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Weekly Points – May 31st, 2024 – 5 Things to Know in Investing This Week – The No Rate Hikes Next Month Issue

Comments by a Fed Governor started a debate this week on the future of rate HIKES. That was followed by a PCE report that had both the hawks and doves declaring victory. The underlying data isn’t getting better and the government is still engaging in massive stimulus so DKI’s conclusions will not surprise you. 1Q GDP was revised down further demonstrating how much value government spending is destroying. (I’m expecting hate mail for this one from people who think printing, spending, and entitlements will actually increase productivity.) Following ineffective efforts to defend the yen, the Bank of Japan follow’s DKI’s advice from the 4th quarter of 2022 and is openly considering raising rates again. Finally, we get a merger in the oil space as commodity prices continue to rise.

This week, we’ll address the following topics:

  • The PCE is in-line with expectations. Hawks and doves disagree on the conclusion. Regular readers will be able to guess mine.
  • Minneapolis Fed President, Neel Kashkari, signals a possible rate hike. Is he right? Can anyone at the Fed resist an open microphone?
  • 1Q GDP revised down. In a move sure to upset a lot of people, DKI points out the obvious: When government debt increases more than GDP, Washington DC is destroying value.
  • Japan tries defending the yen to no effect. Now, they’re talking about raising rates again. The chart shows that the bond market is ahead of the BoJ.
  • ConocoPhillips $COP is acquiring Marathon Oil $MRO for $22.5 billion. If you think fuel is too expensive, you might as well sell it to yourself.

DKI Intern, Andrew Brown, with a week of rest separating him from his last exam, continues to up his contribution to the 5 Things. He’s selecting excellent topics, preparing graphs, and doing more of the writing. Plus, DKI went from doing 1 video a week to clipping and posting 20 with Andrew taking the lead in that effort. DKI has always put considerable energy into the professional development of our young interns, and we are all pleased to see Andrew following in the footsteps of the dedicated students who held the position before he did.

Ready for a new week of no rate hikes yet? Let’s dive in:

1) April PCE is up 2.7%. What are the Implications?:

The Personal Consumption Expenditures (PCE) report is the preferred inflation gauge of the Federal Reserve. The April PCE was up 0.3% vs last month and 2.7% vs last year. That 0.3% annualizes to 3.7%. The Core PCE, which excludes food and energy, was up 0.2% monthly and up 2.8% annually. These results were all consistent with expectations. Personal income was up 0.3% monthly which was well below last month’s 0.5% gain. Spending went from up 0.8% (which was revised down to 0.7%) all the way down to 0.2%. The consumer may be tapped-out and is still feeling shocked by inflation which has led to weak revenue at Target $TGT (reported last week) and this week’s declining same store sales at Best Buy $BBY.

PCE & Core - May 31st, 2024 - Five Things

Weekly Points – May 31st, 2024 – 5 Things to Know in Investing This Week – The No Rate Hikes Next Month Issue

PCE - May 31st, 2024 - Five Things

This is why the average American is not grateful for our “excellent” economy. Prices high and rising!

DKI Takeaway: Within minutes of the report’s release, the doves (those who favor lower interest rates) were declaring victory on Twitter/X insisting that the Fed would now reduce rates. Equity index futures turned from negative to positive as some anticipated a return to easy money and asset bubbles. The hawks (those who favor higher interest rates) replied that inflation is sticky and the monthly numbers annualize to close to double the Fed’s target. Shortly after the open, the same equity indexes trended down. If you’re new here, welcome. For everyone else, you already know my opinion: “higher for longer”.

2) Kashkari Signals Even Higher (Possibly):

This week, Neel Kashkari, President of the Minneapolis Federal Reserve, discussed future Fed policy. While he did not dismiss the possibility of rate hikes due to persistent inflation, he said he believes that rates will likely remain steady. With the Consumer Price Index (CPI) staying elevated (April at 3.4%), the Fed faces competing demands. Kashkari emphasized that significantly more positive inflation data would be needed to consider rate cuts. Following his remarks, the market dipped, with all three major indices—S&P 500, Dow Jones, and Nasdaq—declining.

CPI - May, 2024 (1)

If policy is “restrictive”, then why is inflation sticky?

DKI Takeaway: We will commit to saying “higher for longer” as long as it’s necessary. Another key Fed member has supported our position and openly talked about more rate hikes, something that would have been inconceivable just a few months ago. Despite the Fed’s push towards its 2% inflation target, we still believe the proper and moral rate of inflation is 0%. With both consumers and manufacturers facing elevated prices, a potential rate hike can’t be ruled out, especially if inflation remains around 3%. We’ve also highlighted Jerome Powell’s fear of repeating Arthur Burns’ mistake of cutting rates too early, which led to inflation settling at a higher level than anticipated. DKI continues to expect the Fed to leave rates unchanged at the next meeting.

3) Government Revises GDP Down – I’m Expecting Hate Mail:

DKI has long noted the tendency of government agencies to report positive economic data when everyone is watching only to revise that data in a negative direction a month or two later when there’s less attention. The latest revision is a huge one with 1Q GDP growth being revised down from 1.6% to 1.3%. More than 100% of that growth came from debt-fueled government spending.

Dollar Change GDP and Debt - May '24

Weekly Points – May 31st, 2024 – 5 Things to Know in Investing This Week – The No Rate Hikes Next Month Issue

Dollar Change GDP and Debt Change - May '24

Some had difficulty understanding this the first time around so we’re providing a bonus graph.

DKI Takeaway: Last month, we showed that the increase in Federal debt was greater than the growth in GDP. The only conclusions we could draw were that government spending is destroying value and that the private sector is suffering. While many people sent me angry notes supporting their political “team” and insisting that government spending creates value, political preferences don’t factor into our analysis. Government spending isn’t creating value; but rather, is pulling forward demand with the bill to come later. We’ll also provide one more reminder that Congress has decided to fund this excessive spending with inflation. They’ll offer us guns and butter, bread and circuses, but in the end, we’re going to pay for our “free stimmies” with more inflation. DKI is not making a partisan argument as we do not expect this insane spending to stop regardless of who controls the White House and Congress after the November elections.

4) The BoJ is Finally Considering Raising Rates (Again):

DKI started speaking and writing about Japan’s pending sovereign debt crisis in October of 2022. Recently, the Bank of Japan (BoJ) has blown through tens of billions of dollars of foreign currency reserves in an attempt to defend the yen. Those efforts tend to be effective for only 24 to 48 hours because they don’t address the underlying problem. The BoJ is now waiting for their version of the CPI to make a decision on potential rate hikes. Officials are openly considering raising rates, a strategy DKI recommended more than 18 months ago. With the US Federal Reserve not about to cut rates, Japan must sacrifice their budget or the yen.

Japan 10 Year Goverment Bond

For Japan, this is a huge increase in only five months.

DKI Takeaway: Japan is an economic powerhouse, but it’s also a small island nation with few natural resources. The only way Japan can afford the interest expense on its massive debt of more than 260% of GDP is ultra-low interest rates. In response, the yen has fallen by over 50% against the dollar in just a few years. That’s made the price of imports expensive; especially oil which tends to be priced in dollars. Making things more difficult, rate hikes could affect smaller Japanese banks which hold large bond portfolios. This mirrors some of the difficulties US banks had in 2023 when higher interest rates reduced the carrying value of bank bond portfolios.

5) ConocoPhillips $COP Announces $22.5B Acquisition of Marathon Oil $MRO:

ConocoPhillips has revealed plans to acquire Marathon Oil Corp in an all-stock transaction valued at $22.5 billion. This move follows significant consolidation in the oil industry, with cash-rich companies such as ExxonMobil, Chevron, and Occidental Petroleum seeking to grow their portfolios by acquiring smaller producers. The acquisition by will add 2,600 drilling sites, increasing its total to over 13,000 locations in the U.S. This expansion will strengthen ConocoPhillips’ presence in the shale fields of the Midwest and Great Plains.

Marathon Oil & WTI

We think higher for longer is also going to apply to oil prices.

DKI Takeaway: Amid widespread consolidation in the oil industry, ConocoPhillips is aiming to catch up by acquiring a company with solid assets and cash flow. Marathon Oil’s assets are considered decent with many mature wells that have lower outputs. The deal is expected to face scrutiny from the SEC as have other recent acquisitions in the industry. DKI has long supported investments in oil and energy due to their reliability and potential as a hedge against the declining purchasing power of the dollar. Further consolidation in the industry is likely and will benefit oil and gas positions by making companies more efficient and reducing capital expenditures. Plus, if you don’t like paying high prices at the pump, you might as well sell yourself the fuel and pocket the profit.


Here’s the video version:


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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