A World of Cards
Long-term yields rising... This is not a low-inflation world... A major port strike nears... Different, but the same... The U.S. is now a net importer of food... China's stimulus plans... China tells the Fed: 'Hold my Snow'...
The bond market keeps speaking...
And it is anticipating some brand of trouble, eventually.
The major U.S. stock indexes were again "mixed" at best today, with the benchmark S&P 500 down slightly. At the same time, longer-term Treasury yields rose again, meaning bond prices also went lower.
The 10-year Treasury traded higher for the fifth time in the past seven days with a 3.8% yield, while the 30-year Treasury is up to 4.1% from 3.9% in the same time frame. Now, in the world of "low" inflation after the great financial crisis, people might've been inclined to chalk up this behavior to welcome growth expectations...
But we're not living in a low-inflation world.
We're living in a time when a 40-year-high pace of inflation remains in our short-term memory... the Federal Reserve just cut interest rates by 50 basis points while U.S. GDP allegedly remains strong and the S&P 500 is near an all-time high... and other major central banks in Europe and China are following the same ploy to juice their economies.
The 'everything is expensive' effect...
Here in the U.S., plenty of people are jumping at the first reality of lower interest rates to reduce their home-loan costs, presumably with the idea of spending money on other things instead.
According to the Mortgage Bankers Association's survey covering last week, refinance applications rose 175% from the same week a year ago, a surge that helped overall mortgage applications rise to their highest weekly level since July 2022.
Still, the cost of living is rich. Joel Kan, the Mortgage Bankers Association's deputy chief economist, said in today's report that average loan sizes for purchase and refinance applications were at the highest in the survey's history at $413,100.
More about a potential port strike...
In yesterday's edition, we reported on the potential workers' strike at East Coast and Gulf Coast ports starting on October 1. We examined its potential consequences for the economy and markets, namely as a source of inflation.
I (Corey McLaughlin) also asked yesterday for thoughts on the subject from those of you with ties to the shipping industry, and longtime subscriber Bill W. answered with this insightful take...
I worked for the American Trucking Associations for 20 years; six of that was as Director of Intermodal Operations. I can guarantee you that if the Longshoremen strike on October 1st as promised, we will definitely see major supply line disruptions.
Further, I agree that many ramifications are utterly unpredictable, based on complexity theory. Noteworthy is that annual Christmas freight begins to arrive at ports as early as August. But the Christmas supply line is still in full volume & velocity on the Longshore strike date of Oct. 1st. Early Christmas shopping might be a good idea.
I don't know whether it's true, but I read this week that the US is now a net importer of food. If this is true, our food supply could be severely disrupted, and even contribute to social unrest just before the election on November 5th.
None of this bodes for glad tidings. So let's hope Longshore negotiations get resolved before October 1st.
First off, Bill, thanks for the note and the insight.
I find it helpful, and it reminded me of something we wrote about ordering Christmas presents early in 2021 amid the ongoing supply-chain disruptions back then, a lack of workers at ports, and freighters stuck at sea. As we wrote that October...
We just shake our heads and think about what this all means...
In short, this bout of inflation is not "transitory," as Federal Reserve officials had told us it would be.
We never believed the claim anyway, mostly because any current levels of inflation can't be reversed. But now, Fed Chair Jerome Powell is admitting the inflation-causing supply-chain issues may go on for months...
Of course, it could be a year...
The latter was more like it... and the pace of inflation accelerated to a 40-year high and didn't "peak" for almost another year, too.
It's amazing and frankly sad to me how many people just expect things to show up, guaranteed, on their doorstep or the store shelves without thinking about how they get there. Even the supply-chain breakdowns during the pandemic didn't change this mindset...
It's similarly disappointing how folks at the Fed – and Congress – just go about their business, claiming they know what is best for everyone and the "people that we serve," as Powell claimed last week.
But we digress. Thank you for the note, Bill.
As for your reading about the U.S. perhaps being a net importer of food, it is true.
Any strike at these ports would hamper food-supply flows...
According to the U.S. Department of Agriculture ("USDA"), the U.S. imported $189 billion of food in 2023 and exported $179 billion, the latter a $17 billion decrease from 2022. Vegetables, fruits, and grains are the most imported foods by volume.
Last year was actually the third in the past five in which the U.S. imported more food than it exported, part of a trend that the USDA attributed to a "strong U.S. dollar and consumer preferences for year-round produce selections."
Of course, the U.S. imports a lot of food across the Mexican border, which this proposed strike wouldn't directly restrict. But East Coast and Gulf Coast ports manage between 30% and 40% of U.S. food imports, so any disruption could be substantial for the overall food supply.
For example, three-quarters of U.S. banana imports – from countries like Guatemala and Ecuador – currently pass through East or Gulf Coast ports. (In March 2020, the banana section was one of the first in my grocery store to go empty.)
The threat of a strike is already stoking inflation...
Here is global news service Reuters today...
U.S. companies that rely on East and Gulf Coast seaports have been importing early, shifting goods to the West Coast, and even putting cargo on pricey flights to hedge against a threatened Oct. 1 strike that could jam supply chains and reignite inflation ahead of the U.S. presidential election.
"This is just another headache after everything else we've been dealing with," said Kenneth Sanchez, CEO of Chesapeake Specialty Products, which sends goods like metallic abrasives and foundry sand additives used to make engine blocks and transmissions to customers around the world.
His main port is in Baltimore, one of three dozen covered by an expiring contract between the International Longshoremen's Association (ILA) union representing 45,000 port workers and the United States Maritime Alliance employer group, whose renewal talks are at an impasse over pay.
We could go on with more examples, but the point is...
As we said yesterday, supply-chain breakdowns are fuel for inflation. And that's actually at the root of the labor negotiations at the ports themselves, as workers feel paychecks for the same work they've been doing haven't kept up with the costs of the same expenses.
It's an awful cycle... which I ultimately trace back to fiat currency and the casual manipulation of the U.S. dollar for short-term solutions at the expense of hundreds of millions of people who deal with the consequences every day.
That's why we need to protect and grow our wealth, without relying on Uncle Sam to do much of anything except get in the way.
As I referenced above, the USDA said in its annual reporting that the "robust increase in U.S. demand for [food] imports has been largely driven by the strong U.S. dollar and consumer preferences for year-round produce selections."
I would say "the strong U.S. dollar" should be amended to "the relatively stronger U.S. dollar compared with other major global currencies." After all, the dollar's purchasing power has fallen by 96% since 1913 (when the Fed was created) and by about 85% since 1971 (when the dollar left the gold standard for good).
The value of the dollar has eroded within our borders. It's impossible to argue with that. It's just that the U.S. hasn't lost the global currency race to the bottom – yet. So the game – the "world of cards" – goes.
Speaking of this, China's central bank just went 'bigger' with stimulus...
We've covered plenty of the Fed's recent "pivot" to a stimulative stance – and its "big" 50-basis-point interest-rate cut, and the potential inflationary impacts.
Well, the central bankers of the world's second-largest economy said "hold my Snow" (China's bestselling beer brand).
Yesterday, the People's Bank of China ("PBOC") unveiled its largest stimulus efforts since the pandemic, hoping to boost an economy dealing with deflation and a property collapse that has reportedly erased $18 trillion in household wealth.
The PBOC slashed several interest rates, said it would lower the reserve requirements for banks soon, and intervened directly in the stock market. It set up facilities to allow brokers, funds, and insurers to pledge assets for liquidity to buy stocks – a first – and more.
Major Chinese stock indexes spiked yesterday on the announcements but are still well below pre-pandemic levels. This leaves analysts wondering if the stimulus plans are "enough" while weighing concerns about debt burdens and more inflation. Sounds familiar.
New 52-week highs (as of 9/24/24): Agnico Eagle Mines (AEM), Altius Renewable Royalties (ARR.TO), Alpha Architect 1-3 Month Box Fund (BOXX), BWX Technologies (BWXT), Compass (COMP), Western Asset Emerging Markets Debt Fund (EMD), iShares MSCI Emerging Markets ex China Fund (EMXC), iShares MSCI Spain Fund (EWP), iShares MSCI South Africa Fund (EZA), Comfort Systems USA (FIX), VanEck Gold Miners Fund (GDX), SPDR Gold Shares (GLD), Home Depot (HD), Houlihan Lokey (HLI), iShares iBonds December 2025 Term Treasury Fund (IBTF), iShares Convertible Bond Fund (ICVT), KraneShares MSCI Emerging Markets ex China Index Fund (KEMX), Kinder Morgan (KMI), Linde (LIN), Lynas Rare Earths (LYSDY), NYLI CBRE Global Infrastructure Megatrends Term Fund (MEGI), Motorola Solutions (MSI), Newmont (NEM), Pembina Pipeline (PBA), Sprott Physical Gold Trust (PHYS), Sprott Physical Silver Trust (PSLV), PayPal (PYPL), Ryder System (R), Royal Gold (RGLD), Sandstorm Gold (SAND), iShares 1-3 Year Treasury Bond Fund (SHY), iShares Silver Trust (SLV), Spotify Technology (SPOT), ProShares Ultra S&P 500 (SSO), TransDigm (TDG), Torex Gold Resources (TORXF), Toast (TOST), The Trade Desk (TTD), ProShares Ultra Gold (UGL), Vanguard S&P 500 Fund (VOO), Vistra (VST), Vanguard Short-Term Inflation-Protected Securities (VTIP), Wheaton Precious Metals (WPM), and ProShares Ultra FTSE China 50 (XPP).
In today's mailbag, one subscriber shares a "cooking" feeling he has about living in the present-day economy, in response to yesterday's edition... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"[I'm] retired and starting to feel like a lobster getting cooked. The pot of water gets put on the stove, (retirement). The flame gets turned on (inflation, geopolitical problems, supply chain disruptions, computer chip fears, terrorism). Water temp is like a warm summer day... Hot tub temp comes next, (time to take a good look at the budget for cuts). Eventually, you're cooked, (fixed income and rising prices).
"At age 70, I am still making financial plans to live to age 100. This is not just a retiree problem. I read a headline that stated, '78% are living paycheck to paycheck, and up 6% from the previous year.' We in this country, at an early age, should have more education regarding money and how it could work in our favor." – Subscriber Crieg I.
Corey McLaughlin comment: Crieg, the lobster in peril is a great analogy, if only it weren't so true. It sounds like you have the right approach to survive being cooked, though... And I am with you on financial education. It's a big reason why we at Stansberry Research do what we do.
All the best,
Corey McLaughlin
Baltimore, Maryland
September 25, 2024