An Epicurean “Live for Today For Tomorrow We Die” Economy and Market

Peter's Weekly Economy and Market Wrap for the Week Ending 6.30.23

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Hey there.  Peter Navarro here with this week’s economy and market wrap.  You’ll see that in this episode, I introduce some key concepts in finance like the “discount rate” and “consumption smoothing.”  Accordingly, it might be a good time to offer you as a substack subscriber a free coupon to my online Strategic MICROeconomic course.

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Ok.  Here we go.

An Epicurean “Live for Today For Tomorrow We Die” Economy and Market

It was a bullish week for economic news – and a mildly bullish week for both stocks and bonds. 

On Monday, durable goods unexpectedly rose for the third month in a row to 1.7% on strong demand for aircraft and new autos – analysts had forecast an almost 1% decline.

On Tuesday, new home sales surged, likewise for the third month in a row, with an increase the highest since February 2022.  This despite a continued increase in mortgage rates.

On this same day, consumer confidence hit a 17-month high to 110 – yet still off the pre-pandemic 2020 high above 130.  A caution here: the “future expectations” index is still signaling a coming recession.

On Thursday, it was more bullish news: While real GDP growth was supposed to begin slowing sharply as higher interest rates take their bite, an upward revision to 2% with signs of a continued expansion pleased the markets.  Another caution here: By historical standards, anything less than 3 real GDP growth is considered slow growth.

Deconstructing the GDP report, we see once again that consumer spending remains a major growth engine.  It rose 4.2%, thereby accounting for most of the overall growth.

Within that consumption, auto sales did indeed pop, as our earlier signal on durable goods might predict.  The only downer came from some analysts who see this consumption splurge as “likely nearing the end as consumers released most of the pent-up demand for spending.”

I have a slightly different interpretation of the unexpected role that consumption has been playing in propping up the Biden economy.

My own theory is that in a post-pandemic age where more of us may have looked death in the eye or prematurely lost a friend or loved one, consumers have embraced what economists call a higher “discount rate.”  In this new “live for today for tomorrow we die” view in an old Epicurean bottle, a higher discount rate means consumers will tend to spend more in the present and save less for the future. Collectively, this helps lead to the kind of strong consumer demand we continue to witness despite relatively low consumer confidence by historical standards.

Of course, another explanation of today’s strong consumer spending, one not mutually exclusive to the high discount rate theory, is that rational consumers are looking at the economic landscape and see continued high inflation ahead.  So why not buy that car or refrigerator today to avoid higher prices tomorrow?  Economists call this “consumption smoothing.”

These higher discount rate and consumption smoothing explanations would certainly help explain the robust rebound in auto and home sales we have been seeing. 

Of course, robust consumer spending can’t last forever, particularly in a slowing economy with high inflation eroding real purchasing power.  Nor can it last forever if consumers are draining their savings or running up credit card debt at exorbitant interest rates to sustain their “live for today” lifestyle.

So where do these musings leave us?  We must go back to first principles and the Bidenonomics chessboard.

As I have discussed in earlier missives, we know the Biden regime has stoked demand pull inflation which continues to ripple through the economy at levels well above the Fed target of 2% so Fed policy must continue hawkish.

We also know the Biden regime has stoked cost-push inflation by driving up both food and energy prices with its war on fossil fuels, mishandling of the Ukraine-Russia conflagration, and its failure to address supply chain disruptions.  No change on the horizon there.

Finally, we know that the only tool our government is now fighting inflation with is contractionary monetary policy at the Federal Reserve; and with the Fed approach, the only way to wring inflation out of the economy is by bearishly inducing slower growth or recession. 

This deflationary process will almost certainly be both lengthy and painful, particularly to wage earners. 

The iron rule here is that workers must bear the brunt of the reduction in inflation through a drop in real wages because Federal spending simply will not fall to the level necessary to quell demand pull inflation.  Need I remind loyal readers here that this failure to roll back Keynesian inflationary spending ultimately rests on the shoulders not just of Biden but also Republican House Speaker Kevin McCarthy who folded on Biden’s demand to raise the debt limit without meaningful concessions.

So stay tuned.  This is where we stand in this summer of American discontent.

Cash in my judgement remains king – but, of course, that’s just this wonk’s opinion.

Peter Navarro.  Out.

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