Inflation Remains Too High Despite Decreasing from Its Peak

In his podcast addressing the markets today, Louis Navellier offered the following commentary.

Fussy Economic Data

The statement in Fed Chairman Jerome Powell’s Jackson Hole speech that is getting the most attention is “Navigating by the Stars Under Cloudy Skies.” Clearly, Chairman Powell must like sailing and the history of navigation. Ironically, the sky in Jackson Hole is crystal clear and magnificent, where you can see the Milky Way and the stars almost every night.

What Chairman Powell is referring to is that the economic data is fussy, which I agree with. This week we hope to get some clarity on payroll growth, since ADP and the Labor Department have been far apart in the past couple of months, especially on manufacturing jobs.

In addition to announcing the August payroll report, the Labor Department is also expected to dramatically reduce overall U.S. payroll growth in the past 12 months. This big payroll revision is anticipated to finally fix the bogus seasonal adjustments (like in January) as well as overstated manufacturing jobs (like in June and July) relative to ADP. This is why I do not trust the monthly payroll reports from the Labor Department since there are simply too many seasonal “fudge” factors.

Inflation Remains Too High

Fed Chairman Jerome Powell in Jackson Hole said “Although inflation had moved down from its peak … a welcome development … it remains too high.” Powell added that, “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving substantially down toward our objective.”

Translated from Fedspeak, Powell basically is not planning on hiking key interest rates, but instead will be waiting for inflation to meander lower to the Fed’s 2% inflation target before cutting key interest rates.

This was a dovish speech in my opinion, and I stand by my prediction that the Federal Open Market Committee (FOMC) will likely commence cutting key interest rates at its December meeting since I believe the annual core rate of inflation will be under 2% later this year. The Wall Street Journal’s Heard on the Street column also featured an article entitled “Despite What Powell Says, the Fed is Likely Done.”

We will also get clarification this week from the Institute of Supply Management (ISM) on manufacturing which has contracted for several months. The manufacturing recession and related job losses according to ADP are running counter to the “Bidenononics” message emanating from the White House.

So far, the Biden Administration’s onshoring efforts have failed to create new jobs, since manufacturing employment has been falling. Furthermore, the Biden Administration has been losing support among working-class voters and Hispanics, who continue to worry about economic issues, like the higher cost of living.

Rising Cost Of Living

Speaking about the cost of living, I should add that gasoline prices are now at their highest level this year, which is annoying inflation-wary Americans. The fact that inventories remain low for crude oil and refined products is facilitating the high prices at the pump. Typically, peak summer demand ebbs after Labor Day, so it will be interesting if there is any meaningful relief in the upcoming weeks.

However, when the refineries shift from summer fuels to “oxygenated” winter fuels, gasoline inventories typically decline and gasoline prices all too often surge higher, so any price relief may be temporary.

Senator Bernie Sanders is mad at the Biden Administration for losing working-class voters and Hispanics that are worried about inflation and wages, so he recently gave an economic policy speech in New Hampshire, which is the first primary state. Complicating matters further, Robert F. Kennedy, Jr. is saying that President Biden is taking South Carolina for granted and trying to stage an upset in an early primary state.

The Biden Administration, especially Vice President Kamala Harris, is reportedly furious that California Governor Gavin Newsom is proceeding with plans to debate Florida Governor Ron DeSantis in what is widely expected to be a high-rated televised debate.

A Major Change Is Coming

I am not a political expert, but the unrest with working folks and union workers is not good for the Biden Administration. I suspect that a major change coming since it will be hard for Joe Biden to compete when other candidates have much more energy. When a big Democratic state is unhappy, namely Hawaii, after Maui suffered a Pompei-scale disaster, it will be interesting what the political repercussions will be.

The biggest example of worker unrest is the United Auto Workers (UAW), where 97% of its workers voted to authorize a strike after September 14th. UAW President Shawn Fain in a statement said “Our union’s membership is clearly fed up with living paycheck-to-paycheck while the corporate elite and billionaire class continue to make out like bandits.” Fain added, “Our members’ expectations are high because Big Three profits are so high. The Big Three made a combined $21 billion in profits in just the first six months of this year.”

The UAW is also worried about job security since Ford and GM have moved its mass-market EV production to Mexico. Furthermore, Stellantis is openly talking about moving its Ram 1500 trucks to Mexico from suburban Detroit to reduce costs, otherwise, automakers have to raise prices on gas-powered vehicles to compensate for their growing EV losses.

One reason that the UAW has not endorsed Joe Biden for his Presidential re-election, is they are worried about their job security, due to the fact that EVs have 70% fewer parts and are increasingly being outsourced to Mexico.

The U.S. Is Providing China With Mixed Messages

Commerce Secretary Gina Raimondo is in Beijing on a quest to boost business and tourism ties. Despite China bashing by the Biden Administration that has resulted in advanced semiconductor restrictions, a ban on American investment in China’s critical tech industries, and higher tariffs, Secretary Raimondo is the fourth official from the Biden Administration to visit China this year in an attempt to not “decouple” from the Chinese economy.

Obviously, the Biden Administration needs China to make an EV transition, since they dominate battery production and raw materials. Secretary Raimondo said “The U.S. and China share a large, dynamic, growing economic relationship, one of the largest trade relationships in the world” and added that “Both of our countries, in fact the entire world, need us to manage that relationship responsibly.”

In the past, Secretary Raimondo has talked about the many challenges to doing business in China due to “unfair trade practices.” Obviously, the U.S. is providing China with mixed messages, so not a lot of progress is anticipated.

In the meantime, the collapse in Chinese exports and imports are now impacting other economies. As an example, Japan reported its first drop in exports in more than two years after China cut back on importing vehicles and semiconductor chips. The central banks in South Korea and Thailand both lowered their GDP forecasts due to a weak Chinese economy. Africa also has been hit especially hard by falling Chinese imports.

Finally, Germany’s ifo Institute’s sentiment gauge declined to 85.7 in August, down from 87.4 in July. In a statement, Germany’s Economy Minister, Robert Habeck, said “The restrictive interest rate environment and the weak global economy — especially the development in China — make it difficult for us as an export nation.” ifo’s Klaus Wohlrabe said on Bloomberg TV that the institute expects German output to hover around the “zero growth line.”

Food And Energy Crisis

In the U.S., we are blessed to be food and energy-independent. However, for much of the rest of the world, many countries have to import food and energy. Russia has successfully disrupted Ukraine’s exports of corn, sunflower oil and wheat, so acute food shortages are anticipated in the sub-Sahara and other countries that traditionally import food staples from Ukraine.

Last year there was an ideal growing season, so Canada and other nations helped offset Ukraine’s falling agriculture output, but this year there has been droughts in the Midwest, South American and much of Europe, so food costs are rising outside of the U.S. Energy prices also remain stubbornly high due to sanctions on Russia and well as a Saudi Arabia production cut, but central bankers know that there is little they can do to offset rising energy costs. The bottom line is the U.S. is in much better shape that the rest of the world and remains an oasis.

I think it is safe to say that change is coming. The most positive, energetic Presidential candidates are breaking out. Specifically, Robert F. Kennedy, Jr. and Vivek Ramaswamy are upstarts that are getting a lot of voter and media attention.

Elon Musk is calling for Vivek Ramaswamy to be the Vice President on the Republican ticket. Although Joe Biden and Donald Trump are leading the polls, clearly they will be facing some major obstacles. Usually, the candidates that are the most inspirational attract the most attention and prevail.

In summary, the Fed will be cutting key interest rates in December and in early 2024. The deflation from China is spreading and just like it resulted in EV price cuts, it may soon impact other goods. Although the Ukraine/Russia war remains a wildcard, the U.S. is an oasis, since we are food and energy-independent.

The U.S. is in the midst of a strong, but inequitable economic recovery that has left many workers behind. In fact, the Atlanta Fed is forecasting 5.9% annual third-quarter GDP growth, thanks to improving consumer spending as well as a shrinking trade deficit due to rising energy exports.

Coffee Beans: Reunited

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