the Bureau of Labor Statistics is making a change right under your nose – and NOBODY is talking about it…
We’ve all heard of the Consumer Price Index (CPI).
It keeps track of the rate of inflation in a basket of goods like used cars or even eggs.
When the Bureau of Labor Statistics (BLS) releases it every month, investors and traders usually fixate on it.
For years they’ve looked at the cost difference in the price of goods, and the weight was adjusted bi-annually – so, change over a two-year period.
Well, the Bureau of Labor Statistics (BLS) is making a change right under your nose – and NOBODY is talking about it…
At the end of the day, we are still spending more and more money every day. Any difference in the way these statistics are calculated is going to just be a muse to fool the market, the Fed, and, most importantly, the consumer (that’s you and me).
The reported Consumer Price Index (CPI) shows inflation is running at just under 7%, annualized. But, you might be surprised to hear that number would be closer to 15% if the BLS used the same formula it did in the 1970s!
At some point in the 1990s, the U.S. Congress decided the old formula needed updating, so they introduced several “methodological improvements.”
In fact, over the past 30 years, they have changed their methods of calculation 20 times.
And the further you go back, the more changes you’ll find…
You can find a list of these changes dating back to 1919 on the BLS website.
So, changes to the CPI calculation are nothing new, but the reason this one is so important is that it’s only to pad the statistics and stroke the public perception of inflation and the ego of our ‘ol pal Jerome Powell in hopes to pull the economy away from the impending recession…
Alright CJ, what’s changed?
Starting with January 2023 data, the BLS plans to update weights annually for the Consumer Price Index based on a single calendar year’s worth of data.
This might seem like a small change, but it’s not…
We are going from two years of data to one, cutting our sample size in half.
Now you all know I’m a numbers person, and the first thing they teach you in a statistics class is the sample size is key to accurate results…
A study without a large enough sample size is like going to a museum, looking at a few paintings, and thinking you’ve seen every exhibit.
That is exactly what the BLS is doing in three weeks…
This is going to create a practical effect of inflation going the other direction – and fast.
When in reality, prices are still outrageous, and you and I feel it every day.
So, why all the smoke and mirrors?
There are plenty of incentives for the government to report lower inflation figures.
The CPI is used as a benchmark for several government programs that affect around 80 million Americans, including school lunch programs, military and civil service retirees, food stamp recipients, and Social Security beneficiaries.
The lower the CPI, the less the government needs to spend on cost-of-living adjustments (COLAs).
Also, the lower the reported inflation rate, the less the Fed needs to do to raise rates, thereby appeasing their Wall Street masters.
So, this is how you need to approach this change if you plan on making any money around the Fed or CPI moving forward.
How to Play the Big CPI Change
First, you need to understand that the market’s knee-jerk reaction to this change is going to be a real barn-burner of a rally.
Just think back to two short weeks ago when the last CPI was released.
It came in at expectations and this happened…
The Invesco QQQ Trust Series 1 ETF (QQQ) ripped 12.4% higher since the rally started on January 6th.
Now, the CPI is going to be flashing on everybody’s screens next month with a number that is much lower than we’ve been conditioned to expect, causing the sideline money to flood into the market upon the initial reaction.
This will be short-lived, as people will start to catch on to the changes that were made and the market will again sit in fear as we wait on the Fed to tell us where their head is.
Now, they’ve already said they don’t expect to make any rate cuts for all of 2023.
The real question is: will the change in the CPI numbers – due to the calculation adjustment – cloud the judgment of the Fed or are they going to stay on the path they are taking?
If the Fed even has a slightly dovish switch to their tone, the idea of a rate cut goes back on the table in the market’s mind.
This will likely be amazing for the market in the days following the rumor.
The last time there were rumors of a Fed rate cut, the Dow Jones Industrial Average (DOW) was on a six-week losing streak, only to soar 5% higher in a matter of days.
And historically, the SPDR S&P 500 ETF (SPY) has been a great performer during these rate cuts as well.
That’s because a rate cut is a sign of economic recovery – or maybe just a sign of optimism from the Fed thanks to a misleading CPI.
But now we’re ahead of the curve, all we need to do is figure out where to put our money when all this unfolds.
Of course, if you are a real whale, you could drop money right into QQQ, SPY, or the Dow, and that will surely make you some money… But there is a better way to go about it.
You have to look at the sectors that will benefit the most from the rate cuts.
There are a few that I expect to be the true hotspots in the market, starting with the financial sector.
Because so many of the big banks have gotten out of the investment-banking realm, this will be a prime opportunity to jumpstart that business again.
You see, when rates go lower, it becomes less profitable to stay in cash, so more companies opt to invest that money into new ventures, further stimulating the economy.
Keep an eye on the Financial Select Sector SPDR Fund (XLF) to catch some profits from this change.
And as loans become cheaper for the general public, you can look toward homebuilders using the SPDR S&P Homebuilders ETF (XHB).
New buyers who are ready to build but have been waiting due to rate hikes are going to be itching to get construction underway.
And lastly, the Bond market will likely get rocky for those investors, as the typical bond buyer will be looking to invest for income, and with lower rates, the bonds will be returning less – even with a higher cost of entry.
This selling pressure is likely to affect the entire bond market, from the IShares 0-5 year Investment Grade Corporate Bond ETF (SLQS) to the iShares iBoxx $ High-Yield Corporate Bond ETF (HYG), driving the price lower as investors look for a better way to supplement their incomes.
Of course, we will be tracking every move from the Fed so we can capitalize on these shifts before they happen.
I’ll be back in the office next week, and I expect to see you in the main room first thing Monday morning.
Enjoy your weekend!
January 26 2023