Tim Pierotti, Chief Investment Strategist

The Fed will successfully destroy demand.  Gasoline prices may not come down meaningfully anytime soon due to the structural supply issues we discussed last week.  Job openings may well stay elevated for months to come and consumer spending will continue to benefit from the dwindling stockpile of savings from fiscal stimulus and the vestiges of QE. But in one very important sector of the economy, the Fed's efforts to cool demand are already playing out.  That sector is housing (OER/Shelter) which represents roughly 40% of the data that goes into CPI.  To state the obvious, interest rates matter to housing and a doubling of long-term interest rates matters a lot.  

New home sales are already down over 25% y/y.  Leading indicators like builder sentiment and home-buying intentions have collapsed.  The stocks of multi-family Reits have rolled over hard recently reflecting nosebleed cap rates and concerns that the historically strong demand in the US rental market will lead to an oversupply situation that will sharply reverse the double-digit rent growth these companies have enjoyed of late.  

I would also posit that the negative effect of stock, bond, and crypto market losses will have a negative wealth effect that will further suppress housing demand.  

The point of all of this is not to say that we are no longer worried about inflation.  Our long term view is unchanged: as a direct result of a lower future potential GDP growth outlook, inflation will be, unlike the last forty years of grinding declines, episodically and consistently problematic.  Of course that is not to say that inflation is going to be a constant issue.  The pattern of economic cycles will endure.  This Fed simply started removing accomodation far too late into an economic downturn while also battling global supply constraints over which it has no control.  This tightening cycle is likely to be longer and more painful than any in recent history.  We are going into a recession and just like all modern recessions, the inflation rate will fall.  

But, let's look out a bit further at what the landscape for inflation will look like when we emerge from the pending slowdown.  Our aging demographics and falling immigration will remain structurally inflationary.  Global oil production capacity will likely be lower and global refining capacity will undoubtedly be flat to down while the near constant growth of the global middle class begets an inexorable growth in demand for commodities broadly.  The trends of deglobalization and the strategic reality of supply chain onshoring will continue and that again is a factor that is structurally inflationary.  

Lastly, and perhaps most importantly, it is hard to imagine that the spate of global competitive currency devaluation won't have the predictable effect of destroying buying power.  

For more from Tim listen to our weekly podcast, WealthVest: The Weekly Bull & Bear here.