10-25-22: Don’t Just Complain About Higher Prices – Invest with Inflation in Mind

by Louis Navellier

October 25, 2022

Jim Cramer used his popular television show to advise investors to sell into earnings strength right before earnings season started, just a day after the market bottomed out on October 13. He said he is worried by inflation impacting bonds, oil, and the dollar. But there are ways to profit from inflation without selling stocks. My advice to Cramer (and any who follow him) is that we can’t prevent government or the Fed from implementing inflationary policies, so we might as well get used to inflation and learn to profit from it, by (1) investing in a wide array of good energy stocks; (2) investing in stocks like Sociedad Quimica y Minera De Chile S.A. (SQM) to profit from high lithium prices, (3) investing in fertilizer and agriculture stocks to profit from high food prices, and (4) investing in clean energy, too, including natural gas!

If, like Cramer, you are worried about inflation and want to flee the stock market, then you might as well resolve to be out of the stock market for years, if not decades, since inflation could persist until common sense returns to our elected leaders. Even if we have a Congressional leadership change in November, any huge policy change will take time. This election won’t quickly fix everything that is wrong. It may merely cause gridlock, so the EV revolution is likely to persist, as these green incentives will not disappear soon.

Sometimes we cannot see the forest through the trees. The simple fact of the matter is that when inflation surfaces, we have to learn to live with it and also profit from it. Not only can we buy shares of fossil fuel companies to profit from high energy prices, we can also own many other stocks profiting from inflation, like many food and fertilizer companies. We can also ignore the clamor to buy ESG stocks in their place.

This is a good time to remind you that I am originally from Berkeley, California, growing up there in the late 1960s and 1970s, so I have been thoroughly indoctrinated in these social investing trends, long before ESG was invented. The simple fact of the matter is that ESG was hijacked to “pump and dump” IPOs like Rivian and Lucid Group last year. Each was briefly worth more than Ford or GM after their IPOs.

Berkeley led the way in banning natural gas, which has expanded recently to a new requirement that all natural gas appliances in California (i.e., water heaters, pool heaters, dryers, etc.) must now be replaced by electric appliances. My family was lucky to replace a natural gas water heater in our Solano Beach home last year, which would have had to be replaced by an electric water heater this year. These arcane rules to eliminate natural gas appliances to “save the planet” and “reduce the carbon footprint” are grossly misguided, since natural gas is a very clean and efficient fuel, even though it is labeled a “fossil fuel.”

Europe is leading the world’s “green revolution,” but they never strived to systematically ban natural gas like Berkeley and the rest of California have tried to do. The truth of the matter is that if this misguided form of a “green revolution” persists, it will be very inflationary for decades to come, since it is replacing efficient fossil fuels with less efficient alternatives. A good example is how California handed out lucrative incentives to refiners to produce green diesel from organic animal waste, so suddenly the refiners’ diesel output declined by 400,000 barrels per day, which in turn sent trucking and transportation costs soaring in the past year. This naturally triggered inflation in food and other goods! Again, the green revolution is inflationary and will be for decades if these green policies continue to be implemented.

So in the end, you can profit from inflation or you can let it ruin your life and make you as depressed as Jim Cramer and other talking TV heads. I am choosing to be happy. Frankly, I hope Jim Cramer can cheer up and feel better after the elections.

Speaking of the elections, the big news last week was that President Joe Biden was supposed to address the nation to announce another big release from the Strategic Petroleum Reserve (SPR) that will persist through December in a desperate attempt to manipulate crude oil prices lower, just ahead of the mid-term elections. Representatives of the Biden Administration have also signaled that they will start refilling the SPR when crude oil hits $70 per barrel. The reaction on Bloomberg TV was: “Since when did the Biden Administration decide to get into the commodity trading business and set a floor on crude oil prices?”

The truth of the matter is that the Biden Administration is running out of ways to manipulate crude oil prices as they drain the SPR to 1980 levels. Energy markets like to look ahead, and we can now expect higher crude oil prices, due to (1) strong seasonal demand in the spring, (2) Europe will seek ways to shore up its 2023 energy supplies, and (3) we should see a resurgence in China as well as other major economies, which will put more upward pressure on crude oil demand. As a result, I do not expect that crude oil will hit $70, so the SPR will remain depleted due to the Biden Administration’s political moves.

Amidst all this uncertainty, the only thing that is certain is companies that continue to boost underlying earnings and lead the market higher, so this is a good time to remind you that the strongest results tend to be announced early. So far, companies in the S&P 500 that have announced sales have sales that are 1.1% higher than analyst estimates and earnings that are a phenomenal 5.7% higher than analysts’ estimates.

Former flagship Netflix resurged on new subscribers and positive guidance. Another former flagship, Tesla, posted strong third-quarter earnings results, but Tesla’s third-quarter sales were slightly below expectations and its fourth-quarter sales will miss previous optimistic forecasts. This caused CEO Elon Musk to intervene and promise a very strong fourth quarter, but Musk’s influence seems to be waning as the current leadership of the stock market remains in disarray. Frankly, I am looking forward to how the stock market will respond to record third-quarter results of energy stocks in the upcoming weeks!

The Latest Developments in Russia and China

In the wake of the OPEC+ crude oil production cuts, Europe apparently figured out that they cannot fully break away from Russian crude oil. As a result, the U.S. and its European allies are striving to come to an agreement on a price cap on Russian crude oil, so while OPEC+ (including Russia) imposes production quotas, the G7 and Australia are trying to implement a plan by December 5^th that would bar the financing, insurance and shipping of Russian crude oil, unless it is sold before a set price limit. In the meantime, Russia is happy to sell its crude oil to India, Saudi Arabia, the UAE, and other countries that can then refine that oil to sell “non-Russian” products (like diesel, heating oil, jet fuel, gasoline, etc.) to circumvent restrictions on Russian crude oil. As a result, I expect most attempts to limit Russian crude oil to fail.

Many G7 members are also in a proxy war by arming Ukraine in their fight against Russia’s invasion. Since Russia recently ramped up its attacks on major Ukrainian cities after a bridge to Crimea was blown up, the G7 risks being drawn into a long, drawn-out proxy war. If Vladimir Putin shows up at the G20 meeting in Indonesia in mid-November, it will be fascinating to see how other countries react to him.

At least with China, the U.S. is only in an economic war – for now. Chinese President Xi Pinging is in the midst of being reappointed for an unpresented third 5-year term after his campaign of anticorruption purges effectively suppressed any potential challenger. The Biden Administration is now actively trying to suppress Chinese semiconductor manufacturing and refused to eliminate any Trump Administration tariff against Chinese products. The bottom line is that the Biden Administration is actively involved in an economic war with China as well as a proxy war with Russia, by being closely aligned with Ukraine.

While Chinese officials meet to select Xi and other leaders, all Chinese trade figures and third-quarter GDP announcements were abruptly delayed during the Communist Party Conference. China’s statistics bureau did not provide a reason for the delay, but it is widely believed that they do not want to interfere with President Xi’s quest for a third 5-year term. Additionally, other economic reports from China, like retail sales, property sales, and fixed asset investment, were marked as “delayed” on the website of China’s National Bureau of Statistics. There is no doubt the Covid Zero lockdowns in major provinces to suppress the opposition to Chinese President Xi has likely restricted China’s third-quarter GDP growth.

President Xi has always been suspicious of free market reforms and has instead preferred state-owned enterprises (SOEs) that have become stronger in recent years. Looking forward into his third 5-year term, President Xi wants China to become more self-sufficient, especially in science and technology. China is a world leader in surveillance and artificial intelligence (AI), as well as electric vehicles (EVs). The biggest problem for China moving forward, other than the trade war with the U.S., pertains to productivity, since its state-owned enterprises are not as productive as its private sector.

Britain’s PM Liz Truss Quits After 44 Days

New British Chancellor of the Exchequer (Treasury minister) Jeremy Hunt proposed reversing most of Prime Minister Liz Truss’ proposed tax cuts and also pared back an energy price cap to calm nervous financial markets that caused gilt (bond) yields to soar, undermining the British pound. The Bank of England intervened last week to shore up British bond yields to stem a “fire sale” by British pension funds. It will be interesting to see if the Bank of England will have to intervene again, but Hunt did what the market wanted. In my opinion, Prime Minister Truss did the right thing to provide energy price relief and stimulate the British economy, but unfortunately, the British bond market disagreed, and she was not able to deliver on the mandate she was elected to implement, so she resigned last Thursday after 44 days.

Obviously, Truss’ Conservative Party is in chaos, and they do not want to declare a new election, since the Labor Party would likely crush them after all this chaos. At the heart of Britain’s immediate problem is that many citizens cannot pay their electric bills. Truss wanted to approve of fracking to boost domestic energy production, but she ran into massive opposition. It is very hard to manage any economy without reasonable energy costs, so the chaos in Britain is expected to persist, until electricity costs decline.

I should add that France is facing massive labor strikes and protests over electricity costs and workers are demanding higher wages. The drought curtailed France’s nuclear industry as river levels dropped, so France became an energy importer, when it has been traditionally an energy exporter. France’s national grid operator warned that prolonged strikes have delayed restarting some nuclear reactors, and that could have “heavy consequences” this winter. Train service has been curtailed due to strikes and gasoline/diesel shortages are growing due to strikes at refineries. These protests are being led by the opposition party to French President Emmanuel Macron, and any resolution to France’s national strikes may be weeks away.

Like Britain’s debt woes, the U.S. budget deficit is also weighing on Treasury bond yields, despite record tax revenue and employment. However, the U.S. Treasury market is much larger than the British bond market and is aided by a strong U.S. dollar that should attract foreign capital. But beware: The British have showed the world that there is a limit to how much a government can effectively borrow. There is no doubt that the era of Modern Monetary Theory (MMT), which is unlimited money printing, has made bond investors skeptical, and that is why many currencies and government bond yields are under siege.

In America, New England relies on natural gas to generate electricity and heat homes, but now that U.S. utilities have to compete with Europe for LNG supplies, a severe cold front this winter could strain the electric grid and result in rolling blackouts. Specifically, electricity producers in New England have limited natural gas storage, since most natural gas pipelines are reserved by gas utilities, so electricity producers in New England must buy via spot prices and compete with Europe, so prices are rising.

As a result of rising prices, the governors of the New England states sent a letter to U.S. Energy Secretary Jennifer Granholm citing high natural gas prices as a reason to waive the Jones Act and allow for domestic LNG imports to the region. These governors also requested more coordination with the federal government to ensure energy reliability and modernize New England’s heating-oil reserves.

Pay No Attention to Quarterly GDP Numbers in 2022 – It’s All Artificial

It has been a strange year for measuring the Gross Domestic Product (GDP), with the first two quarters of 2022 being negative for technical reasons, and now the third quarter looks positive for equally artificial reasons. The Atlanta Fed currently estimates third-quarter GDP growth at an annual pace of 2.9%, with 2.2% of that growth due to an improving trade deficit due to the SPR release and exports of refined petroleum products. Since President Biden is continuing the SPR release through December, the U.S. trade deficit is expected to continue to improve, so U.S. GDP is being artificially boosted by this draining of the SPR in the second half, so we have slow growth all year long but widely different GDP numbers.

The other statistics reflect slower growth. On Wednesday, the Commerce Department announced that new housing starts in September declined 8.1% to an annual pace of 1.439 million, which was below economists’ consensus estimate of a 1.475 million annual pace. Multi-family homes were hit the hardest and declined 13%, while single-family home starts slipped 4.7% in September to an 870,000 annual pace. In the last 12 months, housing starts have declined 7.7%. Although high mortgage rates have impeded housing starts, building permits surprisingly rose 1.4% in September to a 1.564 million annual pace.

On Thursday, the National Association of Homebuilders announced that existing home sales declined 1.5% in September to an annual pace of 4.71 million. This represents the eighth straight monthly sales decline. In the past 12 months, existing home sales have declined by 23.8%. The inventory of existing homes for sale also continues to decline, as many homes are being removed from the market, so there are now 1.25 million homes for sale, a relatively tight 3.2-month supply. The median home price declined in September to $384,800, which marked the third straight monthly decline. Overall, the housing market is cooling off due to high mortgage rates, but tight inventories may limit just how much home prices drop.

Also on Thursday, the Labor Department announced that weekly unemployment claims declined to 214,000 in the latest week, down from a revised 226,000 in the previous week. Continuing unemployment claims in the latest week rose to 1.385 million compared to a revised 1.364 million in the previous week.

The most important release was the new Beige Book survey on Wednesday, since it influences the Fed’s upcoming Federal Open Market Committee (FOMC) policy meeting on November 1 & 2. The Beige Book survey noted that businesses have “growing concerns about weakening demand.” Furthermore, the Beige Book survey reported that all 12 Fed districts reported declining activity, citing “slowing or weak demand attributed to higher interest rates, inflation, and supply disruptions.” These comments indicate that the Fed may stop raising rates after its December FOMC meeting. The 10-year Treasury bond now yields over 4.3%, so two 0.75% rate hikes at its upcoming November and December meetings are likely.

On Thursday, Philadelphia Fed President Patrick Hawker said, “We are going to keep raising rates for a while,” adding that, “Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4% by the end of the year.” In other words, the Federal Funds rate will likely be at 4.5% after the December FOMC meeting, up from 3% currently. Hawker then confirmed that that the Fed would keep rates high for an extended period, saying, “Sometime next year, we are going to stop hiking rates. At that point, I think we should hold at a restrictive rate for a while to let monetary policy do its work.” Hawker thereby provided the clearest vision of current Fed policy – without any double talk.

Navellier & Associates owns Sociedad Quimica y Minera de Chile (SQM), a few clients, own Tesla (per request) and Netflix Inc. (NFLX) in managed accounts. We do not own Lucid Group (LCID), General Motors (GM), or Rivian Automotive (RIVN) in managed accounts. Louis Navellier and his family personally own Sociedad Quimica y Minera de Chile (SQM), via Navellier managed accounts and Netflix Inc. (NFLX) in a personal account. They do not own Tesla (TSLA), Lucid Group (LCID), General Motors (GM), or Rivian Automotive (RIVN) personally.