by Louis Navellier
October 24, 2023
The fact that a second aircraft carrier strike group has been ordered to the eastern Mediterranean, and Air Force jets have been dispatched to the region to deter escalation, demonstrates how tense the situation has become around Israel. The economic impact on Israel and much of the Middle East is unquestionably severe, especially since there are over one million refugees with nowhere to go, as bordering countries like Egypt and Jordan have barred entry to Palestinians. The good news is that in times of uncertainty, Treasury securities are an oasis, so it is still possible that interest rates will decline in a flight to quality.
The U.S. has issued a “do not travel” advisory in Lebanon and is evacuating non-emergency personal after protestors started a fire at the U.S. embassy. President Biden canceled his planned trip to Jordan after the Amman summit was abruptly canceled. Jordan’s Foreign Minister, Ayman Safadi, said the Amman summit was canceled since “there is no use in talking now about anything except stopping the war.”
The Egyptian President and Palestinian leaders were supposed to be at this summit. President Biden was apparently trying to appease some in his own party by attending the Amman summit, which is split over the fate of Palestinian refugees. This Middle East trip, which had been set up by Secretary of State Anthony Blinken turned out to be a disaster for President Biden, since he was shunned by Arab leaders.
In his address to the nation last Thursday evening, the President asked Congress to provide war funding for both Israel and Ukraine. In what was viewed as probably his best address, President Biden said that the world is at an “inflection point in history.” President Biden also said that “American leadership is what holds the world together. American alliances are what keep America safe. American values are what make us a partner that other nations want to work with.” And finally, President Biden concluded that, “To put all that at risk and walk away from Ukraine and turn our backs on Israel – it’s just not worth it.”
Despite being widely praised for his Presidential tone, President Biden did not clarify how much money was needed to fight these two wars to completion, probably because Americans are war weary. U.S. representatives will be meeting with Ukraine in Malta on October 28th and 29th to discuss a “peace formula.” Waning support from Congress, an abrupt end of aid from Poland, and waning support from other EU nations are all taking a toll, causing Ukraine to settle for a favorable peace agreement.
I expect Congress – when it finally elects a permanent House speaker – will provide the aid that the President requested, since U.S. troops have had missiles fired at them in Iraq, Syria and on a Navy ship off Yemen. Although the Navy intercepted these missiles, U.S. troops in Iraq and Syria are in danger.
Last Thursday, the State Department issued a “Worldwide Caution” to all Americans due to “increased tensions in various locations around the world.” As Iran strives to escalate Israel’s conflict with Hamas, any and all allies of Israel are at risk. And due to Iran’s provocation, crude oil prices continue to rise.
The Biden Administration has also provided up to $500 million in green energy aid to Ukraine, but despite National Security Advisor Jake Sullivan’s recent statement that climate change is an “existential threat” that may end all of humanity, I suspect that the more imminent threat of nuclear war in the Middle East poses a much bigger concern, especially as Iran continues its dangerously inflammatory rhetoric.
U.S. Economic News Was Led by Robust Retail Sales (But Downbeat Confidence)
Last Tuesday, the Commerce Department announced that retail sales rose 0.7% in September, while August’s retail sales were revised up to a 0.8% increase (from 0.6% previously reported). Vehicle sales surged 1% in September, the largest monthly gain in the past four months, and sales at bars and restaurants rose 0.94%, so clearly consumers were out and about last month, spending more money.
Oddly enough, the Conference Board reported that consumer confidence declined to 103 in September (from 108.7 in August), while the “present situation” confidence component rose to 147.1 (up from 146.7 in August), so the confidence decline revolves around expectations, which dropped sharply, to 73.7 in September (down from 83.3 in August). Clearly, consumers are spending now, based on the money in their pockets, versus their sour expectations. Frankly, it is up to President Biden and our elected leaders to improve the national mood, but…if consumer pessimism persists, President Biden will not be re-elected.
Naturally, there is a lot of added insecurity due to the threat of potential war escalation in the Middle East, political turmoil around the world, soaring interest rates, high energy prices, labor unrest and gobs of other uncertainties. Fortunately, since the U.S. is still a major energy exporter of over four million barrels per day of crude oil, refined products and natural gas (via LNG), the U.S. dollar remains strong, and the U.S. economy is not expected to slip into a recession any time soon. In fact, the Atlanta Fed recently raised its third-quarter GDP estimate up to a 5.4% annual pace, after the September retail sales report.
I mentioned on Bloomberg TV last Thursday, that record energy exports were boosting U.S. GDP growth.
A Bloomberg survey of economists estimated that U.S. GDP growth likely expanded at a 3.5% annual pace in the third quarter, not as high as the Atlanta Fed estimate, but higher than most other estimates.
I should add that China reported a lofty 4.9% annual GDP growth rate in the third quarter. Naturally, this mythical GDP growth rate – amidst plunging exports and imports – doesn’t really add up. Additionally, China’s youth (under 24) unemployment problem persists, and the fact that China is no longer reporting that statistic, tells us that the problem is likely worse. The bottom line is that China is likely exaggerating its GDP growth rate to support the Chinese yuan. I for one, no longer trust China’s GDP statistics.
U.S. unemployment will likely top 4% soon. Philadelphia Fed President, Patrick Harker, recently said that the unemployment rate may rise to 4.5% in 2024, up from 3.8% currently. Harker added that, “this does not mean that I expect mass layoffs.” He also cautioned that a 4% unemployment rate is what economists once called the “natural rate” that theoretically supports stable 2% inflation, which is the Fed’s inflation target. Finally, Harker told a business group in Delaware that, “I do see a steady disinflation under way, and I expect it to continue, with inflation dropping below 3% in 2024 and leveling out at our 2% target.”
Due to the anticipation of higher unemployment by Philly Fed President Harker (and likely by other Fed officials), I think it is safe to say that the Fed is done raising key interest rates for this cycle. However, if the unemployment rate rises due to the UAW strike and other disruptions, the Fed’s high interest rate policy will likely be blamed. Since the Fed does not want to be in the political spotlight, I anticipate key interest rates cuts in early 2024. However, Atlanta Fed President, Raphael Bostic, said on Friday that the Fed might not cut rates until late 2024. If so, the Biden Administration will likely be under pressure as unemployment rates rise, which is not ideal in an election year, so I think rate cuts will begin earlier.
Speaking of elections, right-wing parties in global elections continue to win leadership positions in Ecuador, Germany and New Zealand. Poland is the only exception, electing a centrist party. By far the biggest election news was in Argentina this past weekend, where Javier Milei, a libertarian candidate that looks like Elvis, earned a place in a run-off election with the incumbent, who has run inflation up to 140% on his watch. Milei is important because he wants to get rid of the Argentinean peso and peg Argentina’s currency to the U.S. dollar. The Argentina Central Bank recently raised its key interest rate to 133%, up from 118%, which is evidence that Argentina’s central bank has lost control of the Argentinean peso.
In other news, high interest rates are pushing mortgages up to nearly 8%, so the National Association of Realtors reported last Thursday that existing home sales declined 2% to a 3.96 million annual pace. In the past 12 months, existing home sales have declined 15.4% and are now running at the slowest pace in 13 years (since October 2010). There were 1.13 million homes for sale in September, down 8% from a year ago. At the current annual sales pace, there is only a 3.4-month inventory of new homes for sale.
Clearly, high mortgage rates are systematically restricting existing home sales. Also supporting this trend, building permits declined 4.4% in September to a 1.47 million annual pace. In the meantime, mortgage demand hit a 28-year low (since May 1995) in the latest week, as 30-year mortgage rates rose to 7.7%.
High Interest Rates are Squelching High-Priced EVs and Other Alternative Energy Sources
One more market that is being choked off by high interest rates is green energy projects, since most such projects are quite expensive and must be financed. Since interest rates are no longer near zero, the payback on new wind and solar projects is becoming increasingly uneconomic. Additionally, Arizona is following the California Public Utilities commission and curtailing solar electricity reimbursement that is sold back to the grid, which discourages solar panel installations. Furthermore, a big offshore wind turbine project in the Northeast has been postponed after six Northeastern governors asked the Biden Administration for aid, since offshore wind turbines are currently forecasted to be cost prohibitive.
High interest rates are also squelching electric vehicle (EV) sales. The Wall Street Journal recently published a great article entitled, “Automakers Have Big Hopes for EVs; Buyers Aren’t Cooperating.” The latest example that the Journal cited is that Ford is considering canceling a shift at the plant that builds the F-150 Lightening. In the third quarter, Ford’s EV sales plummeted by a whopping 48.5%!
Despite generous price cuts, EVs remain more expensive than internal combustion vehicles. I should add that Ford offered the UAW a 23% pay increase over four years and is now “at its limit” of the wage and benefit increases that it can offer. The expanded UAW strikes at Ford’s Chicago and Louisville plants will be a destroyer of at least 100,000 supplier jobs. Clearly, the negotiations with the UAW are at a crossroads.
In other EV news, Tesla confirmed on Wednesday that they missed analyst sales and earnings forecasts, after confirming that they are struggling to sell more vehicles, due largely to higher interest rates as well as lower operating margins due to price cuts. CEO Elon Musk confirmed that Tesla Cybertruck sales would commence in late November, but also signaled that Tesla’s ambitious truck will not be profitable for at least 18 months. Interestingly, Tesla has not confirmed the price of its Cybertruck, but I expect it to be high, because it is such an imposing vehicle. Overall, Musk seemed cautious on almost everything.
Bloomberg reported that 6.11% of subprime vehicle loans were at least 60-days delinquent in September, the highest delinquency rate since 1994 (when such data collection commenced). The previous high for delinquent subprime auto loans was 5.93% in January. Clearly, many Americans are struggling, despite what Fed Chairman Jerome Powell said at the New York Economic Club last Friday – that the U.S. is a “Very Resilient Economy.” Another example of America’s debt fragility is that 48% of Americans are incurring credit card debt to cover normal household expenses, led by 59% of millennials. Some other interesting indicators are that 6% of credit card holders believe they will never pay off their credit card debt and 29% max out their credit card every month. It is obvious many consumers are struggling with debt.
Regarding the UAW strike, Bill Ford on Monday urged the UAW to end their 32-day strike and reach a new agreement, warning of the growing impact to the automaker and the U.S. economy. Specifically, Ford said, “We can stop this now,” adding that, “I call on UAW colleagues … We need to come together to bring an end to this acrimonious round of talks.” Bill Ford made his appeal in a press conference at the automaker’s historic Rouge assembly plant near company headquarters in Dearborn, Michigan.
UAW President Shawn Fain replied with a statement warning Ford that the union could “close the Rouge” with a strike, and added, “If Ford wants to be the all-American auto company, they can pay all-American wages and benefits.” I think it is safe to conclude that the UAW strike may persist into early 2024.
GM announced it is delaying its electric pickup truck factory in Orion, Michigan “to better manage capital investment while aligning with evolving EV demand.” The slowing demand for EVs, especially EV pickup trucks, influenced GM. Ford has responded to this slumping EV demand for its pickups by making more hybrids. GM may want to follow this strategy, since EV sales in the heartland are weak.
And finally, Bloomberg reported last week that there is a lack of LNG to satisfy world demand in the longer-term transition to a green economy. This essentially means that LNG carriers, like Dorian (LPG) should be able to charge high day-rates for its ships. There is no doubt that burning natural gas is cleaner than burning coal, but global coal consumption continues to steadily rise, since emerging markets like China, India, Indonesia, Malaysia and Vietnam rely mostly on coal for cheap electricity generation.
Navellier & Associates owns Ford Motor Co. (F), and Dorian LPG Ltd. (LPG), and a few accounts own Tesla (TSLA), per client request in managed accounts. We do not own General Motors (GM). Louis Navellier and his family own Dorian LPG Ltd. (LPG) via a Navellier managed account. He does not own Ford Motor Co. (F), Tesla (TSLA), or General Motors (GM), personally.