Introduction

Thanks for reading the May 2024 issue of I-Dog Capital Monthly!

After some turbulence in April, May saw things settle down. Unfortunately, May was a one-paycheck month, so I could not contribute as much or start trading again like I had wanted to. However, we’ve done some important things, and the future is looking bright. Let’s get into it!

My positions

Since its inception in 2022, I-Dog Capital has mostly traded small options on S&P 500 funds. These proved lucrative, but carried big risk relative to the fund’s size. For the last couple months, I have begun to retool the fund’s strategy, taking advantage of more fundamental factors. Admittedly, this may be a good time to stack shares in the S&P, since the market has traded sideways for the last couple months. For now, the fund has been building a position in a short-term bond fund, to capture today’s high interest rates. That fund, $BIL, starts each month around $91.45, slowly accrues interest, peaks around $91.85, and then pays out that accrued interest in the form of a dividend. The strategy with $BIL is to buy low, in the beginning of the month, and either sell at the end of the month, or wait for the dividend.

The fund’s current holdings are as follows:

• $275.46 in 3 shares of $BIL
• $1739.86 in cash

The fund’s total value is $2,015.32.

My Performance

The fund’s performance in March was 0.06%. The fund’s performance year-to-date is 1.96%. Since inception, the fund has returned -8.89%.

By contrast, the S&P 500 is up 11.88% year-to-date, rebounding from April’s dip.

My Activity

The fund’s activity in May is as follows:

• First, I purchased 1 share of $BIL at $91.43. That brought my $BIL position up to 3 shares, currently yielding 5.16%.
• Second, I received a dividend from my existing $BIL position of $0.78.
• Third, after a long time of working with my broker, I was finally able to connect a bank account to the portfolio! I deposited $170 into the portfolio.
• Finally, I received an interest credit of $0.01 on my cash balance.

The Fund’s total P/L in April 2024 was $0.79. Like I said, pretty light, all from interest and dividend income.

BIL currently trades at $91.82, and our cost basis per share is $91.47. This gives our 3 shares an unrealized gain of $1.04. We have received dividends totaling $1.18 in 2024.

Insights

The major American stock indices continue their volatility in the Spring and Summer months of 2024. After a disappointing April, the S&P 500 recovered in May, and is currently back near all-time-highs. I will never claim to have the definitive answer for why the stock market does what it does, indeed there is never a truly definitive answer. But it appears that after April’s breather, caused partly by changing expectations of when the Fed will cut rates, May’s rebound appears to have been driven by a few factors. Higher corporate earnings may have been chief among them, coupled with better consumer spending data in May. Good news, as the consumer still seems to have plenty of money to spend, and corporations are making more money. Stock prices are derived from corporations’ future cash flows, so these do push prices higher.

However, I wanted to spend this month talking about the Inflation situation in America. The Fed sets a symmetric target for PCE inflation (Personal Consumption Expenditure) of 2%, meaning they expect prices to rise by an average of 2% per year, as measured by the PCE index. The more commonly used index, the Consumer Price Index, or CPI, will usually come in a little above the PCE index. This is because, while both measure inflation, the CPI index tracks the same basket of products every month, while the PCE index gives consumers some room to shop around and find better deals. The Fed set their 2% target in 2012, and from then until 2020, they had been unsuccessful in keeping inflation as high as 2%. You may have fond memories of the 2010s, the savings, low prices, and generally static nature of the economy. Despite the Fed’s best efforts, back then, that was the norm.

Covid changed things. Starting in late 2020, we began to see higher inflation, above the Fed’s 2% benchmark. There were many reasons for this, and long-time readers of this periodical may know them. Some were transitory, pandemic-related, such as disruption of supply chains, goods simply not being able to be shipped to America, or backlogged at the ports due to lockdown-related labor shortages. Other reasons are more structural, relating to long-term changes in the broader economy that the pandemic may have accelerated, but were happening before and are happening after. March’s Monthly issue goes deeper into these reasons, and I suggest reading that issue for a longer explanation. But rising minimum wages, the affects of climate change, shirting supply chains away from China and toward more expensive labor, these are structural issues that aren’t related to a pandemic, but are a retooling of how our economy works. We should expect these structural factors to continue into the future.

If you’ve read this periodical in the recent past, you will know that I am a vocal proponent of the Fed revising its inflation target, from 2% to 3%. In light of the factors listed above, I think that we should expect a higher baseline of inflation for the short-to-medium term, at least. But why do I feel this way so strongly? Let’s look at the data.

Since 2020, there have been two distinct periods of inflation. The immediate covid inflation, lasting from late 2020 to early 2023, saw CPI inflation rise as high as 9%, before starting to fall back to Earth. The second distinct period began in March 2023, when CPI fell below 5%. Since then, the figure has fluctuated, but has averaged 3.6%, and has not crossed the 5% threshold. That’s right, for the past 14 months, CPI inflation has trended pretty close to 3%. This tracks with PCE inflation, which has averaged 3.18% in the past 14 months. May’s PCE figure came in at 2.7% this past Friday. If the new target becomes 3%, I’d say we’re pretty close to the goal of taming inflation post-covid.

Why am I hammering this point home instead of talking about something else? Because I think this is a very important indicator of how much the world has changed in this decade. I am 30 years old. The world I grew up in was a world of secular stagnation, with many reasons why we should accept low inflation, prices, growth, and wages. I stress, and I will keep stressing, that the world after covid is a very different world. There are challenges to be met, alliances to fend for, a planet to save, and most importantly, shifting demographics that finally will demand that we simply do things differently. Over the long term, your guess is as good as mine as to how we change. But we will change, and you need to be prepared for it.

As it relates to inflation, I have been operating for almost the past year with the assumption that our new target should be 3%, and that inflation structurally is just higher today than it was in the 2010s. I do not expect it to drop much more from its current level, and I do not expect it to rise much more from here either. We are where we are. The new normal. Embrace it, and act accordingly.

Conclusion

After a weaker April, May saw the fund get back on track. We did not have much gains at all, but we funded the account, and will continue to fund it in the future. Starting in June, I will get back to some trading. For now, though, our position ion $BIL is getting bigger, and I love the passive income it provides. Tune in next time to see the return to form. Thanks for reading, and have a great start to your summer!

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