Today is "New Year's Eve" for the Federal Government; Headwinds and Highlights as we enter a new fiscal year (Commercial Real Estate implosion incoming)?
Economic and Geopolitical Headwinds and Highlights
By Silence DoGood
Remember, today is the last fiscal day of the government's year; it is also the last day of Q2 - so expect some window dressing (stock markets are ripping higher again today), so get ready for a hot July and a choppy Q3 & Q4 now that many investors are now complacent with the 15% gains in the S&P, and 32% gains in the NASDAQ, mostly being propped up by only a handful of companies!
This is the most hated rally in recent memory, because of individual perceptions; "real wages" for the masses are continuing to fall. Real wages are wage increases, minus the inflation rate. Economics is all about perception; even though the economy has lots of stimulus still floating around, it's only finding its way into certain pockets of the economy. Subsequently, we are only experiencing disinflation, which is a decrease in the rate of the increase (going from 9% inflation last June to 4% inflation today, but it is still trending higher YoY). Companies are at a point where they are strained; they have mostly already let go of any employees that needed to go over the past 3 years, and in many cases, companies are now left with a skeleton crew of hard workers whose wages have not kept up with the rate of the increase of inflation. In simple terms, businesses simply cannot raise the cost of their product too much, before consumers change their consumption habits. Which is why you see a lot more workers being more up front in asking for tips; because they need them to survive.
And of course, we have statistical manipulation rampant all throughout Government. Which basically makes most of the numbers just noise and hoopla. It's important to use discernment when measuring where things might go moving forward. Many people, including myself, were wrong in our assessments that we would be heading into a recession this year. It seems some parts of the economy have some life left, and is trickling its way down. I personally talk to individual business owners who cater to the 1%, and it seems the 1% got the inflation memo about a year ago, and are finally ramping up their spending on basically whatever they want; the crumbs on their feast table are making their way (albeit slowly), to the rest of the economy.
The major canary in the coal mine is Commercial Real Estate, which is still on life support, and has no real signs of coming back, as the top 5% of the workforce is using remote/work from home as a decisive bargaining chip and a line in the sand as to where they will work. With Biden's debt forgiveness package being rejected by the Supreme Court this morning, this is yet another incentive for individuals to work from home as student loan payments will be starting back up again soon (just add up gas, wear and tear on your vehicle, lunches and dinners, and one can realize that going into the office can get quite expensive). Companies who offer a flexible work from home policy should continue an upper hand advantage against companies who refuse to hire employees outside of their geographical region because they "can't come into an office". The world has changed. Get with the program.
As Noah Smith wrote in his most recent "Noahpinion" piece: "despite a very recent, very slight recovery, Americans have seen themselves working more and more for less and less money over the past 2 years. Darren Grant's data, along with older surveys by Robert Schiller, suggest that real wages decline are what people really, really hate about about inflation. We can theorize about the psychology of the vibe session all day long, but maybe in the end it was just a wagecession".
We are at a point where the manipulators at the central bank can choose a few different paths. They can keep interest rates higher to push down inflation and maybe turn it into outright deflation in a year, they can keep rates stable, or they can lower rates to try to stimulate the economy. A new tool might be that they try higher rates while stimulating the economy simultaneously. Remember, if the US catches a cold, the rest of the global economy will catch something much worse. Our interest rate policy has ravaged the rest of the world in many ways that US consumers are unaware of, especially since we have the added benefit of being able to export a fair amount of our inflation due to holding the global reserve currency status. Essentially, the rest of the world is broke in dollar terms. As BRICS chip away at dollar hegemony and attempt to create new mechanisms to settle payments, most notably Russia's attempt to peg gold to the ruble for a short period of time, this brought in a significant amount of capital, and then they quickly shut off that mechanism. Don't put it past any of the central banks to try something like that, much like a fire hydrant can be turned on and off. These countries may try a currency with oil and rare earth metals, but Gold and Silver have always been money, and will always be money, as defined in Article 1, Section 10 of the United States Constitution. So at this time, any tangible hard asset in my opinion is worth an overweight in one's portfolio over traditional synthetics, like stocks and bonds. I believe energy will be overweight over the next 6 to 12 months, while technology takes a breather as the AI hoopla settles down as investors reassess viable versus unviable projects, in a stable to increasing interest rate environment. Money is not free anymore. And it may never be free again, unless we fill an entire cabinet with MMT'ers.