Weekly Points – 5 Things To Know In Investing This Week

The Pivot Issue 

For two years, Wall Street pundits and asset gatherers have been screaming for the Fed  to pivot to lower interest rates. Unsurprisingly, they make more money when asset prices  are high. They were doing this even as the CPI was approaching double digits and when  real inflation was approaching 20%. This week, Fed Chairman, Jerome Powell, changed  his tune and delivered a dovish message. The CPI is trending down led by lower energy  prices. Consumers continue to spend like crazy. A year ago, the soft-landing crowd  sounded crazy. Now, it’s a real possibility. 

This week, we’ll address the following topics: 

- The Powell pivot. This week he delivered a different message. It’s different this time?  Yes, it is. 

- The CPI: Still too high, but it is coming down. 

- Retail sales: up from a slow start and indicating a strong Christmas. 

- Nvidia NVDA moving production out of Taiwan. Good move despite Taiwan having  the best fab plants in the world. 

- Barron’s calls for a higher neutral rate. We think they’re right. Don’t know what the  neutral rate is? No worries. Explaining is what the 5 Things is here to do. 

Ready for a new week featuring the long-awaited pivot? Let’s dive in: 

1) Powell Changes His Tune: 

For the last two years, DKI has been correctly critical of the asset gatherers who make more  money when the Federal Reserve blows up asset bubbles with too-low interest rates. Even last year, with inflation raging these people screamed for the Fed to “pivot” to lower rates.  DKI has spent the last two years saying inflation is too high, rates were too low, there will  eventually be a pivot, but for now, Powell means it when he says “higher for longer”. This  week, Powell gave a speech with a completely different tone. It’s clear that the Fed is done  with interest rate hikes this cycle. Fed projections for the end of 2024 went from a net  decrease of .25% in the fed funds rate to a .75% decrease. 

I know I said “higher for longer” two weeks ago, but WAIT! 

DKI Takeaway: Some are arguing that the Fed has overtightened and the US is now going to experience a massive recession. DKI suggests that a 5.3% fed funds rate is sensible and  that it’s really the decade and a half of zero and near-zero interest rates that created the problem. I further suggest that regardless of what the Fed does, Congressional  overspending is going to lead to massive future inflation. Their view and my view no longer matter. The “pivot” is here. The most significant part of Powell’s speech was he made it  clear the Fed would consider reducing the fed funds rate even before the CPI came down to 2%. The Fed’s next move will be a rate decrease. Gold and Bitcoin have been rallying. DKI owns both. 

2) November CPI in Line with Expectations – Cheers Investors: 

The November CPI was up 3.1% vs last year and .1% from October. The Core CPI, which  excludes food and energy, was up 4.0% vs last year and .3% from October. These were in line with expectations, and the market liked the results.  

Looks flattish to me, but the market celebrated. 

DKI Takeaway: There isn’t much in this report that’s a surprise. Inflation has come down  partly due to rate hikes and partly due to comparisons against two years of big increases.  The core CPI remains sticky as services and labor are still expensive and becoming more so.  Housing remains high as mortgage rates decline. And energy is bailing out the Federal  Reserve but potentially signaling a recession. As noted in this week’s first “Thing”, core CPI  might be double the target, but the Fed pivot is here.

3) Retail Sales Grow – Defying Expectations: 

Last month, weak retail sales indicated we could be heading for a Grinchy Christmas. As  usual, the US consumer came to the rescue. November sales were up .3% from October  crushing expectations for sales to be down 2%. 

A lot of people thought that last bar would be negative.

If you’re in the no-recession soft-landing crowd, this is exhibit one. 

DKI Takeaway: Inflation has hurt a lot of families. Feelings of insecurity and dissatisfaction  with the economy are horrible right now. Despite that, unemployment is low, a lot of people  have gotten raises, and the government is spending like the US will never have to pay its  bills. That last point should scare you, but for the moment, people feel flush enough to  continue spending. DKI also acknowledges that while we have previously pointed out that  higher inflation is part of higher retail spending, the consumer continues to buy more goods  and services. 

4) Nvidia Moving Some Production to Vietnam: 

Nvidia makes some of the best graphics chips in the world which are ideal for both crypto mining and AI applications. Taiwan has the best semiconductor manufacturing plants  in the world led by Taiwan Semiconductor. The facilities and personnel there are so  advanced that even though Taiwan Semi is building new plants in the US, the expectation  is that even those plants will produce less advanced chips than the Taiwan-based facilities  do. This week, Nvidia announced it is diversifying its supply chain and investing in  production in Vietnam.

The Nvidia 3060Ti in my home computer is below 20% of capacity on high-definition video calls. 

DKI Takeaway: China has a near-monopoly on rare earth minerals, the components  required for green energy, and 90% of US pharmaceutical production. Taiwan makes the  best chips in the world. China has made clear its intentions to take control of Taiwan, and Nvidia is smart to diversify their supply chain. Apple AAPL is moving more iPhone  production to India as well. I’d like to see US pharma take this coming problem as seriously as the tech firms and start to move production back to Puerto Rico. For decades, many of  us benefitted from price deflation by moving production to the lowest-cost producers. Going forward, securing a reliable supply chain, even if it’s a more expensive one, is going  to be crucial. 

5) Barron’s Gets it Right on the “Neutral” Rate: 

The “neutral rate” is the fed funds rate that neither stimulates nor restricts the economy. It  can’t be measured; only observed after the fact. The zero and near-zero rates we saw  following the 2008 financial crisis were too stimulative and led to the inflation we’ve experienced the past two years. Many now claim the current 5.3% fed funds rate is too  restrictive and about to cause a recession. Those claims can’t be proven now, and will only  be evaluated by future economists and market participants. During the past two years, I  have often been at odds with the legacy media on inflation and interest rates. DKI was early  when we warned on high non-transitory inflation in November of 2021 and right when we  spent two years saying “higher for longer”. 

Barron’s is a great publication and Megan Cassella just penned the post of the year. 

DKI Takeaway: This week, Barron’s Megan Cassella wrote an article titled “Higher Interest Rates Are Here to Stay. What It Means for the Economy”. In it, she nails DKI themes of a  higher neutral rate, higher government spending and stimulus, higher costs due to reversing  globalization (see “Thing” 4 above), and expectations of higher future inflation. She also  warns that near-zero interest rates aren’t and shouldn’t be the status quo in the future. It’s  a great article and I recommend reading the entire thing. DKI congratulates Megan and  Barron’s on the thoughtful analysis. 

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