May 13, 2023 | CPI, PPI, Regional Banks, Consumer Credit and Student Loans

CPI
Headline CPI of 4.9% came in below expectations of 5.0% and registered the slowest growth since April 2021. It also marked the 10th consecutive month of slower growth since the report peaked in June 2022 at 9%. Areas that continued to see a growth in prices were food (+7.7%), motor vehicle insurance (+15.5%), transportation services (+11.0%), admissions which includes concerts, movies and theaters (+6.9%), and electricity (+8.4%). There continues to be more components that are registering declines compared to last year. Energy was a big one as it was down 5.1% as gas and oil prices fell from high prices last year. Gasoline in particular was down 12.2%. Other areas that saw declines included major appliances (-10.4%), used cars and trucks (-6.6%), and even airfares (-0.9%). The Core CPI, which excludes food and energy, did come in higher than the headline number at 5.5% but over 60% of that increase came from shelter costs which grew 8.1% compared to last year. If those shelter costs were removed from the report the Core CPI would have grown at just 3.7%. Overall, I continue to see inflation heading in the right direction as costs continue to decelerate.

 

PPI
Big news on the Producer Price Index (PPI) as it came in with just a 2.3% increase in April. This was the lowest reading since January 2021, and it was well off the high of 11.3% in June 2022. This is so important because if businesses are not seeing costs increase as much, they should not need to increase prices as much for consumers to offset the costs. I really believe inflation will not be a problem as we exit 2023 and head into 2024.

 

Regional Banks
The regional banks have really caused a lot of concern in the markets lately. Unfortunately, short sellers have stepped in and are magnifying movements of stock prices beyond belief. But if an investor looks at where some of these regional banks are trading, like Western Alliance at 2.3 times forward earnings or CoAmerica at 3.9 times forward earnings, it would appear that the worst is probably over. For the big banks, they have been beaten up somewhat as well, and are currently trading at 1.2 to 1.3 times tangible book value. If you back out the non-cash impact from potential bond portfolio losses, the price to tangible book value trades closer to one. The normal for big banks is more around two times tangible book value. For an investor looking down the road two or three years I think this is a good time to add some good bank positions to the portfolio after some strong research. I would also caution investors to be prepared for a bumpy ride for the next few months but if you wait and by the time everything looks good, you would’ve missed the opportunity.

 

Consumer Credit
You may hear how terrifying it is that revolving consumer credit outstanding is at record highs and recently in February it was at $1.2 T. What you don't hear though is how that number relates as a percentage of disposable income. In fact, in the chart below you'll see revolving consumer credit outstanding as a percent of personal income was just 6.2% in February and is actually still below pre-covid levels. It's important to understand that when the price of assets and incomes rise so will costs and debt levels. The absolute level is not nearly as important as the relationship that the numbers have.