by Louis Navellier

August 22, 2023

The Fed’s latest minutes referred to “two-sided” arguments between “overtightening of policy against the cost of an insufficient tightening.” Chairman Powell keeps reassuring us that the Fed is “data dependent,” but what do they do if some data is unclear or even flawed? I have often discussed the conflict between the ADP jobs data and the Labor Department’s “seasonally adjusted” jobs data. In recent months, ADP has reported massive manufacturing job losses, while the Labor Department has minimized that problem.

Obviously, some of the economic data the FOMC is monitoring is masking the manufacturing recession that may get even worse if the UAW strikes. That’s why I think the FOMC should listen to the doves and hold its key interest rates steady until the economic and inflationary outlook becomes clearer to them.

Another confusing indicator is the Atlanta Fed’s GDPNow model, which currently estimates 5.8% annual third-quarter GDP growth. This provides an example of how numbers can confuse rather than clarify the situation. Industrial production surged 1% in July but that was largely due a 5.4% surge in utility bills for air conditioning caused by the July heat wave for much of the U.S. Vehicle production and auto parts also rose 5.2% in July, but much of that was in anticipation of a UAW strike, as the UAW is surveying its members in preparation for a strike, so the auto manufacturing sector stepped up its production in July.

Retail sales were also robust in July, but you need to examine the details there, too. On Tuesday, the Commerce Department announced that retail sales rose 0.7% (month-over-month) in July, which was substantially higher than the economists’ consensus expectation of a 0.4% increase and the fourth straight month that retail sales have risen. On-line sales surged 1.86% in July, led by Amazon’s Prime Day. Spending at bars & restaurants rose 1.41%. However, consumers were not spending much on big ticket items, as auto sales declined 0.29% in July, furniture sales dropped 1.77%, and electronics & appliance sales fell 1.26%. Consumers were spending freely on the “small stuff,” but avoiding larger purchases.

Speaking of big-ticket items, real estate is the biggest investment that most families will make, and the National Association of Home Builders on Tuesday announced that home builder confidence declined to 50 in August, down from a 13-month high of 56 in July. Prospective buyer traffic declined to 34 in August, down from 40 in July. The bottom line is the surge in Treasury bond yields has caused mortgage rates to spike to the highest level in 20 years, which is clearly undermining real estate sales volume.

New homes are being built, mostly because existing homeowners do not want to sell the homes they bought at lower mortgage rates. Housing starts rose 3.9% in July to an annual pace of 1.452 million and are now up 7% year to date, despite higher mortgage rates. Single family housing starts are even stronger, rising 6.7% in July to a 983,000 annual pace. Single family housing permits have risen every month this year, most recently +0.7% in July (930,000 annual pace) and +24.3% year to date. The fact that Berkshire Hathaway recently disclosed that it owns multiple homebuilders helped lift many homebuilding stocks.

America May Have Its Problems – But We’re Still the Global Oasis

We often read about America’s challenges, but if we look clearly at the situation in any other major nations, we can be thankful we live and invest mainly in America. China is currently facing deflation and a likely recession. Although China’s GDP apparently rose 0.8% in the second quarter, the Chinese economy may be contracting in the current quarter, as China’s GDP forecasts are being slashed by many independent economists. To spur the economy, the Bank or China on Tuesday cut its key short-term interest rate by 0.1% to 2.65%, while its 1-year medium lending rate was cut by 0.15% to 2.5%.

Last Tuesday, The Wall Street Journal reported that China is suppressing key economic data to mask its problems. For example, China is suspending all data on youth unemployment. Chinese authorities have also made it more difficult for foreign institutions to access economic and financial data in recent months.

Chinese authorities have stepped up their efforts in the last week to bolster financial markets and the yuan. Specifically, China’s mainline exchanges asked some investment funds to avoid selling equities. Furthermore, state-owned banks were told to escalate their intervention to support the yuan. Chinese officials also encouraged companies on the tech-heavy Star Board to buy back their own shares.

A Friday Wall Street Journal article (“Investors Fear China’s ‘Lehman Moment’ is Looming”) discussed the risk of financial contagion from its slumping property sector. Clearly, Chinese officials are rattled by their dismal economic data, deflation fears, a weak housing market, a crisis in the shadow lending sector, and a foreign exodus. I suspect that any intervention will be futile, since it only undermines confidence.

Japan is finally recovering, after three dormant decades. Japan is now the third largest economy in the world, behind only the U.S. and China, recently surpassing Germany, as Germany has stalled and Japan has started to revive. That’s partly because Japan has been a big beneficiary of China’s woes, reporting last Tuesday that its GDP surged 1.5% (a 6% annual pace) in the second quarter. Japanese exports rose 3.2% in the second quarter (vs. the first quarter) and Subaru’s global car sales rose 20% last quarter.

Although global export demand remains strong, Japan’s two largest trading partners, namely China and the U.S., are importing less from Japan. The real key to Japan’s export boom is sales in the emerging market economies, which bodes well for worldwide GDP growth. Since Japan is an aging society, its domestic demand remains weak, as private consumption declined 0.5% in the second quarter. Also notable, Japan’s imports declined 4.3% in the second quarter compared to the first quarter.

Inflation in Russia has been averaging a 7.6% annual pace in the past three months, and the Russian ruble has been very weak lately, even after declining 27% so far this year. The ruble recently fell below 100 to the U.S. dollar, its lowest level in 17 months. As a result, the Bank of Russia held an emergency meeting last Tuesday to increase its key interest rate by 3.5% to 12%. The central bank reported that Russia’s crude oil and natural gas exports declined to $6.9 billion in July, down sharply from $16.8 billion in July 2022. Clearly the invasion of Ukraine is having dire economic consequences for Russia. Due to a weak ruble, the cost of imported goods naturally rises, and the standard of living in Russia continues to decay.

Fortunately for the rest of the world, Canada and other nations were able to offset Ukraine’s lost wheat production last year. This year is abnormally dry, so the worldwide production of corn, soybeans, and wheat is down substantially. Food inflation is a growing problem, especially in poor nations that traditionally relied on Ukrainian crops. With the Baltic Sea transportation now curtailed as Russia tries to intimidate cargo ships after firing a warning shot, Ukraine is trying to sell its crops to its neighbors, but even Poland does not want Ukrainian wheat, because it wants to protect its domestic wheat production.

As a result, the West must decide how long it wants to tolerate higher food and energy prices due to the fighting between Russia and Ukraine. Both countries, and now much of the rest of the world, are suffering, so it will be interesting to see if a cease fire will ensue in the upcoming months. In the meantime, we can continue to profit from acute commodity shortages, especially in the energy sector.

As long as crude oil inventories remain low, it will be safe to continue to hold many refineries and integrated oil companies. The Energy Information Association on Wednesday announced that crude oil inventories plunged 5.96 million barrels in the latest week. Gasoline inventories declined by 261,000 barrels, while distillate (i.e., diesel, heating oil, and jet fuel) stockpiles rose by 296,000 barrels. Right now, the world is ignoring the economic collapse in China and focusing on the economic recovery in the West.

Although it is very dangerous for me to venture into U.S. politics, I think the next President could be the person that calls for diverting the next installment of $20 billion in aid to Ukraine to Maui to rebuild after the devastating fires in Lahaina. The news that Ukraine’s regional army chiefs were buying villas and luxury cars in Spain means that some aid to Ukraine may have been diverted. President Volodymer Zelensky recently fired Ukraine’s regional military recruitment chiefs after it was revealed that some got rich helping eligible military-age men flee the country to avoid military service. Clearly, the West is growing tired of the war between Russia and Ukraine, which is at a stalemate, where everyone is losing.

Navellier & Associates owns Amazon (AMZN) in some managed accounts.  Louis Navellier and his family own Amazon (AMZN) in a personal account.

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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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