ANDIKA BULLETin 26 APR 2024

Overall, US macro data has suddenly started to disappoint not the least of which was today's ugly GDP print which saw in Q1, US GDP unexpectedly collapsed to just 1.6%, down more than 50% from the Q4 print of 3.4%, the lowest print since Q2 2022.

But, while 'bad news' for the economy has recently been 'good news' for stocks (enables an easier Fed), overnight's data 'punched that narrative in the face' with Core PCE (personal consumption expenditures) price index in Q1 soaring considerably more than expected.

Personal consumption expenditures prices increased 3.4% in the first quarter after increasing 1.8% in the fourth quarter. And the punchline: excluding food and energy, the all important core PCE price index increased 3.7% after increasing 2.0%, and coming far hotter than the 3.4% estimate; in fact it came in above the highest estimate!

And here's the problem - inflation expectations are surging at the same time as growth expectations are sliding - the nemesis of every central banker is upon us: STAGFLATION.

It's been a theme all year but recently has become so much more pronounced that not even the best 'spinners' can ignore...

And that sent rate-cut expectations plummeting to cycle lows (and took June completely off the table for a cut)

Now the data suggests The Fed will not cut rates at its May or June meetings. Wall Street’s been predicting rate cuts for almost two years and they’ve been wrong every time. They’re predicting a June rate cut, and they’ll be wrong again.

A rate cut at the July 31 meeting is possible but is in jeopardy now due to inflation going up again in the latest report. We’ll have three more months of inflation, unemployment and GDP data between now and then.

If the Fed does cut rates in late July, it won’t be for good reasons. It’ll be because the economy has fallen into a recession. But given the boost to U.S. growth from out-of-control government spending in an election year, the recession may be postponed. So don’t count on a July rate cut either.

There’s no Fed meeting in August. The next meeting after that is Sept. 18. The Fed may be ready for a rate cut by then but here’s the problem: The Sept. 18 date is just seven weeks before the election on Nov. 5. The Fed pretends it’s non-political but in fact, it is highly political.

A rate cut in September will be viewed as helping Biden by boosting the economy and hurting Trump. At the same time, Trump is the likely winner based on currently available polling data and trends.

The Fed won’t want to be in the position of appearing to boost Biden and hurt Trump if Trump is going to win. Trump will make the Fed Public Enemy No. 1 and that’s the last thing they want. So the Fed will take a pass in September.

There’s no Fed meeting in October. The next two Fed meetings after that are on Nov. 7 and Dec. 18, both safely after the election. The Fed could cut rates at both meetings. But the Fed has painted itself into a corner on that.

The US stock market has been running on Fed Happy Talk. That situation may end abruptly on June 12 if the Fed doesn’t cut rates and signals that rate cuts are not to be expected in the near future and perhaps not before the end of the year.

By then, we may be facing one of the worst economic outcomes possible: recession + inflation = stagflation.

Anyone under the age of 60 (which includes me) probably has no acquaintance with stagflation.

The U.S. last experienced this in 1977–1981. I was 5 in 1977 and I have read how great it was for leveraged holders of hard assets such as gold and real estate.

It was a nightmare for holders of stocks. (The long-term bull market in stocks did not start until August 1982.)

Investors might keep that winning hard asset portfolio allocation in mind as events unfold between now and June.

Seems the portfolio of the Future is Gold (and other precious metals), Bitcoin, Residential Real Estate. Basically own things that have some sort of intrinsic value not things that require leverage to make money.

and don't forget The Fed next week where no action is expected, but the words of nothing nothing may speak even louder this time.

Happy Friday

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