bitcoin maximalists relishing the equity's accretive yield to traders thriving on the asset's volatility, MicroStrategy's novel approach carves a niche in the market.

Its ability to issue convertible bonds with a Bitcoin twist sets it apart from traditional ETFs, offering a compelling blend of upside potential and downside protection.

Navigating Bitcoin's Valleys and Peaks

Despite Bitcoin's rollercoaster journey from $68,000 to $17,000, Saylor's conviction remains unshaken.

Drawing parallels with Warren Buffet's investment philosophy, Saylor champions Bitcoin as a superior asset class, outpacing gold, equities, and bonds with its digital agility and omnipresence.

The asset's ethical standing, devoid of issuer or geopolitical ties, further cements its appeal as the ultimate digital property for global transactions and capital preservation.

The Future of Bitcoin: Bright but Uncharted

Saylor envisions a future where Bitcoin's halving events only amplify its scarcity and value, countering the selling pressure from bankruptcy estates and miners. He advocates viewing Bitcoin as digital property rather than currency, sidestepping the contentious debates surrounding its utility as a medium of exchange.

This perspective not only safeguards Bitcoin's growth trajectory but also aligns it with global property ownership paradigms, promising a future where Bitcoin's value is universally acknowledged and embraced.

As we stand on the cusp of a new era in digital assets, Saylor's bold moves and visionary outlook offer a glimpse into a future where Bitcoin transcends its volatile reputation, emerging as a cornerstone of digital property and capital preservation.

A New Age Of Risk-Takers Is Changing
Asset Management 🪂

People are getting filthy rich in Bitcoin. You’d think this is a financial advisors dream!

But, believe it or not, there are advisors that are really afraid to work with anyone who owns crypto! Large firms won’t even let their advisors touch it half the time.

For one, many financial professionals don’t fully agree that Bitcoin is a worthwhile asset to own. They don’t get why anyone would want to own a volatile asset that doesn’t kick off “cash flow” or have any “intrinsic value” in their opinion.

Second, they don’t want to take on the liability and risk of suggesting or managing Bitcoin.

But, Bitcoin investors with a high percentage of their net worth in the asset is more common than you think. Tyrone is right, firms are not prepared for dealing with these clients. The financial industry in general isn’t.

It’s simple: Crypto investors are built differently and they need financial professionals who understand them.

Many of them were hoisted into the blockchain world early and they got used to volatility.

Bitcoin volatility makes stock corrections look like child's play, and most of them don’t care. It’s par for the course that they’ve grown accustomed to.

One other thing: Many Bitcoin investors don’t trust the traditional financial system.

They would prefer to own more Bitcoin over fiat currency like the U.S. dollar. Advisors are supposed to take into account a clients morals and values. This fits in the values category.

So, advisors behind the curve are being forced into a dilemma. They’re having to embrace the adoption of Bitcoin (and other cryptocurrencies to a degree), and not make a client feel shameful for wanting to have a higher allocation or being invested in the first place.

They’re having to put their personal biases to the side, and respect the high level of risk these investors WANT to take on.

Here’s an example of how advisors can be quick to label crypto investors in a similar light as “lottery winners”. I very much disagree with this person’s thoughts, and it’s a shame financial professionals are feeling this way (no wonder there is a disconnect):

If they don’t shift this mentality, they’re going to lose client opportunities. Better yet, the crypto community will completely avoid going to advisors for help that they may really need with their money.

But, advisors in the end go where the money goes. It’s going in the hands of the ultimate risk-takers.

Not only that, Bitcoin isn’t going anywhere anytime soon. In fact, it’s becoming more engrained in our system with ETF’s being approved.

So, the asset management industry is going to have to learn how to balance client values, risk tolerance (like they’ve never seen before), and concentration risk that crypto investors may face.

It’s a delicate dance, but it’s very do-able.

Food For Thought 🧠

“Wide diversification is only required when
investors do not understand what they are doing."
- Warren Buffett

DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.