The Boondoggle Is Just About Over

Yea or nay? The boondoggle is just about over... Same story, small new details... More of your thoughts on the economy... A 'collapse' in shipping rates... Remember those container ships?... What you didn't know about cherries...

Putting a bow on the debt-ceiling boondoggle...

We have more of your thoughts and observations about the U.S. economy to share today. But first, I (Corey McLaughlin) want to talk about the headline development out of Washington, D.C... so I don't have to again, for another two years at least.

As far as I'm concerned, the debt-ceiling "debate" ended with a predictable whimper last night, around 9:30 p.m. Eastern time. That's when more than 300 members of the House of Representatives voted "yea" for a new bill – dubbed the Fiscal Responsibility Act.

The names of these things, man...

As we write, the bill still has to pass the Democrat-controlled Senate. But we expect it to happen, because otherwise it sounds like Uncle Sam will be dead-broke as of next week.

Today, for example, we saw an indication of what a U.S. debt default could look like and how quick it could happen. The Treasury Department said it was only "tentatively announcing" the routine sale of 13- and 26-week T-bills next week because...

These announcements are conditional on enactment of the debt limit suspension because Treasury forecasts insufficient headroom under the current debt limit to issue securities in these amounts on June 8.

Nobody in D.C. wants that to happen, even if they don't say it out loud.

As we've been saying for months, for all the soundbites in the mainstream media and from politicians about the debt-ceiling "debate," the resolution is inevitable: a higher debt limit for the Treasury Department to pay for spending that Congress has already approved.

There's nothing new about that. Congress has done it dozens of times over dozens of years. And it means more debt for Uncle Sam... more fuel for inflation... and more of the same fundamental story about big government.

That said, there are some unique details worth mentioning...

We haven't read the final text of the entire bill yet. (Neither have the folks who voted on it, most likely.) But it reportedly caps fiscal spending into 2025, and will cut "discretionary spending" – excluding defense and veterans' health care – to $12 billion less than current levels by 2024.

That's not much, relatively speaking, when we're talking about $32 trillion in government debt (that doesn't even include future Social Security or Medicare obligations), but it's something. (It also means marginally more budget for defense in the next two years.)

In other provisions, the bill claws back $28 billion in unspent COVID-19 funding and $1.4 billion of the extra funding pledged to the Internal Revenue Service as part of the Inflation Reduction Act.

It also ends the moratorium on student-loan repayments that had begun early in the pandemic and removes the president's ability to extend the pause again. Republicans said this was costing the government roughly $5 billion per month, but that means a big "start paying again" to the college grads of America with mounds of debt of their own.

In all, the bill outlines a plan to cut $2.1 trillion in spending over the next six years... But I would imagine Congress will renegotiate those terms once the two-year "cap" is up and the debt-ceiling "debate" begins again.

The final sticking point this time, holding up Senate passage as of midday, involved the Mountain Valley Pipeline, a natural gas project that's a pet project of Senator Joe Manchin. The West Virginia Democrat managed to work this pipeline into the deal negotiated by President Joe Biden and House Speaker Kevin McCarthy.

Senator Tim Kaine of Virginia introduced an amendment today to strip the pipeline's approval out of the final bill, complaining that he wasn't informed about the plan even though the project would run through his state as well. The pipeline is also a sore spot with climate-concerned progressives.

That quibble aside, that's that. Our long national-debt nightmare continues.

Now let's get into more of your thoughts on the economy...

Yesterday's Digest was a hit based on subscribers who wrote in, and we continue getting thoughts and observations we want to share. So, here it goes again... We begin with subscriber B.L., who wrote in just to say that we're all doomed...

Enjoyed the input from subscribers... all this seems to me like arranging the deck chairs on the Titanic... in my opinion the "digital dollar" will be the end of this country's freedom. War with China? Ha! They have already won...

Speaking of boats, subscriber Michael D., a veteran captain of the seas, sent us an article with several notes about the shipping industry. It reports nothing short of a "collapse" in long-term shipping rates.

According to the industry publication gCaptain...

The container shipping industry experienced a significant downturn in global long-term freight rates during the month of May, as the contracted cost of shipping containers plummeted by a staggering 27.5%, according to Xeneta's Shipping Index (XSI®). This marks the ninth consecutive month of rate drops and represents the largest monthly fall ever recorded on the platform.

"If industry observers were left wondering just how bad it could get for carriers after the 10% fall in long-term rates seen in April, here's the answer," said Patrik Berglund, the CEO of Oslo-based Xeneta. "This is the largest drop we've ever experienced on the XSI®, which charts real-time global rate developments, and it paints a bleak picture of the state of the industry."

Yikes.

This is a shipping 'collapse'...

Here's more from the article and the CEO of Xeneta, which is a leading ocean and air freight analytics company...

Berglund emphasized that while monthly declines have become the 'new normal' this year, "this is a collapse," he said.

"The reasons behind that are manifold, but the main driver is the fact that May marks the point when existing 12-month contracts in the US come to a conclusion and new agreements come into force," Berglund explains. "These reflect the reality of today's subdued markets, so are priced much, much lower than their predecessors. The impact of that on the wider industry is here for all to see."

The decline in long-term rates is particularly noteworthy coming after the pandemic-driven freight rates surge. However, Berglund believes that era is now "well and truly over."

In dollar terms, the average contracted price of shipping containers moving between the Far East and U.S. West Coast has fallen 76% since its peak last October, and total import volumes to the U.S. were down by 21.1% in the first quarter. As Berglund said...

With demand for containerized exports out of the Far East falling, and a lack of hunger for imports into the US, we have something of a "retreat" in the two forces that traditionally drive global trade growth.

Those numbers portend a slowdown of economic activity in the U.S. and globally.

But on the ground – not yet...

As we noted yesterday, a lot of people aren't seeing a recession unfold just yet. Here is subscriber Kenneth L., who said a recession is "questionable" where he is in Florida...

The stores still have lots of customers, but they are buying lots of BOGO's and store brands. Desirable "sale" items are often "sold out".

Churches and charity organizations are seeing many new people looking for food, clothing, etc. Local festivals are well attended and there is no urgency or panic.

This aligns with our takeaway yesterday: People are still spending on some "wants" like travel, and their "needs" such as food and housing, but maybe are starting to be more selective because of persistent higher prices.

To this point, Rodger G. wrote in...

I'm surprised the word stagflation wasn't mentioned [yesterday]. Visiting local vendors I've heard agree we're definitely in a Recession with Inflation. That's Stagflation. The Fed is obligated to fight inflation which is a cost being passed along which is compounding the problem. The USA is especially a heavily [service-based] economy which is the stubborn component. I believe the psychology of inflation supports higher prices, margins, and perpetuates the inflation problem which is hurting the entire economy...

Here is some more about that, including the role wages play. We haven't mentioned this topic yet, but it's critical to think about. To highlight this, we turn to our example of the $14.99 container of cherries my wife decided not to buy the other day.

What you should know about the cherry biz...

According to subscriber Ray E., a veteran of the fresh-produce business, the high-priced cherries at our local grocery store probably say more about the time of year than anything. But they are happening within a variety of factors driving prices higher. Ray wrote in...

Great article on folks' opinions on if we're in a recession or not, and just how a recession is defined. Having spent a career in the fresh produce business, both for retail supermarket chains around the country and on the supply side, the comments on cherries caught my eye.

The first domestic cherries come from California in mid-May and those retailers probably paid around $65.00 F.O.B. ["Free on Board," assuming all the risk during shipping] for a 16 lb. carton with a landed cost of around $70.00 or so. Depending on if a particular retailer has an internal upcharge, they probably have a cost per pound of around $5.10 or so. The $14.99 retail was probably for a two lb. container. Those retails are really not about inflation, more about supply and demand as the season just started.

But Ray says he believes there are longer-term trends at play, too. Notably, a rising minimum wage will keep pushing prices higher and higher for fresh food in the years ahead. He continued...

Everyone in the U.S. that eats any fresh produce is going to wonder what hit them.

So, from what I'm hearing, we should expect "sticky" inflation in fresh food from California for a while... That would be kind of a big deal, no?

Here's what all of this also tells me: Turns out, throwing trillions of made-up dollars into the economy all at once (here's to you, Congress in 2020 and 2021), and governments compounding the issues, does have a long-lasting effect. Who would have thought?

New 52-week highs (as of 5/31/23): Salesforce (CRM), Commvault Systems (CVLT), London Stock Exchange Group (LNSTY), Meta Platforms (META), Palo Alto Networks (PANW), and VMware (VMW).

In today's mailbag, a couple more opinions on the state of the stock market and the U.S. economy... Do you have a comment, question, or observation? As always, e-mail us at feedback@stansberryresearch.com.

"It is a simple fact that the majority of the people suffering, the present recession, are not investors or subscribers to Stansberry. Let's face it, the majority of us probably still have a good job, and/or have been successful which allowed us to accumulate and invest. Recession for most of us will only become apparent after the stock market takes another 40 to 50% hit and/or the housing market suffers another '08-'09 downturn.

"I am 85 and I was actively farming during the 80s when an operating farm loan interest went over 21%. In addition to the high interest cost, all of the input costs followed, while at the same time the price you would receive for your production was always based on the market price at the time you sell. The typical farmer has absolutely no control over what the price will be when it is time to market his yearly production... Understand the stress of working the entire year and not having any control over what your final price is going to be. This type of stress is difficult during ordinary times... it only become multiplied during inflation.

"Also bear in mind, the 80s interest rate era was at the end of the Dow Jones trading in 1982 at the same price it had traded during 1972." – Stansberry Alliance member H.B.S.

"Drawing lines through data points over the last 20 years to perform an economic analysis, in this post COVID environment, is misleading and non-constructive.

"There is no precedent to account for the virtual employment tidal wave. There could be tens of millions of 1099 workers, 'self-employed', working mostly on commission, or not working much at all. No payroll tax, no social benefits, and therefore no data trail for statisticians. We won't have a good read until tax time ten months from now. Full employment is therefore probably way overstated, but who can say?

"There is no historical precedent for fertilizers and animal feed rising by a factor of four. Domestic growing season in early stages of coming to market, but will extend to late fall. Mushrooming domestic prices just starting to dominate food spending costs. No real hope for relief this year.

"Energy prices beyond our control, complicated by difficult SPR recovery, and subject to major geopolitical risks. How can the Fed chart that?

"Throwing trillions of dollars of new money into the economy in such a short time is totally unprecedented. Almost no one has read the plethora of funding provisions in the several thousand page IRA [Inflation Reduction Act], let alone accounting for it in economic projections. All you can say it has allowed consumers to spend more than they should, run up debt higher than they should, and continue to tolerate higher mortgage and rent costs more than they should. Is this the sign of a strong economy?

"We're at near record percentage of families living paycheck to paycheck and near record of per capita percentage of credit card debt. Many are getting by from this transitory pulse of social funding cash. And now the new budget reconciliation bill could somewhat moderate that support?

"Perhaps most troubling is that the dreaded disease, 'Inflation Psychology' is apparently taking root. More difficult to cure than COVID. Tens of millions of small businesses trying to get healthy after the ravages of a COVID economy, recovering their life savings, reducing their debt, rebuilding their inventory. All of this in excess of their actual present costs.

"So recession, who knows and who cares. We are in a hell of a mess and who thinks the Fed is up to a constructive solution? And you could say that in spades before the additional constraint of a fragile banking system." – Paid-up subscriber E.N.

"We are and have been in a recession for several months now. Look at the markets. Overall they have been going sideways. With the exception of AI stocks like Nvidia (which is now parabolic and heading for a giant pullback) the rest of the markets are struggling to get any real traction. Some have gone up in single digits and the low 2 digits but that's the exception not the rule.

"There are trillions of greenbacks out of the markets in money market funds and losing ground because of the inflation bite. And investors are scared out of their flipping minds to do anything with their money even as its dwindling value shrinks (with absolutely NO faith in the Fed and the government to turn this situation around). Does that sound like confident people in a growing economy?...

"It's true, people are traveling and eating out again but they are doing it with plastic and following the government's lead in spending money they don't have. It's not exactly a 'let the good times roll' environment. That's a 'real time' recession in a real world reality." – Paid-up subscriber John M.

All the best,

Corey McLaughlin
Baltimore, Maryland
June 1, 2023