Prof Navarro’s Weekly Market Wrap – A Hamlet Fed Question and Sideways Market

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Hi. Peter Navarro here putting my economist’s boots on for our weekly market and economy wrap for the week ending June 9, 2023.

The biggest news of the week was certainly the indictment of President Trump but it had no discernible effect on the financial markets – I’ll have much more to say about the law and politics of this in a later podcast and substack.

On the economic front, our broad market index, the S&P 500, traded in a tight range at the top of what is a sideways trading range, with 4,000 as the lower bound. This action – or lack thereof – signals little bullish appetite for another move upward.

On Thursday, there was an unexpected jump in jobless claims to the highest since October 2021. This suggests the Fed policy of inducing slower growth or recession to fight inflation may finally be taking some effect as the labor market has been quite resilient – yes, workers are the Fed’s sacrificial lambs. Predictably, bond prices rose on the expectation of lower interest rates.

Here is the Fed’s Hamlet question plaguing the markets that will be answered at the Fed’s meeting on June 14 next week: To pause or not to pause its rate hikes strategy.

Absent any further extreme news on inflation – which could come next week with the Tuesday Consumer Price Index report which we will watch closely – I predict that the Fed will indeed pause. The real question is whether that will be a long or short pause.

When it announces its June pause next week, it will continue with the spin that has been dripping out of the Fed – we need to wait and see if the higher interest rates we have been administering are having the appropriate effects on slowing down economic growth, killing the job market (although they won’t put it quite like that), and, ultimately, holding down inflation.

Yet, the Fed policy is clearly at odds with the actions of other central banks around the world. For example, both the Bank of Canada and the Reserve Bank of Australia unexpectedly have raised rates in the face of an inflation that is more persistent than Fed rhetoric would suggest.

Here, it is useful to note that the Jerome Powell Fed has an awful track record. It first saw inflation as “transitory” when it clearly was not. Then, once it started raising interest rates, it’s been far too optimistic about how quickly that medicine would take hold.

What this all adds up for me is that, at least for the cyclical elements of the stock market, there is far more downside risk than upside potential. Remember here that sectors like artificial intelligence are enjoying a secular boom that will likely be insulated from any bearish shock.

Rather, the clear Sword of Damocles hanging over the market right now is the prospect that inflation will erode corporate earnings and, since stock prices represent an expectation of future earnings, a bear market will set in – the exact conclusion of a recent, albeit outlier, forecast of Morgan Stanley.

In closing, here are a couple of things that likewise caught my eye this week that may be helpful to you.

First, you might want to get your shopping done early this summer. There is a very high likelihood that the Teamsters will strike UPS in August for a prolonged period; and that will induce a massive shock to our already fragile supply chains.

Second, with the Biden-McCarthy surrender on the debt limit now set in infamous stone – McCarthy absolutely must be rid of as Speaker as he can no longer be trusted – look for a massive trillion dollar spike in government borrowing leading into the end of the fiscal year in September that will put strong upward pressure on interest rates – never a good thing for homebuyers or car buyers or for those holding large credit card debt. Here’s a tip: This would indeed be a good time to pay off any such credit card debt as things are likely to get worse before they get better.

Third, it looks like we are officially going to have an El Niño weather condition this year. As a newly minted Floridian (within a stones throw of Mar a Lago), that’s good news because this phenomenon creates windshear that can literally tear apart hurricanes and tropical storms coming up from the Caribbean and Gulf of Mexico.

Yet, that’s the only good news as El Niño can bring drought to places like Australia and India and significantly disrupt food prices – remember that the stagflation of the 1970s was in part triggered by an El Niño that screwed up the anchovy supply off the coast of South America. That, in turn, drove up the cost of animal feed and therefore the price of things like pork and chicken.

Finally, there is some new evidence that at least part of the inflation that we are facing – along with its persistence – is the result of ongoing consolidation and concentration in a myriad of sectors of our economy. According to a Fed report, to preserve “steady profit margins,” firms are raising their prices – but as Econ 101 teaches us, that can only happen if they have some degree of oligopoly or monopoly power.

This point of view has led to talk of using windfall profit taxes to dissuade such behavior; but all this tells me is that mainstream economists still don’t understand that the real and only solution to our stagflation crisis is the kind of structural reforms that we practiced during the Trump administration.

At the top of my list of structural changes, there is reestablishing our strategic energy dominance by vaulting once again to the world’s top energy producer and a net oil exporter. Only by doing so will we be able to push aside Saudi Arabia and Russia now wagging the OPEC dog – and they are dogs to be clear.

Second on my list is a return to Trumpian FAIR trade. Here, it may be useful to note that this week the April trade deficit came in higher than expectations at $76 billion, on track for a more than $1 trillion deficit yet again. That translates into both slower growth and lower tax revenues because of the factories and jobs lost through unfair trade. Before I die it would be nice if our politicians and economists recognized publicly just how devastating globalization has been to our country and our people. Nah, that ain’t gonna happen.

And that’s it for this week’s wrap. Please guard your money and watch your back. The Biden regime is doing everything possible to impoverish you and Wall Street doesn’t care a whit about you.

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Have a great weekend!