The market has been sustained in recent months by growing hopes and perceptions that the Federal Reserve will be able to achieve the rare 'soft landing'. One of the tenets of that belief is that inflation will continue to cool at a significant clip. Surging pricings have fallen noticeably in recent quarters even if the core CPI remains far above the central bank's target.
Unfortunately, the easy part of this journey has been accomplished. The remaining work on the inflation is likely to be a tough and slow grind for several reasons.
Inflation rose approximately 17% since the start of 2021. And that is according to government statistics, the actual rate the average American has experienced is significantly higher. Not surprisingly, employees are demanding and getting large wage increases, especially in unionized shops. The teamsters recently garnered massive wage hikes within their new contracts with UPS (UPS) that will see some truck drivers making $170,000 annually. This was after the same union had a large part in bankrupting trucking concern Yellow Corp by refusing to make any further concession.
Pilots at major airlines garnered approximately 40% increases over four years at major airlines. Now the UAW is demanding 46% boosts over four years, among many major requests, from the Big Three automakers. They have countered with 15% raises, which is a chasm and not a gap. I expect a significant strike that will begin in a week, which has the potential to last for months. Obviously, huge wage increases are not good for the prospect of lowering inflation further.
We also have seen surging energy prices recently. Crude oil hit is highest level in 10 months on Tuesday as both Russia and Saudi Arabia agreed to extend their recent production cuts to year end, something that caught the markets off guard. With the Strategic Petroleum Reserve recently drained for political purposes and at a 35-year low, there is little relief that can be expected on that front.
We are also still in hurricane season, so there is always the potential for a major storm to shut down production in the Gulf of Mexico at some point over the next two months. Higher energy prices make the costs of myriad items to go up given their role in the creation and transportation of so many products.
Then, there is the fact the Federal government is spending $5 billion a day more than it is taking in from taxes and other fees. And they are doing this during an economic expansion. The spending itself is inflationary. This also helps keep interest rates high and becomes a vicious circle as higher interest costs must be paid on the $32 trillion national debt.
I don't think any of these three issues are getting resolved in the near future, which makes the case that inflation from this point will be much harder to bring down further. I see two scenarios playing out over the next few quarters. Slow growth continues while inflation stays at elevated levels resulting in Stagflation. The alternative is interest rates stay at the current level or go slightly higher until the Federal Reserve triggers an economic recession.
Neither of these two likely probabilities are priced into the market at current trading levels. This is the key reason that my portfolio will continue to be very conservatively positioned until we see a significant pullback in equities.