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Inside the Economy: The Consumer and Inflation

By January 10, 2024No Comments

This week on “Inside the Economy”, we talk about some important economic data. GDP estimates continue to be above trend and unemployment remains low. However, the Fed seems to be content with inflation data trending lower and many are speculating on future rate cuts. How will this impact the stock and bond market in 2024? Tune in to learn more!

Key Takeaways:

        • Oil prices drop below $70/barrel
        • Mortgage rates trending below 7%
        • Headline inflation trends lower

Full Transcript:
Welcome to the first edition of Inside the Economy for 2024!

I hope it is a good one for everyone. I titled this one we’re not going to hell in a handbasket because unfortunately, I think everybody is going to get really beat down in the media. It, it’s going to be an unpleasant political environment. There’s going to be a lot of drama in the presidential race because that’s where the money is, that’s where the interest is.

I’ll remind everyone, especially from the economic side of things, that the clogs and the confusion and a lot of the issues are in Congress, not with who’s in the White House. So I recommend that you think about those positions and with a little luck, we’ll get an improvement over what we have now. It’s likely going to be another threat or two for another government shutdown because they can’t agree.

But hell in a handbasket is a message I heard a couple of times in some of the media outlets that I don’t agree with. And specifically, if we look at some of the numbers, there have been interest rates coming down for a while. Even a year ago, where 30 year mortgages are where they were nearly a year ago, treasuries are all down, unemployment still 3.7. Initial claims are way down in the low 200s.

This is not what the Fed wants. The Fed wanted a lot more slowing and don’t believe for a minute they’re going to lower their rates when the job market and interest rates are coming down without them mechanically lowering the rates. That’s not good news. They’re simply going to keep the rates up there until they get a more promising picture that spending and the economy are slowing. We’re going to see that this year.

It’s going to be part and parcel of, in some respects, this now this is cash. We’ve talked about this before. The big bump in cash over there. This is cash in consumers accounts, $5 trillion, 4 trillion of that is from the stimulus money for COVID. Good diversity initially went to everybody went all kinds of households, helped people pay rent, buy groceries. It was productive. I still think it was a good idea.

Now after a year or so, well, it’s moved around a few accounts and it’s congregated in a lot fewer accounts than it was in before, but it’s still $5 trillion. You notice how the numbers start to come down. That’s because the Fed is very slowly taking that money back out of the system. We’ve talked about this before. That $4 trillion was pure stimulus money, pure, get you through money, but it doesn’t belong in the system. It’s a source of inflation. The control of inflation is going to be pulling that money out of the system and I’m sure the Fed is going to do that. They’ve started on the process already.

All the fanfare about interest rates, that’s for the media and for debate and public consumption. The real work is done with the money supply and it’s slowly, slowly coming out of the system. Take a peek at this chart and the important part of it is the gold and the blue. That’s where we were in the middle of COVID the gold, oh, the credit card debts were way down and spending was down. Auto loans were down. It was great.

We look at it now, you look at the blue now. Credit cards now are as bad as they were the beginning of the 2008 crisis. Auto loans are up lot more defaults. I haven’t seen zero interest rate yet, but I have seen offers for reduction in price. They have to sell those cars to the middle income, wage and hour side of the economy. And mortgages are starting to see some not default yet, but certainly late.

The Fed wants to see more of this. So spending slows, so that side of the economy is slowing and it really tames inflation, gives them opportunity to pull the money out of the system. I will remind you that you see a lot of press on this. The dark one is, boy, look at the changes in rent, way down. Isn’t that great? The growth is way down and that is great. Look at the red line. That’s where the average rent is one, $1700 a month. A family of four paying $2,730 a month.

Well, we know where that goes with a working guy. And part of that rent, part of the eleven or so lower end food franchises which are going to go under this year. We’ve talked about that a little bit. A meal for four people in any one of those Denny’s or whatever it is, it’s $100. Working guy can’t afford that. And since all of their costs are up 23%, 25% and they can’t raise their prices, well, that’s why you go under. That’s kind of where we are.

That’s going to be. It’s all fallen apart in the media because of these events. The labor market is okay, the job market is okay, it’s all the way at the right. It’s nothing like it was a year ago, which was a little bit of recovery. But the job market is vibrant because people are finally figuring out that Door Dash alone isn’t enough to pay the rent. So they’re getting jobs. There are some jobs available because corporate America is resolving their supply issues, getting their act together, adjusting things. Manufacturing is coming out of China. It’s going to Mexico, Philippines, Vietnam, all over the place, India.

But the job market needs to slow some more to pull the rest of the steam out of inflation. Markets reacted well the last quarter. It was fine. The S&P 500, all of them did well. It’s a little premature because earnings aren’t there yet, but we will have good earnings by the second quarter. Early third quarter, that isn’t good news for the Fed. They don’t want to see that until they lower rates.

But there’s a lot of other things going on right now. And though the market has adjusted as much as it has already, is not going to encourage them to lower anytime soon, I still think the Fed’s not going to do anything towards the very end of the year, the market is great. And there have been a lot of questions on, gee, what really has been the driver for this market?
Well, down there on the bottom, that little huge wad is the S&P 500, the 400, the 600 mid cap small cats. Everybody’s down there. That blue glorious line up there, that’s the magnificent seven. Boy, I don’t like that term, but it’s the seven biggest stocks in the S&P 500 technology, mostly technology. They’ve really outperformed everything. They get all the press, everybody buys them. The investment clubs, everybody buys them. They’ve really been the performers. But the rest of these markets that are down there are going to improve on their own, which will be a big boost to the broad market growth starting this year.

Real estate side of things, we’ve gone over the top with office vacancies. We knew this was coming. We’ve now exceeded where they were in the savings and loan crisis several years ago. It’s going to be interesting to watch, but it’s going to help slow things down. United States has always been seemingly very energy dependent and sensitive to things going on in the Middle east and there’s nothing really good going on in the Middle east right now. But now we’re the largest oil producer in the world, have been for a while. Soon to be the largest oil exporter in the world a little while. And one of the customers we used to deal with is Venezuela. This is Venezuela.

The petroleum they produce is horrible, nasty stuff, but it’s good for making diesel fuel, which, if you’ve noticed, has been very high. That’s because we stopped buying it. Well, we just started buying it here a little while ago to get back in the role of oil shipping. We’ll see what Venezuela does with their neighbors in Guyana because they’re arguing over a big oil field of this really nasty stuff. Natural gas is the big thing. It’s not oil so much anymore. It used to be critically important for China and us. It’s not. It’s natural gas. 60% of all the power generated by fossil fuels is natural gas now.

So we had a big boom when, well, Mr. Putin invaded the Ukraine, stood up there for a while, while Europe is going, OMG. We’ve always counted on them. So you know the story. Then it adjusted and it’s back down, predominantly because the United States is far and away the biggest exporter of natural gas, liquefied natural gas. Russia was kind of in the running there for a while, dropping rapidly. That’s not necessarily due to anything other than the ruble, is useless, technically, in the currency market, it’s known as. It’s become toilet paper. That’s a technical term, but the United States has taken over that market. Europeans are buying, and everybody’s getting that market. The Israelis, Turkey, everybody.

A lot of places in Africa, a lot of media conversation about China going to be coming back and solve their little problems. I don’t think that’s the case. You’ll get a lot of input from people, advisors that want you to like China again, to put money in their fund because they think their stock market is going to recover. Or you hear from the press or in the media that China is a great place and don’t believe everything you see. Well, that’s part of the decades old public relations process that China’s been engaged in.

The truth of the matter is, those that remember the Japanese real estate collapse in the 90s, they got to the point where everything was too expensive and they just couldn’t sell them anymore. Boof! And it went. Japan lost an entire decade of growth after that. And what’s going on right now in China is very similar. Too much debt, too much high price, too much counting on real estate as a source of wealth to the middle class. I mean, it’s all standard.

China’s just a little worse. Their developers are dropping like flies. Xinjiao, another huge trust company, filed for bankruptcy yesterday. The big one, Evergrande, really has been able to dodge it for a while, but it’s not going to go on forever, and I don’t think the Chinese government is going to bail them out. That market is not going to recover probably ever. It’s going to stay there because there’s a lot of people. But the exodus back to the country has already started.

If you’re going to be poor, it’s a lot easier to be poor in the country than it is in a tier one city like Shanghai or Beijing. Manufacturing and jobs are in tier three cities anyway, so they’re just moving back. And the real estate market is probably not going to recover. The stock market is probably not going to recover, mostly because the consumer sentiment is so bad. That’s the dark line.

China is not doing well. Their prospects aren’t great. They’re still going to survive, which is fine, but they have serious competition for the first time in their modern existence from Japan, Taiwan, Philippines, Indonesia. They’ve never really had to deal with that before, but that’s not going to change. And their number one customer is not going to come back for the foreseeable future.

Okay, you’re going to hear a lot of bad news. Please just let it go in one a year and out the other because the US economy is in pretty good shape. It’s just going to hurt that lower end more and more this year. It has to. That’s the whole program. But it’s not going to affect a lot of people. And the fundamentals of the US savings industry, the US economy are very good. They are excellent. And by the time this political, well, season is over, we’ll see some really robust growth for a while.
Well, thanks for joining me. Questions? Send them along to info@SHJwealthadvisors.com.
Happy to deal with it, and I’ll see you next time!

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