by Professor Jeremy J. Siegel, Senior Economist to WisdomTree and Emeritus Professor of Finance at The Wharton School of the University of Pennsylvania
The economy keeps showing signs of strength and resilience. Our favorite high frequency data indicator, jobless claims, again came in very low and shows great strength in the labor markets.
We had two inflation reports last week. On Thursday, the CPI came in a little hotter than expected, but Fridayâs PPI was below expectations. The Bureau of Labor Statistics (BLS) puts out commentary along with the statistics, specifically âThe Shelter index [the cost of rentals and owner-occupied homes which is 41% of the core index] increased 6.2% over the last year, accounting for over 2/3 of the total increase in all core inflation.â In contrast, real world rental indexes like Apartment Listâs measure or Core Logic show almost no rental price inflation or even declining prices.
We had been utilizing Case Shiller home prices in lieu of the ownersâ equivalent rent (OER) in an alternative shelter calculation, but even Case Shiller housing is now likely biased higher by the increase in cash transactions of high-priced homes. We are investigating alternative indices, but the bottom line is that shelter inflation is much lower than the 6.2% figure reported by the BLS.
My sense is that the inflation trajectory is well on the way downward. If you put in a 0% for shelter inflation, overall core CPI y-o-y reads out between 1 and 2%. I believe this is the view the market is taking, as it starts to price in cuts to rates starting in March and continuing through year end.
Of course, we have oil prices rising as a result of escalating tensions in the Red Sea area. But I think the Fed will look past those issuesâas they concentrate on the core measure of inflation that excludes energy prices. The U.S. is basically self-sufficient with respect to energy now. We import certain types of oil, and we export liquid natural gas.
Being self-sufficient minimizes the impact of rising energy prices on the U.S. We have nowhere near the sensitivity as Japan and Europe which import energy. Our energy sector gains are the losses to consumers and that balances out at economy level and creates sector rotation when oil rises.
Bank earnings have been mixed, with some special items bringing down profits. United Health Care also faced pressure after costs escalated. Health care inflation has not been an issue, but perhaps utilization of health care has risen, and it will be interesting to watch if cost pressures spread. In general, I expect profit margins in other industries to be well supported.
Last week we witnessed approval of Bitcoin ETFs. In my view these ETFs should have been approved much earlier. There was a lot of anticipation and hype surrounding this, so I am not surprised Friday was a "buy the rumor/sell the news" day. I generally am neutral on bitcoin as an asset class, but I do like the competition it provides to a rather lazy banking system that needs to improve monetary transfer systems. Bitcoin trades and settles 24/7. Our traditional finance system should learn and adopt features of the technology.
If bitcoin serves a similar purpose as being a digital alternative currency like gold, my work in long-term asset class returns showed gold provided inflation protection, but little else. Over the real long-term gold has shown less than 1% real returns over the last 200 years. But the bull case is that 1 to 3% of portfolios will be allocated to bitcoin, which will push prices higher. These ETFs are providing a useful tool to access exposure.
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