New
Highs, Old Headaches as 3% Inflation, Weak Consumers, and Rampant Euphoria
Persist
By the Curmudgeon with Victor
Sperandeo
Week in Review:
Stocks continued their relentless rise, despite the continued
government shutdown, weak consumer sentiment and a CPI reported to be well
above the Fed’s 2% target.
Here’s what happened
last week:
Nasdaq CTA Artificial Intelligence Index (NQINTEL) was +1.96% on Friday closing at a new
all-time high of 3,631.64 and + 50.29% over the last six months.
The DJI, Nasdaq and
S&P 500 also hitting record levels, largely
due to AI-driven technology stocks.
The DJI average of 30 stocks closed above 47,000 for
the first time at 47,207.12.
Margin Debt increased
by 6.3%, rocketing up to $1.13 trillion. The rise lifted the Margin Debt Carry
Load as a % of GDP, which takes borrowing costs into account, up to a new
all-time high as speculation continues to run wild.
Meme stocks experienced
a frenzied and volatile rally, driven largely by speculation and a short
squeeze in Beyond Meat (BYND). Other stocks like Krispy Kreme (DNUT) and GoPro
(GPRO) also saw significant, though less extreme, volatility. The surge, which
drew comparisons to the meme craze of 2021, appeared to be largely detached
from company fundamentals.
The Consumer Price Index (CPI) came in a tiny bit cooler on Friday, as it rose 3%
year-over-year (YoY) vs the 3.1% expected. Nonetheless, it was up from 2.9% YoY
last month. That’s still a full percentage point over the Fed’s 2% target, but it
clears the way for a 25bps rate cut at the FOMC meeting end on October 29th.
The Core CPI rate, which excludes the volatile food and energy components, also
came in at 3% YoY which was a slight decrease from 3.1% last month.
Stocks cheered this benign CPI report which vaulted the major
indexes to new all-time highs. U.S.
intermediate and long-term yields ticked up slightly, perceiving the report as an
indicator of sticky inflation.
Consumer Sentiment from the
University of Michigan dropped 1.5 points to 53.6 as consumers’ evaluations of
the present and their expectations for the future slipped. This is one of
the lowest readings on record, indicating that consumers continue to be
pessimistic about their personal financial situations.
U.S. President Donald Trump announced a new 10% general tariff on
Canadian exports to the U.S., but the specifics are still being determined. The
catalyst was an Ontario government television advertisement which criticized
U.S. tariffs using the words of former President Ronald Reagan. Trump
considered the ad a hostile act and a misrepresentation of facts, leading him
to retaliate with a 10% increase in tariffs.
Existing Home Sales ticked up by
1.5% in September while inventory also increased 1.3% and 14% year-over-year.
Despite this slight increase in sales, the median time on the market for
properties increased from 31 days to 33 days. This is a sign that even with
slightly lower mortgage rates the housing market is still unable to gain
momentum.
The U.S. government shutdown, now in its 4th week, has hit federal employees
hard. Approximately 1.4 million federal employees are currently not receiving
wages as they’ve either been furloughed or working without pay. Conventional wisdom holds that a prolonged
shutdown should rattle markets. Yet Wall Street’s response has been a
collective shrug. Investors have treated Capitol Hill gridlock as background
noise, and in the absence of new data, “no news is good news” has
prevailed. Paradoxically, the news vacuum may even embolden bulls.
Fed Watch:
It’s all but certain that the Fed has abandoned its stated 2%
inflation target. The CME Fed Watch tool
assigns a 96.2% probability of a 25bps rate cut on Wednesday, October 29th
and a 91.7% probability of another 25bps cut at the December 9th
FOMC meeting. In addition, the Fed is expected to announce the end of
Quantitative Tightening or QT (reducing the Fed’s balance sheet via
runoffs) despite extremely lose financial conditions as we documented in last
week’s Curmudgeon/Sperandeo post.
It will be most interesting to hear how Fed Chair Jerome
Powell at his Wednesday press conference as he explains why the Fed will be
adding even more liquidity to the financial system despite rampant speculation
in many asset classes and YoY inflation 50% above its stated 2% target.
U.S. Bond Market:
While the Fed has been and will
continue lowering short term interest rates, it hasn’t helped bond
investors. Jeff Sommer wrote in Sunday’s NY Times (print edition):
For bondholders, the pain persists. In the five years through Oct. 20,
the core Bloomberg U.S. Aggregate was down 0.1% annualized — a small loss but
compare that to the 16% annualized gain of the S&P 500. For longer-term
Treasuries over the same period, the performance was horrendous: The iShares
20+ Treasury Bond E.T.F. lost 7.7%, annualized, for a 33% cumulative loss,
according to FactSet.
Another startling downturn in bond prices occurred in April after
President Trump’s “Liberation Day” announcement. “People were getting a little
queasy,” Trump said on April 9th, explaining why — at least temporarily — he
moderated his tariff policy. “The bond market is very tricky,” he said.
The government funding shutdown is harming the economy but even if it
ends soon, it is likely to contribute to the erosion of the U.S. government’s
reputation.
After myriad shutdowns and debt ceiling crises, the U.S. government bond
rating is no longer first-rate in the eyes of any of the major credit-rating
agencies. The so-called risk-free Treasury has been tarnished.
The gradual loss of Treasuries’ pristine status has increased the yields
that must be paid in the marketplace. Those higher yields are adding to the
burden of future taxpayers and increasing the costs for businesses and
consumers.
Victor’s Comments:
Most recent economic indicators are backward-looking and appear
weaker. I largely discount the CPI as a politicized measure often used by the
Fed to justify policy decisions. Meaningful economic forecasting depends
instead on identifying the most rational and credible sources.
Among bearish economists, Lacy Hunt, PhD stands out as one of the most respected
voices—recognized by both The Curmudgeon and Victor as “best of breed.”
David Rosenberg (“Rosie”) is another credible bear. In this
video, he opines “the economy is in serious trouble.” In an October
26th Thoughtful Money piece,
he says “All Bubbles End - So You'd Better Have Some Liquidity.”
On the bullish side, Anna Wong of Bloomberg offers a
thoughtful counterpoint. In her October 2nd interview with Adam
Taggart (Thoughtful Money: Warning for the Bears). She outlines five reasons for her optimism:
1.
Trade policy uncertainty has
peaked. (I disagree.)
2.
Fiscal spending is
moderating, which should add to GDP.
3.
Financial conditions have
eased 0.5–1% as the Fed loosens policy.
4.
AI-related capital
expenditures are boosting productivity and GDP.
5.
The business cycle may be
turning up as auto, consumer, and credit card delinquencies have peaked.
While I don’t share Ms. Wong’s bullish outlook, her
perspective is worth hearing for balance and context. In general, most “market soothsayers” avoid
direct answers—clarity and specificity remain rare commodities. When you find
an analyst who answers questions directly, they’re often more valuable, even if
occasionally wrong.
Looking ahead, I expect the Fed to cut rates by 25 bps, but
the real market driver will be balance sheet policy,
i.e. QT as discussed above by the Curmudgeon. Powell’s post-meeting Q&A will be
pivotal. He has four remaining FOMC meetings before his term ends (April 27–28,
2026), with no likelihood of extension considering all the criticism he’s
received from Trump.
Victor’s Market Positioning:
·
Gold: Bullish, though a
correction may be underway.
·
5-Year T-Note Futures: Bullish
and long.
·
Silver Futures: Selling
trading positions on the 29th, maintaining core holdings in silver dollars.
·
Crude Oil: Likely bottomed; no
position yet.
If geopolitical tensions—particularly U.S. policy toward
Russia—intensify, oil prices could double. Treating Russia as a secondary power
risks severe market repercussions and appears strategically reckless.
End Quote:
“Human beings act in a great variety of irrational ways, but
all of them seem to be capable, if given a fair chance, of making a reasonable
choice in the light of available evidence. Democratic institutions can be made
to work only if all concerned do their best to impart knowledge and to
encourage rationality. But today, in the world's most powerful democracy, the
politicians and the propagandists prefer to make nonsense of democratic
procedures by appealing almost exclusively to the ignorance and irrationality
of the electors.”
Aldous Huxley was a prolific English
writer and philosopher who produced nearly 50 books across genres, including
novels, essays, poetry, and travel writing. He's best known for his 1932
dystopian novel “Brave New World,”
which depicts a future society where citizens are engineered into a social
hierarchy based on intelligence.
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Wishing you good health, success and good luck. Till next
time……
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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