LAST WEEK’S FALL & RISE OF U.S. STOCKS. In the first three days of last week, the stock market suffered its steepest three-day plunge in seven months after a startling inflation report rekindled investors’ fears of runaway prices.
On 12 May, The S&P 500 Index surrendered 681 points, about 1.4 percent of its value, after the U.S. Labor Department reported prices rose 4.2 percent in April year-on-year, the largest jump since 2008 and significantly more than March’s 2.6 percent.
The NASDAQ shed 357 points, about 2 percent, and the ongoing sell-off in government bonds sped up, raising yields by 0.006 to 1.68 percent.
Tech stocks, which are particularly sensitive to interest rate fluxes, were hit hard, with Apple losing 3.1 percent and Tesla off 4.4 percent.
Rebound?
On Friday, the Dow added 360 points but still closed the week down 1.1 percent, finishing about 800 points below its Monday peak of 38,080.
The S&P 500 rose 61 points in the final session but also settled for a loss of 1.1 percent for the week… registering its biggest weekly loss since late February.
The NASDAQ closed the week gaining 305 points but still lost 2.3 percent over the five days, marking its fourth consecutive losing week.
The S&P’s growth index gave up 2.1 percent over the week, its worst since February; ARK Investment Management’s exchange-traded innovation fund retreated 4.9 percent.
“It’s interest rates, stupid.”
With inflation rising, the fear on The Street, as we have long forecast, is that the higher inflation rises, so, too, will interest rates move higher, which will, in turn, shut off the spigot that has flooded cheap money into equity markets and the economy. Indeed, the high-flying NASDAQ is on its longest losing streak since August 2019… finishing down four weeks in a row.
This week is starting on a low note, with equities down yesterday and the U.S. stock indexes wiping out earlier gains today to close at session lows.
Down around 50 points for most of the day, The Dow closed down 267.13 points. The tech-heavy NASDAQ was up 0.8 percent but closed down 0.56 percent while the S&P slumped nearly one percent.
Among the news pushing them lower is home construction saw its biggest drop since the COVID War was launched in early 2020.
While home prices keep rising and demand is staying high – despite the historic shortage of homes to buy – production is slowing. The Street says it’s because commodity prices are skyrocketing and a labor shortage of skilled workers is holding back construction.
Single-family housing, which accounts for the largest share of the housing market, declined more than 13.4 percent in April compared with March, according to U.S. Commerce Department.
“Builders are delaying starting new construction because of the marked increase in costs for lumber and other inputs,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, told Reuters. “These supply-chain constraints are holding back a housing market that should otherwise be picking up speed, given the strong demand for buying fueled by an improving job market and low mortgage rates.”
As we have reported, the increase in lumber prices alone has added $36,000 to the cost of building the average single-family home.
The National Association of Home Builders survey also noted that builders slowed down production because of higher costs for lumber, steel, gypsum, and copper… some of which have hit record highs this year. According to the producer price index, overall, the mix of residential construction materials is up 12.4 percent over the previous 12 months.
TREND FORECAST: The higher the price of new homes, the lower the number of buyers. And, when the Fed raises rates, new home sales will steadily fall.
Bullshit Has Its Own Sound
We note this inflation data to again illustrate the reality of rising inflation, which the Federal Reserve keeps talking down. Yesterday, the Federal Reserve Vice Chairman Richard Clarida said the inflationary spike was only temporary and the U.S. economy has not yet climbed to the levels needed for “substantial further progress” that would cause the Fed to stem its $120 billion a month bond-buying scheme.
Also dismissing the inflation spikes was Federal Reserve Bank of Atlanta President Raphael Bostic who told CNBC yesterday that the Feds would not cut back on their money pumping, and it would take months to get a good read on inflation.
The central bank will need to collect several more months of data about job growth and inflation before it considers revising its policies, Fed governor Christopher Waller said on 13 May in comments quoted by the WSJ. The Fed has pledged repeatedly not to raise interest rates until the economy reaches “full employment” and inflation shows evidence of remaining above 2 percent for an unspecified “extended period of time,” he said.
The inflation rate, which exceeded the mainstream business media’s forecasts, was pushed by an unlocking nation enthusiastic to go out and spend, an ocean of government stimulus money, rising commodity prices, and bottlenecks in supply chains that caused shortages across a range of goods.
Some investors expressed confidence in the Fed’s pledge; in the week ending 12 May, more money flowed into U.S. stocks than at any time since March, according to data firm EPFR.
It’s in the Numbers
Still, the stiff rise in prices stirs growing concerns about the Fed’s ability or willingness to continue its policies of low-interest rates and bond-buying.
In recent weeks, investors have shown themselves ready to flee the markets if inflation might stir the Fed to raise interest rates or curtail its lavish, $120-billion monthly bond purchases.
Several Fidelity International funds have recently bought gold, metals, and inflation-protected Treasury securities, the Wall Street Journal reported, all hedges against inflation.
“It is time for the Fed to revisit its accommodative policy stance,” Senator Pat Toomey declared in comments quoted by the FT.
“Not only is inflation a bad story for any type of returns in your portfolio,” Matt Forester, chief investment officer at Lockwood Advisors, told the WSJ, “it’s also increasing uncertainty around the Fed’s next moves over the next couple of months.”
The Biden administration’s council of economists called the inflation number a “normalization of prices.”
“There will be months that come in below or above expectations as strong demand meets recovering supply,” the council wrote in a statement quoted by the FT. “Recovery [from the shutdown] will not be linear.”
TREND FORECAST: The reality of inflation, despite what the central bank is selling, will force the Feds to raise interest rates… which we believe The Street already knows and expects. Thus, prepare for the 2021 Bear Market, coming soon to a country near you!
Inflation Surge
Yes, get ready for “INFLATION SOON TO GET MUCH WORSE” as Gregory Mannarino details in his new article this week… and what to expect next.
The prices American consumers paid for milk, socks, cars, washing machines, and other items rocketed up 4.2 percent in April, compared to the rate a year earlier when the economy was shut down.
The price of used cars jumped 10 percent in April from March’s level, the biggest monthly hike ever recorded and accounting for fully one-third of the new inflation rate, the U.S. Labor Department reported.
Consumers turned to the used-car market when the worldwide shortage of computer chips curtailed the production of new cars, analysts say.
The price of hotel rooms is edging up as people begin traveling again and companies pass the rising price of raw materials through to consumers. During the shutdown, most companies absorbed higher prices and made up for it by cutting back on sales, discounts, and coupons for shoppers.
Grocery prices added 2.4 percent, restaurant meals 3.8 percent, airline fares 9.6 percent, and the cost to rent a car or truck zoomed up 82 percent, the Wall Street Journal reported.
Higher and Higher
The median expectation for inflation’s pace over the next 12 months ticked up from 3.2 percent last month to 3.4 this month in the Federal Bank of New York’s Survey of Consumer Expectations, the highest level since September 2013.
Expectations for home price gains reached a record 5.5 percent in the survey.
About 36 percent of small businesses raised prices last month, the most since 1981, according to a survey by the National Federation of Independent Businesses.
Ups and Downs
Although gasoline prices rose 50 percent in April over the price a year before, they declined 1.4 percent from March this year, Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, explained in a WSJ interview.
Compared to 2019, April’s prices were up only 2.2 percent, the WSJ noted.
Price pressures are likely to continue, with economists surveyed by the WSJ in March forecasting 8.1-percent growth this quarter.
That would mark 2021’s as the most robust economic expansion in almost 40 years, the WSJ reported.
Eye-popping growth rates signal strong consumer demand, which drives prices up.
The longer consumers’ spending sprees last, the easier time producers will have jacking prices, Richard Moody, Regions Financial Corp.’s chief economist, said to the WSJ.
TREND FORECAST: As we have been forecasting, and as Moody’s noted in the Wall Street Journal, once prices rise, they rarely fall, even if inflation eases, causing permanent shifts in spending and demands on household budgets. Thus, the spending spree will moderately continue, and the housing market will climb… until interest rates rise. When the Fed rate hits the 1.5 percent range, Wall Street will dive and Main Street will sink further into the “Greatest Depression.”
TRENDPOST: Repeating what the Federal Reserve is selling, the Biden administration expects to “see a specific number of months or quarters where there is a transitory increase [in inflation] and that’s something that… most economists say will be temporary,” White House spokesperson Jen Psaki said in her daily press briefing on 12 May.
Over There
Inflation anxieties were sharpened by the European Commission’s heightened expectations for the region’s economic growth.
The commission now says the Eurozone’s economy will expand by 4.3 percent this year and 4.4 percent next year, no longer 3.8 percent in both, due to an increasingly successful vaccine campaign.
And while the Fed keeps saying the higher inflation is temporary, the gold market disagrees.
Gold/Silver: Gold, the #1 safe-haven asset that is the primary hedge against inflation, closed today at $1,868 per ounce, trading at its highest level in four months. Silver closed today at $28.31 per ounce, its highest level since 2 February.
We also forecast that the “Biden Bounce” will only temporarily juice the economy and that more cheap money will be injected by Washington to artificially prop it up. Thus, the dollar will continue to trend lower, inflation will rise, and so, too, will precious metals.
Thus, we maintain our forecast for gold to range around $2,100 per ounce, and silver to break above $50 per ounce by years’ end.
Bitcoin: Bitcoin’s price and other cryptos back-pedaled after Tesla announced it would no longer accept the crypto-money in payment for its cars.
Bitcoin, down nearly $20,000 per coin from its all-time high, is still trading strong. As we have long reported, cryptocurrencies are digital age replacements for gold.
Despite the Tesla-induced sell-off, today, CNBC acknowledged what Trends Journal subscribers have known for years:
“Crypto bulls have long championed Bitcoin as a modern-day replacement for gold, and by one measure, the new market is already close to surpassing bullion in that respect.”
They quoted a new report from Bernstein that the total value of the cryptocurrency market now stands above $2 trillion… which is almost equal to what investors hold in gold.
“Investors need to find return streams that can hedge debasement risk and be a diversifier of equity risk at higher levels of inflation. These assets [cryptocurrencies] might have the potential to perform that function,” the firm said Tuesday.
TREND FORECAST: Indeed, as we have noted, if there were no cryptocurrency markets, gold would be trading in the $3,000 per ounce range and silver above $100 per ounce.
We should also note that unlike the cryptocurrency markets, which will experience sharp volatility – be it from Tesla-type statements or government/central bank intervention – precious metals will not be subjected to such statements or action. Thus, we maintain our forecast for both gold and silver to remain as the most secure safe-haven assets.
Oil: Crude oil, trading just above $68 a barrel, took a breather today. Prices remain stable, however, and are projected to move higher, as much of the world begins to end their COVID War restrictions and the high hopes that a vaccinated U.S. public will gobble up more gas.
TREND FORECAST: What is missing in the business world analysis of oil is the Gaza War – the fourth one launched by Israel in 13 years – that has killed 213 Palestinians, including 61 children, and at least ten Israelis, including two children. (See our “SPECIAL REPORT: THE GAZA WAR” in this issue.)
Should the war continue and expand – and particularly if Iran becomes involved and the oil-rich region is destabilized – oil prices will sharply spike. As we have forecast, with inflation already skyrocketing, should Brent Crude near the $90 to $100 per barrel range, equity markets will dive and nations will sink deeply into the “Greatest Depression.”
