I don’t usually pay much attention when data like the GDP, CPI, or even when the jobs report is released…
They report what happened in the past – with very little insight about the future.
Usually, these indicators are in line with analyst estimates and are often forgotten by the time the market opens.
But, when the economy comes to an inflection point, analysts tend to get things really wrong…
That’s why yesterday’s GDP report was so jarring…
The second quarter GDP was expected to grow 8.4%, yet it only grew 6.5%.
But it wasn’t the lower number that stuck out, it was the reason behind it.
Supply chain constraints and inflation is starting to weigh down on growth more than economists thought possible.
The inability of U.S. companies to keep inventories high enough and continuing supply chain bottlenecks have now put a cap on growth.
And given how the FOMC meeting went on Wednesday, I’m starting to think we’re entering a self-fulfilling cycle…
The Fed refuses to acknowledge that there’s an issue, so they’ll keep pumping cash into the system while keeping rates low – all to keep the markets propped up. Which in turn creates more demand in an economy that just doesn’t have the capacity to absorb it.
In last week’s essay, I mentioned how the market is at all-time highs as the S&P 500 earnings growth is set to decline going forward. Now, we’re seeing it in the headline GDP number.
There Should Be No Surprise… And Yet There Is
High inflation stops growth and seeps into earnings.
Earnings are the ONLY thing that ultimately drives markets, regardless of whether some might think we’re in a “meme stock revolution.”
Right now, we’re in the thick of earnings season, that’s why I’m focused on financial statements. But more importantly, I’m listening to what management is saying about future growth and inflation to either validate or invalidate what I’m seeing in the data.
So, here are some examples from three companies, involved in three completely different industries, with three completely different types of consumers:
- 3M is considered a bellwether to gauge inflation. CEO Mike Roman said they are focused on raising prices broadly to mitigate the rising cost of materials. Why? Because the higher material cost accounted for a $.17 per share drag on Q2 earnings.
- Ford will spend $2 billion more on commodities in Q3 and Q4. Its entire 2021 projected earnings before interest and taxes (EBIT) is $9-10 billion.
- Apple CEO Tim Cook commented that he’s “paying more for freight than he’d like to pay,” while seeing slowing growth and worsening supply constraints.
Now to contrast this, here’s what the steward of our economy in Washington, Fed Chair Jay Powell, had to say on Wednesday aside from the word “transitory”, which we’ve heard a thousand times by now… he believes there’s no evidence that the current high inflation readings are raising public expectations for future inflation.
I find that hard to believe, I guess I won’t believe my lying eyes then…
So here, we have the boots-on-the-ground CEOs saying one thing – and the ivory tower official saying something else… something just isn’t adding up.
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BlackRock just poured a record inflow into the iShares TIPS Bond ETF (TIP) last Friday. It’s the biggest fund that protects investors from inflation.
But here’s the kicker…
They poured out almost the same exact $1.4 billion away from the U.S. Treasury Bond ETF (GOVT)…
Meaning, they think the rate of inflation will continue to outpace the rate of growth into the foreseeable future, and that the real rate will continue to fall. Currently, the 30-year real rate is trading at -.39.
To me, the long end of the interest rate curve (10 years and higher) is an important gauge of economic growth. So aside from the 30-year real rate deep into negative territory, the entire treasury yield curve is flattening.
Take a look at this chart…
Earlier this month, I discussed how the real rate will continue to fall. It’s also where I first recommended TIP since I believe it’s the best alternative to any cash holdings over the next few years.
Cash will continue to depreciate, and this product should be all the fixed income exposure investors need in their portfolios going forward.
However, we have been recommending other inflation-sensitive assets that the market likes to forget about… like gold… and now bitcoin. A 50% selloff in a matter of weeks tends to get the weak hands out of any market.
Bitcoin has held above $30k in a stunning way. Countless times it tried to break it, and countless times it failed to do so… all because the whales keep buying. We’ve been recommending this level as well.
If you’ve been keeping up with Jeff Clark’s essays, you’ll know he’s been pounding the table on gold for some time now. In fact, both of us have been bullish on it.
Ultimately, it’s assets like gold and bitcoin that will outperform the stock market going forward as inflation takes its toll on earnings and savings. And that puts a big bid for assets that benefit from this type of environment.
Even though GDP missed its estimates, it was still the biggest increase on an annualized basis since the Paul Volcker era in the 1980s.
That’s fitting, because he was the last Fed Chair who had the guts to do what needed to be done… and raise rates. His actions may have temporarily crashed the economy, but in the long term he saved it. But, I doubt we’ll see that kind of courage again.
So, while the question still remains as to whether or not inflation is actually “transitory,” for now bitcoin, gold, and the TIP ETF seem to be a safe haven against rising prices.
Contributing Editor, Market Minute
Happy Friday Market Minute readers. It’s been a busy week, and I have another brand-new presentation on what’s been going on in the markets.
Today, I’ll be covering what’s needed for a big bull market, the FOMC meeting, and what liquidity means for the market. Click below to start watching.
In today’s mailbag, Jeff Clark Trader member Kevin thanks Jeff for his trading insights…
Hi there, thank you for the wonderful insights. I’m new to trading and will cautiously buy when the timing is right. Keep up the good work.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming – and send us any questions – at [email protected].