JD Straight Up - 1Sep25 - Inflation Nation

Inflation Nation

Drulard Family Capital Fund

Fortnightly Macro View

JD Straight Up:

S&P 500 at 6460 – flat from 6448 two weeks ago

VIX at 16 – flat from 16 two weeks ago

10yr Treasury yielding 4.21% (down 3% from 4.34% two weeks ago)

Agg (US Aggregate Bond Index) at 99.46 – up 1% from 98.79 two weeks ago

Gold at 3474 per oz (up 3% from 3379 two weeks ago) - all time high

Crude Oil (WTI) at 64 per barrel (up 2% from 63 two weeks ago)

Bitcoin at 109k (down 6% from 116k two weeks ago)

JPM shares at 301 (up 4% from 290 two weeks ago) - all time high

Deutsche Bank shares at 35.28 (down 4% from 36.53 two weeks ago)

Truist shares at 46.82 (up 6% from 44.12 two weeks ago)

Blackstone shares at 171.40 (up 1% from 170.40 two weeks ago)

Magnificent 7 Index at 375 (up 1% from 378 two weeks ago)

US unemployment: at 229,000 in latest claims – up 2% from 224,000 two weeks ago

EUR at 1.17 USD (flat from 1.17 two weeks ago)

GBP at 1.35 USD (flat from 1.35 two weeks ago)

Macro Environment

US inflation rate persists at 2.7% and unemployment at 4.2%.  EU inflation is at 2% and unemployment at 6.2%.  US debt to GDP is at 124%.  German debt to GDP is 64%.  US 1yr Treasury yields 3.85% and 10yr yields 4.2%.  Germany 1yr Bund yields 1.9% and 10yr yields 2.7%.  War continues in Gaza and Ukraine.  US trade and tariff negotiations are ongoing with all major trading partners.  Tariffs are being applied.

Macro View

US is levered and going for growth.  It is betting that it can pay off its relatively expensive debt through growth.  In comparison, Germany is more fiscally conservative.  The US is operating like an LBO.  It believes it can take out cost while also juicing top line growth and can use its extra income to pay down debt.  Like LBO's, it relies on access to readily available and relatively inexpensive funding for its financial engineering.  Unfortunately, it is not part of a portfolio in a PE fund, but is a singular bet with 340m employees.

Relevance

If the price of everything goes up notably, do you really need statistics like a CPI, PPI, PCE, Core, or anything else to tell you that there is inflation?  If the price of a house, car, bottle of orange juice, restaurant dinner, share in a company, ounce of gold, or pint of beer nearly doubles in under a decade, is it ok to note the inflation in that change?  More importantly, what is the impact on society of that change.  In particular, if wage increases do not keep pace with the change in asset prices?  The near-term outcome would seem to be an increase in the welfare state.  If citizens cannot afford to live at the higher prices, accommodation will be made to keep them housed, clothed, and fed, and hopefully healthy and educated.  If the change is prolonged and the state is unable to offer ongoing accommodation, there is a likely increase in crime and ultimately unrest as the disenfranchised take it on themselves to make ends meet and preserve themselves and their families.

Prolonged inflation hurts the poorer and lower classes fastest and deepest and will bring about political change either peacefully or belligerently.  The US administration and other dollarized economies can restate statistics, alter calculations, and replace statisticians, but the person spending at the checkout counter knows how much disposable income they have and how fast it drains from their accounts.  No matter what inflation number prints, they see it in their wallets and will not be fooled.

The idea that rate cuts are required to increase money supply further to ensure continued economic growth and that this requirement takes precedent over inflation risk is misguided.  It might work for financiers, private equity, banks, and the government interest bill in the immediate term, but it risks further fracturing society and driving to an irreversible outcome in stagflation.  Ultimately, the risk is of seeing widespread job losses while inflation persists.

Head Scratchers

1 - What model justifies this chart of JPM share price:

What do you have to assume between Sept '22 to Sept '25 to rationalize this?  Reflect back to what felt like extreme volatility in the GFC in 2008 and note that the volumes spike, but the price movement is hardly evident in the chart.

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#24- 1Sep25