Is The Consumer Dying?

Estimated read time: 2 minutes and 45 seconds

In this week’s newsletter:

1. Market recap

2. Top holdings: what I am buying & selling

Market Recap

YTD returns:

• S&P 500: +7.76%

• Nasdaq: +15.83%

• Russell 2000: +0.98%

• US Dollar ($UUP): -0.50%

• Gold ($GLD): +9.85%

Consumer Price Index (CPI): 5% Actual, 5.2 % Forecasted, 6% Prior

The Fed's primary job is to control monetary policy so that inflation stays near ~2%, yet after a boat load of rate hikes they still can't get it below 5%...?

Yes, the prior rate hikes have been working. Inflation is slowing. But it's not slowing fast enough.

We can see the effects that interest rate hikes (blue line) have on inflation (red line) - as interest rates rise, inflation falls soon after.

Cost of borrowing goes up, demand goes down, prices follow. Congrats, you've just passed Econ 101.

But, contrary to popular economic belief, just because interest rates are being cut doesn't mean that the economy goes into boom mode...

In the graph above, the Fed was cutting interest rates during every single recession. So yeah, go ahead and beg some more for rate cuts. I dare ya.

But the reality is, more interest rate hikes...isn't the answer? Sure, it will help bring inflation down. But it will cripple an economy that is showing signs of slowing growth.

When the economy is growing as the same time interest rates are on the rise, businesses can combat the increased cost in borrowing because their revenues are soaring.

But if growth is slowing (hint: it is) then it's a double whammy of less revenue at the same time the cost of borrowing gets higher. Boom...recession.

So what does the Fed do from here? It doesn't look promising, Chief.

Retail Sales: -1% Actual, -0.4% Forecast, -0.2% Projected

It's no surprise that the consumer is the heartbeat of our economy. When the consumer is healthy they spend more. Spending more means businesses make more money. Higher revenues means higher stock prices. Congrats, you've just passed Econ 102.

But when inflation rips the faces off consumers, demand starts to slow and company revenues follow. The economy tanks.

If you look at the above chart, the peak of retail sales was when? January 2022.

When did the S&P 500 peak? January 2022.

Now, is the latest retail sales number catastrophic compared to history? Absolutely not.

But is the health of the consumer in good shape?

Credit card debt has been soaring as consumer combat historic levels of inflation. What doesn't help is annual APR levels are also historic!

Knowing that the consumer is the heartbeat of our economy, what do you think will happen to demand when the consumer has to pay off debt (that they can't repay) while also racking up $$$ in interest payments.

Consumer demand down. Company revenues down. Interest rates up.

What could possible go wrong?

In The Account | my top holdings

1. GOLD - $GLD

   1. Still beating the S&P 500 YTD. But hey, who's keeping track.

2. BONDS

   1. The economy will slow, at it's fastest pace in Q2. Slowing growth is bullish for bonds, and we can see that across the broader basket of Bond ETFs that I've been adding to

   2. $EDV, $TLT, $BNDD, $IIGD, $AGG

3. US DOLLAR - $UUP

On The Radar | positions I want to build / sizing up

1. CHINA

   1. The only economy in macroeconomics that is actually accelerating. So we wait, and we watch, and we invest when the timing is right

Off The Grid | removed positions / short selling opportunities

1. TECH - $XLK, $QQQ, $GOOGL, $TSLA, $NFLX

2. RETAIL - $XRT

3. HIGH BETA - $SPHB

4. CRYPTO - $BITO, $MSTR

5. HIGH YIELD - $HYG

6. ENERGY - $XOP

7. BASIC MATERIALS - $XLB

Until next week....

-BW

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.