How Inflation Strangles the Economy

[Trading With Larry Benedict]( How Inflation Strangles the Economy Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… By Larry Benedict, editor, Trading With Larry Benedict Was it good news or bad news? That’s the question the market has been asking since the latest Consumer Price Index (CPI) data release on Wednesday. [At 8.3%, April’s inflation number]( was slightly lower than March’s 8.5%. But it was enough for some of the talking heads to declare that we’ve now passed peak inflation. [Chart]( I’m not sure I can agree… The headline number may have dropped, but it’s all those little subsets of data that tell the real story… data from essential items like gas, electricity, and food. While gas fell 6.1% in April, we must remember that it increased a whopping 18.3% in March. [It’s still 43.6% higher than a year ago](. Electricity is up 11% year over year, and it’s the same with piped gas up 22.7%. But the real creeper is food inflation, which has now risen 17 months straight. At nearly 11% higher than a year ago, food inflation rose at its fastest rate in over 40 years, affecting everyone’s pocket. Meaning, the average consumer has less to spend on everything else…whether that be a night out, a weekend away, or even upgrading devices. [[DEMO] Penny or Dollar? (Not what you expect)]( This is the real underlying story behind the data. Runaway inflation erodes people’s ability to purchase goods over time… and this slowly strangles the economy. Even after the slight drop, we’re still talking about an inflation rate going over 8%. That should be enough to frighten anyone… Not only because 8.3% inflation is above market forecasts of an 8.1% rise… but because it reinforces the hard truth about inflation. Once inflation takes hold, there’s simply no quick fix… the Fed’s brutal and one-dimensional lever of increasing interest rates is the only resort. And this latest inflation data further confirms that the market will continue to see interest rates rise after plenty of future Fed meetings… The Fed was clear about having a 0.5% increase at each meeting. But some people believe the Fed will have to raise by 0.75%. While I believe they’ll stick with 0.5% at these next two meetings, the speculation of a bigger rate increase continues to spook the market… That’s why the S&P 500 fell 2% after the inflation data released and is now trading near March 2021 levels. And the Nasdaq fell even harder at around 3%. Remember, high-growth stocks are more vulnerable to higher rates. After these latest falls, the S&P 500 is now down 18% since the start of 2022. The Nasdaq has fared much worse and is down a whopping 27% over the same time. The same thing that drove the market and tech stocks higher, is now driving these huge falls. Sure, there’ll be opportunities for some countertrend trades when the markets bounce… But the huge weight of rising interest rates – coupled with slow growth and contracting stock (P/E) multiples – means there’s plenty of pain ahead. The S&P 500 could still fall by 10%. Even if this were to occur, the S&P 500 would be trading well above its pre-pandemic highs. That’s why I remain extremely cautious… Throughout these latest falls, I’ve noticed many hedge funds have drastically reduced their exposure to the markets. Plus, we’re seeing many redemptions as retail investors pull their money out of the market. We’re also seeing the same kind of “flight from risk” response in other speculative markets like non-fungible tokens (NFT) and cryptos. It’s all adding to the daily noise and stress of trading the markets… Now more than ever, it’s key to tightly hold our capital. Because once the dust settles there’ll be countless opportunities ahead. Regards, Larry Benedict Editor, Trading With Larry Benedict Reader Mailbag What sector do you think inflation will impact next? P.S. We’re excited to hear what you think of your new eletter, Trading With Larry Benedict. Let us know at feedback@opportunistictrader.com. 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