Navarro’s Bulls vs. Bears Weekly Market Wrap

Cash Remains King

LISTEN TO THE PODCAST AT APPLE OR GOOGLE

Hi. I’m Peter Navarro and in this edition of my Taking Back Trump’s America podcast and substack, we’ll do a economics and market wrap for the week ending May 11, 2023.

The only real mildly market-moving event of the week was the April release of two inflation reports that showed a moderating of inflation.

The overall annual Consumer Price Index came down to 4.9% while core inflation was 5.5% – core inflation measures the inflation rate without food and energy prices.

Both the stock and bond market reacted positively to this mildly BULLISH news as the general consensus is that there is a low likelihood that the Federal Reserve will be raising rates at its next meeting in June.

Bond prices, which move inversely to interest rates, rose and stocks rallied mildly on the prospects of lower interest rates as well.

The Producer Price Index came in with equally mild good BULLISH news – changes in the PPI are eventually reflected in changes in the CPI as producers shift the inflationary burden forward when inflation is on the rise.

The PPI increased 2.3% -- the smallest year-on-year rise since January.  The annualized PPI is downshifting as last year's large increases are dropped from the calculation.

In the fog of Bidenomics, the financial markets are trying to figure out the net market effects of contradictory forces.  As a result, we have what they call in the trade a “range bound  or sideways stock market.” 

Such a market is a day traders delight as rather than trend up or down strongly, the market just goes up and down in grooves that are fairly easily detectable by program traders.  In such a range bound or sideways market, there is no real way for the rest of us folks to make any money investing as the sharks on Wall Street peck away at our 401(k)s.

What can we expect over the longer run? Here are a set of indicators we will keep our eye on that will eventually signal a fully bullish or bearish scenario – right now, the outlook is muddied.

Let’s start with the two most important drivers in the GDP economic growth equation – consumption and investment.

As we discussed last week, consumers are spending robustly but paradoxically they are doing so in contradiction to a very low consumer confidence. At least for the moment, we must put consumers in the bullish camp but with a very big cautionary *.

As for business investment, which was a significant drag in the last GDP report, it is bearish on its face but corporate earnings have bullishly exceeded expectations. With interest rates high and credit constrained but inventories lean, we rate this as a MIXED.

Now oil prices: When oil – and therefore gasoline prices are high – consumption dollars are diverted from goods and services that create jobs to paying off the oil sheiks and Russian oligarchs in a pure wealth transfer. High oil prices also drive higher food prices because natural gas is a critical component of fertilizer.

During the (prepandemic) Trump administration, a barrel of oil averaged around 60 bucks,. Driving and air travel were cheap, businesses produced cheaply, and the low oil price contributed significantly to the robust growth of the Trump administration’s economy.

When Joe Biden took office in January 2021, price of oil was sitting at around $50 a barrel; but promptly began a sharp upward trend peaking in $120 a barrel in June 2022.  The Biden regime spiked the price of oil both through its green war on the petroleum sector and its mishandling of Russia and the war in Ukraine.

While oil has trended down since – that’s bullish -- it’s still sitting above 70 bucks, despite a softening economy.

On a bearish note, if global economic conditions were better, the Saudis and the Russians, who run the OPEC cartel – see a previous substack on this – would be able to push the price to $80 or more, which I fully expect them to do should the global economy recover.

From this set of facts, moderating oil prices are modestly bullish, at least for now; but the Catch 22: as soon as the economy starts to recover, the OPEC bad guys will again be gouging us.

Remember here that Donald Trump performed the incredible magic of making the United States energy independent. He also never would have tolerated the Saudis treachery.  Elections have consequences.

Our next indicator today is the price of gold. It is a little over $2000 per ounce, up from a low of about $1600 an ounce in October 2022 – a 25% jump. Clearly, gold prices have tracked with the onset of the Biden inflation – gold is arguably the best hedge against inflation.

Yet, as an economic indicator, we must be cautious here as the price of gold has gone into a flat trading range over the past several months. This indicates inflation may indeed be moderating, but it is too soon to tell. And that is why we will watch gold prices very carefully for any next upward movement.

Lastly, at least for this missive, I want to introduce you to one of my favorite indicators – the Institute of Supply Management or purchasing managers index for the manufacturing sector. This is a so-called “diffusion index” measuring from 0 to 100 and any prints over 50 indicates a growing economy and any print under 50 indicates recessionary forces afoot.

The bearish news here is that the last print in April was at 47, but this was a slight improvement from a print out of 46 in March. Clearly, there is nothing to get excited about here and I see this as a BEARISH signal.

So what we have in the data is clearly a mixed bag. There is some optimism on Wall Street which is reflected in, for example, the S&P 500 bouncing back above a 4000 support level, as technical traders call it. Yet, this is very much a wait-and-see market where things could go either way.  Unless you are a wizard at day trading or so-called swing trading over short intervals, cash is king, at least in my house.

As a preview for next week, the retail sales report on Tuesday will be of particular interest. How negotiations on the debt ceiling are proceeding will also be closely watched.

In the meantime, let’s keep our eye on these indicators as well as on the lookout for any macro waves – a break either way in the stalemate in Ukraine, a Communist Chinese move on Taiwan, the collapse of the commercial real estate market, another wave of bank failures.  Peter Navarro.  Out.