by Louis Navellier

July 25, 2023

The dollar has fallen lately. Normally, a weak dollar fuels commodity price inflation, but deflationary forces are keeping commodities in check. As a result, several major banks, including Citigroup, JP Morgan Chase, and Morgan Stanley, have cut their China growth forecasts. Officially, China has a 5% GDP growth target, but how it can make that target when its exports are declining is questionable.

The Wall Street Journal reported that China’s economy only grew by 0.8% in the second quarter and over 20% of Chinese youth between 16 to 24 are out of work. Complicating matters further, Germany and the U.S. are systematically uncoupling from China, since it is no longer viewed as a reliable trading partner.

If China can find a way to get its “mojo” back, commodity prices could firm up, but deflationary forces persist for now, as China’s exports and imports are both sagging. One of the reasons why the cost of wholesale goods declined 4.4% in the past year, according to the June Producer Price Index (PPI), is that consumers are no longer buying as many goods, so imports from all the Asian manufacturers, including China, Japan, South Korea, and Vietnam, are declining, as The Wall Street Journal recently reported.

China’s exports plunged 12.4% in June, while its imports declined 6.8%, the biggest declines since just after the start of the pandemic in 2020. China’s exports to the U.S. declined a whopping 24% in June, while its exports to the EU dropped 13%. Germany has joined the U.S. in openly encouraging businesses to look for alternatives for China trade, even though Chinese EV sales to Europe and other markets rose.

In the midst of all these tensions, the Biden Administration dispatched John Kerry to China to attempt to revive climate negotiations. After Nancy Pelosi’s visit to Taiwan, China cut off any climate talks. Since China dominates the production of solar panels, lithium batteries, and electric vehicles (EVs), it profits from the green agenda, even though it is not following it, as it is still building coal-fired power plants.

John Kerry’s main goal was to convince China to transition away from coal for electricity generation, but China is a master of “kicking the can down the road” to 2050 or later. In this case, Xi Jinping refused to meet with Kerry but confirmed China would reach “peak emissions in 2030,” which is another way of saying they will increase their carbon emissions for at least seven more years, polluting the world’s (and their own) air, while still dominating the production of our solar panels, lithium batteries, and EVs,

Another interesting China visitor was 100-year-old Henry Kissinger, who met with China’s defense minister, Li Shangfu, in Beijing. According to Li, the two had a “friendly conversation.” Li quoted Kissinger as saying, “Neither the United States nor China can afford to treat the other as an adversary.”

About 52 years ago, Kissinger first paid a secret visit to Beijing that paved the way for Richard Nixon to visit China in early 1972 to normalize relations with Mao’s regime. Since then, Kissinger has repeatedly warned of “catastrophic” consequences if there were an armed conflict between the U.S. and China. Kudos to Henry Kissinger for making this trip, which cannot be easy for a 100-year-old person to make.

China imported 11.4 million barrels per day of crude oil in the first six months this year, which is 11.7% higher than a year ago. Interestingly, 2.13 million barrels per day of crude oil came from Russia and China has boosted its stockpile of crude oil to take advantage of cheaper Russian crude oil. So, due to China stockpiling crude oil and the tension in key crude oil shipping lanes, crude oil prices continue to meander steadily higher. Our energy stocks have been especially strong in the past few weeks. They have been aided by the tension in the Middle East as Iran continues to hijack ships. The U.S. Navy dispatched two amphibious warships and thousands of Marines to the Middle East to counter Iranian threats.

Update on the Situation in Russia vs. Ukraine and Europe

The bridge linking Russia to the Crimean Peninsula was attacked again, and Russia is blaming Ukrainian forces, which used naval drones to attack the bridge. This bridge collapse will hinder Russia supplying its troops in southern Ukraine. Previously, a dam break in Ukraine also cut Crimea off from its fresh water source. It is now becoming harder for Russia to supply Crimea, so its residents are becoming restless.

Russia announced last week that it is pulling out of the international agreement that allows Ukraine to export much of its Black Sea grain, which will raise concerns about global food supplies. Specifically, Russia said that it would rejoin this export agreement if Western nations allow Russia to export its own grain and fertilizers. Russia also seized operations of Carlsberg and Danone last week. (Carlsberg has eight breweries with 8,400 employees in Russia, while Danone is the largest dairy company in Russia.)

Spain held a general election on Sunday and results are close, but there is a good chance that Spain will follow Italy and swing to the populist right after five years under a left-wing government. Nationalism has become a big theme in the EU, as parties that promote their country’s traditions versus EU mandates are rising to power. Frustration over higher food and electricity prices remains acute in the EU, where green policies are increasingly being blamed for inflation. In the summer heat, Spanish utilities can control the thermostats in many homes, so this magnifies how the EU push to go green is making folks miserable.

According to the Office of National Statistics, the inflation rate in Britain decelerated to a 7.9% annual pace in June, down from 8.7% in May, and it is now at the lowest level in 15 months. The core inflation rate, excluding food and energy, declined to 6.9% and delivered the first monthly decline in five months. Since inflation came in better than economists had expected, hopes are rising that the Bank of England will stop raising key interest rates due to service prices cooling as well as market rates declining.

U.S. Economic Indicators Signal “No Recession in Sight”

Consumers can be fickle from month to month, but retail sales have risen for three straight months, so the U.S. economy continues to grow. The service economy is carrying the U.S. economy at the present time, since the manufacturing sector has sunk to its lowest level in the past three years after contracting for eight consecutive months, but putting all the numbers together, the Atlanta Fed continues to estimate second-quarter GDP coming in at a healthy +2.4% annual pace, due largely to consumer spending.

Last week, the Commerce Department announced that retail sales rose 0.2% in June, below the consensus expectation of a 0.5% rise, but in the same release, May retail sales were revised up to a 0.5% increase, up from 0.3% previously reported.  Online sales rose the most, up 1.9%, followed by furniture sales, up by an impressive 1.4%. Electronics & appliances posted an impressive 1.1% gain. Gas station sales dropped 1.4%, but that was due to falling gasoline prices, so that makes the 0.2% “headline number” misleading.

Last Wednesday, the Commerce Department also announced that single-family home starts declined 7% in June to 935,000 units after surging 18.7% to a revised annual pace of 1.005 million (up from 997,000 previously reported), but May was the highest level for single-family home starts since June 2022.

Also notable, building permits for single-family homes rose 2.2% in June to an annual pace of 922,000 units. The Wall Street Journal reported that many folks do not want to sell their single-family homes due to the low mortgage rates of the past few years, so home builders are effectively being forced to build more new homes, since the inventory of existing homes for sale remains abnormally low.

The National Association of Realtors on Thursday announced that existing home sales declined 3.3% in June to an annual pace of 4.16 million. In the past 12 months, existing home sales have declined by 18.9% to the slowest pace in 14 years (since 2009). There were 1.08 million homes for sale in June, which is 13.6% lower than in June 2022. That’s only a 3.1-month supply at the current sales pace.

The median home price in June was $410,200, the second highest ever recorded, so affordability remains an issue. For example, first-time home buyers fell to just 26% of all existing home sales in June, the lowest proportion ever recorded. As a result, housing price inflation seems to have revived lately.

A Looming UAW Strike Complicates Biden’s EV Mandate

It seems like the United Auto Workers (UAW) are gearing up to go on strike in the upcoming weeks. The timing is good for the UAW, since auto manufacturing plants are often retooled in August, plus there is a growing glut of vehicles on dealer lots, especially EVs. The UAW wants to get rid of a tiered wage system and have equal pay for all its workers. Furthermore, UAW President Shawn Fain said, “I think they’re doing layoffs under the guise of the EV transition.” Fain added that, “It’s shameful to me, because as I’ve said before, these companies talk about transition to EVs, and they talk about workers and call them family. I don’t know how their family works, but my family don’t roll that way.”

Interestingly, the UAW has not endorsed President Biden for re-election, since many UAW members expect to lose their jobs due to the transition to EVs. Obviously, this UAW dilemma may become a problem for President Biden, since he has been a pro-union President. However, as Tesla (a non-union company) becomes more dominant, while Ford loses EV market share after slipping from #2 to #5 in the U.S. in EV sales in the past year, this falling market share is making many UAW workers very nervous.

GM is now #3 in EV sales in the U.S. after Tesla and Hyundai/Kia, but GM will be shutting down its Bolt EV production at its Orion Assembly Plant in Michigan to start selling its Equinox EV that will be made in the San Luis Potosi plant in Mexico. Although the Orion Plant in Michigan will be retooled to start building the Chevy Silverado and GMC Sierra EVs, UAW workers remain uneasy as the inventory of EVs continues to rise. The fact that EVs are not profitable for the Big 3, especially Ford, if EVs succeed like President Biden wants, more EV manufacturing may be moved to Mexico, costing many UAW jobs.

Ford slashed the price of its F-150 Lightning by as much as 16.6% on some models last week to get ready to compete with the Tesla Cybertruck that, according to Elon Musk, is designed for the “zombie apocalypse.” Currently, there is an 88-day supply of the F-150 Lightning, so Ford has to discount these EVs to clear its existing inventory. Ford is very serious about electrification, and the F-150 Lightning should be its highest selling EV soon. It will be interesting to see when Ford will break even on EVs, since the F-150 is the best-selling truck in America, so I suspect the F-150 Lightning will eventually be profitable.

Tesla announced its second-quarter results on Wednesday and its sales, earnings, and operating margins were all impressive. However, Elon Musk cautioned investors that further price cuts may be necessary, despite price cuts of 14% to 28% this year on its EVs. Furthermore, Musk said that Tesla would scale back its production in the third quarter to update its factories. Finally, Musk said that Tesla is investing heavily in supercomputers to develop autonomous driving based on all the data that its cars collect.

Navellier & Associates owns Ford Motors (F) and Tesla (TSLA), per client request in managed accounts. We do not own Hyundai Motor Company Inc. (HYMTF), or General Motors (GM).  Louis Navellier does not own General Motors (GM), Ford Motor Co. (F), Tesla (TSLA), or Hyundai Motor Company Inc. (HYMTF), personally.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Please see important disclosures below.

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Louis Navellier

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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