Markets choose sentiment over reality, inflation crests another peak and more lessons from the fin del mundo...
(Source: Getty Images)
Joel Bowman, checking in today from Houston, Texas...
Hooray for the “relief rally!”
Stocks popped on Friday with the Dow Jones Industrial average leading the charge to end higher by 658 points, or 2.15%, on the session. The S&P 500 gained 1.92% while the Nasdaq Composite rallied 1.79%.
Happy days are here again. Wait... make that “happy day,” singular. CNBC:
Despite Friday’s rally, all the major averages closed out the week with losses. The Dow slipped close to 0.2% while the S&P and Nasdaq fell 0.9% and nearly 1.6%, respectively.
As for the year-to-date numbers, you may want to hold your nose. The above-quoted indices are down 14.5%, 19.4% and (gulp…) 27.7%, respectively, since Jan. 1.
The big story this week, as our resident macro analyst, Dan Denning, pointed out on Monday, was the Consumer Price Inflation (CPI) print, courtesy of the hard working economists over at the Bureau of Labor Statistics. Wednesday morning’s 9.1% read came in well above what the “peak inflation” crowd had anticipated, sending markets into a tailspin mid week.
Add to that Thursday’s forward-looking Producer Price Index (PPI) number, which weighed in at a hefty 11.3% year on year increase, and one could be forgiven for thinking that the worst was still ahead of us.
When Bad is “Good”
No matter... by Friday, the worm had turned. Wednesday and Thursday’s high inflation readings were trumped by a consumer sentiment survey, out Friday, that showed respondents expected lower inflation. So... there. Again, CNBC:
Along with fresh bank earnings [Wells Fargo reported a 48% decline in quarterly profits... but rallied 6.2% anyway], traders digested strong preliminary consumer sentiment data and retail sales that beat expectations. Those numbers appeared to soothe concerns that the Fed will hike by 100 basis points at upcoming policy meetings and indicated that consumers are bolstering retail spending even as inflation hits record highs.
And here, we dare to offer a little insight from the Argentinian School of Economics... high inflation numbers (the “official” figure in Argentina is around 60%) may goose retail figures in the short term, as people rush to trade their hot potato pesos for goods and services... but, over the long term, persistently high inflation eats into real savings and capital formation, thereby undermining economic vitality.
By discouraging investment in critical production and industry, you actually get less goods to go around, not more. And with a deluge of newly inked money chasing a dwindling scarcity of goods, inflation can quickly go from a “civilized, western democracy” 6... 8... 10% figure to a “sh!thole, banana republic” 60... 80... 100% figure, and beyond...
But that’s all by the by. Speaking of real goods, investors have turned sour on certain key commodities, suggesting they may be either bracing for a recession... or finally accepting that we’re already in one.
Most notably, Dr. Copper – the metal said to have a PhD. in economics due to its tendency to “predict” where the economy is headed – dipped below the key $7,000 per tonne mark on Friday, the first time it has done so since the mid-pandemic days of November, 2020. That’s a significant capitulation from its March high, of just over $10,600, when fears of a global supply shortage pushed prices of a range of commodities to nosebleed levels.
Over in the energy markets, meanwhile, oil just hit its lowest price since the world learned how to properly pronounce the Ukrainian capital,
Kiev Kyiv... (it’s Keev, as we are mirthlessly informed.) Brent crude, the international benchmark, dipped below $95 per barrel this week while West Texas Intermediate (WTI) fell to $90 per barrel.
How to make sense of all this wayward price action, dear reader?
The divergence between the price trajectories of what you own (mostly heading lower) and what you buy (largely ripping higher) is a key element in the economic stress currently squeezing Americans consumers and investors.
The Bonner Private Research team has been on the case all week. Here’s how Dan Denning explained the situation to members in his Friday note...
Both Bill Bonner and Tom Dyson mentioned falling commodity prices in their recent communications with you. This is a critical subject in our private communications with each other. You see deflation in the things you own (falling asset prices) and inflation in the things you buy and need (food, housing, energy). How do you make sense of it?
Check out the chart below. It’s the ratio between the S&P 500 index and the CRB Commodities Index. I come back to it from time to time to look at the relationship between financial assets and real things.
The little blip at on the far right is the recent sell off in key commodities like copper, oil, and gold. Stocks are up and real assets are down, in simple terms. Some of this, by the way, is the very strong US dollar, which achieved parity with the Euro for the first time in 20-years and is at two-decade highs against the Japanese Yen. But what’s the long-term trend here?
We think financial assets peaked relative to real assets in late 2020. That was after a ten-year trend that began in 2012 in which stocks crushed oil, gold, and commodities. Interest rates were low. Returns on ‘risk assets’ and growth stocks were absolutely and relatively high. The recent commodity sell off/stock rally doesn’t reverse the trend of lower stock prices and higher real asset prices, though.
Part of this is basic macroeconomics. The US is likely already in recession, with GDP contracting in the first two quarters of this year. China’s second quarter GDP growth of just 0.4% was the smallest margin since March 2020. The two biggest economies in the world are collectively going in reverse.
From that point of view, the copper/oil sell off makes sense. In a worldwide recession/depression, you get lower production and resource prices. Also, the recent highs in various commodities probably DID destroy some demand for them. As they say, the best cure for high prices is high prices.
But we live in an ‘inflate or die’ world. There’s over $300 trillion in global debt, according to the Institute for International Finance (IIF). That’s over 350% of global GDP. You can’t ‘grow out’ of that debt. You have to pay it off, re-finance it (at higher interest rates), restructure it, or default on it.
Inflation is a kind of ‘soft default.’ Creditors get paid. But it’s with money created form thin air. In the meantime, you can’t print oil, copper, or gold. Look for more on opportunities here as they present themselves.
Speaking of which...while Investment Director, Tom Dyson, continues to urge Bonner Private Research members to remain in “maximum safety mode,” there will be opportunities along the way. Tactical trades, Tom calls them. In fact, he just introduced one to the BPR watchlist this past week. The company has no debt, no hedges and a great track record of returning value to shareholders. Tom will continue to monitor the action, adhering (as always) to his strict stop loss philosophy.
Remember, priority number one in these challenging markets: Capital preservation.
If you’d like to learn more about Tom and Dan’s work and how you can begin receiving their twice-weekly market updates, plus monthly issues, in-depth research reports, Zoom calls with Bill’s private network of investors and money managers, and plenty more, take a look at what’s on offer, today...
And now for Bill Bonner’s missives from the past week...
And final thoughts for today…
They say “everything is bigger in Texas.” We’re not so sure about that… but we do note that the inflation rate here in the Houston metro area came in this week at 10.2%, a meaningful chunk above the 9.1% national average.
What does that mean, practically? Well, like elsewhere in the United States, inflation only really effects you if you’re into “food, energy and shelter.” Other than that, you’re in pretty good shape.
But to quantify – anecdotally, at least – the cost of living in America’s fourth largest city, we spent Friday evening watching the top-of-the-table Houston Astros being handily throttled by the bottom-of-the-table Oakland A’s at the Minute Maid stadium downtown.
For a mere $50, you can enjoy two beers, a water, a couple of hot dogs and… barely have enough left over for peanuts.
Leaving the official figures aside, we’d love to know what the price of everyday goods look like in your neck of the woods. Hit us up in the comments section below, and feel free to share this article with athletes and armchair critics alike.
We’ll be back with your regular Sunday Session tomorrow… including a brand new Fatal Conceits podcast with the always fascinating Mr. Byron King.