Both the CPI and the PPI rose from the prior month (again) as DKI predicted. Yet, the Fed is about to cut rates for the third time this year. Just a reminder that we can make money even from bad policy, so make sure your portfolio is prepared for more inflation. The European Central Bank cut their version of the fed funds rate this week. Stagnant growth, political instability, and bad energy policy are hurting the continent. Macy’s lowers guidance and for the fourth week in a row, DKI reports on weakness in retail sales. Despite that, young people looking for in-person experiences are making more trips to the mall. This reminds me of some of the teen films from my youth with scenes in shopping malls. In our educational “Thing”, we discuss how to think about a short-term vs long-term investment thesis. Finally, DKI always stands against governmental overreach. This week, an Ohio legislator tried to make planting a flag at Ohio Stadium a felony. If you can’t win…legislate? DKI recommends that Ohio representatives take some advice from Michigan’s unstoppable running back and philosopher, Kalel Mullings who suggested “They’ve got to learn how to lose.”

This week, we’ll address the following topics:

• CPI rises. PPI rises. Fed about to cut again. What could go wrong?
• The ECB cuts rates. Europe still has stagnant economic growth and political upheaval.
• Macy’s $M lowers guidance. 4^th straight week we report on weak retail sales.
• Mall-based retail may have a future, but they’re going to need to do more than offer signatures from Ohio State players to succeed.
• How to make money whether your thesis is long-term or short-term.
• Legislative overreach in the State of Ohio indicates the state of Ohio is miserable.

A typically strong week from the interns. Alex contributed a scholarly section to the re-release of a DKI white paper on Bitcoin. Look for that in the next couple of weeks. Andrew wrote much of this week’s 5 Things including some funny sections. This is his last official week and we thank him for his meaningful contributions to the DKI community and to the 5 Things! He moves on with our applause and appreciation.

Ready for a week of high inflation and apoplectic Ohioans? Let’s dive in:

1) Inflation Roars:

On Wednesday, we got the November Consumer Price Index (CPI) report which showed an overall increase of 2.7% for the last year and 0.3% for the month (annualizes to 3.7%). That’s above last month’s 2.6% and above the prior month’s 2.4%. The Core CPI, which excludes food and energy, was up 3.3% vs last year and up 0.3% from last month. That 0.3% annualizes to 3.7%. Those figures were in-line with expectations and consistent with the prior month. On Thursday, we got the Producer Price Index (PPI) which measures wholesale pricing and is a leading indicator of future CPI releases. It showed an annual increase of 3.0%, up from last month’s 2.6%. It was up 0.4% for the month which annualizes to 4.9%. Core PPI increased 0.2% and was up 3.5% on an annual basis. This was higher than anticipated driven by a substantial increase in eggs, dry vegetables, poultry, and fresh fruits. (Insert constant reminder that we believe food inflation to be understated.)

Core still sticky. CPI rising again. They keep telling us they have inflation under control.

A rising PPI will lead to a future rise in the CPI.

As foretold by the prophecy. (I’ve wanted to use that line for years.)

DKI Takeaway: When the Fed lowered the fed funds rate in September, and again in November, DKI warned of the “Arthur Burns” problem. Burns was the Fed Chair who reduced the fed funds rate while inflation was on the way down, but not under control. That’s where we are now with the Fed cutting into above-target and rising inflation. With Congressional overspending (regardless of which party is in control), there’s continued inflation-causing stimulus. Other inflation metrics have risen in recent months as well. President-Elect Trump has made it clear that he wants a more accommodating Fed. It will be interesting to see if the Powell-led Fed, which cut rates just before the election, will push back with a pause or higher rates in the next year. On to next week, the Fed will likely go against our analysis and cut rates another 25 basis points. We’d offer them a complimentary subscription to DKI, but don’t trust them to use it.

2) The ECB’s Reluctant Rate Cut:

Last week, the European Central Bank (ECB) shaved its deposit rate to 3%, marking the fourth cut this year. On paper, it’s a move to address stagnant growth and waning inflation. In reality? Let’s just say they’re doing what’s necessary to keep the ship afloat. President Christine Lagarde (who DKI insists is not a vampire) acknowledged that some policymakers had flirted with the idea of a larger, 50-basis-point cut, but ultimately settled for 25. The ‘official’ rationale? Sluggish growth and inflation expected to hit the 2% target by 2025.  Growth forecasts continue their descent, with GDP for 2025 now pegged at a feeble 1.1%. The ECB also dropped its commitment to “sufficiently restrictive” policy, hinting that rates are heading back to a neutral zone—though not because the economy is thriving. The Euro responded by slipping over 0.1% to $1.05.

Euro weakening again. Bad energy policy, bad labor policies, and overspending have a cost.

DKI Takeaway: The backdrop isn’t doing Europe any favors. Germany faces early elections, France wrestles with political instability, and potential US tariffs are threats that could batter an already fragile trade environment. Add in massive overspending, self-destructive energy policies, and difficulty integrating immigrants from different cultures, and it’s going to be a challenge for the ECB to encourage meaningful economic growth.

3) Macy’s Disappoints:

This marks the fourth consecutive week of covering disappointing consumer news. Macy’s $M reported earnings last Wednesday after a delay in November due to internal accounting fraud involving $151 million in unreported delivery expenses. To make matters worse, the earnings report wasn’t positive. Revenue fell 2.4% year-over-year to $4.7 billion, and adjusted EPS dropped sharply from $0.21 last year to $0.04. End-of-year adjusted EPS guidance was cut to $2.25–$2.50 from the previous $2.34–$2.69. However, the company did raise its revenue guidance slightly from $22.3 billion to $22.5 billion, which would still be below last year’s revenue.

Mall-based retail and department stores permanently off the highs.

Refinancing the debt is going to increase interest expense. Source.

DKI Takeaway: We have consistently blamed inflation on excessive government spending. Higher prices have caused consumers to shift away from discretionary goods and higher-priced shopping locations toward more affordable options like Walmart $WMT and Dollar Tree $DLTR. While rising prices and reduced spending on discretionary goods are contributing to Macy’s disappointing earnings, there is more to the story. Consumers have been transitioning away from in-store shopping to e-commerce for the past 15 years, and Macy’s has been slow to adapt. Additionally, their declining sales coupled with upcoming debt refinancings could create a precarious situation for the stock price. Macy’s is an iconic American brand that is attempting to revitalize itself with both store and square footage cuts and increased emphasis on merchandizing.

4) Is Gen Z Actually Embracing Malls?:

A recent CNBC article highlights a new trend of Gen Z beginning to embrace the mall shopping experience. The article presents some excellent reasons. One of these is Gen Z’s obsession with instant gratification, which leads to a preference for receiving products immediately instead of waiting a day or two for delivery. It also touches on Gen Z’s interest in experiences, even more so than millennials, likely due to Covid lockdowns. The article further mentions changes retailers are making to lure shoppers back into stores, such as having Ohio State football players offer signatures. No word on whether those are still in demand after four straight losses to Michigan. (Note that superstitious OSU fans refer to Michigan as “that team up north” because, like “Voldemort”, just saying the name can cause them to appear.)

Some mall-based brands are luring in traffic.

DKI Takeaway: Intern Andrew weighs in on the subject:  As a member of Gen Z, I agree with some areas of this article; however, I find certain aspects deceiving. The article paints a picture of Gen Z roaming the halls of malls like it’s the ’80s. That is not the case. Malls across the country have enacted restrictions requiring teens to have chaperones or imposing curfews due to rising crime and the overall deterioration of the shopping experience. One thing this article gets right is the transition toward experiences, which I see across the board with all generations. Shoppers today want experience in some regard, whether it’s free samples, rock-climbing walls, or top-tier merchandising. Another important distinction in mall shopping is the type of stores Gen Z prefers. Classic department stores like Macy’s $M, Dillard’s $DDS, or Nordstrom $JWN are not where they shop. Younger people gravitate toward smaller boutique stores. Looking ahead, I see malls surviving only in a smaller, hybrid indoor-outdoor format that enhances the customer experience.

5) Identifying Long Term Growth vs. Short Term Trends

In this week’s Ask Gary segment, we received a great question about distinguishing between growth companies with true long-term potential and those riding short-term trends. The investment landscape surrounding COVID-19 is a prime example, as hundreds of companies saw their prices soar due to short-term trends, such as people being stuck at home. For example, companies like Peloton $PTON and Zoom $ZM soared to absurd valuations that reflected immediate conditions, but not long-term potential.

It was glorious – until it wasn’t.

DKI Takeaway: DKI has a long list of stocks that we’ve identified for both short-term and long-term trends, which have led to high-return investments. Take HCA Healthcare $HCA, for example, which we bought back in 2020 when it was trading as if it were going out of business due to COVID-19. That didn’t happen and DKI subscribers made more than 100% in under a year. The market had incorrectly sent the stock down creating the opportunity for us. We have other stocks in the portfolio right now that have traded down on temporary news, but where we like the long-term outlook. If you’re willing to be patient and accept some additional volatility, there are opportunities to earn outsized returns. If you’re interested in learning more about our positions, be sure to check out our positions page and consider subscribing to a DKI premium membership.

6) Government Overreach:

College football entered the political arena this week, and we’re going to take a moment to talk about the state of Ohio (and the State of Ohio). On Wednesday, State Representative, Josh Williams, announced his intention to introduce a bill that would make flag planting at Ohio Stadium a felony. This follows Ohio State’s embarrassing 13-10 loss to Michigan in late November with Michigan attempting to plant their flag on the OSU field. After a weak performance during the 60-minute game, OSU players finally found their pride, raced across the field and started a post-game fight resulting in the police pepper spraying players. This conveniently gave the OSU team an excuse for the evident tears.

Source: Actual photo of Michigan saving the world by poking out the Eye of Sauron.

DKI Takeaway: Flag planting is not the classiest move after a win over your biggest rival, but should it be illegal? The answer is no. OSU fans are just severely (and justifiably) embarrassed after their $20 million roster could not beat a recovering (and defending National Champion) Michigan team which lost most of its players to the NFL. The best way to prevent a humiliating flag planting isn’t overreaching legislation. It’s to win the game. DKI notes that this was the fourth straight Michigan win in the series, and that by the time these teams meet in Ann Arbor for the 2025 game, it will have been more than 2,000 days since OSU beat Michigan. For the delicate OSU fans who are mortified by a flag celebration, but who also derisively refer to their rival as “that team up north”:  It’s spelled Michigan.

Here’s the video version: https://youtu.be/E2yqcsrQVjM

 

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