Weekly Points – The Everyone Is Wrong And Should Admit It Issue

1. In December, we produced a version of the 5 Things titled “The Smart People Doing Smart Things Issue”. This time, we’re not so positive. This was a week of people being consistently wrong including Bitcoin bears who refuse to apply a consistent lens for their thesis when it’s not working, Fed doves who keep insisting the “pivot” to lower rates is just around the corner, politicians in both Washington DC and Beijing who think they’re doing a great job creating economic “growth”, and economists who keep misinterpreting the American consumer. These are people making bad decisions and should feel badly about it…or at least be honest.

This week, we’ll address the following topics:

• Bitcoin BTC/USD rockets up almost 60% from January “lows” and critics refuse to take the “L”.

• The Fed’s preferred inflation gauge, the PCE, accelerates. People hoping for the Fed “pivot” to lower rates need to push back the projected date again.

• GDP revised down again. Washington DC keeps telling us the economy is doing great while destroying economic value.

• Consumer confidence has a huge miss. People are not nearly as bullish as economists think.

• Chinese home prices fall again. That’s a problem in a country where property is how people store wealth.

Before we move on, a moment of appreciation for the “kids”. DKI Intern, Andrew Brown, joins us from the University of Tennessee and did excellent work this week on the graphs that follow. He also pitched two of the following “Things”. Flying V Intern, Alex Galbreath, did much of the work on the new 5 Things logo. What do you think? Do you like it?

Ready for a new week of explaining bad decisions? Let’s dive in:

• Bitcoin Bears Are Not Being Honest:

In anticipation of SEC approval for multiple Bitcoin ETFs, the dollar price of Bitcoin rose last year from just over $15k to a little over $40k. I was among many who thought the buying power unlocked by allowing people to own Bitcoin exposure in a traditional brokerage account would cause the digital currency to rise further. The Bitcoin bear community claimed that the approval was “priced in”. Post approval Bitcoin fell about 10%. Including the minutes-long spike right after the approval, the peak to trough drawdown was 16%. The bears loudly claimed victory on Twitter/X and I acknowledged they had the better part of that short-term argument in a subsequent version of the 5 Things. Then, Bitcoin rose 58% to cross $60k. Did the bears recant?

The bears claimed victory on a 16% drawdown. Shouldn’t a 58% rise cause them to admit defeat?

DKI Takeaway:  In my opinion, it’s foolish to have a short-term price target for an asset like Bitcoin. I don’t know what the dollar price of Bitcoin will be in a year, but I do know the purchasing power of the dollar will be lower. As Congress overspends, this inflationary trend will continue. However, I do think it’s important to be honest about your investment thesis whether you’re long or short an asset. The people who claimed a win on a 16% drawdown related to the ETF approvals should admit defeat on an almost 60% increase in the last month. If you’re intellectually honest, your humility should match your hubris.

• PCE Accelerates – A Familiar Refrain is Coming:

The Personal Consumption Expenditures (PCE) index is the preferred inflation measure of the Federal Reserve. This month, the PCE was up 2.4% and the Core PCE index which excludes food and energy, was up 2.8%. Of greater concern, the PCE was up 0.3% from last month breaking a string of 0.0% or 0.1% increases. The Core PCE was up 0.4% after months of 0.1% or 0.2%. This might not seem like much, but a 0.4% increase annualizes to 4.9% which is well-above the 2% target. In addition, the services part of the index remains very high and nothing the Fed is doing seems able to move that down much.

This looks better as long as we don’t consider the monthly change or services inflation.

DKI Takeaway:  In late 2023, expectations were for the first Fed rate cut to come in January or March with a total of 6 cuts (for a total of 1.5%) in 2024. DKI said often that there would be fewer rate cuts and they would come later than the market expected. Now, the expectation is for the first cut to come in June and people are to starting to settle on only 3 reductions (.75%). The market rose much of last year on dovish projections for the Fed and has continued to rise this year. With inflation still high due largely to excessive Congressional overspending, there is even talk that the Fed could hike again. I don’t think that’s about to happen, but do think that there’s risk that isn’t priced into current market indexes. At a minimum, people should have taken Jerome Powell’s warning seriously. You all know the line:  ”higher for longer”.

• GDP Revised Down – Congress Set on Destroying More Value:

We have long commented on the tendency of government agencies to report favorable numbers only to revise them in a less attractive direction later when fewer people are watching. Following the example of The Boy Who Cried Wolf, this has only caused people to place less emphasis on the initial (fake) reports. Fortunately, there was substantial attention on this week’s revision of 4Q ’23 GDP from 3.3% down to 3.2%. While this change isn’t significant, there were two items that jumped out at me.

This isn’t bad as long as we don’t look at the details.

This indicates a huge problem.

DKI Takeaway:  GDP figures are adjusted for inflation. For 4Q, the price index was 1.8% for regular PCE and 2.1% for Core. If you think inflation is above 2%, you might also be skeptical and think GDP was overstated. Of greater significance, government spending adds to GDP. The second chart shows the huge dollar increase in federal debt against the dollar increase in GDP. For the past three quarters, the increase in government debt has exceeded the increase in GDP which means that a dollar of government spending is producing far less than a dollar of economic value. I’d say your tax dollars are being wasted, but the government is increasingly funding its spending with inflationary debt instead of taxes. The end result will be ongoing inflation and higher interest rates.

• Consumer Confidence is a Huge Miss:

The consumer confidence index was 111 last month with 115 expected for this month. Instead, we saw a reading of just below 107. That might not seem like much, but 8 points off of expectations is a huge miss. Combined with a recent decrease in retail sales spending, it makes me think the consumer is facing a lot more difficulty than economists thought.

The absolute value isn’t awful, but it’s far from the 115 estimate.

DKI Takeaway:  Many of us have spent the past year a bit surprised at the strength of the American consumer. Despite higher prices and worsening credit metrics, people continued to spend on travel, restaurants, and Taylor Swift concerts. This month, we saw a decline in spending combined with a massive miss in consumer confidence expectations. Perhaps the US is hitting the inflection point where Covid stimulus handouts are exhausted and people are starting to choke on ever-higher prices. Some pundits are extrapolating out to this year’s November elections. Declining consumer confidence is never good for the party in the White House, but there’s a lot of time between now and November.

• Chinese Housing Prices Continue to Fall:

The price of secondhand homes in China continued to fall with prices down 4.4% in January. This is a problem in a country where the primary way to invest and store wealth is in property. Part of the issue is caused by Chinese central planning where housing is often built without regard for demand. This is further exacerbated by investors fleeing the Chinese stock market due to fraud, lack of accounting and audit oversight, and the tendency of the government to put entire sectors out of business. That’s what happened with the after-school tutoring companies a couple of years ago. One day, the government just made them illegal. None of this encourages foreign investment.

For the Chinese this is the equivalent of a bear market in equities in the US.

DKI Takeaway:  Because China doesn’t allow foreigners to invest directly in Chinese companies, investors have to settle for tracking stocks that represent a loose commitment rather than direct ownership. This is one of many things driving international investment out of the Chinese stock market. The property sector is the source of much of Chinese citizens’ wealth, but that’s also facing headwinds due to too much leverage. The building companies can’t afford to complete apartments despite taking deposits. The overleveraged banks have exposure to the property market and the builders. This is another indication that the CCP is mismanaging a weakening economy.

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