The inflation fight appears to be won. What follows a won fight is rarely a celebration — it is usually a slowdown.
A short note on what the latest readings show, and how the portfolios are positioned while the economy digests the cost of getting prices under control.
Disinflation confirmed, growth cooling
Recent inflation numbers, supported by charting work from Stan Larsen, point to price pressure receding. At the same time credit creation is slowing, and the broader indicators are pointing the same direction.
Those two facts belong together. Tight policy brings inflation down by making money expensive — and expensive money slows an economy. The second effect arrives after the first.
What the Indicators Show
Inflation Receding
The recent numbers no longer describe an inflation problem. On the charting, the trend has broken in the direction the Fed was aiming for.
Creation Slowing
Lending is where policy meets the real economy. When credit creation slows, activity follows — with a lag that makes the effect easy to underestimate.
Broad Cooling
Other measures are pointing the same way. Not a single alarming reading, but a consistent direction across several of them.
How We're Positioned
We remain conservative. Four expressions of that, currently:
A modest short on the Russell
Small-cap companies carry more floating-rate debt and less balance-sheet cushion. They feel a slowdown earlier and harder than the large-cap index does.
Utilities
Regulated revenue and steady dividends. Demand for electricity does not fall much in a recession, which is precisely the property worth owning when growth is in question.
Consumer staples
Households defer a new car. They do not defer groceries or household goods. Earnings in the sector hold up when discretionary spending contracts.
Plenty of bonds
With inflation receding, the case against duration weakens considerably. Bonds also do what they are supposed to do in a slowdown — which they conspicuously failed to do during the inflation shock.
Each position expresses the same view from a different angle: inflation is no longer the risk worth hedging, and slower growth is. The portfolio is arranged to hold its footing rather than to chase whatever rallies next.
This commentary reflects current positioning and is not financial advice, nor a recommendation of any security, sector, or strategy. Positioning changes as conditions do. Investing involves risk, including the possible loss of principal.
Is Your Allocation Set for a Slowdown?
A conservative stance looks different depending on what stage you're at and what the portfolio has to fund. We're happy to look at yours.
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