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Weekly Points – May 17th, 2024 – 5 Things to Know in Investing This Week – The Let’s Look at the Data Issue

DKI stock pick, AuthID, announces 1Q revenue almost as high as all of 2023. Guidance indicates they expect quarterly revenue to double this year. They still need to announce new contracts, but the year is off to an excellent start. Lyn Alden @LynAldenContact makes a brilliant point explaining fiscal dominance. DKI illustrated the Fed’s dilemma in a 20-page eBook. Lyn makes the entire situation clear in one post on X. (That’s the definition of great writing.) The PPI is high and some say the Fed should raise rates. The CPI is also high, but below expectations and some say the Fed should lower rates. DKI predicted the dollar would lose share as the world’s reserve currency yet foreigners are buying more Treasury bonds. Were we wrong?

This week, we’ll address the following topics:

  • AuthID $AUID reports 1Q revenue almost as high as full year 2023 revenue. What else did they say?
  • Lyn Alden @LynAldenContact makes an important point about fiscal dominance. Are we now Japan?
  • The PPI comes in hot. Should the Fed raise rates?
  • The CPI comes in light. Should the Fed lower rates?
  • DKI has said the dollar is losing share as the world’s reserve currency. Is there data proving us wrong?

Ready for a new week of rigorous analysis? Let’s dive in:

1) AuthID $AUID Reports 1Q:

I’ve been writing about the importance of biometric authentication to secure your sensitive accounts, and we’ve been publicly positive about the investment opportunity in AuthID $AUID. 1Q revenue was almost as high as full year 2023 revenue, and the company gave guidance for the first time. At the low end of guidance, $AUID would average quarterly revenue for the rest of the year that’s double the 1Q number. The company is almost a year ahead of the model I published in DKI’s report. In addition, CFO, Ed Sellitto, did an outstanding job clarifying AuthID’s previously confusing bARR metric by breaking it up into its discrete components.

AuthId - Slide 6 - May 17th, 2024

Presentation clearly shows what part of bARR is a contractual obligation and what is estimated usage above that commitment.

DKI Takeaway: DKI listed three near-term catalysts for $AUID stock. Clarification of financial metrics is now complete. On the call, management expressed confidence in being able to both sign new customers and complete a necessary financing round later this year. Those two things combined with the successful onboarding of multiple new customers this quarter will go a long way towards reducing/eliminating significant downside in the stock. Follow DKI for more information on a coming webinar with company management. You’ll have the opportunity to evaluate management quality and the use cases for biometric security.

2) Lyn Alden Summarizes an Entire eBook in One Post:

DKI wrote an eBook called Counterintuitive Inflation where we describe how Federal Reserve rate hikes can lead to more inflation. I’ve also written extensively on the quiet war between the Fed, which has been raising rates to try to control inflation, and Congress and the Treasury Department which are spending and monetizing at a level that is creating more inflation. With her typical incisiveness, Lyn Alden @LynAldenContact, manages to summarize all of that work in under 280 characters.

Lyn Alden Tweet - May 17th, 2024

Explaining how fiscal policy trapped the Fed in one post.

DKI Takeaway: @LynAldenContact’s point is that US debt has reached a level where more Fed rate hikes will be ineffective in reducing inflation. That’s because higher rates lead to higher interest expense on government debt. Rate hikes worked in the late 1970s when debt to GDP was around 30%. With that ratio now more than 4x where it was just four decades ago, and federal interest expense above $1T per year, higher interest expense can only be paid for with more debt and dollar debasement. That path leads to more inflation, not less. The only option is for Congress to reduce spending. DKI thinks the probability of less governmental spending is close to zero. This is the same problem Japan is facing. For more excellent work on macroeconomics, please follow Lyn here.

3) The PPI Comes in Hot:

The PPI is the producer price index, and is a measure of wholesale prices. In general, higher producer prices make their way into higher consumer prices. The April PPI was up 0.5% from last month which was much higher than the 0.3% expected. It also reversed the direction of last month’s decline. The yearly PPI was up 2.2%, also an increase from recent levels (chart below). The Core PPI, which excludes food and energy, was up 0.5% vs last month which was well above the 0.2% expected. Core was up 2.4% vs last year, also an increase from last month.

PPI and Core PPI - May '24

Not only has inflation not subsided, it’s increasing.

DKI Takeaway: We’ve seen a series of higher-than-expected inflation reports in recent weeks, and that’s a big part of why more Fed Governors are saying they might not need to lower the fed funds rate later this year. There have been occasional comments that they might need to raise rates this year. While I disagree with Chairman Powell that the current fed funds rate is “restrictive”, I don’t think they’re going to raise rates at the next couple of meetings and will remain in wait-and-see mode. Changing the fed funds rate anytime close to the November election will result in the appearance of political advocacy, something the Fed would prefer to avoid. The conclusion:  Higher for longer (still) with no near-term rate changes.

4) The CPI Comes in Light:

The April CPI was 3.4% which was in-line with expectations and slightly below last month’s 3.5%. The monthly change was 0.3% which annualizes to 3.7%. the Core CPI was up 3.6%, slightly below last month and consistent with expectations. Food at home was up 1.1% and I continue to believe that anyone who’s seeing grocery prices up only 1% hasn’t actually been in a supermarket. Car prices continue to decline from the insane Covid levels and energy prices have ticked back up from last year’s reductions. Sticky services prices remain a problem for the Fed at a 5.3% increase.

CPI - May, 2024

The disinflation story is dying. Inflation looks pretty sticky.

Real Interest Rates - May, 2024 (2)

Real rates (fed funds rate less CPI) remain below 2%. That’s not restrictive.

DKI Takeaway: The market got excited by the possibility of rate cuts, but we’re less sanguine. DKI has been saying for more than a year that Congressional overspending and monetization of new debt will lead to another round of inflation and future Fed rate hikes. I still think we’ll continue to see “higher for longer” unless Chairman Powell decides to panic and follow the lead of former Fed Chairman, Burns, who authored the high inflation of the 1970s by reducing rates too early. Large increases in the price of Bitcoin, gold, and silver combined with higher overall commodity prices indicates that most of the world is expecting more inflation. At least, that’s our view. Do you have an alternate opinion?

5) Is the Dollar Both Losing and Gaining Share?:

DKI has written many times about the dollar losing share as the world’s reserve currency. That’s still true. China has been responding to a deteriorating relationship with the US by selling Treasuries. Japan has been selling them to defend the yen. In response to the US debasing the dollar with excessive debt and to the government stealing the dollar reserves of countries engaging in behavior that Washington DC dislikes, other countries have been reducing reliance on US Treasuries out of both financial prudence and fear. Yet, foreign holdings of Treasuries aren’t declining. So, what’s going on here?

Foreign U.S. Debt Holdings, May 17th, 2024

Institutional ownership is down, but private foreign ownership is up more.

DKI Takeaway: We were right about the dollar losing share as the world’s reserve currency, and yet, foreign ownership of Treasuries is flat. The difference is private foreign ownership has increased. The US Federal Reserve has been more aggressive in trying to tame inflation than other central banks, and right now, the yield on the 10-year Treasury is above comparable government securities in the UK and the EU. It’s far above the anemic yield of the Japanese government 10-year bond. That’s attracted foreign individuals who want higher-yielding bonds. Federal interest payments are now over $1 trillion per year and rising at an exponential rate. The conclusion is that the US can create demand for Treasury securities – as long as we’re willing to pay for that demand. That’s keeping the government solvent, but as we noted in @LynAldenContact ‘s post on fiscal dominance, it’s also going to create more inflation.

 

This week’s video version: https://www.youtube.com/watch?v=y6iGY03uAAs

 

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. 

The information we provide in this and in each of our reports, is publicly available. This report and each of our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion in this and in each of our reports are precisely that. Our opinions are subject to change, which DKI may not convey. DKI, affiliates of DKI or its principal or others associated with DKI may have, taken or sold, or may in the future take or sell positions in securities of companies about which we write, without disclosing any such transactions.

None of the information we provide or the opinions we express, including those in this report, or in any of our reports, are advice of any kind, including, without limitation, advice that investment in a company’s securities is prudent or suitable for any investor. In making any investment decision, 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. 

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