The Stock Market Is in for a Rude Awakening
Bull Market
Stocks are Taking Off Again
Since the release of the inflation numbers, equities have taken off again. We see investors are again incredibly bullish at the apparent slowing inflation numbers but is inflation really slowing? A slowing rate of inflation would indicate to investors that the federal reserve will stop the interest rate increases and perhaps go so far even to cut rates in the face of a not-so-strong economy. I would strongly argue that investors are in for a rude awakening.
Controlling Inflation
Tearing Apart "Inflation is under control"
Looking at annual inflation, the year-of-year rate has decreased from 9.1% last month to 8.5%. Additionally, the month-over-month increase has stalled at 0.0% meaning no increase or decrease. Great news, right? Well, not really. These numbers are the headline inflation numbers in which food and energy are accounted for in the inflation estimate. The core inflation numbers, which remove food and energy, show inflation had no increase or decrease year-over-year(compared with July last year) and have actually increased 0.3% month-over-month(compared with last month).
Now why strip out food and energy. Well, these assets are known for being incredibly volatile and tend to drag the numbers all over the place yielding hard-to-understand or misleading data. Energy prices broadly declined 4.6% and gasoline fell 7.7% such that a large percentage of the decrease in the CPI is due to energy price decrease. And actually, as of today, oil prices are again shooting up near $100.
Still not convinced? It would be good to remind ourselves that inflation is still at a massive 8.5%. This means that prices are still increasing. If we were to convince ourselves that inflation has indeed decreased with certainty, there is still the fact that inflation is still at a half-century high. In an optimistic scenario where inflation rates decrease at this same rate from last month's reading, we would still be at high inflation numbers at the beginning of 2023 and much high prices for items compared to now.
Energy Costs
Energy Prices Are Skyrocketing
Now that we've established that the decrease in the inflation rate is led largely by the decrease in energy prices, we will see now why this is short-lived. Energy prices are and will continue to increase massively. The world is currently seeing massive droughts, heat waves and floods. Some see temperatures and rainfall at decade-high/lows, others century-high/lows and others still the highest/lowest on record. This means a massive energy bill to cool and heat homes and buildings.
Further, Russia has severely reduced and outright halted gas flows to many European countries, who are seeing a massive increase in their electricity bills to the point of grid overloads, energy rationing and blackouts. In the UK, it is estimated that individuals see an increase in their bills from around 1300 pounds in 2021 to 4200 pounds in 2022. The energy bill is projected to cost twice an individuals monthly salary in 2023(per Trades Union Congress, UK). And Boris Johnson lacks any incentive or will to do anything about the issue, so this will remain unresolved for the moment.
We can continue this narrative. Per Bloomberg, Poland faces a 180% energy spike. Germany power prices have almost tripled this year.Per Enerdata, Italy's prices have closed to doubled. And the list goes on. All this mind you, with just a few months to prepare before winter.
An economy can produce nothing without energy, and individuals will have less to spend as energy prices increases so we can expect a nose-dive in economic growth.
Strong Jobs Growth
We now take a look at the jobs numbers. 528,000 jobs were added to the economy. and the unemployment rate edged down to 3.5 percent, a historic low for the past half-century. Let's take a look at household jobs. About 170,000 jobs were added according to the household survey. Interestingly, we actually lost about 71,000 full-time workers and added around 380,000 part-time jobs. The amount of multiple job holders increased by 92,000.
Now, this means that most of the job creation we see are people working less full-time jobs meaning less pay. Further, individuals are so strapped they see it fit to juggle multiple jobs. So, where will all the excess cash to fund this "booming" economy come from? In addition, most of these new jobs have been in the public sector, the absolute OPPOSITE of what you'd want to see in a healthy economy.
Further, I stated above that we are at historic lows for unemployment.We you should know that every time we have hit very low employment has been a very strong signal for a recession. (Recessions are the grey area in chart below).
Unemployment Chart
How Employment Is Looking
And yet still, labour force participation has still not yet recovered to pre-pandemic levels, still over a full percentage point lower. This percentage point is certainly not a trivial number, as one percent of 320 million people is, well, a very large number still. Worse yet, labour force participation rate hasn't even recovered to pre-Great Financial Crisis levels! What we are actually seeing is a recession within a recession. This is why since the GFC, we have had nothing but low interest rates, as the markets utterly rejected the Fed's attempts at raising rates each and every time in so forcing a pivot back to low rates. But that is a WHOLE other mess of a topic. Let's continue on personal finances.
Individuals' Finance
Let's now switch gears to analysing directly the finance of individuals. The personal savings rate is low at 5.1 and actually heading down approaching lows across history. Meanwhile, consumer credit is spiking. We have actual seen a huge 60% jump in consumer credit from May to June is YoY numbers. Meanwhile, expected change in income is taking an graceful swan dive, straight into the abyss. Where oh where will all this consumer spending come from to support the great economy?
Consumer Credit
Personal Savings Data
Expected Change In Income
Trade Weighted US Dollar
The US Dollar - The King Has Spoken
The mighty dollar always has the final say, and it has spoken as it absolutely shot up and obtained near parity with the Euro. While Americans may be happy that the dollar has been and is still on an excellent run, all the while other currencies are crashing and burning, they really shouldn't. A strong dollar means everyone suffers. The responsibility of a reserve currency means that that currency needs to be weak to support global economies. If the dollar is strong, that means likely that there aren't enough dollars in existence to be exchanged for goods and services to allow and economy to grow. And in our global economy, that means all economies suffer. Sri Lanka, Pakistan and Turkey among quite a few others are seeing a double whammy of a lack of US dollars while energy prices go up. If there were more US dollars in the economy, perhaps they could still afford rising energy but a strong dollar is a certain nail in the coffin. Maybe US citizens might be better off but that doesn't mean that they'll be well off. So if economies can't grow, well, there's only one other direction.
Conclusion
There are rough times ahead. There's been a massive misreading of market conditions by investors and people are putting themselves up for a world of hurt. Positivity in the markets has little bearing in reality and weak data to support it. In the very short term, perhaps there is some profit to be made as investors react to some small positivity but there is little to support a strong market rally. Investors seem to be going full steam ahead when the long term signs and signals are telling them they are, unfortunately, going the wrong way. Take care out there.
aka OneThatNoseOne
