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5 Things to Know in Investing This Week – October 6th, 2023

The Things That Aren’t an Issue Issue

The market is deep into over-reacting to surface analysis mode. Stock prices are responding to news no one will remember in 5 days or to data that’s going to be revised out of meaning next month. In this special issue of the 5 Things, we’re going to focus on things that people think matter, but don’t (at least in terms of medium to long-term stock prices).

We’ll also be releasing the public version of Counter-Intuitive Inflation this week where we examine whether Federal Reserve rate hikes can create more inflation. DKI premium subscribers got their copies two weeks ago.

In this week’s list of 5 Things that don’t matter for your portfolio, we examine:

  • The Speaker of the House ousted in mid-Congressional term by his own party.
  • Multiple contradictory employment reports which will be revised to mean something else.
  • The current strong housing market and whether the AirBnBust can crash it.
  • GDP non-recession – due to government spending. Ponzi-on.
  • Short-term volatility. People are trading minor things and ignoring the big picture.

Ready for a week of things you can safely ignore? Let’s dive in:

 

1)  Speaker McCarthy Ousted:

For the first time, a sitting Speaker of the House was voted out of the position during a Congressional term. This was caused by a small group of Republicans who are trying to cut spending. They were upset with the Speaker for cutting a deal with the Democrats approving more spending. We’ve been told by the hysterical people in the press that this means the Republicans are dysfunctional and incapable of governing, that this means the government will shut down later this year causing immeasurable chaos, and one well-known pontificator wrote in public that this vote brought the US closer to a civil war. I have personal and professional respect for the unnamed alarmist, but disagree that having to pick a second Speaker this Congressional term is the end of the Republic.

It’s all theater. No one is cutting spending. (Caption from last week. Left it because it’s still accurate.)

DKI Takeaway:  The US Federal government is on pace to spend over $6T this year (plus additional spending by the States). Regardless of the other policy views of the dissident Republicans, having a few people in Congress try to put the brakes on spending increases isn’t the end of the United States. We might have a government shutdown later this year. We’ve all lived through them before, and most of us can’t remember the last 2-3 of them because they were so unimportant to the lives of the average American. Finally, even a more fiscally conservative new Speaker of the House isn’t going to be able to get real spending cuts through a small but disciplined Democratic majority in the Senate. The end result is going to be the same overspending we had before. DKI suggests hedging for higher inflation and higher future long-term rates.

2)  More Games with the Employment Reports:

Early in the week, we saw a new US Job Openings report that showed available jobs heading back up towards the 10MM mark. This sent the markets down on the theory that a strong employment market means higher wages, more inflation, and a possible additional rate hike by the Federal Reserve. At the end of the week, we saw a jobs report indicating the US economy added 336k jobs which was almost double the 170k expected. This initially sent the market down, but once people realized full-time jobs decreased and were replaced by more part-time workers, and that wages increases had slowed, that sent the market up. The thinking is a weaker job market without as much full-time employment means lower inflation and a reduced probability of another Fed rate hike.

9.6MM jobs available in August is a huge number.

DKI Takeaway:  It’s been a DKI mantra for years that government statistics do not represent reality; but rather, are generated by government employees to advance a specific narrative. In addition, we’ve noted that government reports tend to give positive data when the market is looking, and then revise the numbers in a negative direction a month or two later when there’s less attention. The rest of the market has started to pick up on this trend, and we’re seeing an increasing number of market participants ignore the “official” data knowing it will be revised so much in a month or two that the current “information” doesn’t carry any valuable understanding of the economy. This is the economics version of The Boy Who Cried Wolf.

 

3) The AirBnBust Isn’t Here Yet:

Last week, we commented on plummeting housing transaction volume. This week, I saw references to massive forced sales by owners of multiple AirBnB properties. The narrative was reduced bookings combined with higher interest rates and leveraged properties were going to force owners to sell and take down the housing market. The evidence cited was a huge increase in Google searches. Let’s examine the evidence:

Anecdotal evidence – yes. Data – no.

DKI Takeaway:  I find the thesis compelling, and like many, have seen lots of social media posts by AirBnB hosts complaining about falling rental volume. If they can’t rent their properties, they’ll have to sell and the additional volume would almost certainly bring down housing prices. While this could happen, continued high housing prices and low volume indicate it hasn’t happened yet. As for search volume indicating panic, the data doesn’t support that interpretation yet.

 

4) The GDP Non-Recession Brought to You by Government Spending:

One of the favored past-times of the 2022/2023 financial world is speculating on when we’re going to have a Federal Reserve-caused recession. DKI correctly called recession last year, but the political group that makes the official decision declined to define last year’s 2 quarter GDP decline as a recession for political reasons. Gross Domestic Income (GDI) is indicating a likely recession as is the inverted yield curve. Gross Domestic Product (GDP) is still showing growth. What’s going on here?

We now have constant “emergency” spending.

DKI Takeaway:  The 2008 bailout spending got incorporated into the baseline and then the same thing happened with “extraordinary” Covid emergency spending. The Federal government is spending at emergency levels with GDP (nominally) growing, a tight labor market, high inflation, and the country at (relative) peace. Many forget that government spending is additive to GDP regardless of whether that spending produces value or not. We’re seeing the government print more currency to fund more debt-fueled spending which masks any underlying economic weakness. That means the official numbers aren’t real, or reliable.

 

5) Short-Term Volatility Will Lead You Wrong:

We get an employment report causing the market to plummet. A subsequent employment report causes the market to skyrocket. A Federal Reserve Governor can’t resist a microphone in public and tech stocks jump in response to speculation on future rates. The yield curve becomes less inverted leading some to insist the recession is starting and others to debate the implications of a “bear steepening” or a “bull steepening” of the curve.

The bond market is starting to recognize a long-term problem.

DKI Takeaway:  This kind of discussion and debate is an interesting part of the job and a valid attempt at understanding market moves better. However, the real long-term issue is a government that’s spent us into almost $250T of liabilities that can’t ever be paid. Current debt on the balance sheet is $33T and is increasing by about $2T a year. The currency creation to fund that spending will lead to future inflation. Like the Bank of Japan, the US Federal Reserve finds itself trapped with no good options. The bond market is recognizing this problem with yields going from 4.3% to 4.8% in the last week. We’ll be releasing the eBook version of Counter-Intuitive Inflation this week to explain the issue in greater detail.

 

 

Information contained in this report is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied and DKI makes no representation as to the completeness, timeliness or accuracy of the information contained therein or with regard to the results to be obtained from its use.  The provision of the information contained in the Services shall not be deemed to obligate DKI to provide updated or similar information in the future except to the extent it may be required to do so. 

The information we provide is publicly available; our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion are precisely that and are subject to change. DKI, affiliates of DKI or its principal or others associated with DKI may have, take or sell positions in securities of companies about which we write. 

Our opinions are not advice that investment in a company’s securities is suitable for any particular investor. Each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose. 

In no event shall DKI be liable for any costs, liabilities, losses, expenses (including, but not limited to, attorneys’ fees), damages of any kind, including direct, indirect, punitive, incidental, special or consequential damages, or for any trading losses arising from or attributable to the use of this report. 

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