This post was first sent out in our free finance newsletter. If you’re interested in staying in the loop, you can subscribe by entering your email in the box below!

 
Dan Nastou, CFA
 
 
Last week was a pretty big one for the financial world – the November CPI inflation report dropped, the Fed raised rates again (as expected), and disgraced crypto bigwig Sam Bankman-Fried was finally arrested on a multitude of charges. Let’s dig in.
 

CPI – generally positive, but still too early to celebrate

The November CPI inflation report came out on Tuesday, and overall it was fairly promising, showing that inflation slowed for the month. Month-over-month headline inflation was 0.1% (that includes everything) and core inflation, which excludes food and energy, was 0.2%. Both were lower than last month and lower than expected by economists. The line item breakdown was a bit of a mixed bag though. Food was up 0.5% for the month, energy was down 1.6%, shelter was up 0.6%, while used cars and trucks tanked by nearly 3%.
 
You can check out the full report on the BLS website here.
 
I think the key takeaway here is that yes, the last two CPI reports have been encouraging, but it’s still too early to declare victory. Prices were still up 7.1% relative to a year ago (and 6% for core inflation). So we need to see a longer period of sustained, low inflation to really feel comfortable that it’s been beaten. Which is where the Fed comes in…
 

Fed still in rate hike mode

Last week the Fed raised their short-term interest rate by half a percent, or 50 basis points. Their fed funds rate is now targeted at 4.25% to 4.5%. You can read their official statement here.
 
This increase was generally expected based on previous Fed comments. However, Fed chair Powell’s commentary indicated the Fed might be even more aggressive raising rates and holding them higher for longer than some were expecting. Financial markets reacted negatively. Generally, higher rates means asset prices fall – I do a more detailed explanation of the link between inflation, the Fed, and asset prices here.
 

Setting expectations

Basically, Powell and the Fed want to communicate that they’re serious about preventing inflation from becoming entrenched. And sometimes the signaling and messaging can be just as important as the actual rate moves.
 
If people think inflation will persist, they may be more inclined to spend now – if stuff will be more expensive later, might as well buy it now! But this demand pressure can actually help fuel more inflation, creating a positive feedback loop of rising prices and rising inflation expectations.
 
However, the reverse is also true. If people expect inflation to fall, that expectation can actually help slow it down.
 
So the Fed has been very clear about their intent to stop inflation, hoping to leverage the power of expectations. In the 1970’s, inflation became entrenched for a decade, and defeating it proved to be a very difficult and painful process. That’s exactly what the Fed wants to avoid. So it will be interesting to see how their communication evolves in coming months. Based on their current messaging though, I wouldn’t expect lower rates in the near term.
 
In terms of markets, they remain somewhat volatile. As always, I would encourage you to stick to your long-term plan and avoid making any impulsive changes to your investments. Bear markets are painful but they’re part of the process. And of course reach out to your financial adviser if you have one.
 

SBF arrested after FTX implosion

To anyone following the wild collapse of crypto exchange FTX, this news probably comes as little surprise. I won’t get into the details here, but basically it looks like FTX took depositor money, lent it to their own hedge fund, Alameda, without customers knowing (violating their own policies and the law) and then proceeded to take huge trading losses, wiping out billions. They also donated millions to a number of political campaigns, spent hundreds of millions on Bahamas real estate, and even loaned billions to themselves. The founder of FTX and Alameda, Sam Bankman-Fried, was arrested last Monday.
 
Since FTX entered bankruptcy last month, it’s been helmed by new CEO, John Ray, who has similarly navigated other high profile bankruptcies, including Enron. Basically he’s the guy companies bring in to salvage the wreck. He testified before Congress last week, and what he had to say was pretty astounding. It’s worth a watch if you have some time (Ray’s written statement starts around the 10:00 minute mark followed by Q&A from Congress).
 
During questioning, Ray stated the muti-billion dollar firm had “virtually no internal controls,” “no record keeping whatsoever”, no independent board, and even used QuickBooks for its accounting (which is generally used for small businesses only). It’s truly hard to comprehend the magnitude of this mess. I imagine we’ll learn a lot more before all is said and done.
 

Bonus topic – energy science!

Last week we also learned that the awesome power of fusion had finally been tamed. Well, sort of. Scientists at the National Ignition Facility were able to operate a contained fusion reaction that generated more power than it required, albeit on a small scale. Very exciting.
 
For a long time, fusion has been considered the holy grail of energy generation, and if/when it becomes commercially viable, it would have huge implications for energy production and the world. However, based on my limited knowledge, it seems like we are still a ways off. Apparently this reaction required a facility the size of three football fields filled with lasers, and even so, the reaction was fleeting. Still pretty cool though!
 
Can we get some frickin’ football fields with lasers in here!
 

via GIPHY

 
That’s all for now.
 
Happy Holidays!

 
This content is intended for educational purposes and should not be taken as specific investment advice. Please talk to your financial professional if you need help or are thinking about making changes to your investments.