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On My Radar: Price Controls Don’t Work, Here’s Why

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August 23, 2024
By Steve Blumenthal

“Inflation is always and everywhere a monetary phenomenon.“

– Milton Friedman 

Located in the heart of the Teton Mountain Range, Jackson Hole is a sunlit paradise in the summer and a powdery haven for skiers in the winter. Wildflowers bloom in the warmer months, with the colors bright against a backdrop of rugged, snow-capped mountains. Crystal-clear rivers meander through the landscape, inviting fly fishers, kayakers, hikers, and bikers to explore its breathtaking vistas. The beauty, the fresh mountain air, and the peaceful silence make it a true slice of heaven.  

This week, all eyes are on Jackson Hole for another reason—Jerome Powell and the Federal Reserve have taken center stage. Breaking news – this is just in: Chairman Powell indicates interest rate cuts ahead: “The time has come for policy to adjust.”

A dovish Powell with no surprises – Wall Street loved the news: the Russell 2000 small-cap stock index gained over 3%, and the NASDAQ and S&P 500 Index were up more than 1%.

The Fed Futures continue to price in a 100% chance of a 0.25% rate cut and a 33% chance of a 0.50% rate cut in September. The market sees a 73% chance of 1% in total rate cust by year-end. The market is also pricing in an additional 1.25% in 2025. That would bring the Fed Funds rate down to 3.125%, which would still be above the current level of inflation. Source: MBS Highway

The 10-year Treasury yield is slightly lower, closing at 3.81%. If you are in the market for a mortgage or waiting to refinance, we may see a 30-year mortgage rate of 5.50% in the near future. Current 30-year mortgage rates are between ~ 6.50% and 7%. 

The following is a Weekly MACD chart of the yield over an extended period of time. It also includes the MACD trend signals in the lower section. I update this chart each week in Trade Signals. The “Target zone” to the right shows my working hypothesis of where I believe rates could go in the short term. There are no guarantees, and my thinking remains data-dependent. Not a recommendation for you to buy or sell any security. 

Source: StockCharts.com

As a quick aside, if you have never had a chance to visit Jackson Hole, do put it on your bucket list. It’s one of the most superb ski mountains in the world, and the summers are fantastic.  

Grab a coffee and find your favorite chair. I comment on the insane idea of government price controls, examine the gold market, and finish with a short sports update.   

On My Radar: 

  • Price Controls Don’t Work, Here’s Why
  • Gold Breakout? 
  • Random Tweets 
  • Personal Note: Grandland Rice
  • Trade Signals: August 22, 2024 

See Important Disclosures at the bottom of this page. Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.

Price Controls Don’t Work, Here’s Why

Much of the press, including the Washington Post, has emphasized the topic of price gauging. Vice President Kamala Harris’s presidential campaign says “price gouging” is a focus of her economic agenda. She will crack down on “excessive prices” and “excessive corporate profits,” particularly for groceries.

In a news release Wednesday, her campaign said the first 100 days of her presidency would include the “first-ever federal ban on price gouging on food and groceries — setting clear rules of the road to make clear that big corporations can’t unfairly exploit consumers to run up excessive corporate profits on food and groceries.”

I want to put politics aside (I am not a fan of either candidate) and examine the economic implications of such action. You’ll see I conclude that government price fixing, while it may sound like a good idea, is a terrible idea. 

First, let me share a short Milton Friedman clip on government price controls. Click on the image (1 minute). The short answer is that price controls may work briefly in the short run but are disastrous in the long run as they produce scarcity in the goods you set the prices on. 

 

The idea of the government implementing price controls on food and other consumer goods is a fundamentally flawed and dangerous economic policy that has failed repeatedly throughout history. Price controls disrupt the natural dynamics of the free market. In a competitive, free market like the agriculture and food industries, prices rise and fall based on supply, demand, and companies competing to offer the best value to consumers.

However, when the government steps in and artificially sets price ceilings, it throws off this delicate balance. Companies will stop producing as much if they can’t charge what they need to maintain profitability. This leads to shortages and the reemergence of higher prices in a more distorted way. 

I am a fan of the ‘All In’ podcast. All In is a business and technology podcast hosted by four venture capitalists: Chamath Palihapitiya, Jason Calacanis, David Sacks, and David Friedberg. The podcast covers current events, market trends, political issues, and industry insights. Jason quarterbacks the podcast, and I particularly like listening to Chamath and Friedberg. While I don’t always agree with everything presented, I listen carefully and try to take in the information, even when I disagree. I do appreciate opposing views. It gets me thinking. 

In their recent episode, I particularly liked how David Friedberg summarized the challenges with government price fixing. Following are my bullet point notes:

Friedberg said, “I hate socialism. Socialism destroys innovation, destroys productivity and destroys individual liberties. Agriculture and Food Markets have insanely competitive dynamics because there are commodity markets, and there are tons of competitors. There is no monopoly in making food. There is no monopoly in making consumer packaged goods products. There is no monopoly in retail. There is no monopoly in grocery stores. It is a small margin, highly competitive, highly fragmented free market. And the free market works in that everyone is always competing with each other, creating new productivity improvements, and as a result, over time, prices come down, except when the government intervenes and gets involved.” 

He argues:

  • The real cause of price inflation and food is not the supposed price gouging by corporate players in the ag and food industry, all of whom are deeply competitive with one another, but rather is the result of the inflation associated with government spending and stimulus coming out of COVID-19.
  • He example the Fed balance sheet. From COVID to today, the Fed balance sheet grew from $4.2 trillion to $7.2 trillion. A growth of 70%!
  • The Federal Reserve bought assets, issued debt, and introduced liquidity into the system.
  • As a result, the M2 money supply increased from $15 trillion to $20. 21 trillion since COVID, a 40% increase.
  • With more money in the system, the cost of everything should go up, which is precisely what we’ve seen.

He went on to talk about other commodity prices, showing charts from the St Louis Fed.

  • He reviewed financial data and stock market performance for Kraft Heinz.
  • The stock pre-COVID was $29 bucks a share in 2019, and it is $34 bucks a share.
  • Revenue was $25 billion in revenue, and it was $26 billion in 2023.
  • EBITDA in 2019 was $6.1 billion. EBITDA in 2023 was $6.3 billion.
  • There’s not a lot of profit gouging.

In fact, Kraft Heinz has not been able to keep up with inflation. Starbucks, which the podcast just talked about, stock was at $90 pre-COVID, and today, it is $93 bucks. In 2019, revenue was $26 billion, and operating income was $4.1 billion. In 2023, revenue was $36 billion, and operating income was $5.9 billion. He said operating margins have come down for Starbucks. 

In 2023, McKinsey studied the state of grocery in North America. They found accelerating pressures on profitability. To cope with the pandemic upheaval, grocers have had to dramatically increase capex and supplies.

  • As a result, they’ve seen a significant impact on margins. Here’s the margin profile, pre-pandemic, and today, gross margin has declined by two points, from 47.6 to 45.6, and EBITDA margin has declined by one and a half points.
  • Friedberg then shared a chart on consumer packaged goods (“CPG”), companies—the companies that make food and sell it to consumers.
  • Food companies are seeing food prices come down, wages are up, and farmers are suffering.
  • Labor costs have tripled since the pandemic, but companies still have to sell products at the same price. CPG companies and supermarkets have lower margins.

Friedberg concluded:

  • There is nowhere in the agri-food supply chain that we are seeing price gouging happening.
  • What has happened is the cost of labor, the cost of moving stuff around, the cost of fuel, the cost of electricity, the cost of goods, has all risen with inflation because of the increase in the money supply and federal spending and the stimulus associated with the Federal Reserve buying assets onto the balance sheet.
  • So, arguably, he said that trying to step in and fix prices will reduce competition and, as a result, reduce investment in improving productivity.
  • We have seen this countless times: Every socialist experiment in human history has started with caps on food, and it has resulted in bread lines like the ones in the image he shared of Soviet Russia.
  • This is a mistake! It is anti-free market, anti-innovation, anti-productivity, and ultimately anti-liberty.
  • He said, “I cannot stand it.”

Chamath chimed in, ” There is no sustainable solution to inflation if you cap what a company can charge because what they’ll do is they’ll just stop producing. They’ll stop. And the reason they can stop is that they would rather contract and maintain their profitability than lose money. And then what happens when there are fewer products in the market? Prices go up.

  • So, I think it stands to reason that the Harris campaign has access to some reasonably intelligent people. They also have access to smart people, so if they make a few phone calls, they’ll figure out that this is a terrible idea.

You can listen to the All In podcast here. The discussion on price fixing starts at 1:02:45, but you may find the entire discussion/debate interesting.  

Put me in Milton Friedman’s school of thinking… “Inflation is always and everywhere a monetary phenomenon.”

Please know that I am not expressing a political view. I am attempting to explain the crucial dynamics of free market systems. Free markets are not perfect, but they are far better than a bureaucrat setting prices. Free markets will punish the gaugers by putting them out of business, and fixing food prices will most likely punish the masses. 

So will a tax on unrealized capital gains. But that is a rant for another day. 

Please see the important disclosures in the disclosures section below.

Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.

Gold Breakout?

I find it very interesting that the media does not cover gold much. If you are bullish, I believe quiet is a good thing. Each week, I post a weekly gold chart. The current technicals are supportive. 

I came across the following on StockCharts.com written by Martin Pring (I’m a long-time subscriber of stockcharts.com). 

From Martin, “It’s not very often that any market experiences a 10-year breakout, let alone a 45-year one. That, however, is what Chart 1 says is about to materialize for the inflation-adjusted gold price.

Since the chart is based on monthly data, we will not know for sure until the end of August when the next monthly plot will be finalized. That’s why I used the “on track” caveat in the title. However, as it stands right now, the gold price, when adjusted by the CPI, has broken above the trendline, joining the 1980, 2011, and 2020 peaks. That’s a huge barrier of former resistance that looks as if it has been overcome. Provided it is genuine, and there are few technical grounds for suspecting otherwise, the breakout has huge implications, not just for gold but for inflation generally, but more of that later.

Chart 2 displays the gold price divided by the US Dollar Index. It shows that the ratio has recently broken out from a multi-year inverse head-and-shoulders pattern and is therefore likely to move higher, regardless of what the dollar itself does. If the Index rises, it will act as a headwind, somewhat limiting gold’s advance. Conversely, a weaker dollar will add icing to the gold cake, so to speak.

One attribute supporting higher gold prices comes from recent action from the Gold Bugs Gold Index ($HUI). This index comprises mining stocks that downplay the policy of hedging future gold production. It is therefore a purer and more leveraged play on the actual price than many of the companies included in the Van Eck Vectors Gold Miners ETF (GDX).

Chart 3 shows that the $HUI has recently broken above its secular down trendline, action which is being supported by a positive long-term KST. Its 12-month MA is also in a rising trend, which is another reason for expecting firmer gold prices over the course of the next few months.

The views are Martin Prings. You can learn more and find the source of this information here.  is one of the most prominent names in the industry. A master technical analyst and educator extraordinaire, he is the award-winning author of numerous books on Technical Analysis, including Introduction to Technical Analysis and Technical Analysis Explained. The latter is now used by several international technical societies for training and for several decades was one of the three core books for Level 1 CMT certification with the Market Technicians Association. Translated into over 7 languages, the book is, as quoted by Forbes, “widely regarded as the standard work for this generation of chartists”. Learn More 

Please see the important disclosures in the disclosures section below.

Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.

Random Tweets

Inflation!

Source: Fred.StLouisFed.org

Net Interest Payment on Public Debt as a % of GDP

Source: @wmiddelkloop

I “like” and “retweet” posts I find interesting. I enjoy X because I can easily follow people I like to keep On My Radar.

You can follow me on X (formerly Twitter) @SBlumenthalCMG.

You can also listen to my podcasts on Spotify, and find me on LinkedIn.

Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.

Personal Note: Grantland Rice  

“For when the one great scorer comes to write against your name, he writes not if you won or lost but how you played the game.”

– Grantland Rice authored a book of poetry, Songs of the Stalwart, which was published in 1917 by D. Appleton and Company of New York

The boys’ first week of training has been challenging. Twenty-two of fifty players made the varsity squad, fourteen made the JV(A) team, and fourteen made the JV (B) team. The teams have been set, the captains selected, and it’s time to compete.  

Long-term readers know I live vicariously through my wife and soccer coach, Susan (Coach Sue). Dinners this past week have been filled with tryout updates: some joy, sadness, and much learning. There are several very talented ninth graders: one who made varsity and will see playing time and two who did not. I’m particularly interested in seeing how the disappointed young men respond. Coach feels they will get more playing time on the JV team vs. bench time on varsity. 

A few years ago, Susan had an assistant coach leave just before the season started. She asked me if I could help out for a few games, which I enjoyed. I’ll be helping again this year. I watch the opposition and report their formations, player strengths, and vulnerabilities to her. Getting to know the boys and watching them grow is a great joy. I especially enjoy watching Susan coach the boys. 

This year’s squad is looking strong, and Coach reminds them every day, “we are here to win.” There are three legitimate goal scorers, a skilled midfield, and a solid backline of four defenders. One young man spent the week at the New York Red Bulls player ID camp. We are unsure what that may mean for his availability this season, but it is a beautiful opportunity for the boy. And I’m keeping an eye on that disappointed young Freshman… I hope he gets tapped on the shoulder to play a game or two on varsity. 

Grantland Rice – One of the Greatest Sports Writer of All Time

“Grantland Rice was the greatest man I have known,” Red Smith once wrote. “The greatest talent, the greatest gentleman.”

Most of Rice’s contemporaries would have shared this assessment. It was Grantland Rice who immortalized Notre Dame’s outstanding 1924 backfield as “The Four Horsemen,” who nicknamed Red Grange “The Galloping Ghost,” and who authored one of the most frequently quoted poetic couplets in all of sport: “For when the One Great Scorer comes to mark against your name, he writes not that you won or lost but how you played the Game.”

But more importantly, if we see the 1920s and 1930s (the era of Jack Dempsey, Babe Ruth, and Bobby Jones) as a Golden Age of Sport, it is in large part because Grant Rice saw them as golden and conveyed this golden vision to millions of readers daily. Source

Years ago, my mother gave me a framed copy of the famous Grandland Rice quote. Mom knew I was a sports nut and wanted to send me an important message about life. The quote hung on my bedroom wall when I was a kid and sits on the bookshelf in my office today next to my father’s old Phillies hat. It seems appropriate as the Malvern Prep Friars begin their soccer season. 

Speaking of sports, college football begins this weekend. Georgia is ranked number one in the preseason polls, followed by Ohio State, Oregon, Texas, and Alabama. Twelve teams make the NCAA playoffs this year. As you probably know by now, I’m a rabid Penn State alum, and I see my Nittany Lions currently ranked 8th. The NFL season kicks off next Friday, with the Philadelphia Eagles playing the Green Bay Packers in Brazil on Friday night, September 6. If you are not a sports fan, my apologies. If you are, shout out loud with me… “Let’s go!” Fall is in the air, the premier league is back in action, and football season is here. 

Best of luck to your favorite team. 

“How you played the game.” Love that… 

Kind regards, 

Steve

Trade Signals: August 22, 2024

“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.” 

– Charlie Munger

Notable this week:

The dashboard of indicators and charts with explanations is updated. 

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Each week, we update our dashboard of indicators covering stock, bond, developed, and emerging markets, along with the dollar and gold charts. We monitor inflation and recession as well.   

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It is designed for traders and investors seeking a better understanding of current macro trends. Click on the link below to subscribe or log in. The letter is free for CMG clients.

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The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice. Not a recommendation to buy or sell any security.

Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Private Wealth Client Website – www.cmgprivatewealth.com
TAMP Advisor Client Webiste – www.cmgwealth.com

Forbes Book – On My Radar, Navigating Stock Market Cycles.  Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.

Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.

Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.

IMPORTANT DISCLOSURE INFORMATION

This document is prepared by CMG Capital Management Group, Inc. (“CMG”) and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, CMG’s actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing, and transaction costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice. The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice. 

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Written Disclosure Statement. CMG is an SEC-registered investment adviser located in Malvern, Pennsylvania. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy, or exclusively determines any internal strategy employed by CMG. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at www.cmgwealth.com/disclosures. CMG is committed to protecting your personal information. Click here to review CMG’s privacy policies.Please take note of the following text:

 

“The blue line in the lower section shows how much the orange line is above or below the long-term trend line. It is currently in the “Overvalued” zone. Lastly, the data boxes at the bottom of the chart display the annualized gains based on each zone (Overvalued, Fairly Valued – blue line in the middle zone, or Undervalued).”Please take note of the following text:

 

“The blue line in the lower section shows how much the orange line is above or below the long-term trend line. It is currently in the “Overvalued” zone. Lastly, the data boxes at the bottom of the chart display the annualized gains based on each zone (Overvalued, Fairly Valued – blue line in the middle zone, or Undervalued).”