Looking Backwards …
LB #1
Last Sunday night in the Asian markets, gold broke out above $2,100 running all the way up to $2,135 before it triggered a wave of selling. From up almost $60 an oz overnight to down $40 at the end of the Monday session, gold is moving. We go to the Indian Economic Times where Praveen Singh writes that gold achieved its first monthly close ever over $2,000 an oz but was smashed all week concluding on Friday when the better-than-expected US non-farm payrolls number pushed interest rates higher at the expense of the yellow metal. Average hourly earnings rose from 0.3% to 0.4% MoM which if annualized is 4.8% and a far cry from this inflation rate goal of 2%. Interest rates down is supposed to be good for gold since it doesn’t offer an interest rate, but gold doesn’t always work this way. It seems logical on the surface but remember in the late 70’s when interest rates were 20%, gold was hitting all-time highs. Gold is trying to tell the markets something, but the question is what?
LB#2
The University of Michigan survey regarding inflation expectations came out on Friday with expectations of inflation dropping more than expected. Jeff Cox writes for CNBC “In the latest University of Michigan consumer sentiment survey released Friday, the one-year outlook for the inflation rate slid to 3.1%, down sharply from 4.5% in November and the lowest since March 2021. The five-year outlook also moved lower, down to 2.8% from 3.2% the previous month.” That is a very big monthly move for this survey. I always said that the best guide for what people think about inflation is the grocery store and the gas pump. Gas and groceries have dropped a lot and people are recognizing that, but the problem is that it is still higher than pre-Covid, by a lot. Tom Keane from Bloomberg Surveillance calls this cumulative inflation. I’ve attached my handy inflation calculator link but in the last three years in October the inflation rate has been 6.2,7.7, and 3.2 percent. Prices are compounded so in 3 years something costs 18% more. Forgive most of America if they don’t rejoice in falling inflation rates. Remember inflation hasn’t fallen yet, it is simply rising less fast. That is an important distinction. Inflation expectations are trying to tell us something, the question is what?
LB#3-
The single most important question facing the markets today is when will the Fed pivot and lower interest rates. The treasury market yields started dropping about 7 weeks ago and it induced a massive 10-12% rise in equities, depending on the index. This has been bolstered by the fact that Powell must pivot, in fact the futures markets show it a strong possibility as soon as March. 13 months ago, the S&P 500 was below 3700 and people were concerned about the bear market as they should have been losing money in both bonds and stocks as they were. Now flash forward 13 months and the S&P 500 just set a new 52 week high on Friday closing at 4604. How is this possible with higher interest rates? Simple, the government is running a 7-8% budget deficit, which is war-time spending during peacetime, the highest on record as a percentage of GDP. Higher than the Great Depression or any recessionary stimulus the government has ever used before. So, what growth have we gotten? 2.2%, 2.1%, and 5.2% quarterly GDP growth rates along with the 4th quarter expected to be 1.2%. That would be an average of 2.7% or a bit above the long-term average. This is a clear case of diminishing returns. The economy gets less growth the more the government spends. Dr. Lacy Hunt, formerly of the Dallas Fed, writes extensively about this very topic. What happens if we go into a recession, and we are already spending at the highest percentage in history and the more the government spends the less good it does? Why are we expecting a drop from 5.2% GDP to 1.2% GDP in the 4th quarter? The GDP numbers are trying to tell us something, the question is what?
Looking Forwards…
LF#1
This will be a big week for economic news as the CPI announcement will be Tuesday morning followed on Wednesday by the Fed rate announcement concluding their meeting and we will get a Powell press conference or presser if you will. This will be very interesting because of what is not talked about, quantitative tightening. Everyone is focused on interest rates and inflation and Powell has quietly been cleaning up his mess unlike Gavin Newsom in California, but more on that in a minute. The Fed was the buyer for US treasuries for years and a very large buyer during Covid out of necessity while Trump spent trillions. In Aprill of 2022 the Fed slowly started tightening and the tightening of their balance sheet started accelerating last October. They have reduced their holding from $8.9 trillion to $7.8 trillion. It has been almost in a straight line except for the quick QE boost that was required during the banking blowup in April, but they got right back on their horse and their balance sheet continues to decline. This is taking money out of the system as they retire their debt and someone else in the private system must buy it. At the higher interest rates there have been enough buyers to absorb not only the increased bills and bonds that Janet Yellen has to offer to fund the deficits but also the $1.1 trillion that the Fed has reduced. Which is why if you go look at the M2 money supply chart I’ve attached you can see that the amount of money that was going parabolic just 18 months ago has now got a hook on it like a Pedro Martinez curveball. This is the largest reduction in money supply since the Great Depression. The Fed doesn’t talk about it and hardly mentions it because this will slow the economy down far more than raising rates. So with governmental spending at the highest peacetime rate on record the economy and the production of goods and services is growing by 2-3 percent this year and the money supply is shrinking. More supply and less money to demand those goods. This is why prices are starting to fall and we are in disinflation, rate of increases falling, not yet deflation, which would be lower prices year over year. This is a great scenario for the consumer who benefits from price increases slowing down, but it is bad for asset prices which measured in a lower amount of money must come down. In essence it is the opposite of the quantitative easing we have seen for the last 10 to 15 years. Businesses and rich folk are going to be pissed, but the other 90% should be pleased at the progress Powell has made, not that he didn’t help create the problem, but he is trying to remedy it. Expectations for the CPI print on Tuesday are for falling prices and we will see how the Fed reacts to that on Wednesday. Right now the stock market is digesting bad economic news is good news, meaning Powell will pivot. Unfortunately, on Friday, they considered good news in the US non-farm payrolls to be good news and rallied. If we get good economic data and the Fed doesn’t pivot then this market is severely mispriced and the bond market is way mispriced. Sometimes falling prices can’t be stopped very quickly and that means bad news is bad news. Which is it going to be? Falling prices are trying to tell us something, the question is what?
LF#2
“California’s budget deficit has swelled to a record $68 billion after months of unexpectedly low tax revenues, a shortfall that could prompt the state’s deepest spending cuts since the Great Recession.” Blake Jones writes for Politico. Oh boy, you mean just giving free handouts of money results in a deficit go on Blake, tell me more. It isn’t yet a record in % terms but it is in dollar terms, but the state does have options.
“The LAO (Legislative Analyst’s Office) forecasts a $4 billion drop in the amount of funding the state is required to send to schools and community colleges under Proposition 98” The article goes on to point out that the state has $30 billion in reserves. Now Blake correct me if I am wrong doing my sums incorrectly here on the back of this envelope I have for a free credit card that promises to give me a big loan for no money down. Let’s see here, 30 plus 4 equals 34. 34 divided by 68 is 50%. If they use all their reserves and cut education spending they cover half of the deficit? That would be hilarious if so many people weren’t about to have their lives upended by their governement, but I found two other things funny about this article in a haha oh shit sort of way. This $68 billion number is up from the $14.3 billion deficit estimate in June. Let me get my envelope back out here, $68 b now, $14.3 B then, that is a 376% increase in the estimated budget deficit in 5 months. Wow! Lastly, Blake writes that the state will have to reduce spending due to the tax revenues not covering the outlays, “adding education to a list of possible targets for reductions that also includes climate and health care.” There it is! They are going to have to spend less on climate and health care. We have seen private companies going bankrupt with climate agendas whether it be wind or solar, but now we are going to get our first look at a state that has leaned in the most to the green agenda. They have forced companies and their tax revenues out of the state and continued to spend to be green. What they now lack is green, dollars. The California budget deficit is telling us something, the question is what?
LF#3
Another potential geopolitical flareup has occurred with wide reaching ramifications. The small nation of Guyana, I will wait while you look it up on a map. Found it? Nope not the French one, the one with a y. That’s it. The one that shares the border with Venezuela. Barron’s reports that “Venezuelan President Nicolas Maduro has raised the pressure in recent days after gaining overwhelming support in a referendum on Essequibo’s fate that was held Sunday.” What is Essequibo you might ask, well it is home to about 1/8 of Guyana’s population but it is also home to oil which is why it is important. This is where Exxon found oil and Chevron recently bought Hess who also has a large footprint in the region. This is some of the largest growth areas of new oil production found anywhere in the world. This border dispute goes back over 100 years, but this is a piece on the chess board populated by real tangible products and not paper dollars. Remember when Sleepy Joe Biden sanctioned Russia and reached out the olive branch to Iran and Venezuela looking for other sources of oil and offering to reduce their sanctions. Well Iran backed Hamas attacked Israel and now Venezuela is increasing tensions is Essequibo. The world is playing chess against the Americans knowing that the only way to win is to exhaust us financially. The Middle East is a powder keg as the Houtis are firing missiles at US ships, in fact the Hill’s Ellen Mitchell writes that the US has been attacked 67 times since Oct 17 in the Middle East. Yet the price of oil is down over 20%, which is interesting. US troops are now facing conflicts with the Chinese in the South China Sea, the Middle East with Iran backed Houtis, and now the Guyana border is getting US military support as they will be conducting drills in a show of strength obviously. All this costs lots of money and spreads us thin as we continue to be the policeman around the world and remember we are funding Israel and the Ukrainians. Geopolitics is trying to tell us something, the question is what?
US attacked 67 times since Oct 17
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.