Why inflation may be yesterday's problem

The headline CPI inflation rate was 3.7% y/y through September. The core rate for the CPI was higher at 4.1%. The headline and core CPI inflation rates, excluding shelter, were both 2.0% y/y during September.

Rent of shelter accounts for 34.7% and 43.6% of the headline and core CPI measures. Its inflation rate jumped from a low of 1.5% in February 2021 to a peak of 8.2% in March 2023.

It was down in September but only to 7.2%.The Zillow rent index (More accurately reflecting actual prices) was down to 3.2% y/y during September.

Using that reading rather than the CPI’s rent of shelter reading of 7.2%, the headline CPI has been up just 2.3% versus 3.7% for the actual headline CPI!

Inflation is yesterday's problem, in my opinion.

The "5" handle on both the 10-year and 30-year yields yesterday signaled an excellent place to take profits for the shorts since the two yields are back to their Old Normal levels.

These are levels where they were from 2002 until 2007, before what Ed Yardeni has called "the Great Abnormal period from the Great Financial Crisis through the Great Virus Crisis"

The yield of the US long bonds may be influenced in 2024 by Quantitative Tightening from the FED, the lack of bond buying from Japan, China, and the Arab nations, and too much supply (federal deficits) pushing yields and term premiums higher.

Still, I think that short-term, medium-term, and long-term yields have topped/are topping. If true, the following asset allocation seems appropriate going into 2024.

Asset allocation

1. We like tech stocks and think the NASDAQ 100 will continue its move up. We believe selected AI plays and cloud stocks may outperform the mag-7 stocks.

2. We like Bitcoin (pure price action, no philosophical reasons) and think we will retrace at least 50 % of the move from the high sixties to the mid-teens in the next 12 months.

3. We like gold (pure price action...) and think it will cross 2000 soon and move up. We prefer top gold mining and precious metals stocks instead of the metal, applying an options strategy.

4. We like global stock markets - ex-China (too difficult to assess due to politics) - especially in Southeast Asia and India.

5. We may even add initial positions in selected German stocks, those with little exposure to the German economy and extensive exposure to the global economy.

The moment to buy

The moment to buy US tech is when the earnings of the mag 7 stocks this week and next week show that the earnings recession is over.

Why? I want to be sure that the recent upward earnings revisions of most of the big tech stocks materialize and are not fake dreams/wishful thinking of stock analysts.

If these upward revisions do not materialize and the performance of the tech stocks is as mediocre as the performance of the average SP 500 stock, there can be no sustained bull in 2024.