This week presents more evidence that a weak private market economy and inflation are taking an increased toll on the American consumer. Luxury sales are falling with consumers seeking out used and discounted items. While companies like $MSFT, $GOOG, and $AMZN buy more $NVDA chips to power AI datacenters, consumers balk at buying AI-powered electronics hurting sales projections at $DELL and $BBY. The PCE is the Fed’s preferred inflation gauge and last week, it joined the PPI and the CPI as inflation indexes that rose following the Fed’s rate cut. We keep saying the Fed cut too early and with Congressional overspending unlikely to subside, we continue to expect inflation will be a 2025 problem. In our educational spot, we talk about the need for discipline and emotional control if you want to become a successful investor. Finally, because I wanted to write our Thanksgiving “Thing” on Thanksgiving itself, our appreciation for the many people who have contributed to DKI’s success comes this week.

This week, we’ll address the following topics:

• The PCE joins the PPI and the CPI as inflation indexes that have risen following the Fed rate cut. At this point, the Fed appears both out of touch and politically driven.
• Buyers are seeking out used and discounted luxury items leading to weakness in luxury sales.
• The consumer decides not to spend on AI-powered electronics leading to lower guidance at $DELL and $BBY.
• We discuss the importance of being disciplined and unemotional while investing.
• DKI recognizes and thanks a few of the people who have contributed to our success. We’re thankful to all of you reading this now.

This week, I bring you bittersweet news. Star intern, Andrew Brown, will be moving on to focus on a new position in investment management at the University of Tennessee. While we are disappointed to lose Andrew’s meaningful contributions to DKI, gaining experience making investment decisions while still in college is the right decision for him, and we support him completely. Andrew departs with our applause and appreciation. Unsurprisingly, when I relayed the news to our other star intern, Alex, his first reaction was to let me know he’d be ready to step up and handle more responsibility right away. I keep hearing how this generation of young people are entitled and lazy. Spend one day with the DKI interns and you’ll feel more optimistic about the capabilities and fortitude of our young people.

Ready for a week of revolting consumers? Let’s dive in:

1) Hot PCE – Inflation Remains High:

On Wednesday, the October Personal Consumption Expenditures Price Index (PCE) data was released. It was in line with expectations but still showing rising inflation. The headline number increased to 2.3%, up from last month’s 2.1%, while the core figure (excluding food and energy) rose to 2.8%, a 0.1% increase from last month’s 2.7%. The PCE remains the Federal Reserve’s preferred measure of inflation. Since the Fed cut, the CPI (Consumer Price Index), the PPI (Producer Price Index), and the PCE have all risen. Notably, DKI predicted this trend last summer, anticipating rising inflation following the Fed’s September rate cut. We don’t think the Fed rate cut caused inflation to increase so soon; but rather, that the Fed cut before getting inflation under control.

Both the PCE and Core PCE are up following the Fed rate cuts.

https://x.com/Gary_Brode/status/1861900601648447935

DKI Takeaway: The “Arthur Burns” mistake is a topic DKI has been covering for more than two years. Burns was the Fed Chairman who cut too soon leading to the massive inflation of the 1970s. Jerome Powell may be repeating this mistake. For the past two months, inflation has risen from its previous lows and Core PCE levels have been stuck above the 2.7% mark since July. Powell will have to make the decision in the next couple of weeks to either hold the rate steady or cut another 25bp (.25%). There is a valid argument for additional rate cuts due to the disappointing jobs numbers from the past few releases. However, we all know grocery prices and inflation remain too high and above target. The Fed may keep cutting, but if DKI ran the Fed, we would think otherwise about adding to Congressional stimulus. Alternatively, our preferred plan would be to #EndTheFed.

2) Potential Signs of Consumer Weakness Heading into the Holiday Season:

In recent issues of The 5 Things, DKI has discussed signs of the consumer transition to cheaper stores. A great Wall Street Journal article highlights how consumers are gravitating toward resellers featuring discounted prices rather than purchasing at full price directly from major luxury brands. The Covid-related shift in spending from experiences to goods allowed these brands to quickly raise their prices. However, with “stimmies” now long-gone, these brands are dealing with a more cautious consumer leading to slowing sales.

The luxury brands are performing poorly while the low-price reseller gains. Source: WSJ.

DKI Takeaway: The luxury consumer has helped prop up the economy over the past year as these individuals are typically less harmed by inflation, or even benefit from it. However, many of the items designated as “luxury” are accessible to the middle class. This is primarily because when these people experience a slight increase in disposable income (stimmy checks), they tend to spend it on luxury goods like purses and watches. While these items may symbolize wealth, it’s the weakness in the middle class and in the productive private market economy that are affecting sales right now.

3) Consumer Tech Earnings Miss

The consumer environment has been inconsistent over the past year, and this week we are seeing more signs of weakness. Dell $DELL reported strong revenue and earnings from its expanded Infrastructure Solutions Group, driven by growing AI demand. However, the stock traded downward after disappointing end-of-year guidance, citing challenges in securing Nvidia’s Blackwell chips and slowing PC sales. Best Buy $BBY reported earnings on Tuesday, missing estimates and lowering its end-of-year guidance. Three significant misses were a -18.8% decline in entertainment, -14.7% in appliances, and -5.8% in consumer electronics. All of these categories fall under discretionary goods, where consumers have been reducing purchases. Even as Nvidia $NVDA sells more GPUs to power AI datacenters, consumers have largely decided to wait rather than buy today’s AI-powered electronics.

Lack of demand for AI-powered phones and computers contributed to the drop.

DKI Takeaway: First, weakness from the luxury consumer, and now weakness from Best Buy’s $BBY and Dell’s $DELL consumers means a large part of the economy is spending on necessities and not discretionary items. Both Best Buy and Dell have cut guidance and reported disappointing results in the consumer-driven sectors of their businesses. It’s interesting that Dell beat earnings expectations due to their AI expansion, but PC sales guidance, which is better proxy for consumer demand, is weak. The consumer shift to necessities and discounters continues exemplified by a move from brands like Target $TGT and Best Buy to more value driven brands like Walmart $WMT.

4) How to Maintain Discipline While Investing:

Beginning to invest in the stock market can be nerve-racking. There are no minor leagues meaning the first time you commit real money, you run the risk of losing it. That can be emotionally difficult. However, for those willing to take some time to read and learn, long-term investing is a powerful way to build life-changing wealth. Like any sport, you do not become a professional overnight. It takes time and practice to become great at something. There may seem to be shortcuts, but those are almost always get-rich-quick schemes with unseen risks. To invest successfully and avoid portfolio-crushing pitfalls, you must gain strength and discipline with repetitions over time.

Practicing emotional control when positions move against you is difficult and crucial.

DKI Takeaway: Markets will inevitably turn and head downwards. Having the strength to stay composed during these periods is a crucial part of investing. The best investors remain fearless when the market is crashing. Right now, many people are asking what Berkshire Hathaway is doing with its $325 billion in cash. The most likely answer is that Buffett is waiting for signs of weakness in stock prices or broader market downturns to deploy that capital strategically. Adaptability in investing and starting early (or now) are two critical factors that help build resilience early, making future market dips less harmful to your portfolio. Overall, if you want to minimize market risk and hedge your portfolio against future inflation, we invite you to subscribe to our premium membership.

5) Thanksgiving:

Being grateful is one key to living a good life. The reason our expression of thanks is a week late is because I wanted to write this on Thanksgiving. I’m fortunate to be surrounded by incredible people while doing a job I love and want to thank some important people who have contributed to our shared success. Besides being a collection of incredible talent and knowledge, the DKI Board of Advisors includes my best friends. They’ve been a source of high-return ideas including huge winners, $SWAV and $TPL, a source of information in a wide variety of industries, and have provided me guidance on running the firm. I’ve also found working with our 9 (so far) college interns to be personally rewarding. Being a mentor to them and helping them prepare to succeed in their first jobs has taught me great lessons about leadership. I’ve been able to be demanding regarding their work product and kindly supportive of their professional aspirations. I would encourage anyone who’s critical of the emotional fortitude and work ethic of our younger generation to spend a day with any of the DKI interns. You’ll feel better about our shared future.

If you’re reading this, I’m thankful for you.

DKI Takeaway: My first conversation with Robb Fahrion of FlyingV featured yelling. We’ve become friends and partners, and he hosts the weekly video version of the 5 Things. I’ve also benefitted from dozens of podcast invitations which enable me to discuss our thoughts on investing with new audiences. People like Michael Gayed @leadlagreport, Phil Muscatello @phil_muscatello, Andy Wang @RunnymedeCap, Tony Nash @TonyNashNerd, Tracy Shuchart @chigrl, and the team at Onramp Bitcoin @OnrampBitcoin have huge audiences, and have all been kind enough to ask me back multiple times. Finally, DKI exists to help our partners and subscribers earn better returns in the stock market. It’s become the cerebral community I always hoped it would be with smart amateur investors and professionals working together to understand our next money-making idea. Thanks to all of you for being part of Deep Knowledge Investing.

Here’s the video version: https://youtu.be/z8DS8b4E4dw

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