S2 E7: Powell Taps Out

First, don't miss the offer of a FREE Chart Book that accompanies this Episode, with dozens of cool charts on Consumer Credit, Delinquencies, Household Finances, Inflation, Retail Sales, and, ALL the markets we are currently involved with, Financials, Utilities, Consumer Staples and Utilities along with the US Dollar, Gold, Silver, Platinum, Copper, Base Metals, Uranium, Natural Gas, Bitcoin, Ethereum and more!  Email us at sales@weldononline.com to request this FREE Chart Book.

 As for "Powell Taps Out", Greg notes that at the May FOMC meeting, as he did in March, Jerome Powell offered subtle yet significant "signals" that the Fed has no interest in raising rates again, and that eventually there will be rate cuts. But nuance speaks more loudly, as the Fed is increasingly signaling that they are willing to acquiesce to higher general rates of inflation, and inflation expectations, as long as the labor market remains relatively "tight" and the Consumer continues to spend. 

 But the latter point is coming under attack, even as Powell's "downshift" in the policy narrative is causing ALL asset prices to appreciate, primarily because as US interest rates fall, again, the US-EU (German) Rate Spreads are narrowing, among others, meaning a lower premium is being paid to holders of Dollars, versus other currencies. A lower US Dollar is bullish for stocks, but in times of inflation a lower USD is MORE bullish for commodities, especially Precious Metals (Gold, Silver, Platinum) and commodities in short supply (Copper, Cocoa, Coffee, Wheat, Energy). Indeed, increasingly hard assets are outperforming paper assets, specifically over the last two weeks since our last podcast.

Transcript

Speaker 1 0:01

Hi, greg Weldon, back at you with another episode of Money Markets and New Age Investing, and today I want to talk about the most recent podcast, exit Stage Left, where I was suggesting that taking some risk capital off the table, particularly in the US stock market, wouldn't be such a bad idea. Now, certainly, comments from Jerome Powell changed the narrative, but, having said that, it's still the right move, and it still was the right move because in so doing, what I was preaching was being long stuff over paper, and what Powell did, by shifting the narrative to our next move will not be a rate hike, really is part of this whole bigger picture with the Fed, where two meetings ago, the dot plot showed 2.5% inflation in 2026, 2.5% real GDP growth and 2.5% Fed funds. And what did I say then? I said the Fed will ultimately move to an inflation target from 2% to 3%, likely ditching just the 2% target, and that's right in the middle. And now he's saying well, the next move will not be to hike rates and with inflation still below 5%, the Fed is still neutral to restrictive at five and a half. So if inflation gets to five, then you have an issue, then you're neutral and maybe they want to be neutral based on what we're going to talk about with the economy, and if that's true, it's another sign of acquiescing to higher general rates of inflation, because inflation expectations that we have for the consumer are well north of 3% and more than twice as many people say consumers. New York Fed survey say inflation will be above 4% within the next 12 months, as say will be 2% or below. So it's still the right move to downsize the paper part of your portfolio and upsize the stuff part of the portfolio. That was the bigger picture message with exit stage left and it plays. It has played because you know stuff that we've been involved in, like copper, gold and silver in particular, but uranium and a few other things have soared and outperformed the US stock market by a large degree and even in the stock market, three of the top five performing sectors are defensive staples, materials and utilities. So we're going to talk more about that at the second half of the podcast when I come back to strategy.

Speaker 1 2:47

Let's talk about kind of the macro reasons why I said what I said two weeks ago and why I say it again here now. All right, because the consumer is in trouble. All right, we start with the inflation numbers, cpi came in at 3.4 and everyone was all happy that it's down from 3.5. And man, it's kind of low compared to nine, right? And all of this, no, no, 12 months in a row it's been above three and the average over the last 12 months is 3.4. And this was the number we got for March, excuse me, for April. So in that context, that's still 140 basis points, or almost double the Fed's target rate.

Speaker 1 3:35

Okay, and what's interesting is if you look at the inflation number, it bottomed right at 3%. All right, so, and basically that used to be the high before the pandemic. If you had inflation, it was high. It was pushing 2.6, 2.7. Now it's at its low end of the range, at 3%, and the reason for this, of course, is $35 trillion in public debt in the US.

Speaker 1 4:03

We can talk about that more in a minute too, but what's interesting in that context is to note that the inflation expectations the University of Michigan survey was at 3% for three months in a row and bounced to 3.3. The New York Fed survey was at 3% for four months in a row the one year ahead outlook and it jumped to 3.3. And it's the same thing. You are now at a level where 3% is kind of seen as the bottom of inflation and the Fed has almost kind of said that's okay because growth is still strong. We're at 5.5, which, versus 3.5, is still restrictive policy measure and the labor market has not rolled over yet, even though inside it has just not above ground. That's the way I like to look at it, because I dig deep and when you dig deep you see the numbers early. The numbers need to be seen above ground for the bulk of people to see them so the market will react, because you need the bulk of the people to react. You know I'm not going to move the markets and if I think it's true, so on and so forth.

Speaker 1 5:11

But when we go back to inflation expectations, what's interesting is the percentage of consumers that said they expect inflation to be above 4% jumped from 40.2% last month to 44.4%. It's up more than four full percentage points. That's a 10% jump in the percentages. All right, so that's number one. It's more than double the percent of consumers who expect inflation to be 2% or below. So that's kind of interesting to me. And when you look at the five-year expected rate of inflation, it bottomed at 2% in the second half of 2022. And it's all the way back up to 2.9, just shy of three. 2.8, 2.9, just a tick off of three. So again, two to 3%. That's the five-year ahead, five-year ahead expectation. Five years of 3% inflation. That means higher interest rates are here to stay. Maybe they come down to 4%, 3.5%. If you have something a recession they can bring it to 3% or lower. So we'll see.

Speaker 1 6:24

So, in all of that context, again, when you have all these things, when we look at inflation expectations in the New York Fed survey gasoline 4.8 percent, food 5.3, medical 8.7, college tuition 9 and rent 9.1. When you take the CPI number, all right, here's some of the components of the CPI, because we know that food has been down, but we know that food is kind of bottomed here and gasoline and energy, you know had been negative, is now positive on a base effect. Look at what's happening already with electricity. All right, so just let me read off some of the most recent numbers came out last week. All right, on inflation, the core rate was three point six, but many components are still above four and above five. Services, excluding energy Five point three. You have a home, I mean, you know rent is five point four yeah, that's down from nine, but it's still five. Point four it's not more than twice too, it's almost 3 times 2%.

Speaker 1 7:26

Garbage and trash collection I guess you could call it gash Garbage and trash collection 5.3. Water sewage 5.3. Stuff you got to get some procedures done Dental 4.1. Optometry glasses 4.1. Hospital 7.7. Outpatient 8.2. Elder Glasses 4.1. Hospital 7.7. Outpatient 8.2. Elderly home care is all the way up to 13.9. So you're talking about high levels.

Speaker 1 7:52

Let's talk about driving a car. Not only is gasoline more expensive vehicle maintenance up 7.6. Vehicle repair up 9.8. Vehicle insurance up 22.6%. There's parking up 6.6. There's tolls up 7.3. Where is this low inflation? It's not in these numbers, it's not in the things that people pay every single day recreation 4.1. Shipping costs up 7.1 percent. And if you have a pet you're kind of screwed Pet services and pet food 4.5. Veterinarian services 7.1. So you know, I don't think people are going to be dumping their pets. They'd rather borrow more on their credit cards to pay the bills.

Speaker 1 8:37

So in that same thought process, what makes it really interesting is that we said all along, we said and it was the Captain Crunch episode of the podcast a couple episodes ago in February all right, basically said a credit crunch would be the worst number. Revolving credit 0.1% growth annualized, down from 9.7% in February, 7.3% in January, 7.5% in the fourth quarter of last year, 8.9% third quarter last year, 8.3% second quarter last year, 9.2% first quarter last year, 15.1% in 2022, and it's now 0.1%. Hello, credit crunch. Overall consumer credit 3.2, which is less than the inflation rate. This is really bad. I mean, it really is the flow. When you do the annualized flow of credit, revolving credit, which is mostly credit cards 1.8 billion in March, down from 128.7 billion in February. Let me say that again, from $128 billion to two, a decline of 98.6% in the annualized flow of revolving credit in March from February.

Speaker 1 10:07

These numbers are dramatic, they really are. And then when you say, well, you know why is that? Well, again, all right, we're talking about, you know, 44% of consumers, more than double. I think you'll see a target rate of 2% in inflation. I think it'll be above 4%.

Speaker 1 10:24

And because of that, in the same Fed household slash consumer survey, the 12-month forward, I'm going to be better off or worse off in your household's financial situation. The percentage saying much worse off. More than doubled in April. More than doubled to 5,. Just under double no more than doubled to 5.5, up from 2.8 in March, 5.5 up from 2.8 in March. Those saying much better off fell and the differential went from plus 2.6 to better off, much better off, to minus 1.1, much worse off.

Speaker 1 11:04

These are non-coincidental facts. These are related to one another. Consumers see higher inflation, think they're going to be worse off and are cutting all of a sudden even your use of the credit cards. Also, of course, senior loan officer survey told us that you know the they're going to be tightening standards and conditions, uh, on credit and terms on credit cards and auto loans for the balance of the year. All right.

Retail Sales, Gold and Portfolio Strategy

Speaker 1 11:32

So aside from the fed changing the narrative, nothing has changed for the better for the consumer. In fact, it's gotten a lot worse just in the last couple of weeks with the data that's been released. I mean so when you kind of look at that, you know you're not out of the woods yet. All right, but the fact of the matter is the dollar came off because of the comments from the fed and because when you're talking about, you know the dollar came off because of the comments from the Fed and because when you're talking about, you know the dollar coming off, that's bullish for all asset prices and that's kind of what happened. All right, but things for the consumer are much worse.

Speaker 1 12:03

Let's look at the retail sales number that came out last week. All right, retail sales came in at 3% year over year below inflation for the fourth month month in a row and for 11 out of the last 14 months below inflation. All right, Not only that, the year-over-year increase in actual dollars spent retail sales all right, this number's not price-adjusted. There's no inflation adjustment. It's seasonally adjusted but it's not inflation-adjusted. So the year-over-year change, nominally, what they reported to get your 3.3% change was an increase from April of last year from $684 roughly to $705 billion. For the month was $20.8 billion. The price differential was $23.27 billion, roughly speaking, not doing it by category by category, which means price increases represented more than 100% of the gain in sales and on a real basis, sales actually fell $2.5 billion from a year ago and in fact, when we look at the year-over-year rate, it's been negative relative to inflation for 11 of the last 14 months.

Speaker 1 13:16

I mean, when you talk about outright deflation, not including the price adjustment, which makes it much worse furniture, building materials, garden supplies, sporting goods, books and music stores, when you include the price adjustment, it extends to electronics, appliances and clothing. What are these? They're discretionary, discretionary. The only things that are up are online and gas and food. Let's take vehicles down over a billion for the month which took the year-over-year rate of change in sales from 3.2 down to 0.8. Car sales a 0.8 year-over-year lost 75% of its year-over-year growth rate in a single month. Hello, I mean hello. Not only that, but credit card debt was only 0.1 annualized, but actually the total fell from the first quarter. And when consumers say they're worse off, take the housing numbers too, and home builders the NHABhab housing index 45 for the month of may that's the lowest may since 2014 and the traffic of prospective buyers the lowest since 2012. And of course, the xhb gets hit. So it's going to be kind of you know it is to whatever extent.

Speaker 1 14:30

You have the fed funds already beginning to price in a rate cut this year, if not maybe a second one, and that in turn is dropping the dollar's yield premium over Europe. As our interest rates come down, europe's kind of stay where they are because they've been a lot lower. They've already come down. Now the US is coming down to kind of match them. You're eroding the premium you get paid to hold dollars. Which weakened the dollar last week and this was key, key, key key to the markets was the weakening of the dollar. So in that context, you saw all asset prices rise, but what rose the most?

Speaker 1 15:05

Commodities and precious metals, particularly gold, silver, copper these were the things that outperformed. These are where we have been allocated in our portfolio playbook, which is a product we sell to family offices and retail investors, and it's a really good equity-based product. That gives you a different way of looking at things, in kind of this new era where just buying and holding stocks is not going to keep pace with the debasement of the purchasing power of your currency. And then you say, well, gold has been disappointing, a lot of people haven't liked gold, and then they liked it and it didn't perform. Guess what? This is the whole time, the dollar's been strong and gold has still performed. How do we know that? Because it's at new highs against the dollar, even though the performance up until recently was really choppy.

Speaker 1 15:51

All right, people were disappointed by that. So what happened? Well, bottom line is you have a situation where people dump their gold, people dump their silver. You're talking about who's buying. Well, etf sales were down. By what was the number in ETF sales? It was 700 tons since July of 2022. 700 tons worth of gold was sold in the ETFs. Coin sales were down for the first time since 2019 in the first quarter on a quarterly basis in 2024.

Speaker 1 16:23

For the first quarter, january through March All right. At the same time, swiss and UK imports were down 14 of the last 18 months. Why is that important? It means the bullion banks aren't the ones buying gold, all right. So who's buying gold? Right, chinese are buying gold Big time, big time, all right. Gold imports a record in January 225 tons. That's a lot of gold.

Speaker 1 16:49

The PBOC, people's Bank of China, stopped reporting their gold buying, so now the numbers are kind of difficult to find, so we rely on some private estimates. One of the more respected estimates puts the gold purchases last year at 700, where was it? 725 tons for the year All right. Last year total central bank purchases were 1,000 tons. 75% of total central bank purchases were in China, and the last two years are the only time ever central bank purchases of gold were 1,000 tons within a year. So the central bank is really accumulating gold big time in China when you're talking about that kind of accumulation 590 tons in 2022, 725,000 tons last year, 225 tons in January means almost 1,600 tons of gold China has taken off the market in the last 28 months. That's an enormous amount of gold, it really is.

Speaker 1 17:57

So within that context, I also want to let you know that I have put together a really cool chart package. It's going to be our chart pack for this podcast, the chart book that will accommodate this podcast. I have a lot of the Fed stuff in there on the consumer. I have all of this on gold, all right, and the Chinese numbers, and it's really fascinating to look at all of this.

Speaker 1 18:20

I then talk about well, what's next? I mean we were long cocoa. We were long coffee. We've been long gold and silver. I mean we've kind of been doing really well knock on wood, because you never want to say that publicly but yes, we've nailed it here and yeah, we got a little bearish there in the stock market. We were stopped out very quickly as soon as the Fed spoke and we understood look, right away, the Fed is doing kind of what we thought we did. We can't be short stocks into this environment because dollar lower means stocks higher. It's the tightest correlation of anything. The fact that the consumer is still choking doesn't matter right now, because even the consumer discretionary stocks are breaking out and that's problematic. So I will wait to pounce when that time comes, when you have an economic reality check. But in the meantime you have a tremendous opportunity right now in some of these markets.

Speaker 1 19:14

I mean copper. I mean the warehouse inventories of copper available for delivery into the futures market is historically low. It's true about aluminum, tin, zinc and, to a lesser extent, nickel. And the DBB is the base metal ETF soaring really taking off here. Copper and the COPX, which is the copper ETF. I mean copper's at a record high in price and we've called that all the way. It's been one of our biggest plays, along with cocoa. I mean this is, you know, in that context.

Speaker 1 19:44

So what I want to do too is, within this whole you know kind of presentation is give you two specific portfolios that are really simple, all right, that is kind of like a baseline to go from when you create your own portfolio. One is equities only, and I'm not saying I want to be 100% long equities, I don't, all right. But I'm just going to say look, I'm going to pick the top five equity sector ETFs from the S&P 500. All right, so standard and poor's equity sectors will be one portfolio, the top five, and then the second five will be like currency, commodity, bond and other and foreign equity index ETFs. All right, I'm calling it my starting five.

Speaker 1 20:24

And the idea came from the fact that all of a sudden I mean the stock market allocations have gone from this high tech into the defensive stocks, staples, materials and utilities. And now that it's NBA playoff season, the chant is defense, defense. That's the chant in the stock market right now, even though it's at new highs. It's more of a defensive posture in the breakdown of the sectors, right? So I'm going to say take a basketball analogy and just say my starting five, my starting five in the S&P 500 sectors financials XLF. Industrials XLI, materials XLB, consumer staples XLP, and utilities XL xlu. I got three defensive players. I got the round mound, the rebound in the utilities all right, that's defensive, materials and staples defensive. And I got the two bombers from three-point range that are, you know, can go on a hot streak industrials and financials.

Speaker 1 21:16

In the other area, in terms of, you know, the commodities, currencies and bonds, and again five, my starting five. And just basically you can say, hey, let's just say 20% in each. I still think this will outperform the overall S&P 500. The currency. And you can then just take all 10 and do 5%. You know, do whatever you want with these. You know it's not black box, but it's just to give you more information in exactly what we're doing and what has been successful and the things that I think will continue to be successful, and what's new and what's coming. And in this case, you know the commodity currency bond, a foreign country ETF portfolio. Right now, the starting five is the silver mining shares, the SIL. We filled that for about two weeks NLR, uranium and nuclear energy, copx, the copper mining shares, dbb, the base metal shares. And instead of gold, we've swapped now into platinum at a $1,500 discount to gold and own the PPLT platinum ETF. In terms of markets, real quickly, that could be coming next.

Speaker 1 22:18

And again, I have the whole chart book here that has all of this, including all these markets. If you want it, email me sales at welddoneonlinecom. I should have said that earlier. I mean it's 40 pages. It's easy reading. It's mostly charts and I think there's a treasure trove of information. We're offering it to you for free. Just send me your email address and we'll shoot it out to you. But within this, too, there's two new commodities right now that I think have tremendous potential upside opportunity. So email me to get the chart pack, to get the chart book, to get all of these charts for free on all of these topics we just discovered, including all these markets, the portfolio breakdowns and all the macro stuff on the consumer from the Fed.

Speaker 1 23:02

And not only that, but looking at the US debt, I mean, you know, when you start talking about gold, all you have to do is look at the debt numbers. Look at the fact that in February, the government spent twice as much as revenue was and that public borrowing as a means to finance the public debt is over $1.2 trillion in just the last five months. This makes the case for stuff over paper, and I still hold to the exit stage left as it applies to just being passively invested in the stock market, you will not keep pace with the next round of debasement in the purchasing power of paper currencies. Don't forget to follow me on Twitter at Weldon live and don't forget to follow the podcast on Twitter at money underscore podcast and a lot of cool videos on my YouTube page. That is uh, you know, user backslash Gregory underscore Weldon on YouTube.