Rod Skyles: The Unconventional Economist
Stocks and Bonds
Stocks are recovering Friday morning after a tough week that will send the major indices lower for the week. While the last 6 months has seen almost exclusively up weeks, the markets are now worried that inflation is not whipped, with gasoline prices up about 40% year to date. We have spoken in the piece multiple times that it is not demand (on the most part) driving prices higher, but massive deficit spending by the government that is pushing the dollar lower. Indications of this fact are seen in the commodities markets, with gold at all-time highs, silver at 45-year highs, and oil pushing back up to near $100 a barrel. Commodities are traded globally in dollars, as the dollar weakens or looks as if it will devalue, key commodities like those mentioned above go up in “dollar” value, meaning it takes more dollars to buy the same amount.
From our nation’s founding in 1788 (adoption of the Constitution) until the Federal Reserve was established in late 1913, the value of gold in US dollars was give or take $20 an ounce, and stable for that period of 125 years. In the 110 years since the Fed was established (to “stabilize” the currency) the dollar has lost over 99% of its spending power, and the gold price has risen in dollars to over $2,300. Stocks have outpaced inflation over that time and remains (over long periods) the best way to protect against poor fiscal and monetary policy the government has employed over the last 100+ years.
In the near term, stocks appear very expensive and seem more likely to fall 40% than to go up another 20% from here. Stocks tend to go up AND down on their way up, part of those gains are attributable to innovation and part of the gains to the devaluation of the dollar, but again, stocks tend to be one’s best long-term protection against a devalued dollar (inflation). Another sign we may be at the top, large investors like Warren Buffett have been liquidating stocks at high rates, Congressmen have been selling at high rates (remember, Congress is EXEMPT from insider trading rules) along with key large insiders at many companies. This could be for several reasons, but the key is that stock valuations are historically high, and the short-term risks of owning stocks remains high.
The bond market was rocked twice this week after a brief rally the last few weeks, as rates have once again moved higher. I know you must be getting tired of hearing the “same ole, same ole” from me on this, but the environment for inflation and higher rates remains rich and fertile. As the government needs to borrow more and more and more, investors will demand a higher and higher reward for lending their money to the government, driving rates ever higher. On top of that, the Fed came out this week and said there may be no rate cuts in 2024 as “inflation” remains high (devaluation and government debt in reality). It has been my opinion, and I could certainly be wrong, that market conditions are there for several more years of rates creeping higher, with near-term short rallies if the economy dips into recession.
Friday’s employment report did not help those who are looking towards Fed rate cuts, as the economy added 300,000 new jobs versus an estimate of 200,000. Still, only 100,000 of those jobs are both productive and reasonable paying jobs, as the vast majority of job gains remain in consumptive industries of healthcare and government, with low-paying hospitality (restaurant and hotel mostly) jobs being the third largest category. The Fed has often mentioned employment as a key driver of inflation (it is not and they know it), and until they see the economy “slowing” based on employment, they will not feel comfortable lowering rates. While market rates over time will have little to do with Fed rates, in the near term, a Fed softening of rates would likely give some temporary relief for bonds.
The real question on higher rates is how long can regional banks hold on with these higher rates? The segment of the market already is in trouble, and with no relief in site on the rate front, pressure on the sector’s top investment, commercial real estate, will continue. Personally, I think we are close to the bottom on the commercial real estate crash, but with $1.5 trillion still up for refinance in the next 20 months, it remains a very risky area. My feelings that we are close to the bottom is because this is a known issue, the refinance problem I mean, and I believe most of that is priced into real estate. However, I do not believe it is priced into the banks, and we could see massive bank failures later this year and into next. My guess, due to politics and this fall’s election, we will not see the issues until after the November elections in an attempt to help retain power for Congress and the Administration. But next year could be a tough one for the banks, and at that point, it is likely the CRE problems could bleed down into housing as well.
General News/Economy
A powerful earthquake rocked Taiwan earlier this week, but thankfully, the damage has been limited. The 7.4 quake was the most powerful since a 7.7 quake hit the island in 1999, killing 2,400 and injuring 10,000 more. The lessons learned and applied from that ’99 quake appears to have significantly reduced the human and infrastructure toll, with 10 people reported killed at this point, and around 1,000 injured. Still, this quake is a reminder that nature can be very, very powerful.
This week also appears to be the peak for Tokyo’s cherry blossoms, with a few weeks remaining until peaks in the higher elevations and in the north island. The pictures of this every year amaze me, and going to Japan this time of year to view the trees in full bloom is a bucket list item for me. One needs to plan on a several week trip, as weather makes the peak of the event different each year, but this looks like a trip worth taking! For me, I would prefer to be in more rural areas for the viewing, as Tokyo is such a massive metro area, but still, it looks absolutely beautiful.
US economic growth is expected to be around $700 billion for the first quarter of 2024, an increase of around 2.5% over last year. This is not, however, adjusted for inflation, which by any reasonable measure has been greater than 10% for the whole of the last 12 months. Also, it is estimated the US government deficit spending in the first quarter was around $400 billion, meaning the actual economic growth would be just $300 billion. Still, better than the last quarter of last year, if one took out deficit spending from the GDP growth, we would have contracted by $300 billion. Think of it this way; one can finance a lifestyle for a while with credit cards and everything may seem wonderful, but is their lifestyle really growing? Of course, the answer is no, and deficit spending by the government works exactly the same way. I would not say we are in recession, but the economy is truly flat at best without that unfunded debt the government is throwing into the GDP.
Sports
Last weekend’s games have paved the way for the Final Four coming up this weekend. Defending champion Connecticut continues to plow through the competition like they are playing high school teams. Alabama won two close ones, the second over Clemson, to advance to their first ever Final Four for the perennial football powerhouse. In one of the best games I remember in a LONG time this late in the tournament, Purdue made its first Final Four since 1980 by outlasting Tennessee who has never made the semifinals. This game featured two of the best individual players in the college game, Zack Edey from Purdue and Dalton Knecht from Tennessee, and both played like the superstars they are. Edey had a career high 40 points in 39 minutes and 27 seconds of play, and Knecht had 37 points in 37 minutes, and both teams left everything on the floor. Defending champions Connecticut continued their run through the tournament by again blowing out Illinois to advance to a second straight Final Four. North Carolina State continued its March Miracle run by upsetting ACC rival Duke on Sunday. To recap, 14 loss NC State (the most losses to ever make the Final Four), was on the way outside of the field of 68. They had to win 5 games in 5 days in the ACC tournament to earn the conference automatic bid, then have won their first 4 games of the tournament.
In the Women’s tournament, consensus number one South Carolina advanced to their 4th consecutive Final Four by sneaking by Indiana and easily handling Oregon State in the Albany Regional. North Carolina State defeated 1 seed Texas to advance from the Portland Regional. Iowa behind 40 points, 12 assists, and 7 rebounds by super-star Caitlin Clark revenged last year’s championship game loss by getting past LSU in the most watched game in women’s basketball history. Following that game, another highly anticipated matchup between stars Paige Bueckers of Connecticut and JuJu Watkins of USC resulted in a UConn victory pushing the powerhouse program to an unprecedented 23rd Final Four appearance, and 15 of the last 16 Final Fours. The UConn victory also established a new record, along with NC State, this is the first time in history that two male and female teams from the same university made it to the Final Four in the same year.
Not sure I have any predictions, but UConn men appear unbeatable at this point, but a showdown with fellow heavyweight Purdue may await us on Monday if they both win Saturday. UConn must get by 3-point shooting experts Alabama, and Purdue past the shocking NC State first. On the women’s side, South Carolina goes into the finals as the favorite and faces NC State on Friday in the first semifinal. Caitlin Clark and Iowa face Paige Bueckers and UConn in what could set another viewing record in the other semi.
One more tournament note, in the Portland Regional, Saturday’s games were played with a court that had two different 3-point lines for the two ends of the court, one at the women’s distance of 20’9” and one at the men’s distance of 22’1 ¼”. This should be a massive embarrassment for the already seemingly inept NCAA, hard to picture how this happened.
Quote
“Give a man a fish, you’ll feed him for a day. Elect a man to fish for you, and all of a sudden fishing becomes some mystical function that only a few elite in society can perform, at great expense to the rest of it.” —Alice Smith
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Rod Skyles 