by Louis Navellier
February 15, 2022
Amidst all the international distractions and economic disruptions going on, the Fed is holding a special closed-door meeting Monday. I expect that the Fed will say that raising key interest rates amidst rising energy prices due to the Russia/Ukraine situation, plus the economic disruptions from the Canadian trucker blockade, may be unwarranted. Essentially, the Fed may get in sync with the European Central Bank (ECB) and hold key interest rates at 0% until international tensions dissipate. Of course, I could also be wrong, and the Fed could decide to hike key interest rates immediately, but I think that is less likely.
Meanwhile, the ECB said that they were “unanimously concerned” about inflation, but ECB President Christine Lagarde in her press conference said that the Governing Council expects inflation to fall back to its 2% target. In my opinion, Ms. Lagarde is delusional. She and the ECB cited geopolitical tensions with Russia/Ukraine as one reason that the ECB decided to leave key interest rates unchanged at 0%, but the problem with this analysis is that longer-term interest rates are now rising in both Europe and the U.S., so market forces are clearly forcing central bankers’ hands, taking certain key decisions out of their hands.
My favorite economist, Ed Yardeni, on his weekly Zoom call to his clients, said that if he were running the Fed, he would just raise the federal funds rate a full point to 1% and then say that “this is it for the year!”
Last Thursday, St. Louis Fed President James Bullard must have channeled his “inner Ed Yardeni,” since he said he wants to see a full 1% interest rate hike by July 1st after inflation data made him “dramatically” more hawkish. However, the Fed officially rebuked Bullard’s comments by saying that a 0.5% interest rate hike or an emergency move was not being considered at its special closed-door meeting on Monday.
Naturally, the real problem that both Europe and the U.S. face (with the possible exception of Germany) is their rapidly rising government debt as a percent of GDP. Government debt is so large that central banks do not want to raise rates too high. For example, in the U.S., the federal government’s total debt now exceeds $30 trillion. Even with today’s ultra-low rates, the debt service now exceeds the Defense Department’s annual budget. If rates grew by just 1%, that would increase debt service by $300 billion.
So, the $64,000 question is this: Will continental Europe or the U.S. be forced to devalue their respective currencies due to this wild experiment with Modern Monetary Theory (MMT), a scheme that involves seemingly unlimited money printing? My best answer is no. I expect that the ECB and the Fed will merely follow Japan and keep interest rates artificially low relative to inflation. As a result, real estate and stocks should remain an oasis for investors, since they are traditionally great inflation hedges.
Foreign Conflicts Offer Great “Political Cover” for Rapidly Rising Inflation
Last week could be remembered mostly as the week when inflation finally spun out of control.
The big shock arrived last Thursday, when the Consumer Price Index (CPI) for January came in at +0.6%, well above the economists’ consensus expectation of a 0.4% rise. The core CPI, excluding food and energy, also rose 0.6% in January. In the past 12 months, the CPI and core CPI are running at an annual pace of 7.5% and 6.0%, respectively. Consumer inflation is now running at the highest 12-month rate in the past 40 years. Electricity prices soared 4.2% in January! Used vehicle prices rose 1.5% in January and have surged 40.5% in the past 12 months, due in part to the ongoing semiconductor chip shortage. In addition, gasoline prices have risen by 39.9% in the past 12 months, so inflation persists on the consumer level and is not expected to abate until at least the second half of 2022, when supply shortages may diminish.
To take our eyes off this inflation, the Biden Administration has shifted its focus to international matters, such as the Russia/Ukrainian situation, the recent assassination of an ISIS leader in Syria, and Canada’s trucker blockade, so the news media is not talking about the domestic issues that aggravate American consumers. However, $5 per gallon for premium gasoline in California is newsworthy, and it cannot be ignored by the news media for too long, so after the Olympics and Super Bowl are over, I expect that the news media will resume talking about prices at the pump, since they are aggravating so many consumers.
It is important to note that crude oil prices typically rise every spring. In addition, these new geopolitical tensions are also putting upward pressure on crude oil prices. Russia has tried to “sanction proof” its economy, since it is actually being economically rewarded for assembling troops on the Ukrainian border.
I hate to say it, but $100 per barrel crude oil and $5 per gallon gasoline is likely coming soon.
The stock market continued to celebrate better-than-expected sales and earnings announcements. Another reason why Wall Street is suddenly optimistic is that mask mandates are being lifted in most states, which should help stimulate economic growth, since folks will be more likely to get “out and about.” Naturally, if we get out more, which we naturally do in the Spring as the weather improves, prosperity should rise!
Due to strong U.S. economic growth in the fourth quarter, worldwide GDP growth did not stall too much. Unfortunately, according to the Atlanta Fed, U.S. economic growth has slowed dramatically in early 2022, since they are now only estimating 0.7% annual first-quarter GDP growth (up from 0.1% previously estimated), which is a stunning deceleration from 6.9% annual GDP growth in the fourth quarter. There is no doubt that U.S. consumers are now in shock over soaring energy prices as well as higher food prices.
Ford announced last week that it had to cut production of its two most popular trucks, the Bronco and F-150, due to an ongoing semiconductor chip shortage. Its other vehicles, including the popular Mustang Mach-e, are also impacted by rising production cuts. Ford faces a bit of a conundrum with the Mustang Mach-e, since it requires approximately double the semiconductor chips of Ford’s average internal combustion engine. Oddly, GM says that it now has enough semiconductor chips, but Ford does not.
The other economic news last week was positive. The Labor Department on Thursday announced that new weekly unemployment claims came in at 223,000, down from a revised 239,000 in the previous week. Continuing unemployment claims came in at 1.621 million, which was identical to a revised 1.621 million in the previous week. Overall, weekly unemployment claims were better than the economists’ consensus expectation of 230,000, but continuing claims were higher than the consensus expectation of 1.615 million. These numbers will be revised, but the trend bodes well for a low unemployment rate.
Navellier & Associates owns Ford (F), in managed accounts but does not own General Motors (GM). Louis Navellier and his family personally own Ford (F), via a Navellier managed account. He does not personally own General Motors (GM).