This week on Inside the Economy, we discuss the current state of the domestic consumer in relation to inflation and interest rates, the potential for a U.S. Sovereign Wealth Fund, and Europe and Asia. The media has been buzzing about an increase in year-over-year inflation. Is this necessarily bad news, or is it an adjustment in the numbers? Which inflation data point saw the biggest increase? Additionally, the current administration has proposed the idea of a U.S. Sovereign Wealth Fund, with the goal of promoting fiscal sustainability. Could monetizing the U.S.’s majority stake in gold significantly aid in the creation of the fund? Across the globe, China has seen record investment outflows, alongside a minimal amount of inbound investment. Japan, once one of China’s top partners for direct investment, has shifted its focus. Who is Japan now prioritizing for direct investment? Tune in to learn more!
Key Takeaways:
- U.S. Core CPI at 3.3 (YOY)
- 30-year Mortgage at 6.87%
- The U.S. holds 8.1k metric tons of Gold as of Dec. 2024
Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
This time I want to talk about what’s going on with the U.S. consumer, especially in light of the seemingly bad news about the CPI numbers. We’ll get to that. The possibility of we might have a U.S. sovereign wealth fund and what’s going on mostly in the rest of the world, which means Europe and Asia. The drama with CPI and a few other things, which we’ll get to in a minute, really doesn’t reflect on what’s going on here in the numbers. The ISM service numbers are up. CPI is up a little bit. Initial claims are down. Mortgage rates are down. Oil is down. The yield on the 10-year is just where it was before.
There isn’t a lot of drama in the economy over the possibility that CPI isn’t coming down as fast as they’d hoped. It’s not going to come down much more, likely. Most of that’s due to the federal government deficit, which we’ll kind of touch on later. But we have a very healthy economy, and regardless of what goes on with the current administration in the next several months or the next year or so, when the economy is this strong, you can make a few mistakes and it won’t have much of an impact. Headline CPI, we’re at 3%. The core is up a little teeny tiny bit. Not bad. It’s not reflective of dropping inflation and the prospect of going back to cheap money. We’re not going to do that. In fact, the real interest rates are up where they ought to be right now. “Real interest rates”, I love that term. It is really, you take the cost of money, four and a quarter, four and a half, whatever it is, you apply 3% inflation to it, you get one and a half percent real interest rates. That’s where we are. That’s where the cost of money really ought to be, about one and a half.
We’ve been through that mathematics before. That’s where we are. That’s why the entire mortgage industry lowered their rates and lowered the price of their product, because they’re seeing stabilization in the interest rates, and they’re not going to worry about whether they go down a little more, because the odds are getting smaller and smaller all the time. We are in a fairly good place. They know it, and I think it’s going to have an impact on a lot of other things. A lot of discussion in the media about, oh, new high numbers in household borrowing at credit card levels. Yes, technically that’s true. The fact of the matter is, the numbers in credit cards and auto loans and those kinds of things are up, because inflation has forced them up. Everything costs a little more, but the ratio of the spending for the average consumer is actually down compared to their income.
The U.S. consumer is not developing a bubble that’s going to break a debt bubble or anything. They seem to be doing quite well. Credit cards are down there in the bottom. The numbers are up. It’s amazing that the actual spending reflects exactly what the inflation has done to the numbers. A $4 cup of coffee is now a $7 cup of coffee, and that’s exactly how it looks on the credit card numbers. Auto loans are up, because the consumer is more confident about their income and have the income. They buy new cars. There’s a lot of that going on. Delinquencies are down, still around 3% or lower. Not a problem with the consumer.
A couple of questions on the buyout that’s going on in this administration of going through governmental agencies and getting rid of some of the employees. Actually, in the last four or five years, there’s been a lot of new federal employees, a lot of new agencies, protection agencies, this agency, so on and so forth. Putting federal employees like 2.4 million, it’s a lot. It is trivia when it comes to actual numbers in the economy or initial claims, but this administration has got to get the federal deficit from where it is right now, let’s call it 7%, down to 4%. This is just a step. It’s just a little piece of the pie, cuts in the expenses out. That doesn’t necessarily affect this 20% of the workforce, and it’s still immigrants that are 20% of our workforce, and a lot of these people are not targeted with being cost. They’re an integral part of, as everyone knows, the U.S. workforce. Just aside from that, that really isn’t part of what’s going on in the current media blitz.
One of the things you are going to hear is about the Sovereign Wealth Fund. Sovereign Wealth Fund, which is a lot of countries on earth, Norway, Sweden, a lot of places have Sovereign Wealth Funds. They are very handy. They don’t require a lot of approval. You can have a purchase. You could buy Greenland if you want if you had a Sovereign Wealth Fund. You don’t need permission from anybody except for people who live in Greenland, but here’s what you’re probably going to hear. The United States has about eight tons of gold. I have no idea how much that is, but it seems like a lot. It’s currently valued at $42 an ounce. Last time I looked this morning, gold was like $3,000 an ounce. Don’t be surprised if they monetize, and you’ll hear the term “monetize”, this gold supply here, and it’ll be the basis of a new Sovereign Wealth Fund. It’s about 750 billion dollars. It’s just accounting. They’re not going to move it. They’re not going to sell it. They’re just going to monetize it and call it an asset.
Okay, the S&P 500, the Dow, the Nasdaq, they’re kind of going sideways. We’re looking for some kind of correction, at least a reduction. If you look at where the forward earnings are, we’re coming up on 23 almost at forward earnings. It’s a little high. We’re about 9% over, and there’s no, so we’re certainly over, way over, compared to the rest of the world, which is having a little bit of a stock rally right now, but it’s because fundamentally their stock is cheap, and investors are buying it because they’re getting a lot of it at a good price, but the U.S. stuff is not cheap. It’s a little expensive. We need to have a little adjustment down about 9%. I don’t know if that’s going to happen in the near future, but it would be good news, but the rest of the world, we’ll just talk about Europe and Asia. Europe is Germany.
There are some fundamental problems with Germany, and we’ve talked about this before. This is not just happening in the last couple of months. Basically, what Germany has always sold to the rest of the world is its good manufacturing. They have not kept up since 21, 2000, end of COVID, whatever it was. They have significantly dropped behind or decoupled from the rest of global manufacturing expansion. They’re slowing their potential big growth market. China didn’t work out, and what they make and sell in the U.S., their best number one customer, they make here. They don’t make it in Germany, except for a few exceptions. Everything else is made here, so what Germany actually contributes is dropping. Their stock market is doing pretty well here short-term because their stock is relatively cheap.
Usually, there’s a reason for that, but we’ll get into that later. China is pretty much in the same situation. I’ve mentioned this before, the FDI, the (Foreign Direct Investment), and China’s dropped again, another 200 billion. Well, China is seeing huge numbers flow out, certainly not flow in like they have. You can’t do this very much longer and expect to be a manufacturer, even on the low end of things, to the world. This problem is significant. It doesn’t have a known cure other than, I don’t know, they can’t lower their price. They’re about to get more tariffs. I don’t know what they’re gonna do, but the dominance of China as a manufacturer and impact in the world dropped another couple of notches, really.
One of the outfits that really has significantly provided them technology, manufacturing skills, all kinds of things in the last decade is Japan. Their FDI has dropped significantly. It’s coming down to a zero. They’ve shifted. Well, we’re gonna put our stuff in the United States. It’s not just we want to buy U.S. steel, which is more about saving the Union than anything else, but it’s everywhere. They know where they see a good investment.
Okay, the economy is doing great. On the investment side of things, it’s very positive. We’re just a little overvalued. If we drop down 10%, don’t even give it a second thought. Going forward, it’s going to be about the federal deficit, and I do mean how much it needs to be reduced. A lot of the things that are going on are fairly positive for the deficit. Unfortunately, the conversation about lowering taxes again is bad for that. The United States needs the revenue. As you know, I’ve been a great proponent of dropping the tax breaks that the first Trump administration got passed. There’s almost no chance they’ll let that sunset, which is too bad. I just hope they don’t make it worse and cut tax rates more and reduce the federal government’s income. Not a good time to do that.
Okay, thanks for joining me. Obviously, send questions along, the info at SHJ Wealth Advisors, and I’ll be glad to deal with it. And we’ll see you next time.
