The Inflation Story Only Ends When This Happens
When a president clips a low bar... China and Russia rebuke Joe Biden's 'dictator' comment... The best house in a bad neighborhood... Inflation is still worse in Europe... In the U.S., it's still bad... Powell doubles down... How it ends...
The good vibes lasted about a day...
Yesterday, I (Corey McLaughlin) wrote a little about U.S. Secretary of State Antony Blinken's trip to China... and advised against making too much of the reports of "progress" in the relationship between U.S. and Chinese high-level officials.
Case in point: Last night, at a fundraiser in California – after meeting with those artificial-intelligence experts in San Francisco yesterday afternoon that we also mentioned – President Joe Biden popped off about Chinese President Xi Jinping...
The comments came in the context of Biden describing details of this year's "spy balloon" incident. First, Biden suggested Xi didn't know the details of what the balloon was capable of, and then called him a dictator. As Reuters reported, Biden said...
That's a great embarrassment for dictators. When they didn't know what happened. That wasn't supposed to be going where it was. It was blown off course.
True or not, that's not exactly great timing. The White House was trying to take a victory lap on deescalating tensions with China simply for having a top U.S. official in the same room as the Chinese president on his home turf for 35 minutes. (It was the least Xi could do... The guy traveled so far.)
The bar for success was pretty low...
And the U.S. president kicked it about 24 hours later.
A Chinese foreign ministry spokesperson followed up quickly on Biden's comments last night... As our Stansberry NewsWire's Kevin Sanford reported in his morning briefing today, the spokesperson called the remarks "extremely absurd," "irresponsible," and a "public political provocation."
A spokesperson for the Kremlin even piled on, describing the comments as "incomprehensible" coming so soon after Blinken's trip to China. Dmitry Peskov told reporters in Moscow today...
These are very contradictory manifestations of U.S. foreign policy... However, that's their business. We've our own bad relations with the United States of America and our very good relations with the People's Republic of China.
Sounds like all this should land Biden his desired meeting with Xi, right, and work out all of the problems of the world's two largest economies? Note the sarcasm, please... As we noted yesterday, expect the tensions – and all of the resulting consequences – to continue.
But here's something the U.S. has going for it, at least...
In the Western part of town, it's still the best house in a bad neighborhood.
We also woke up to reports today that inflation in Europe is still terrible – worse than what it is here, which is still bad... As I'll explain, the situation will influence the economy and markets in the months and years ahead.
The latest inflation data from the United Kingdom, for the month of May, checked in at an 8.7% annual rate – the same as it was in April. As Kevin also reported this morning...
This data is likely to amplify concerns over the country's cost-of-living crisis, which may escalate in the coming months as mortgage holders face the burden of higher interest rates.
As Kevin alluded to, the standard mortgage in the U.K. is a variable-rate loan, as opposed to the fixed rates of the U.S. So the inflation crisis (and raising interest rates to combat it) has been substantially worse there for everyday people than in the U.S.
In the U.S., many homeowners actually refinanced at lower rates throughout 2020 and 2021. In the U.K., though, interest payments on loans have kept going up and up, and Europe continues to deal with energy-supply concerns and other risks tied to the war in Ukraine.
Short of an end to the war, there's no elegant solution in sight. A deep recession with massive job losses would probably do it, but that would still be a recession. Also, today a Bank of France governor said that the European Central Bank's rate hikes are approaching their limit, meaning it will wait and see whether higher prices persist.
That doesn't do anyone any good in the present. Remember what the Bank of England official said not long ago, essentially "have fun staying poor."
Meanwhile, Jerome Powell doubled down on the idea of more hikes today...
Sitting before a congressional committee during semiannual testimony, the Federal Reserve chair repeated the message he delivered following the central bank's latest policy meeting last week. We wrote all about that last Thursday...
The Federal Reserve says the inflation "fight" is more a yearslong ordeal than simply a few more months – or even another year. But, still, it seems enough folks don't want to or just simply can't believe Fed Chair Jerome Powell.
This was the case again today. We saw a few post-testimony headlines feature what could be taken as the upbeat words that Powell uttered today, when he suggested a "more moderate pace" of rate hikes may "make sense."
But that still means more rate hikes, and more moderate only compared with the 10 other raises in the previous 15 months...
The inflation data the Fed cares about – the core personal consumption expenditures ("PCE") index, which has gone sideways and stayed close to 5% for the past six months – has not eased yet. According to Powell, "The process of getting inflation back down to 2% has a long way to go."
He gave the usual lines about how "below-trend growth" is needed, along with supply chains getting healthy. Then he said even more clearly that the markets should expect two more rate hikes by the end of the year, as the Federal Open Market Committee ("FOMC") members wrote down in their latest quarterly projections published last week. According to the AFP news service, Powell said...
Sixteen of the 18 participants on the FOMC wrote down that they do believe it'll be appropriate to raise rates, and a big majority [believe the Fed will need to raise rates twice more this year].
That's a pretty good guess of what will happen if the economy performs about as expected.
It's a large "if." But that's what we have to work with.
What it's really going to take...
Powell then offered some more evidence for further rate hikes, mentioning again what we reported about last week. Nonhousing "services," which make up more than half of the PCE number, have only just started to show signs of desired disinflation.
He said what the solution for that might be, at least as far as the Fed thinks: a "softening" labor market. Translation: job losses and higher unemployment. In response to a question about when the prices of haircuts or oil changes might go down, the Fed chair replied, with my emphasis added...
The broad service sector is famously less responsive and less focused on rate hikes and the cost of capital... Broadly, this is what forecasters think, is it will take some softening in labor market conditions because in that service sector, it's very labor intensive. By far the largest cost for most service companies is labor, so what you want to see is rebalancing of that demand for labor and supply...
Then, in the same breath, he made a right-hand turn to finish the thought and stopped short of saying the entire truth. Powell simply continued...
A lot of that can happen through fewer job openings and things like that – and we do see it happening.
Don't hold your breath that this will be enough. The price of eggs may be down at the grocery store, but what about everything else? Rising prices, at a sustained pace the U.S. has not seen in decades, seem to be here for the long haul.
And if that's the case, it would take an "official" recession to calm things down. That goes even more for Europe. I won't say when that may happen, but it's the most likely route for inflation to get back close to the central banks' supposed 2% annual inflation goal.
I would not put it past the Fed or any other central bank to cry uncle on that goal at some point and say 3% or some higher number for an inflation rate is acceptable, should it determine 2% is unreachable. This could happen should unemployment rise significantly.
In any case, though, if the pace of inflation doesn't ease and the job market stays as "resilient" as it has, expect even higher interest rates than we see today for longer than many people probably think. In this scenario, dollars would become relatively more expensive, and everything else would become worth relatively less.
Once again, we're reminded of the lasting mark we got from the response to those "unprecedented" times of 2020 – notably the resulting trillions of dollars in stimulus. Is anyone taking notes?
Forget Talk of Dollar's Demise
"The U.S. dollar is going to remain the reserve currency for the next several decades, as long as the Bill of Rights stays in place," says Joel Litman, founder of our corporate affiliate Altimetry, mainly because "there's no fiat currency that's a good currency to invest in."
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In today's mailbag, more thoughts about China and conflicts with the U.S., which our Stansberry Venture Technology editor Dave Lashmet wrote about last week and we touched on yesterday... Also, thanks to those who wrote in with feedback on exploring the sovereign wealth funds. I got enough affirmatives that we'll look to publish something soon... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"An alternative position, maybe slightly, [to Alliance member Bill F.'s comment in the Friday mailbag] comes from Ian Bremmer, who had this to say in his TED talk recently: 'Despite all the talk about a new cold war, the U.S. and China are far too economically interdependent to decouple from each other...'
"This was a common idea about Germany, that it was too integrated with other European economies, for war to break out prior to the Second World War. Most of [us] know how that idea worked out!" – Paid-up subscriber M.M.
"Xi has the Chinese media playing up 'the USA is the bad guy' theme responsible for all of China's problems. Economic hardship at home blamed on a foreign power is an easy sell, especially when the regime controls the media. This is the classic maneuver of dictatorships to take the focus of their people off their own failures and transfer their animosity from the regime in power to foreigners. Unfortunately, history has proven this is often the prelude to war." – Paid-up subscriber Robert B.
"With all the gloom and doom about energy stocks on the street [yesterday], it doesn't coincide with prices at the pumps. Prices in my area shot up the last two days to $5.05 a gallon for regular gas..." – Paid-up subscriber John M.
All the best,
Corey McLaughlin
Baltimore, Maryland
June 21, 2023