The Secret Behind the FED's Soft Landing Attempt
Why 2% Inflation Remains a Distant Dream
This has been a tumultuous week for the markets. It was time for the United States to publicly expose its CPI, and this always generates a stir.
First of all, what happened was Goldman expected inflation data to be much higher than the consensus due to price increases at the beginning of the year, in prescriptions, car insurance, tobacco, and medical services.
It did not fail; in fact, the data was even higher than its estimate. It has been the only one that has not failed, this is because the rest of the advisors predicted that the annual inflation was going to fall more than it actually has.
Several conclusions can be drawn from this:
Trying to predict the market is completely random in the short term.
The movements in the market are so moved by the decisions of the central banks.
In the medium term, it is very easy to hit what the market will do.
The annual inflation rate in the U.S. grew to 3.1% in January from a growth of 3.4% in December, but was higher than the forecasts of 2.9%.
Compared to the previous month, the CPI rose by 0.3%, the highest in four months, and above the forecasts of 0.2%.
As we can see, the FED has managed to achieve a soft landing, but not to the point it has always wanted of 2%. This is something that we have commented a long time ago, and it is that we were going to continue seeing inflation around 4% for a long time.
But without a doubt, the focus was on housing inflation (shelter), which increased by 0.6% in January and was the most important factor in the monthly increase of the underlying index:
The housing CPI has declined in interannual terms for 10 consecutive months, from a peak of 8.2% in March 2023 (the highest since 1982) to the current 6.0%. Given its large lag with respect to real-time rental data, it is expected to continue to decline, which should translate into a continued decrease in underlying inflation.
We do not want this newsletter to be very dense. In fact, we like it to be as pragmatic as possible. Something that is easy to assimilate by everyone. We would not like to become doctors, who use complex words to appear: 1) that they know more than you, 2) that you are not as smart as them and 3) that your disease is more complicated than it really is.
What is happening with the price of housing is very similar to what is happening with all physical assets with a limited supply, and that is that the liquidity cycle has returned to the markets. This means that during this cycle we could see how those assets with a low supply: housing, gold, bitcoin, ... suffer increases.
It's not rocket science.
We share again the chart that best shows this phenomenon.
The price increase of all these types of assets, as you know, is very typical of the end of the cycle. What most investors do in this cycle period is save their savings for fear, and when they really see that nothing happens, they invest again. Therefore, the average of investors is a 2% return, while the market averages a 6-7%.
A great opportunity is presenting itself in the OTM options market and being able to capture the next black swan.
One of our contracts is about to expire, and we will rotate these weeks taking advantage of the rise in the markets.
Meanwhile, our portfolio with 50% in cash and very low-risk assets continues to outperform the market by a lot.
