A Tame CPI Paradoxically Conjures Up a Possible Bidenomics Bear

Peter's Weekly Market Rap, Week Ending August 11, 2023

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A Tame CPI Paradoxically Conjures Up a Possible Bidenomics Bear

The big event of the week was what otherwise should have been good news was for the markets turned out to be a dud.  Okay, that’s pretty inscrutable, but here’s what I mean.

On Thursday, the Consumer Price Index data for July came in relatively tame – core CPI had it smallest back to back increase in two years at 0.2%.  Of that increase – bad news for America’s working classes – 90% of the increase came from higher housing costs.  In addition, grocery and gas prices keep popping – thank you Joe Biden.  On the flip side, used car prices fell for a second month while airfares had ebbed as well.

The Wall Street narrative that immediately popped with the data release was that the Fed now had good reason not to hike rates in September.  This narrative spiked the S&P 500 bullishly up while Treasury yields ran in place.

Then, of course, a bit of the dud hit at least a little bit of the fan as the stock market gave back its gains after almost a week of losses and Friday closed flat.

What this inaction tells me as a forecaster is that he smart money ain’t buying what Bidenomics and the touts on Wall Street are selling.  At this point, it looks to me that we are in the upper bound of a trading range for the S&P 500, stock valuations are over their skis, and there is more risk to the downside than up.  Here’s just some of those risks:

On the stagflation front, a combination of war in Ukraine and climate issues like El Nino are looking to put upward pressure on food prices for a very sustained period – food price shocks represent cost-push inflation, which gives us both inflation and slower growth. 

Here, El Nino, together with the higher temperatures and the associated drought or floods we are experiencing, is wreaking havoc with many parts of the global ag system – India, for example, is the world’s largest rice exporter at over 20 million tons but has now imposed export restrictions because El Nino has screwed up the monsoon.  Rice prices have, of course, spiked.

Meanwhile, Ukraine and Russia together account for a significant fraction of the world’s grain exports and Russia is now doing everything it can to prevent Ukraine from exporting – as we discussed last week.

There are some beneficiaries – Brazil, for example, is growing under the socialist Lulu purely on an ag boom.  Yet, higher ag prices are going to hit Americans hard and the rest of much of the rest of the world even harder – and this part of the stagflation crisis will have long legs.

There is also the persistence of higher oil and gas prices under Bidenomics green revolution.  The Saudi princes and Russian oligarchs are now firmly in control of OPEC and this is unlikely to change as well.

Beyond these concerns, which will surely keep the Fed from lowering rates, there is the slow moving crisis in commercial real estate which may ripple over into more bank failures.  Credit card debt has hit over $1 trillion in America, and the bastard credit card companies – and yes, they are bastards – are sticking it to the very people that they lavished their cards on without bothering to check whether they could afford the liberal credit limits offered.  According to the Fed, the average credit card interest rate in the first quarter of 2023 was – get ready --- frigging 21%.    That’s not only obscene.  It’s highly contractionary for the economy.

And let’s not forget that with the ill-conceived Biden student loan giveaway now gone up in a puff of Court of Appeals smoke is about to do.  Incredibly, fully half of the borrowers now have at least 10% more debt than they did before the Biden pause.  Once those payments start again, that’s money sucked out of consumption to fuel growth and into the pockets of lenders. 

My bottom line is that cash remains king – with “cash” now earning a nice 5% in, for example, six-month T-bills.  If, however, you want to walk a little bit on the wild side – not offering advice here – a good speculation (not bet) might be SPXU, a 3X leveraged exchange trade fund that shorts the S&P 500.  The Biden bear is coming; it’s only a matter of time.

Okay, that’s it for now.  Thanks to one and all for participating in the poll about whether Donald Trump should debate on August 23.  Amazing response and results! CLICK HERE to check out the results!

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