Peter Navarro’s Weekly Market Rap: Reading the Economic Tea Leaves

Preserving Your Wealth in a World of Financial Risk

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Hi.  Peter Navarro here and in this market rap for the week ending May 19, 2023, I want to talk a little about the art and craft of forecasting and how you as a Main Street Deplorable can look into the economic crystal ball with some accuracy with just a little more effort reading the financial news. 

But first, the numbers: US markets finished basically flat again for the week with little volatility as investors retreated to the sidelines awaiting news of a possible Congressional deal on the debt ceiling.

There is a move now afoot in the financial press to try and spin and spook the Republicans into caving to Biden.  We are being force-fed a trickle of warnings turning to a flood emanating from the Biden bureaucracy about how it will be a “catastrophe” and a sharp market sell-off if an agreement isn’t reached.

Memo to Sleepy Joe: The far bigger catastrophe will be if the Republicans don’t succeed in forcing you and your merry band of spendthrifts to significantly reduce spending and the forecasted budget deficit and debt.  That catastrophe will come in the form of continued stagflation – slow growth or recession and inflation.  So hold fast Speaker and Brother McCarthy.  Much is at stake, and MAGA has your back.

Now, on the economic report front, the one big report of the week was retail sales.  It rose for the first time in three months – that’s bullish -- but the number came in below the median estimate of economists surveyed – that’s bearish.  So the consumption driver in the GDP equation continues to send mixed signals.

Okay, now let’s talk a little about forecasting.  It’s called forecasting rather than fact because people make educated guesses about the direction of the markets and the economy based on new and emerging information. 

While my primary forecasting tool is the GDP growth equation, which we discussed last week, whereby I follow the leading economic indicators tracking consumption, investment, government spending, and growth, I also like to keep my eye on discrete news stories that may prove to be an important ripple in the broader pond.  Here, the old saw about a butterfly flapping its wings in the Amazon causing a hurricane in the Caribbean has a bit of truth here.

So here are some of flapping butterflies and ripples that caught my eye this week:

Home Depot Inc. cut its outlook and expects sales to decline as much as 5% after first-quarter sales dropped more than expected.  This is BEARISH news as strong consumer spending is the only thing between us and a recession AND it suggests further weakening of the homebuilding sector as mortgage and interest rates strangle demand.

Investors’ confidence in Germany waned for a third month, reigniting fears that Europe’s largest economy is heading for a recession.  And the measure of confidence fell twice as much as expected.

At the same time, the German stock market known as the DAX hit an historic high and has been on a 15-month tear.  That’s bullish.  That’s more mixed signals from Germany.

But why should we here in America really care about the Germany economy and stock market?  Simply because if the German economy goes into a recession, Germany will buy fewer of our own exports, dragging the US economy down with them.  Get the big picture?  Here’s another:

On Thursday, the Indian stock market, the Sensex, crashed as missed earnings by some top tech giants triggered a selloff.  This one hit me both comically and personally as I had just parked a few bucks in IFN, an exchange-traded fund that is like the S&P 500 of India.  From that Sensex pack, Infosys fell 7% and it was a little less than 10% of the total of IFN. Ouch.

Of course, my thinking was that the Indian economy seemed to be outperforming much of the rest of the world in a secular bullish trend so it might be useful to start building a position in IFN.  What I failed to completely account for was the linkage of the Indian economy to US Federal Reserve policy and rising interest rates via business with the US.  Here, I guess it does remain true that when the US sneezes (much of) the rest of the world can catch a cold.  My takeaway is that this Indian bear move down offers a tea leave of a slowing US economy.  So stay tuned.

In closing, next week we’ll be watching the ongoing debt ceiling negotiations of course.  On the economic calendar front, big reports include new home sales on Monday, some more GDP stuff on Thursday, and consumer sentiment on Friday.  In other words, a light week.

Peter Navarro out! And have a great weekend!