Inflation Is Now Stirring
Inflation is now stirring... Unemployment claims fall to a new 50-year low... Why good news could be bad news for stocks... More signs of trouble for Tesla... An announcement 20 years in the making...
Yesterday, the government published its latest report on inflation...
According to the U.S. Department of Labor, the Consumer Price Index ("CPI") rose at an annualized rate of 1.9% in March. Meanwhile, so-called "core CPI" – which excludes more volatile food and energy prices – rose at a 2.0% annualized rate. Both of these figures were roughly in line with the Federal Reserve's official target of 2%.
In other words, according to the government's official numbers, inflation is still not a concern. And this gives the Fed further cover to stick to its recent "dovish" reversal this spring.
However, beneath the surface, there are some troubling signs...
You see, researchers at the Federal Reserve Bank of Cleveland have developed an alternative measure of CPI – known as the Median CPI – that they believe better captures the underlying trend in inflation. Here's how the Cleveland Fed explains it on its website...
To calculate the Median CPI, the Federal Reserve Bank of Cleveland looks at the prices of the goods and services published by the [Bureau of Labor Statistics ("BLS")].
But instead of calculating a weighted average of all of the prices, as the BLS does, the Cleveland Fed looks at the median price change – or the price change that's right in the middle of the long list of all of the price changes.
According to research from the Cleveland Fed, the Median CPI provides a better signal of the inflation trend than either the all-items CPI or the CPI excluding food and energy.
So what is the Median CPI telling us today?
It rose at a 2.8% annualized rate in March. This is well above the Fed's official target. But more important, it now appears to be accelerating to the upside as well.
The following chart shows the annualized monthly change in the Median CPI on both a six-month (dark blue) and three-month (light blue) rolling basis...
As you can see, it has been rising at a 2.98% annualized rate over the past six months... and a pace of nearly 3.2% annualized over the past three months. Each of these are the strongest readings in more than eight years.
After years of false starts, inflation is now stirring again. At this rate, it's simply a matter of time before the official measures of price inflation begin to move higher, too.
If you don't yet have any exposure to the historically cheap commodities sector (and gold, in particular), consider adding a little today.
Meanwhile, data continue to show the U.S. jobs market is booming...
This morning, a separate report from the Department of Labor showed filings for unemployment fell to a fresh 50-year low last week.
As you can see in the following chart, so-called jobless claims fell to 196,000 for the first time since 1969...
The more stable monthly average of claims has now fallen to 207,000, which is also a new 50-year low.
This is a near-term positive...
However, we'll also remind you that extreme lows in unemployment have typically been a bearish sign for stocks over the longer term. The following chart – which we originally published in the January 24 Digest – highlights this relationship...
Again, this doesn't mean the rally can't continue a while longer. But it does tell us that we're almost certainly in the final "innings" of this long bull market.
Last Friday, our friend Whitney Tilson shared his bearish thesis on electric-car maker Tesla (TSLA)...
In short, he believes the company has finally run out of luck, and that the "beginning of the end" is now underway. As he wrote...
Ever since I got burned shorting the stock in 2013 – watching it march higher from $35 to $205 a share – I've warned my readers about betting against CEO Elon Musk and his team. They've simply pulled too many rabbits out of their hat over the years.
Though Musk often behaves like a narcissistic brat, he's also an incredible entrepreneur with a remarkable track record. He has almost single-handedly pushed every major car manufacturer in the world to invest heavily in electric vehicles, and we'll all be better off for it. (The same can be said for SpaceX and the aerospace industry.)
But Tesla has almost done too good of a job. Now, it faces a massive wave of competition. Electric cars from high-end European manufacturers Audi and Jaguar are already vastly outselling Tesla's Model S and Model X cars in Europe. Meanwhile... Toyota, Kia, Hyundai, Volkswagen, Nissan, and Renault are developing their own lower-priced electric vehicles.
As a result of this new competition, I told readers of my free daily e-letter last month that Musk has no more rabbits to pull out of his hat.
I believe Tesla's stock – which closed yesterday around $268 a share – will be trading below $100 by the end of 2019.
As Whitney explained, one of Tesla's biggest problems is demand for its products...
Or rather lack thereof. More from that Digest...
As the first mover, the company had nearly the entire electric-vehicle market to itself, which led to incredible growth in recent years. That has led Musk and his loyal followers to dramatically overestimate the true demand.
That's easy to do with new, innovative products – which early adopters eagerly buy. But very few such products go mainstream. For every blockbuster hit product like Apple's (AAPL) iPhone, dozens of others fizzle out.
No doubt, Tesla's cars are extremely appealing for wealthy, environmentally conscious tech lovers who are willing to spend a lot of money to drive a cool new toy. But that's a niche market.
Tesla recognizes this, which is why it developed its much-hyped, lower-priced Model 3. But... it's not nearly as good of a car. So it's not surprising that once Tesla fulfilled the big backlog of demand from early adopters, sales appear to be falling off a cliff.
Tesla delivered just 63,000 vehicles last quarter. That was well short of Wall Street estimates... And it was more than 30% lower than the previous quarter.
But Whitney believes this shortfall was anything but an anomaly. Instead, he thinks it's just the beginning of a serious slowdown as competition ramps up and demand continues to fall.
Whitney's call is already looking prescient...
Tesla shares plunged nearly 3% today, following reports the company is scrapping plans to produce more batteries. As Japanese newspaper Nikkei Asian Review reported this morning...
Tesla and Panasonic are freezing plans to expand the capacity of their Gigafactory 1, the world's largest [electric vehicle] battery plant, as concerns mount on Wall Street about weakening demand at Elon Musk's car company.
The partners had planned to raise capacity by 50% by next year, but financial problems have forced a rethink, Nikkei has learned...
The Gigafactory, in the U.S. state of Nevada, has been making batteries for the Model 3, Tesla's new small sedan, since January 2017. Panasonic manufactures the cells, and Tesla assembles them into battery packs.
The companies had intended to expand the plant's capacity to the equivalent of 54 gigawatt hours a year by 2020, up from 35 GWh at present.
It's still early, of course. But this is certainly not what we'd expect to see if demand for Tesla's vehicles was as robust as Musk claims.
We won't be surprised if last Friday's Digest marks a significant turning point in Tesla's shares...
As Porter noted in his introduction to that Digest, Whitney has a long career of making major market calls.
But next Wednesday, April 17, he'll be appearing on camera to make what he believes could be his biggest investment prediction yet.
This event is absolutely free for Stansberry Research subscribers. You'll even get the name and ticker symbol of Whitney's No. 1 retirement stock, simply for tuning in. Click here to save your seat now.
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In today's mailbag: Kudos for Wednesday's Digest on the coming IPO insanity... and several more readers share their biggest investment mistakes. As always, send your notes to feedback@stansberryresearch.com.
"Good evening, [Wednesday's edition] one of the better Digests in a long, long time. Good job." – Paid-up subscriber Jeff K.
"Great work Bryan!!! Thank you!" – Paid-up subscriber G.G.
"Well done sir! Nowhere do we get as straight forward a presentation much less the unspoken content. That's why I've been reading since I first came across Stansberry." – Paid-up subscriber Eric V.
"1977: $1000 income tax rebate; bought Walmart. 1978 -1985, 25 to 50 shares when I had the money. My broker said sell it, because as soon as Walmart starts paying a dividend it will tank big time !! well he made his commission of $125.00." – Paid-up subscriber R.H.
"Selling Apple at 24, selling AOL 2 million dollars ago, sorry boys there have been too many multi-millionaire dollar mistakes to elaborate on." – Paid-up subscriber Craig R.
"I owned a thousand shares [of ISRG] that I purchased for around $20 a share. Then sold for a small profit. Today those thousand shares would be worth $1,750,000. Splits included." – Paid-up subscriber W.B.
Regards,
Justin Brill
Baltimore, Maryland
April 11, 2019