A Developing Trend Worth Our Attention
CAMS Weekly View from The Corner - Week ending 7/28/23
July 31, 2023
In recent editions we have sprinkled in commentary addressing, if not deriding what we refer to in-house as “The Narrative.”
Importantly we do not lean into derision relative to said narrative with arrogance nor with a sense of belief that we no more than the collective consensus. Quite the opposite in that market’s have served humility to our psyches over decades – which btw – if you do not have market/econ based humility consider finding it ASAP.
Absolute certainty in this realm is dangerous to your capital regardless of how popular market/econ based absolute certainty may be for a particular topic at any given time.
Two aspects, when placed together with intellectual flexibility, move us into seriously questioning the on-going dominant narrative.
Often times when a collective consensus rests confidently assured in X belief/narrative of which few seem to even question any longer said belief is in peril. This holds especially true while simultaneously history offers said narrative would have to do something history itself offers as a true unicorn - econ style.
If you are not a frequent reader of these editions we have recently pointed to the on-going narrative, which succinctly shared boils down to price inflation is dead and is a non-issue while the economy is fine for as far as the eye can see. The two together, through history, is where the problem lies.
Whenever we have seen the price inflation genie break out of its bottle to the point where general prices (not just one or two particular aspects of the economy/society) rise notably and consistently for many months morphing into years we have not seen a simple fix whereby said price inflation disappears while the underlying economy rolls on as though it never happened.
It is that part which we raise an eyebrow towards. This is especially true when underlined by price inflation measures which do a great job of identifying price inflation trends when general prices are rising which have not receded much during this inflation storyline.
The Cleveland Fed’s Median Price Inflation metric (we have chronicled numerous times) as well as the Dallas Fed’s Trimmed Mean PCE Inflation Rate are two that come to mind.
Interestingly, on a more micro level we have monitored the change in behavior for a key economic commodity in recent weeks. If this trend continues it will not play well with the dominant narrative that price inflation is done and may have an impact on more recognized headline type price inflation measures on the near-term timeline.
Above is the price of Crude Oil for the previous year. Focusing on the far right of the chart we see two developments worth our attention.
First the blue uptrend line highlights the notable increase in oil prices during the month of July. In this short time the price of oil has risen nearly 20%. That is a tremendous increase in price in a very short time, in particular while the narrative offers price inflation is over.
Adding concern to said trend is how the price easily elevated above its 200 day moving average line depicted by the red sloping line.
This line, on a moving basis, depicts the average price of oil over the previous 200 days. When a price cannot trade above its 200 day average you can surmise the underlying instrument is not healthy relative to its price trend.
This has been the case for oil, as depicted in the chart for the previous year – until this past week. The larger story though is the behavior of this key economic input over the month of July which placed it in a price position to eclipse its average price of the previous 200 days. It did so with ease which adds credibility to its trend.
Above we broaden the view via a weekly chart for oil dating back over the previous 5 years. The significance of weekly charts is each bar within the chart represents a full week of trading and in so doing takes out the noise of daily trading.
The red line in this case depicts the 200 week average price for oil. We can see prior to the Covid Recession oil toggled above its 200 week average price line until recession entered and price dropped rapidly.
Current day the far right of the chart via our small black arrows highlights how relentless the oil price has been relative to its 200 week average price line. It would attempt to move below the line (with recession concerns) but refused to move below and held.
We see via our small green arrow that price then escalated upward as previously discussed in our first chart.
The view of oil prices in totality via the weekly chart depicts a pricing structure that remains constructive. This does not assure rising prices from here but evidence is building for such a scenario.
We marry together two themes here in this edition of the “price inflation is dead” narrative along with a key economic commodity that is beginning to move upward that may add additional pressure into the price inflation backdrop offering the opposite reality of said narrative.
Importantly, a backdrop price inflation storyline as shared above that has not gone away when viewing measures that peer deeper into the price inflation landscape ala the Median CPI and the Trimmed Mean PCE Inflation Rate.
This oil story will be important to observe as the coming weeks/months unfold.
I wish you well…
Director, Market Research & Portfolio Analysis