Macro Monthly report - October 2022

The month of October was a very quiet month for 'macro' (a somewhat vague term for the broader economic landscape). I can best explain this current time in the market with a particular meme.

Simply put, there was not much macro news this month, although the world’s financial system seemed doomed. We were sitting and waiting for news to be released, anxiously hoping for relief from the market pain of the last few months. The most important economic change for this month was the release of the US inflation rate. The consensus was that inflation would be in line or even lower than last time, the reason being that oil and gas prices had decreased a lot in September. On the contrary, the Producer Price index came in at 0.4% on a month-on-month basis. The Consumer Price Index also came in higher at 8.2%, while the consensus was 8.1%.

In Europe, we had some more news. After being the prime minister for 45 days Lizz Truss decided to step down from office. I know everyone is making fun of her, but I actually admire her, since she is going to get $128.000 every year for the rest of her life. For 45 days of work, she secured financial freedom. I wish I could work 45 days and never have to work another day in my life.

That is the face of someone that secured financial freedom for the rest of her life. On a more serious note, the European central bank (ECB) raised its deposit rate by a further 75 basis points to 1.5%. The ECB rates had been negative for eight years until it hiked in July. It also cut a key subsidy to banks in an attempt to force them to repay early trillions of euros' worth of ECB loans. In addition, the European central bank had discussions on winding down the ECB's huge holdings of mostly government bonds, which will begin in December.

That was it, the most relevant Macro news.

Don’t leave just yet - I know this wasn't the most entertaining update, but I am going to leave you with some alpha.

The CPI print is one the most used metric for measuring inflation, the methodology and thus the report itself is flawed and has its limitations. When the CPI print was first introduced it was calculated by comparing the price of a fixed basket of goods that every household in America used, the calculation spanned over two different periods. Looking at the products that were used to calculate the original CPI, the CPI wasn’t really a consumer price index, but more of a cost of goods index. Over time, the Congress of the United States of America decided to embrace the view that CPI should reflect the changes in the cost of standard living, and the CPI turned into a cost-of-living index.

Diving deeper into the methodology of the CPI print, it has had numerous revisions. The Bureau of Labor and Statistics reports that they constantly update and remove misconceptions that caused the CPI print to overestimate the inflation rate. For example, a new methodology was once again implemented at the start of 2022, just when the inflation is transitory talks commenced. The new methodology takes fluctuations in the quality of goods and substitution of goods. Substitution of goods is a new implementation of goods where consumers substitute expensive products for cheaper brands because of price changes. This new methodology changes the CPI print and skews the results to a lower CPI. This methodological change to the calculation of the CPI print allows the US government to report a lower CPI print.

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