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Weekly Points – June 28th, 2024 – 5 Things to Know in Investing This Week – The Let Them Eat Cake Issue

We lead off with a government official meme’ing herself. (Is meme’ing a word? Can we get a ruling by someone over the age of 25 on that?) Despite a terrible reputation as someone who doesn’t understand the impact of inflation on normal people, Treasury Secretary, Janet Yellen, couldn’t resist letting Americans know she thinks their grocery prices aren’t up by much. authID $AUID completes a hugely oversubscribed secondary offering. The situation at this rapidly-growing micro-cap is de-risking much faster than even I had expected. DKI provides a revised opinion on the opportunity to subscribers who are already up 38% in a few months in the stock. Proving that no one in government knows anything about history, Canada channels former Fed Chair, Arthur Burns. They say monetary policy acts on a lag, but in this case, regret comes immediately. Moving to Central Bank problems on the other side of the world:  I like Japan. I’ve had positive experiences with Japanese people and there is much about their culture to be admired. Despite that, we’re again pointing out the mess created by the Bank of Japan as the yen continues to fall. Back to the US:  The jobs data was corrupt. That should not surprise any DKI readers. The new jobs data is becoming consistently more corrupt. Are any of you surprised by that? Finally, the new PCE comes in both lower and in line with expectations. Will that finally force the Fed to reduce rates? We opine.

This week, we’ll address the following topics:

  • Treasury Secretary, Janet Yellen, memes herself.
  • authID $AUID completes oversubscribed financing. Situation de-risking quickly.
  • Canada makes the Aurthur Burns mistake and pays for it immediately.
  • The yen breaks through the 160 mark. Currency interventions are ineffective, but the BoJ still keeps too-low rates.
  • The jobs data is corrupt. You knew that, but here we are again.
  • The PCE is in line with expectations and falling. Will the Federal Reserve join Canada and cut?

Another round of applause for the DKI Interns. Andrew is back from Scotland and Alex has become a major contributor in under two weeks here at DKI. They both added in significant ways to this week’s content including pitching topics, preparing graphs, and writing text. Witness the power of this fully operational 5 Things.

Ready for a new week of memes and cake-related financial news? Let’s dive in:

1) Let Them Eat Cake:

Our friends at Unicus Research once described Treasury Secretary, Janet Yellen, as the Marie Antoinette of our inflation. In a moment reminiscent of Marie Antoinette’s infamous “Let them eat cake” quip, Treasury Secretary Janet Yellen’s recent comments on soaring grocery prices left many investors and consumers scratching their heads. As Americans grapple with escalating food costs, Yellen’s response seemed strikingly detached from reality. Speaking at a press conference, Yellen downplayed concerns about inflation’s impact on household budgets, suggesting that economic adjustments were well underway. However, her remarks seemed to ignore the daily struggles of families facing inflated grocery bills. With the cost of staples like bread and milk hitting record highs, Yellen’s optimistic outlook appeared disconnected from the lived experiences of ordinary Americans.

Janet-x-Marie

Chat GPT plus very creative intern, Alex.

DKI Takeaway: Yellen explained, “I think largely it reflects cost increases, including labor cost increases that grocery firms have experienced, although there may be some increases in margins.” Yellen’s comments serve as a stark reminder of the disconnect between policymakers and the public they serve. Given that Yellen has an 8-figure net worth, it’s not incomprehensible that she wouldn’t understand the impact of a $100 increase in a weekly grocery bill for the average consumer. However, given that she’s been a multi-decade Washington DC operator, I find it hard to believe she thought it was a good idea to say this in public. As the phrase “Let them eat cake” historically symbolized aristocratic indifference, today it seems Yellen’s version might be “Let them eat spreadsheets.”

2) authID $AUID Completes Secondary Offering – Situation De-Risking Rapidly:

Last Tuesday evening, authID announced it completed a secondary offering for $11MM. The company had been open about the fact that it expected to run out of cash by the 4th quarter. Now, authID has more than $15MM in cash on the balance sheet meaning they won’t need to raise capital for another year or more. Not only does this offering eliminate significant downside in the stock, it’s encouraging to potential customers who no longer need to consider the possibility $AUID runs out of money this year.

authid-logo

The best solution in biometric security just shed significant downside.

DKI Takeaway: When I first wrote on authID, I thought the company needed to do three things to succeed. Financial reporting under CFO, Ed Sellitto, has been improved with more clear data being provided to investors. This just-completed (and hugely oversubscribed) secondary offering slashes the probability of a negative outcome in the stock. Finally, new CEO, Rhon Daguro, will need to deliver new contracts in the second half of this year. He’s expressed confidence in the sales outlook multiple times in public including in a webinar with DKI. The company has started to talk about a new public key / private key measure that provides customers and their users with additional security. DKI will host a follow-up webinar with management when they’re ready to disclose more in public.

3) Canada Makes the Arthur Burns Mistake:

Canada’s economic scene took a surprising twist in May as consumer prices surged, complicating the Bank of Canada’s recent rate cut strategy. The Bank of Canada reduced its key policy rate to 4.75% on June 5th, making it the first G7 country to do so. Governor Tiff Macklem emphasized that further cuts would be gradual and data dependent. Yet, May’s inflation data showed annual inflation jumping to 2.9% from April’s 2.7% which is a cause for concern. Core inflation measures rose, defying the expected cooling trend. Market reactions were swift, with the chance of a July rate cut dropping to 45% from over 70%. Economists like Royce Mendes of Desjardins and Andrew Grantham of CIBC had anticipated further cuts, but rising inflation has dampened these expectations.

Canada Inflation and Interest Rates

That tick up at the end is small, but is the opposite of what you want when cutting rates.

DKI Takeaway: The great inflation of the 1970s in the US started in the ‘60s. Fed Chairman, Arthur Burns, raised rates, and when inflation started to subside, he was too quick in reducing the fed funds rate. That led to another round of roaring inflation that caused the economy to sputter for the latter half of the ‘70s. Burns was replaced by Paul Volker who brought inflation under control with a crushing fed funds rate of around 20%. US debt is now at a level where Volker-like rate increases aren’t a possibility which means current Chairman, Powell, has less leeway to fix any mistakes made by lowering rates too soon. I suspect Canada’s misadventure in too-soon rate cuts will have Powell’s attention. To Canada’s detriment, they missed Powell’s “higher for longer” mantra and unfortunately for Canadian citizens, their officials clearly aren’t readers of the weekly 5 Things.

4) Down Goes the Yen! Down Goes the Yen!:

The Bank of Japan’s (BoJ) economic stimulus and loose monetary policies over the past decade have significantly weakened the yen. In 2013, the Japanese government aimed to accelerate the economy with billions in economic stimulus and almost a decade of negative interest rates. That, combined with rate hikes from the US Federal Reserve, led to a crash in the yen, now down about 60% vs the dollar in under four years.

Bank of Japan Currency Intervention

These interventions work for 24-48 hours.

DKI Takeaway: The BoJ has tried multi-billion-dollar interventions to prop up the yen. These efforts are effective, but only for 1-2 days. Following that, the yen slides back to its previous low levels against the dollar. That’s because temporary market interventions do nothing to address the underlying problem. If the BoJ wants to support the yen, it will need to raise interest rates. Given Japan’s massive debt which exceeds 260% of GDP, any rate increases will blow out their budget and cause more yen printing to pay the higher interest expense. That leads to more inflation. They are stuck. For readers who support modern monetary theory (MMT) and endless spending in Washington DC, please view this example as a warning.

5) The Jobs Data is Corrupt. Are you Surprised?:

It has been a long-standing opinion of DKI that government data is fundamentally flawed. Employment statistics are particularly problematic. Each month, state employment figures from the Current Employment Statistics (CES) survey are published, based on a limited sample of businesses. These numbers are further subject to annual benchmark revisions by the U.S. Bureau of Labor Statistics (BLS). These aim to align the CES estimates with more reliable data from state Unemployment Insurance programs. However, this annual update often comes too late to correct initial inaccuracies. Since 2021, the Federal Reserve Bank of Philadelphia has been rolling out quarterly state-level “early revisions” using the same data as the BLS. These frequent updates have highlighted some eyebrow-raising discrepancies between initial and revised figures.

California Net Jobs

Initial reports said job growth. Future revisions indicate none.

DKI Takeaway: Take this gem:  preliminary reports flaunted a stellar job growth of 117,000 from September to December 2023.  Then early revisions resulted in a rug pull by revealing a jaw-dropping loss of 32,000 jobs. Confusing? The simple takeaway is California reported big growth in 4Q jobs and then revised that to job losses (red line in the graph above). Total gains for the State for all of 2023:  9,000 jobs. With data like this, it’s hard to criticize Jerome Powell for not having confidence in the Fed’s projections.

6) The PCE Declines:

The personal consumption expenditures price index (PCE) is the preferred inflation gauge for the Federal Reserve because it more closely matches actual consumer experience than other measures. The May PCE came in at 2.6% vs last year and flat vs last month. This was below the prior 2.7% reading. The Core PCE, which excludes food and energy, was also 2.6%, down from last month’s 2.8%. All of these readings were in line with expectations. So, what’s the story here?

PCE

Here’s the disinflation story the market was hoping to see.

DKI Takeaway: This is another of those good news/bad news situations. The doves (who prefer lower interest rates) are interpreting this as a continued reduction in inflation and that makes it more likely that the Fed will lower interest rates sooner. The hawks (who prefer higher interest rates) are pointing out that while the PCE is less elevated than before, 2.6% is still well-above the 2% target. Plus, as Chairman Powell pointed out in his last press conference, the comparisons in the second half are tougher. My view is this incremental news makes it slightly easier for the Fed to lower, but I wouldn’t expect that to happen at the next meeting.

 

Here’s the video version: https://www.youtube.com/watch?v=mH9CBmiYzxw

 

Information contained in this report, and in each of its reports, 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.  DKI makes no representation as to the completeness, timeliness, accuracy or soundness of the information and opinions contained therein or regarding any results that may be obtained from their use. The information and opinions contained in this report and in each of our reports and all other DKI Services shall not obligate DKI to provide updated or similar information in the future, except to the extent it is required by law to do so. 

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