Will Consumers Save the Economy?
Retail sales come in above estimates … Larry Summers casts doubt on “transitory” inflation … a hedging instrument from Eric Fry … journalistic malpractice
The most important influence on our economy is still alive and kicking.
Shoppers.
Consumer spending makes up about 70% of the U.S. GDP. So, as a general guideline, as the shopper goes, so goes the economy.
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Yesterday, we learned that October retail sales increased 1.7%, compared with just 0.8% for September. This tops the Dow Jones estimate of 1.5%.
From CNBC:
…the retail sales numbers — which are adjusted for seasonal variations but not for inflation — indicate consumers are willing to pay the higher prices, despite a recent indication that sentiment is at its lowest level in 10 years.
This is a good sign for the economy as we head into the holiday spending season. But we need to be objective in our analysis.
First, we all know that inflation has been surging. So, at least part of this outsized sales gain is attributable to higher prices.
Plus, it’s likely that holiday shopping has pulled forward some of the U.S. consumer’s year-end spending splurge. That’s because news headlines have told consumers to “buy now, don’t wait” because of potential empty shelves from supply chain bottlenecks.
What we want to see is this consumer spending accelerating through the end of the year, boosting our fourth quarter GDP.
But for now, we’ll take it. It’s a positive sign – especially coming after news last week that consumer confidence hit a decade low earlier in November.
***The lack of consumer confidence is largely attributable to inflation – combined with the belief that the government has no policies in place to curb it
Last week, we learned that The University of Michigan Consumer Sentiment Index dropped to 66.8 for November, well below economists’ estimates of 72.5.
Here’s Richard Curtain, the survey’s chief economist adding more color:
Consumer sentiment fell in early November to its lowest level in a decade due to an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation.
Right on cue, a few days ago, Minneapolis Federal Reserve Bank President Neel Kashkari chimed in, validating this exact consumer fear:
Speaking about the elevated state of inflation on CBS News’ “Face the Nation,” Kashkari said:
…my view is we also need to not overreact to some of these temporary factors.
Adding to this, yesterday, San Francisco Fed president, Mary Daly, urged the Fed not rush to take any quick action to halt inflation:
While it is easy to mistake motion for competence or action for attention, running headlong into a fog can be costly.
To clarify, Kashkari and Daly are telling us not to overreact to inflation levels that are literally 3X what our Fed officials forecasted…while lasting many months longer than they predicted.
***The Fed’s forecasts have been stunningly wrong. Will they continue to be?
Larry Summers, the former Treasury Secretary under President Clinton, just took aim at the Fed’s “transitory” narrative.
In an op-ed piece for the Washington Post earlier this week, Summers began by noting Federal Reserve Chairman Jerome Powell’s Jackson Hole speech in late August. If you recall, it highlighted five pillars supporting the “transitory” view of inflation.
Here’s Summers:
Today, all five pillars are wobbly at best.
First, there was a claim that price increases were confined to a few sectors. No longer. In October, prices for commodity goods outside of food and energy rose at more than a 12 percent annual rate. Various Federal Reserve system indexes that exclude sectors with extreme price movements are now at record highs.
Second, Powell suggested that high inflation in key sectors, such as used cars and durable goods more broadly, was coming under control and would start falling again. In October, used-car prices accelerated to more than a 30 percent annual inflation rate, new cars to a 17 percent rate and household furnishings by an annualized rate of just above 10 percent.
Third, the speech pointed out that there was “little evidence of wage increases that might threaten excessive inflation.” This claim is untenable today with vacancy and quit rates at record highs, workers who switch jobs in sectors ranging from fast food to investment banking getting double-digit pay increases, and ominous Employment Cost Index increases.
Fourth, the speech argued that inflation expectations remained anchored. When Powell spoke, market inflation expectations for the term of the next Federal Reserve chair were around 2.5 percent. Now they are about 3.1 percent, up half a percentage point in the past month alone…
Fifth, Powell emphasized global deflationary trends. In the same week the United States learned of the fastest annual inflation rate in 30 years, Japan, China and Germany all reported their highest inflation in more than a decade.
Bottom line, I hope Kashkari, Daly, and Powell are (eventually) correct about inflation, despite being woefully wrong so far.
But how might we hedge ourselves if this inflation persists?
Our macro specialist, Eric Fry, just highlighted an option.
***Putting rising interest rates to work for your portfolio
For any newer Digest readers, Eric is our global macro specialist. This means he evaluates markets and asset classes from a big-picture perspective to identify attractive opportunities.
He also factors major economic variables into his analysis, with interest rates and inflation readings being high up on that last.
In Eric’s issue of Smart Money from just a couple days ago, he connected the dots between rates, inflation, and a specific hedging instrument he likes today:
I believe it is worthwhile to consider adopting one or more hedges against an unexpected inflationary uptick.
One such hedge is the ProShares Short High Yield (SJB), an ETF that uses interest rate derivatives to bet that high-yield bond prices will fall (as interest rates rise).
A rising interest rate trend would cause the prices of almost all bonds to fall, but junk bond prices could drop even more severely than safer bonds like U.S. treasuries.
In other words, the “spread” between junk bond yields and Treasuries could widen, to the detriment of junk bond prices.
But treasury bonds certainly aren’t safe when inflation is rearing its head. And in case you missed it, the CPI inflation reading just hit 6.2% – a new 30-year high.
In Eric’s newsletter, Investment Report, he’s been highlighting additional ways to help protect your portfolio from inflation. One such way is not only an inflation hedge, it’s a way to position your wealth in front of the explosion of technological innovation we’re going to see (and are already seeing) this decade. To learn more as an Investment Report subscriber, click here.
***Before we wrap up, one quick “eye roll” moment from our financial media
Just a quick reminder that the media isn’t your friend.
Investors and the media have substantially different goals – investors want information to help them make informed decisions. The media want eyeballs to help them generate more ad revenue.
With this differential in mind, take a gander at this headline from yesterday:
Has the ‘crypto winter’ arrived? Bitcoin slides back to $60,000, Ether under pressure.
Bitcoin’s all-time-high came just one-and-a-half weeks ago.
As I write Wednesday, Bitcoin’s price is about 12% below that all-time-high value. Seasoned crypto investors recognize a 12% spread as nothing – it could be erased in one trading session.
Now, that’s not to say the latest bitcoin pullback is insignificant, or that it won’t intensify.
It could. In fact, we should expect such an outcome given the volatile nature of bitcoin and altcoins.
Plus, given bitcoin’s recent all-time-high, more profit-taking would be the norm – even healthy. After all, the scariest growth curve is the one that is straight up without what Louis Navellier calls, “the pause that refreshes.”
But, to me, asking about a “crypto winter” because bitcoin is down 12% from the all-time-high is journalistic malpractice.
To be clear, a “crypto winter” is a period of months, quarters, or years, in which the price of cryptocurrencies languishes in the gutter. Are we in the gutter being less than two weeks from, and just 12% below, an all-time high?
Now, sure, we could be standing on the edge of another major bitcoin correction. They’ve happened plenty of times before and they’ll continue to happen.
But bringing up a “crypto winter” is nothing but a scare tactic.
Keep in mind, Bitcoin just rolled out its new Taproot upgrade. This means greater transaction privacy and efficiency – and most importantly, it unlocks the potential for smart contracts. This is how we eliminate money-sucking middlemen from transactions. It’s a key, long-awaited upgrade that makes bitcoin even more valuable.
And, of course, bitcoin adoption continues. Those stories are everywhere, but here’s an especially interesting one from yesterday from Yahoo! News (emphasis added):
Crypto is being used more and more for real estate transactions.
In fact, the very first commercial real estate property has been put on the market in New York for Bitcoin.
Magnum Real Estate group is selling three retail condos, complete with a fully rented out retail bottom floor in Manhattan’s Upper East Side for $29 million, but they’re only accepting Bitcoin.
And while it’s the first commercial property listing for Bitcoin, we’ve seen real estate transactions and crypto on the residential side picking up the past few years.
Bottom line, I can’t tell you where bitcoin’s price will be tomorrow or next month, but I can tell you to be careful of what information you’re factoring into your investment decisions.
We’ll keep you up to speed on all these stories here in the Digest.
Have a good evening,
Jeff Remsburg
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