S3 E2: The US Fed Acquiesces to Higher Inflation

By deciding to cut their Fed Funds Policy Rate this past week, amid a renewed rise in CPI price indexes is a clear sign that the FOMC is "acquiescing" to higher general rates of inflation.

Subsequently the US Dollar has broken out to the upside in a big way, which in turn is weighing on US Stock Indexes, Gold along with the entire Metals complex, and even Bitcoin.

What's next for the US economy, the Federal Reserve, the Dollar, and US asset prices?

Greg lays out his outlook, in today's episode of Money, Markets & New Age Investing.

Chapters

• 0:01 US Inflation Trends and Market Impact
• 10:37 Service Inflation Trends Analysis
• 16:21 Consumer Vulnerability and Market Impact
• 29:26 Navigating Economic Challenges for Financial Success

Transcript

Speaker 1: 0:01

Hi and welcome back to Money Markets and New Age Investing. I'm your host, greg Weldon, and we've got a good one for you. Today we have the United States of America and what's coming next. We've had a very volatile week and month. As it stands, the FOMC just cut their Fed policy rate, the Fed funds rate, on Wednesday, and we're going to talk about that as the Fed now proving to us that they're acquiescing to higher general rates of inflation and into a stagnating type, stagflation type of economic trend. Here. It's kind of a shift from where we are now, which was moving to kind of protect the consumer who's suffering, to. We have inflation is still an issue and we don't want the consumer to suffer more from that, so we may not be cutting rates as quickly as the market expected. That now upsetting the stock market, and this is a big deal, I mean it really is. I think this is kind of a big turning point for many of these markets and this is a big deal, I mean it really is. I think this is kind of a big turning point for many of these markets and we're going to talk about all of that, starting with inflation and starting with the CPI data that we just got. I mean, you're on a two month upside run in CPI. You got to 2.7 year over year. The low was September at 2.4. The core rate, the low, was 3.2. It's at 3.3 for the last three months.

Speaker 1: 1:28

If you recall, back in the winter, february, march, into the spring April, I kind of laid out the map, the roadmap, for where inflation would go. It was pretty simple as it related to energy base effect, because it had a big rise in 2022, 23,. And a big decline, you know, this year, late last year, into this year. So you could see that the base effect because it had a big rise in 2022, 23, and a big decline, you know, this year, late last year, into this year. So you could see that the base effect was going to drive energy down. It's going to bring inflation down, you know, towards that 3% level. So that would get below four. But it would prove to be sticky and that's the word that I use, that's the word other people you know started to use more frequently more recently. And it is exactly that it has come down to a level above the target, above the recent low, so a higher low and begins to rise because it's the 40-year trend reversal from lower lows in inflation, lower lows in interest rates, based on the dynamic that we had from 1982, when Reagan came to power and again we started to pump out debt. Now we have so much debt Trump can't possibly do the same thing, so it's really going to be a struggle from here. But the bigger picture is the 40-year trend has changed. We've printed so much money we know the only way out is to reflate and this is the course we've chosen. It's going to be higher highs and higher lows in inflation and interest rates from here, and we just got a good dose of that this week.

Speaker 1: 2:46

All right, let's talk about the breakdown on the CPI Energy. Gasoline was down 2.9 for the month. All right, I actually thought you might, you know, bottom a little higher in inflation, because I didn't expect energy and I did say this look, the risk to the forecast of bottoming above three would be energy, and if energy keeps going month to month to month, you'll hit a new base effect that's negative, and that's exactly what's happened. It's extended the negative base effect into right now, 2.9% down for the month, 8.4 year over year. I mean, this is where you have it Now.

Speaker 1: 3:27

What's interesting about gasoline is. It went from the pandemic low of 37 cents all right all the way up to $4.33, all right. It has since come back down to a three-year low here, which is 185. That was four weeks ago. In that context we've jumped back up a little bit. The spot price right now is 199, all right.

Speaker 1: 3:44

Now what's interesting is that last November we start to look at last November prices were $218. So we're 9.1% below November last year price. Well, that matches right off against the year-over-year decline in gasoline and CPI number at 8.4. But let's look forward, because January last year, $218, then got to $ 231 in February, then got to 246 in March and by April of last year gasoline prices were $2.70. Now we have a forwards market that anticipates the movements in those months. Against 231 a year ago, this year's February's price 201.

Speaker 1: 4:22

Still deflation, significant deflation. Not only that, but you're looking at March a year ago, where priced at $2.01. Still deflation, significant deflation. Not only that, but you're looking at March a year ago where prices were $2.46. This year March is priced at $2.02. That's an even deeper deflation than in February, april at $2.70 a year ago. This year's April forward price is $2.21. $0.50 below a year ago price, which is still going to be pretty sizable deflation.

Speaker 1: 4:47

The high in the move in the interim in gasoline was 298. So in essence, you have to get above 270 and above 298 to generate any inflation in energy. And thank God because you have a situation where, if not for energy price deflation, the headline inflation rates would be much higher, maybe even towards 4% on the headline. When you're talking about the gasoline market going forward, well, I can tell you you've had this huge price decline which is a perfect kind of Fibonacci dynamic, and you have a lot of stuff going on in the forward price in June. The suggest is bottoming and that's interesting because gasoline inventories, while they're rising and posted a big increase for the most recent week this is the season where they increase because you're pumping it out, building inventories into the spring peak demand season, all right into the spring peak demand season. When you compare the rise in gasoline prices, it still puts you 2% below year-ago levels and 1.7% below the two-year level and puts you below the five-year low. The build period leads into March and you are behind schedule in a significant way. So this sets it up to maybe you could get above $3.

Speaker 1: 6:06

The June price at $2.26, I mean, excuse me, at $2.26,. It's below that right now. But if you get above $2.26, you take out the medium-term moving average, all right. You would take out the downtrend line. You take out the oscillators would turn positive, all right.

Speaker 1: 6:22

And the open interest suggests this is a short market. You get a short covering rally, it breaks you out and all of a sudden you look around, you don't have much inventories. I mean you need a demand decline to offset that. Now that's possible if you get a recession, but not likely in my view. And the swap rates show that it's the differential between this spring and next winter. All right, normally this spring is going to be a higher price. Well, a higher price of $0.24 in September has turned into a higher price of $0.35, and the high is $0.36. It was set last year. Get my point. I mean the swap market is telling you that gasoline is looking tight heading into May. Unless we accelerate the inventory build and it's already accelerated I'm not sure you can accelerate it anymore. They're pumping out gasoline like crazy. Keep an eye on the UGA. Is the gasoline ETF above 65.50 would be a breakout.

Speaker 1: 7:16

More importantly in CPI and inflation, is food prices. A .4 for the month of November. That's almost 5% annualized. Food at home was .5. That's 6% annualized. That's versus 2.4% a month ago. When you're talking about protein meat poultry, fish and eggs up 1.9% for the month. That's a double-digit annualized rate. Beef, with live cattle prices in a futures market at a record high, almost at $2 a pound. Beef prices up 3.1. Eggs up 8.1. These are monthly numbers. Think about the annualized numbers here. They are huge, all right. Non-alcoholic beverages up 1.5 for the month. Double-digit rates of inflation in some of these things in November,

Speaker 1: 8:00

all right. Now to be fair, not to be, not to be objective, I'm going to say subjective, but that's the trading side. Cereal and bakery down 1.1 for the month, the largest single month decrease ever in the history of this breakdown that goes back to 1989. But at the same time I think to myself well, chicken, eggs, beef, these are the things I eat. I'm a protein guy. Chicken, eggs, beef, these are the things I eat. I'm a protein guy. I'm a carnivore protein guy, all right. But I'm also kind of a sugarholic. So it's the epitome of a polarized spectrum on eating habits Protein and heavy duty and amino acids and working out like crazy versus my

Speaker 1: 8:39

sugar intake. Well, I think you can dump the cereal in bakery a lot easier than you could the protein. The proteins, the one with the huge price increases. Tough to dump it. You can't. You can't live without the protein. You can live without the sugar, but the bottom line really here is that service prices

Speaker 1: 8:59

are high. I mean, you look at CPI, you look at PCE and it seems like inflation is tamed to some degree between and I wouldn't say that, but some people are between 2.7 and 3.3. Well, that's still three. And I said a long time ago right here on my podcast and several times on my podcast, that you're going to reach a point where the Fed is going to adjust their entire policy paradigm to make it an inflation range of 1% to 3%, with 2% as the midpoint. They can say they're really not changing anything, but they are acquiescing to a higher inflation because they need it to support growth so you don't get a debt deflation. This is kind of the missing point for a lot of people when they talk about inflation. The way out of the debt is to inflate out. The problem is that lowers the standard of living and the purchasing power of

Speaker 1: 9:43

your currency. But let's get to services. Services accounted for 77.6% of US GDP, gross domestic products 77.6% it's called 78%. The rest of it's only 22%. Services are over three-quarters of the economy. Service price inflation, excluding energy services, the core services and energy services, is a small part of it, really small compared to the CPI, the service price inflation. Cpi for services 4.6 year over year and yeah, that's down from over 7, but it's 4.6 year over year and yeah, that's down from over seven, but it's 4.6. It's more than double the Fed's target rate of 2% for inflation and when you break this down it's kind of mind-boggling. Rent is 4.9. Yeah, it's down, but it's

Speaker 1: 10:36

still 4.9. All right, when you talk about something like vehicles, all right, and we'll get to that in a second, because if not for vehicle sales, retail sales would be deflating. All right over the last two months, but at the same time, while people are buying more cars, vehicle repair and maintenance up 5.7 year over year. Vehicle insurance up 12.7 year over year I mean, hello, those are huge numbers and that's something everyone has to pay. Just like medical care, medical care services 3.7. Doctors in hospitals up big. I mean, you're talking about dental up 3.9,. Eye care up 3.9,. Nursing homes up 4.8,. Elderly invalids at home 9.9,. And health insurance

Speaker 1: 11:23

up 5.9%. Don't get sick, inflation will kill you. That inflation will kill you, but it's everything. It's even just around the house Garden and lawn care up 6.3. Water 5.2. Trash removed 5.7. Your commuter parking 3.5. Tolls 3.8. You have a pet dog, cat, whatever alligator, like we do down here in Florida? Pet services 12.1% Inflation double digits 12%.

Speaker 1: 11:53

All right. Shopping club memberships you think you're buying something cheap or you're going to pay more to buy it cheap 6.4% year over year. Shopping club memberships were up 2.7% for the month. Shopping club memberships are going up because food prices are going up and other things are going up, and those two buy them. It's going to cost you more just to be a part of the club. Okay, how about tuition? Non-college, rather not like a four-year institution college 3.9. High school if you want to pay for private school high school 4.8. Daycare and preschool you got a kid, you're getting crushed. 6.2% inflation All right. Laundry, dry cleaning 5.4. Bank services 5.5. Taxes and accounting

Speaker 1: 12:37

services 7.2. I broke down the service CPI index. There are 82 services that are counted in this index and 82% of the 82 indexes were above the Fed's target of 2%. Only 18% were below 2%. More than that when you take the whole as a whole, above 3% year over year. 73 percent of services are inflating at more than three percent. 54 percent more than half a service price inflation is above four. 31 percent above five 20. One out of five service industries or service occupations services that the customer would buy are inflating on a year-over-year basis at 6% or higher. One-fifth, 6% or higher 10% are above

Speaker 1: 13:29

7% year-over-year. Now when you start to talk about service CPI, all right, yeah, again it's down. But if you take the 4.6 number and you look at it prior to 2022, pre-2022 measurements 4.6 is the highest in 30 years. The other highs that were not at 4.6 were February of 2002 at 4.1. What did you have then? Tech bubble crash, september 2006,. 3.9, financial crisis You're at 4.6. You're higher than either one of those for service prices and service prices keep in mind 78% of GDP. Now keep that in mind for a few minutes when we get to the Fed. 4.6, service price inflation, 78% of GDP on services. But let's go to core CPI at 3.3 on a pre-2022 level. It's also the highest in

Speaker 1: 14:24

three decades. The only other times 1997 led to the long-term capital management and the Brazilian-Russian tie, debt crisis in 1997-98. It's above the 2007 level where oil was 140 and caused the real estate market to collapse on the back of a consumer collapse after that 140 and caused the real estate market to collapse on the back of a consumer collapse after that, and it's 100 basis points, above all the highs from 2009 to 2022. 13 years you haven't seen a 3.3 core CPI. It's

Speaker 1: 14:56

high. Now. What's even more troubling is PPI producer prices, which is the pipeline. Producers are paying more. They're going to pass that cost along to distributors, who pass it along to the customer. All right, we're seeing it. Ppi the pipeline's full Final demand for services 3.9. It's a new all-time high. All final demand 3%. Goods final demand is finally positive. It's been deflation for a

Speaker 1: 15:20

while Now. What's interesting is foods Food at the wholesale level, the pipeline level. The PPI level was down 0.8 year over year in May. In October it was up 0.3 and now November up 3.1%. Unprocessed food 2.9. Unprocessed energy was

Speaker 1: 15:40

down two. You can see how food's leading the way here when you look at food pork, chicken, eggs, corn, strawberries, melons, vegetables, fresh fruit, tomatoes all at new highs and in terms of the outright prices for some of these commodities cocoa, coffee, oj, sugar cattle and butter, all at new highs. The index for final demand, food is at an all-time high and up 5% year-over-year above the 2022 highs. The wholesale level for food 7.5% year-over-year inflation and the index itself at a new all-time high. And food at the consumer level. Ppi, also a new all-time high, up 7% year-over-year and up 40%

Speaker 1: 16:19

since 2019. Food costs more. We all know, but these numbers are still staggering and it continues and it's accelerating again. So you say but retail sales are good, the consumer's good? No, the consumer's not good. All right, retail sales came out this week. The media cheers the number, the market rallies. I'll tell you right off the bat the year-over-year number 3.2, is below core inflation, relative to core inflation. Real retail sales are down, they're deflating and they have for something like 15 out of the last 18 months. All right, and there's more danger here. All right, because of the two-month increase in retail sales that the media is celebrating. The market

Speaker 1: 16:59

is celebrating. 72% of the growth came from vehicle sales alone. Now we also know, just as I said, repairing and maintaining a vehicle costs more, insuring it costs more. And the delinquency rate on auto loans has hit a new high. It's at the highest level since 2008,. A new high for this move. All right, you talk about food price deflation for two months. All right, minus 0.2, minus 0.1. So you actually are spending a little bit less here because food prices did deflate. It's showing up at the consumer level, but we just saw PPI says that's going to change in a big way. So you've had this pass from gasoline and food for the last few months and still 72% of the growth in retail sales

Speaker 1: 17:42

is vehicles. The biggest tell for how is the health of discretionary spending and the consumer and the feel-good factor. You say there's a huge feel-good factor here because Trump won the election. Well, I mean, you know, maybe not right in a few days before the election, but frankly, okay. The tell. The number to look at for the health of the consumer on a discretionary spending comfort level is eating and drinking establishments. You go out to eat more, you go out to party more. If you're feeling good about your income, if you're feeling good about the economy, if you're feeling good about everything in household, inflation is not

Speaker 1: 18:15

bothering you. The fact of the matter is eating and drinking establishment sales fell by 0.4 for the month of November, by 0.4 for the month of November. It's a big-time rarity to get a decline that's not around December and January, based on the holiday flip-flop. You take those two months out of the equation and that's every year pretty much a seasonal thing. This decline was $431 million for the month, the fifth deepest in history ever. The fifth deepest in history going back 30 years. To this number. I mean, you know history. Okay, the fifth deepest one month. The others, 2001, 2009, 2018, 2020, all of which presaged some kind of

Speaker 1: 18:56

economic downturn. The year-over-year rate of eating and drink establishment sales dropped from 4.2 to 1.9. It is deeply negative relative to the core CPI and many of the sectors are outright negative. The only other times that's been the case where the year-over-year rate of change in eating and drink establishment sales was below core CPI only two times other than now 2009,. Financial crisis, 2020, pandemic.

Speaker 1: 19:23

That's it. So what does the Fed do? Well, they cut rates. The top end four and a half. Well, compare the top end to be generous to the Fed, the top end Fed funds rate of four and a half against our service price inflation. We take it back to that 4.6. It means that policy rate is negative on a real basis and is stimulative, not restrictive. This whole thing around restrictive and is stimulative, not restrictive. This whole thing around restrictive, yeah, maybe against PCE, but not against the prices that accompany 78% of the economy. All right, I mean, only in July did policy finally get to neutral, when you had a 5% and 5.25% Fed funds against that 4.6% rate, which was actually

Speaker 1: 20:06

higher then. So you know again, and if you look at this, all right, the service price inflation has been below the Fed funds rate, except for those two months this year, since 2008. It's been stimulative for 16 years. The closest you came to ending that stint was in 2018, which led to easing in 2019, before COVID even hit. It never got to even neutral. It stayed stimulative the entire time. You've been stimulative on a real Fed funds policy level basis against the service CPI year-over-year rate since 2008. I mean, hello, is this not why stock market's new highs, gold's rallied and bitcoin's higher? And I mean, come on, I mean restrictive. Huh, they're acquiescing to higher rates of inflation, straight up. You know it really is so. Within that context, though, does leave the consumer vulnerable. Delinquencies on all the loans, a new high, like I said, credit card delinquencies, highest since 2007. And now the pace of the rise in mortgage delinquencies we haven't seen

Speaker 1: 21:19

since 2006. In the Fed's risk assessment, all right, they told us the highest risk was to higher inflation. You went from a September number of 16 members versus two members. There's 18 voting and 18 who give their opinions. 16 said the risk was balanced and two said it was towards inflation. Three months later, two said it's towards it's balanced and 16% is towards higher inflation. They all project and 16% is towards higher inflation. They all project 4% or higher Fed funds for 2020. I'm going to say they all. The median and the bulk of the guesstimates are above 4% for next year. I mean, the futures contract for the end of next year

Speaker 1: 21:58

was 3.75. When the meeting took place, it jumped to 4. In September you were 2.82. And you wonder why? Stocks were higher and they rallied even into that little push in rates, because they still thought they're going to get a lot of VIG over the next 18 months. That's not true. Now, according to what the Fed just told us, not only that, the Palisades are going to be more cautious and you had a dissenting vote who wanted to leave rates unchanged because they're worried

Speaker 1: 22:25

about inflation. From the Cleveland Fed president, what's the market impact and what do we do with this information, the market impact is straight up a dollar higher. The dollar is breaking out. The yield differentials are blowing out. The yield curve is steepening, just like we said it would. The thing is we thought the dollar would go lower. I was wrong on that one right. The degree to which the Fed has kind of slowed here before they get where they think is neutral is interesting to me, but it also shows some vigilance on inflation. It's trying to walk a tightrope across Niagara Falls. It really is difficult. You're almost destined to fall. You're going to tip one way or the other too far at

Speaker 1: 22:58

some point. The dollar has broken out on a big long-term basis. It got above $107.35 on the dollar index. It's up to $.50. This is a major breakout that leads you to the 2022 high of 114.75. That level of 114.75 is a perfect 50% retracement of the entire dollar decline from the 1985 Plaza Accord when the dollar was 165, the index to the low in 2008 when it was 70. And now it's all the way back up to 108, headed towards 115. If it breaks above 115, the next level would be the high of 121 15 years ago. If you get up there, the dollar on a year-over-year basis will be up almost 20%. It's already up 6% to

Speaker 1: 23:45

7% year-over-year. Why do I say that? Because you throw tariffs into the mix and the dollar moving higher is the worst possible thing for stocks Dollar higher, stocks lower, dollar lower, stocks higher. It is the most reliable, the tightest negatively correlated dynamic ever meaning stocks higher if the dollar goes lower, stocks lower if the dollar goes higher, dollar's going higher. Right now the divergence is huge. It's gotten really severe over the last two weeks and it suggests an immediate downside risk in the stock market of 400 points in the S&P 500, let alone that the market itself is as stretched and extended technically on a long-term momentum basis, mathematically and even geometrically, as it has ever been, and the medium to longer-term oscillators are now rolling over. They're really losing momentum and it lacks leadership. You don't have China as a leader. China imports. You don't have consumer discretionary in the US being a leader, even though consumer discretionary indexes up

Speaker 1: 24:47

the XLY. Over 40% of it is Amazon and Tesla. When you talk about real retail stocks, they're choking. Their leadership has clearly been AI and XLK and Infotech and chips, but they're widely owned. Every passive investor owns this stuff and owns it big. Every passive investor owns this stuff and owns it big. All right, but the momentum started to slow in the chip sector, even in the leader, the

Speaker 1: 25:13

benchmark, nvidia. We wrote a special piece two weeks ago and then followed it up last week and then followed it up again this week, and our piece, immediately ahead of the Fed, was watch NVIDIA, watch 131. This market is vulnerable and a Fed where they actually cut rates and then talk hawkishly would really crack this market wide open. It's exactly what happened. You have a head and shoulders pattern in NVIDIA. It's very clear. The neckline, the moving averages are all there. I mean the medium-term oscillators already turned lower. The momentum here in these chip stocks has waned significantly and many of them are breaking down. Amd completely broken down, trend from 2020, broken. All the moving average is gone. The oscillator is negative. Same with Applied Materials, amat Broken down. The trend line, the two-year moving average, the oscillators, all of it. Intel is on a weekly close-only base at a 12-year low and this is one of the worst-performing stocks. That was the former leader. Hail to the new boss, same as the old boss. And then Micron got cracked wide open this week. A nasty downside day, all

Speaker 1: 26:16

right Overall. The NASDAQ I said earlier this year, back in January, february, that you could have a melt-up situation. I didn't think it was going to happen, but I was wrong. It did happen, all right, but using the geometry, using some of the GAN angles, for example, the angle of ascent is very important to me. All right, we had a target of 22,500 on the NASDAQ. If it went into a melt-up, it missed it by a couple hundred points. I mean, it's almost there, but what happens when you get there this week? Literally it is one of the biggest outside-downside key reversal weeks I've ever seen the magnitude, the severity, the swiftness and the fact that it's at a record high right on an angle of ascent that is completely unsustainable

Speaker 1: 26:56

over time. Let's pick out some levels on the downside. If we take the fourth quarter, low to the 2024 high, a 38% retracement would be $16,800. You're trading around $21,000. The high was $22,152. You could get even lower than that. But bottom line is you're talking about the two-year moving average, the second quarter low, the 38% retracement, all between $16,800 and $17,400. That's a downside risk of 17% to 21% in the NASDAQ and it could go lower. You have targets down around $15,600 to $16,800. Now $16,000, excuse me. So you know. I don't know that you're going to get those bigger downside depending on what the Fed might do and depending on what Trump might do. But that's the risk here and the risk-reward is very little upside and potentially significant downside on the

Speaker 1: 27:49

risk side. Dollar up means stocks down. But if you see the NASDAQ get below this week's low, this past week's low of a 21.160, that's on the nearby futures contract, that would be a major breakdown and a major sell signal. You would want to have some protection. I'm not saying dump everything, but I'm saying protect yourself. I call them financial prophylactics. The cash S&P 500 below 58.32 would be a breakdown and you're looking at 400 points of almost immediate downside risk. That's sizable. That's 8%, 9%. But what's interesting here? Dollar up also means gold down. It's getting whacked. Could be 21.50, 22.50. A lot of support

Speaker 1: 28:27

at 24.50. Bitcoin at risk and we've been bullish on long Bitcoin. It's made us a lot of money. But right now Bitcoin's at risk too, because Bitcoin has traded in lockstep with the stock market, in lockstep with money supply, in lockstep with policies or whatever extent. Right now more of those things are working against Bitcoin in the short term and we've owned it until last week, sold it before the Fed meeting. And the industrial commodities. Look at base metals, look at steel, look at aluminum, look at copper. They're all really on

Speaker 1: 28:55

the ropes. What does that leave you? It leaves you with the dollar, which leaves you in cash or commodities, food commodities, a lot of them cocoa, coffee, sugar, you know big deal. Natural gas another one in play. I like gasoline and crude oil at some point here in the near term. How about the other side of the dollar? I don't like the dollar, but there are certain currencies I would absolutely sell against the dollar. It's more of those currencies are bad versus the dollar is good, and then foreign bonds offer big

Speaker 1: 29:23

opportunities here. So to stay on top of these things, this is what we do. I mean all of this from a strategy perspective, really looking to assist people, because it's about keeping pace in an environment where it's increasingly difficult to keep pace with the debasement of the purchasing power of your paper money, income and wealth. I help to level the playing field with 40 years of experience. Check me out, happy to send you some samples of the research or some of the stuff that has the charts of these things that I've just talked about, which are really eye-opening. Email me at gregweldon G-R-E-G-W-E-L-D-O-N at gmailcom. Follow me on Twitter at Weldon Live, and then also the podcast at money underscore podcast, and I'm also on YouTube under user Gregory underscore Weldon. Until next time, thanks for listening. Good luck. Be careful out there.