August 16, 2024
By Steve Blumenthal

“We’re caught in a trap
I can’t walk out
Because I love you too much, baby”

– Elvis Presley, Suspicious Minds

July, consumer prices didn’t rise as much as they have in the past, aligning with what experts expected. However, the cost of shelter (like rent and housing expenses) went up and is still increasing at a rate above 5% compared to last year. When you remove shelter costs, overall inflation slowed to 1.8% over the year. This is partly because the prices for core services (not including energy and shelter) and core goods (like products we buy regularly) are not rising as fast, with some falling.

These trends suggest that inflation is gradually easing. Along with a cooling job market, this should give the Federal Reserve the confidence to lower interest rates next month.

The Consumer Price Index (CPI), which measures the average change in prices over time, went up by 0.2% in July, matching expectations. Although this is an increase from the previous two months, the average over the past year has still been going down, indicating that inflation is slowing.

Shelter costs were responsible for nearly 90% of the CPI increase in July, with rents rising significantly. But if you exclude shelter, both the overall CPI and the core CPI (which excludes volatile items like food and energy) barely moved.

Car insurance costs were another area where prices rose by 1.2%. However, vehicle prices themselves, especially for used cars, continued to drop, which could eventually lead to a slowdown in car insurance costs, too.

Medical services, especially hospital services, saw a small drop in prices, marking the first decline in five months. Other services like household operations, education, and recreation saw price increases, but the overall trend for core services still shows signs of easing.

Year-over-year, inflation slowed to 2.9%, which is slightly lower than expected and the lowest it’s been since April 2021. This shows that the Fed’s efforts to control inflation are working, especially since they have limited influence over housing costs in the short term.

The biggest drop in inflation has been in core goods, where prices fell by 1.9% last month—the most significant decrease since 2004. Source: U.S. Bureau of Labor Statistics and NDR

The bottom line is that with the labor market cooling and wages growing more slowly, a September Fed rate cut remains likely as the risks to price stability and employment are now more balanced.

The Fed’s 2024 Economic Policy Symposium, “Reassessing the Effectiveness and Transmission of Monetary Policy,” will be held in Jackson Hole on August 22-24.

Interesting symposium title. “Reassessing the Effectiveness…” Call me suspicious. My head is pounding – I need some Advil. 

Target Zone:

I have written that we are on the back end of inflation wave number one—that’s the bump on the right-hand side of the chart. Could this decade look similar to the three waves of inflation in the 1970s? Perhaps. 

Source: Fred.stlouisfed.org

In the next recession (or market upheaval, or both), the Fed and the government will likely pour even more sugar (money) into the system. Unfortunately, the sugar rush is already in full swing, thanks to an uncapped debt ceiling and government spending about $1.9 trillion more than it brings in. The urge to keep the system propped up is as strong as ever and will probably stay that way until we all realize that too much sugar (or money creation) is toxic. Sadly, we’re not there yet.

My current hypothesis is that the next round of money printing will lead us into inflation wave number two sometime by 2026. A recession is on the horizon, but I don’t believe it will be very deep as the response from the monetary side (the Fed) and the fiscal side (the government) will be quick. Rescue money remains the plan until we reach a point where everyone knows that everyone knows printing trillions and trillions of dollars caused the problem. Too much sugar is poison in humans and in complex economic systems.

I hope that soon, a strong leader with a deep understanding of the economy—someone like former Fed Chairman Paul Volcker—will emerge. And when that time comes, I pray we have the wisdom to elect them and the courage to reset our system.

With U.S. Treasury debt topping $35 trillion this month, we may be looking at $50 trillion before the madness ends. Creating new money out of thin air debases one’s currency. Sadly, sing with me, “We’re caught in a trap, I can’t walk out, Because I love you too much, baby.”

The Fed can’t walk out. Markets are indicating a 100% chance that the Fed will lower rates in September. Rising unemployment and lower inflation provide the needed Fed cover.

The 10-year Treasury Yield

It is especially important that we keep our eye on the 10-year yield. I’ve updated the 10-year Treasury Yield chart I shared last week. A few bullet points:

• The yield moves up and down over time (data from 2005 to the present). Indicated are select yields at various high and low points. 
• The 10-year yield doubled-bottomed at 0.50% in 2020, likely a low we’ll all be talking about for a long time.
• Note, too, that the 10-year yielded between roughly 1.40% and 3% from the Great Financial Crisis until inflation began to be problematic in 2023. 
• I also indicated a potential path for interest rates I’ve named “Target Zone: 3.25% to 2.50%.” That’s my best guess before inflation wave #2 presents in a year or two.

 

One last look. This next chart shows the 10-year Treasury yield going back to 1980. As indicated by the call-out box, I believe the very long-term downtrend in yields is over.

• The monthly MACD signals that rates peaked at 5% and an intermediate-term downtrend in yields.

Grab a coffee and find your favorite chair. We’ll be keeping our eye on the ever-important 10-year Treasury yield. The balance of this week’s post is short. 

On My Radar: 

• Debt Update
• Random Tweets 
• Personal Note: Revenge
• Trade Signals: August 14, 2024 

Source: NDR

Total Domestic Debt is the total outstanding debt owed by all domestic sectors (households and nonprofit institutions, financial and nonfinancial corporations, farms, state and local governments, and federal government) and includes government bonds, corporate bonds, bank loans, other loans, and advances, mortgages, and consumer credit.

• Nonfinancial Corporate Debt is the total outstanding debt owed by all companies, with the exception of financial companies.
• Household Debt is the total outstanding debt owed by the household sector, which includes households and nonprofit organizations.
• Using individual countries’ flow of funds data, Haver Analytics calculates the debt figures to make them comparable from country to country.  This data can be used to evaluate developments in the financial position of sectors, which may impact economic behavior and subsequently influence demand.
• The debt figures as a percentage of GDP are calculated by dividing the outstanding debt by annualized seasonally adjusted GDP.

Bottom line: The problem is everywhere. Simply imagine how too much debt on your own balance sheet decreases your ability to spend. It slows your economy. It’s good in the short term and boosts economies. The problem is when we get to the end of long-term debt cycles, which is where we are today. You can learn more: For example, Reinhart and Rogoff found that when debt gets above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. They found that the threshold for public debt is similar in advanced and emerging economies. Source: Wikipedia

Source: USDebtClock.org

Largest US Budget Items

Medicare/Medicaid, Social Security, Defense, and Interest on Debt. Note how the actual interest on debt is higher as reported by the Fed (see subsequent chart below).

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.

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Personal Note: Revenge

“Weak people take revenge, strong people forgive, intelligent people ignore.”

– Albert Einstein

Steve

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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.

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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.

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“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).”