by Louis Navellier
October 17, 2023
The catalyst for Iran instigating Hamas to invade Israel was likely the pending Israel/Saudi Arabian peace agreement, which infuriated Iran, so it will be interesting to see if the fighting in the Middle East spreads beyond the Israeli region with Hamas and Hezbollah forces, both of which are funded by Iran.
Of course, U.S. aid to Israel will obviously increase, along with the current aid to Ukraine, but there is a growing concern that the U.S. budget deficit will explode if the U.S. funds any more wars. The Wall Street Journal had a great article entitled, “Wall Street Isn’t Sure It Can Handle All of Washington’s Bonds.” Last Tuesday, the Congressional Budget Office (CBO) said that the federal budget deficit for fiscal year 2023 (ending September 30) was $1.7 trillion, accounting for approximately 5.8% of GDP.
With a proxy war with Russia (in Ukraine) and now new tensions in the Middle East, defense spending is expected to steadily rise. Of course, most of the U.S. budget deficit is due to direct transfer payments to retirees under Medicare and Social Security, so there is little room left for budget cutting negotiations.
Amidst all this chaos, I expect crude oil prices will remain high, since sanctions may be reimposed on Iran. I should add that the U.S. Strategic Petroleum Reserve now only holds a 17-day supply, after the Biden Administration released approximately 200 million barrels in 2022 in the President’s attempt to cap crude oil prices and help win more Congressional seats. The Biden Administration also increased insurance company sanctions on shipments of Russian oil last week. Between these new restrictions and the outbreak of war in the Middle East, crude oil had its biggest price surge in six months last week.
Of all our portfolios, the ones that are benefitting the most from the Israeli counterattack against terrorist incursions would be our dividend growth portfolios, which hold (1) defense stocks, (2) energy stocks, and (3) dividend stocks benefitting from moderating bond yields, as yield sensitive investments are resurging.
The U.S. government obviously needs a Speaker of the House, since all new spending bills must originate in the House, so if the government is to function in these trying times, a new Speaker must be approved soon, by a House majority. For a while, Steve Scalise was in the lead, but he bowed out. Now, it appears that Jim Jordan could be elected, but for a while it looked like nobody wanted to be Speaker of the House.
The President was also missing in action. After President Biden supported Israel in a prepared statement, he went silent and was apparently being extensively debriefed. Since the USS Gerald Ford (aircraft carrier) and multiple support ships are being diverted to Israel, it will be interesting to see if the U.S. gets involved directly in this war, since Americans were killed by Hamas, and some hostages are Americans.
Israel has never asked for the U.S. to intervene in its several military fights, but if there is ever a time for the U.S. to help Israel directly, now might be such a time, especially for military support and logistics.
The Two Major Inflation Indexes Came in “Hotter” Than Expected
Last Wednesday, the Labor Department announced that the September Producer Price Index (PPI) rose by 0.5%, and 2.2% in the past 12 months. Much of the monthly increase was due to a 5.4% rise in wholesale gasoline prices in September. Excluding food, energy and trade, the core PPI rose 0.2% in September and 2.8% in the past 12 months. Overall, wholesale goods prices remain soft due to a stronger U.S. dollar.
The next day, the Labor Department announced that the Consumer Price Index (CPI) rose 0.4% in September and 3.7% in the past 12 months. The core CPI, excluding food and energy, rose 0.3% in September and 4.1% in the past year. Unfortunately, owners’ equivalent rent (shelter costs) surged 0.6% in September, up from 0.3% in August. This is a stubborn problem since shelter represents approximately one-third of the CPI. Hourly earnings only rose 0.2% in September, so wages trailed inflation once again.
In the wake of these two disappointing PPI and CPI reports, Treasury bond yields resumed their previous rise, from 4.58% on the 10-Year Treasury rate (at last Wednesday’s open) to 4.71% at Thursday’s close. Furthermore, the Fed released its Federal Open Market Committee (FOMC) minutes on Wednesday, and they were definitely hawkish, because these minutes said that the Fed will keep key interest rates high for the foreseeable future. Specifically, the FOMC minutes said that public communications “should shift from how high to raise the policy rate to how long to hold the policy rate at restrictive levels.”
As a result of these FOMC minutes, as well as the downbeat September inflation data, I feel that a Fed rate cut at its December FOMC meeting is now off the table. I mentioned on Fox Business on Thursday that the Fed will have to cut key interest rates in early 2024, otherwise the risk of a recession is likely.
Speaking of a recession, it appears that China may already be experiencing their first recession in at least 30 years. Consumer price inflation in China was unchanged in September, due largely to a 3.2% decline in food prices. In the past 12 months, pork and vegetable prices have fallen 22% and 6.4%, respectively.
The other shocking news is that Chinese exports and imports both declined 6.2% in September, the fifth straight month that exports have declined. This is the primary reason why deflationary pressures have spread throughout the Chinese economy, as producers have cut prices to try to maintain market share.
Nevertheless, for the upcoming four or five weeks, investors’ attention should shift to third-quarter corporate earnings announcements. The big banks are now announcing record earnings, despite building higher loan loss reserves. Amazingly, the Atlanta Fed is now estimating 5.1% annualized GDP growth in the third quarter, which is well above most private economists, who estimate lower (1.5% to 3.9%) GDP growth. The primary cause of GDP growth is rising energy exports and a shrinking U.S. trade deficit.
The big corporate news last week was Exxon-Mobil’s acquisition of Pioneer Natural Resources for $59.5 billion. This acquisition will allow Exxon-Mobil to dominate shale crude oil production. Exxon-Mobil is planning on boosting crude oil production in the Permian Basin to two million barrels per day by 2027, so U.S. crude oil production is expected to continue to steadily rise. Furthermore, Exxon-Mobil’s crude oil production in Guyana is steadily rising, meaning OPEC+ will become less influential in upcoming years.
The UAW was threatening to close GM’s Arlington, Texas, manufacturing plant, which makes profitable Denali, Escalades and Suburban SUVs, so GM caved and agreed to use UAW workers at its LG Energy Solutions battery plants under construction. UAW President Shawn Fein call this a “transformative win,” (by including GM’s battery plants) in the master agreement that the UAW is trying to finalize with GM.
The UAW announced that its workers would expand its strike to Ford’s largest plant in Louisville, so the UAW is clearly putting more pressure on Ford. Due to the Louisville strike, up to 100,000 supply job slots at suppliers are at risk of being laid off. Ford offered the UAW a 23% pay increase over four years and is now “at its limit” of wage and benefit increases it can offer, making negotiations even more contentious.
Obviously, the UAW is trying to split the automakers on their policies, so I suspect that GM may reach an agreement with the UAW before Ford and Stellantis. Nonetheless, since Ford is now working with China’s CATL, it many choose to import LFP batteries (iron phosphate) from China, since it does not think its proposed CATL plant in Michigan will be profitable. I should add that since batteries are heavy and expensive to transport, the advantage that domestic battery plants have is that they can save on transportation costs. However, Ford has apparently concluded that the UAW cannot make batteries as cheaply as CATL can in China, which is why it cancelled its proposed CATL plant in Michigan.
And finally, The New York Times printed an accurate warning entitled, “A.I. Could Soon Need As Much Electricity as an Entire Country.” Essentially, current AI chips and cloud computing centers supporting AI require a lot of electricity. The New York Times pointed out that in 2022, Amazon and Google’s search engines accounted for 1.0% to 1.3% of the world’s electricity. (Nvidia has a commanding lead in AI, according to the NYT.) I will be doing a special podcast in upcoming weeks talking with an AI chip engineer to discuss this power consumption problem and reveal how some of the new AI chips under development will be approaching AI a bit differently, to parse data more efficiently as well as to save on power consumption.
Navellier & Associates owns Nvidia Corp (NVDA), Amazon.com, Inc. (AMZN), Exxon Mobile Corp (XOM), and Ford Motor Co. (F), in managed accounts. We do not own Pioneer National Resources Co (PXD), CATL, LG Energy Solutions, Alphabet Inc. (GOOG), General Motors (GM), or Stellantis (STLA). Louis Navellier and his family own Nvidia Corp (NVDA), Amazon.com, Inc. (AMZN), and Exxon Mobile Corp (XOM), via a Navellier managed account, and Nvidia Corp (NVDA), Amazon.com, Inc. (AMZN), in a personal account. He does not own Pioneer National Resources Co (PXD), CATL, LG Energy Solutions, Alphabet Inc. (GOOG), General Motors (GM), Stellantis (STLA) or Ford Motor Co. (F), personally.