5 Things To Know In Investing This Week: The Taylor Swift Is Responsible For Inflation Issue

Yet another government agency revises its projections. This seems to be a weekly thing these days. Anyone want to guess which direction the revisions headed? The Bank of England disappoints UK doves and holds rates steady. DKI thinks it’s all Taylor Swift’s fault. GameStop $GME management combined with Roaring Kitty’s memes have been great for company shareholders, but their performance at last week’s meeting was not well-received. Retail sales indicate the private economy is getting weaker. Finally, you’re not the only one feeling like there’s not much sales help in your local stores. But at least we’re all getting experience with self-checkout and bagging.

This week, we’ll address the following topics:

• New CBO debt projections only go in one direction.

• The Bank of England doesn’t lower rates. Is it Taylor Swift’s fault?

• GameStop $GME proposal for non-business effort gets obliterated. Is management focused on the right things?

• Retail sales up less than expected. The economic news about the private economy continues to slide towards negative.

• Customer experience continues to decline.

Another round of applause for the DKI Interns. With Andrew Brown traveling in Scotland, he’s still managed to handle all the video editing and posting from vacation demonstrating his usual excellent work ethic. New Intern, Alexander Petrou, who comes to us from the University of Exeter Business School, stepped in and in his first week made valuable contributions. Alex pitched several of this week’s 5 Things, did much of the writing, and produced most of the images for this issue. We are pleased, but not surprised, to see him make a meaningful contribution in just his first week. Great job Andrew and Alex! DKI strenuously denies any rumor that while in the UK either Andrew or Alex was involved in the Taylor Swift tour and are therefore not responsible for UK inflation.

Ready for a new week of Swift-related central bank news? Let’s dive in:

• The CBO Blowout Projections:

The Congressional Budget Office (CBO) has dramatically revised its deficit projections, and now expects a surge from $1.5 trillion to $1.9 trillion for this year. New legislation, foreign aid, massive stimulus spending, and skyrocketing interest expense are all contributing to consistently higher debt and deficit expectations. Congress has elected to fund this spending with debt that leads to increased future inflation in order to deflect blame from their desire to throw money at anything that could win them a few more votes in November. They may act like the money is free, but when you see the increase in your monthly living costs, you’ll know the reason why.

Always adjusted in the same direction.

DKI Takeaway:  A few months ago, DKI highlighted the inability of the Federal Reserve to predict the fed funds rate which they control. A few weeks ago, we wrote about the constant massive revisions to the employment data. And last week, we highlighted comments from Fed Chairman, Jerome Powell, who acknowledged the Fed has little confidence in their own projections. Recently, I’ve had polite debates with smart market participants who publicly express confidence in government statistics and claim they are a valid way to evaluate the economy. While I respect these individuals, every month there is increasing evidence that government statistics do not reflect reality, and that government projections are worthless. These statistics move markets, but don’t expect the “data” to have much empirical value. Said another way: The next time the CBO offers debt projections, do you think they’ll be higher or lower?

• The Bank of England’s Dilemma: Swiftly Navigating Inflation and Rates:

As the Bank of England (BoE) readied for its interest rate decision this Thursday, a rather unexpected influencer threw a glittery wrench into the works: Taylor Swift’s Eras Tour ( #TaylorSwift ). According to TD Securities analysts, the tour's impact could inflate services prices by 0.3%, potentially upending the BoE's rate-cut plans. Picture this: Swifties descending on London, not just singing along to "Shake It Off" but also driving up hotel prices and boosting local businesses (the horror!). This "Swiftonomics" phenomenon could significantly skew inflation metrics, especially with a tour date landing on a key inflation index day. Financially, Swift's Edinburgh concerts injected £77 million ($98 million) into the local economy, with the UK poised to rake in nearly £1 billion from the tour through tickets, lodging, travel, and merchandise sales. As the BoE deliberates, it's evident that Swift's influence stretches far beyond her music. Her ability to drive consumer spending underscores how pop culture can unexpectedly sway economic policies. So, as Swift dazzles London, the BoE must consider how this fan-fueled economic boost fits into its inflation strategy. Who knew a pop star could rock the world of monetary policy?

The BoE holds at what looks like a reasonable level if you look back more than a few years.

In the US, my X followers blame Fed Chair Powell for inflation with Swift a close second.

DKI Takeaway:  In the backdrop, UK inflation has finally hit the 2% target, giving Prime Minister Rishi Sunak a pre-election boost. However, unexpected service price hikes dampened hopes of imminent rate cuts, nudging up sterling and bond yields. Sunak, celebrating Tory economic stability amid a 20-point poll deficit, is eyeing potential tax cuts. With UK service and core inflation outpacing the Eurozone levels, a rate freeze at 5.25% this week seemed likely. While UK services inflation dipped to 5.7% in May and Core CPI eased to 3.5%, a summer rate cut remains a distant dream. The Bank of England decided to hold interest rates steady at 5.25% in a "finely balanced" decision, disappointing Conservative hopes for a financial uplift just two weeks before the UK's July 4th election. The seven-to-two decision by the Monetary Policy Committee was expected, keeping rates at a 16-year high despite headline inflation hitting the BoE's 2% target for the first time in three years. 

• GameStop $GME Meeting DEspIsed:

Many GMEApes (a term for enthusiastic GameStop shareholders) were disappointed by the outcome of the postponed GameStop meeting. Following the dramatic events involving Roaring Kitty, the meme expert who led the stock's meteoric rise resulting in a subsequent secondary offering. The offering created a $4 billion war chest for CEO, Ryan Cohen, and investors eagerly anticipated clear and bold guidance from the $GME Board. Instead, they were left with a focus on a DEI initiative, proposing that the board report diversity, equity, and inclusion statistics in company annual filings. Shareholders were further disillusioned by the absence of any substantial discussion on GameStop's strategic plans for the recently raised billions in cash. The pressing issues of executive turnover and the returns on previous investments were scarcely addressed. Instead of a forward-looking strategy, the meeting was dominated by regulatory formalities and proposals, with an excessive emphasis on DEI reporting that did not resonate with many investors.

A super-majority of $GME shareholders want the company focused on the core business instead of social issues.

DKI Takeaway:  CEO, Ryan Cohen, emphasized, "Having a strong balance sheet, especially in times of economic uncertainty, is a strategic advantage. Exiting from an ultra-low interest rate environment is likely to have unforeseen reverberating effects across the economy, with inflation hitting 40-year highs in 2022." Yet, this strategic vision was overshadowed by the lack of concrete steps on how the $4 billion would be utilized. Cohen concluded by saying, "We are focused on building shareholder value over the long term. We are not here to make promises or hype things up. We're here to work." Despite this, the emotional let-down was palpable among the shareholders. They had hoped for a visionary roadmap to capitalize on the unique position GameStop found itself in but were met with regulatory compliance discussions and uninspiring reassurances. The glaring omission of a clear strategic direction for leveraging the substantial cash reserves, coupled with the focus on DEI, left investors feeling ignored and frustrated. If you’re a $GME shareholder, let us know what you thought about the meeting. Did you like what you heard, or were you hoping for something different?

• Retail Sales Are Indicating the Consumer is Stretched:

In two of the past four months, retail sales were down. In May, retail sales were up 0.1% which annualizes to just 1.2% and was below the 0.2% estimate. That is below the annual inflation rate meaning consumers are spending a little more to receive reduced amounts of goods and services. At this point, Americans have exhausted the Covid “stimmies”, the “free” money that temporarily inflated bank accounts. DKI has previously reported on increasing levels of personal and credit card debt. One miss doesn’t mean the economy is in terrible shape, but this isn’t a great sign in a consumer-led economy.

As the consumer gets more stretched, the line gets flatter.

Not an encouraging trend if you own a retail store.

DKI Takeaway:  A common and contentious theme here at DKI has been the bifurcation of the economy. A relatively small number of wealthy people are doing extremely well due to high asset prices and are bringing up the averages for economic markers. Massive overspending by Congress is adding stimulus to the economy and keeping GDP growth positive even as that same spending destroys value. However, that excess spending is crowding out investment in the private economy and more families are struggling to make ends meet after years of high inflation. Many are at the point where they’re starting to cut back on discretionary purchases.

• Companies Have Pushed Customer Patience to New Lows:

A new report by Forrester (reported by the Wall Street Journal) indicates customers’ feelings about their experiences with companies have hit a new low. Everyone is feeling inflationary pressure, and companies are dealing with higher supply costs, higher fuel costs, and higher labor costs by raising prices, cutting in-store assistance, reducing customer support staffing, and adding all kinds of unexpected fees. The airlines are now the poster child for this behavior. They advertise appealing fares, but then charge for things like reserving a seat, checking baggage, bringing baggage on the plane, putting carry-on baggage in the overhead compartments, drinks, meals, and even the ability to board before other people who might want to put their bags in the overhead compartments. By the time you’re done, the actual price is much higher than the advertised fare.

Survey by Forrester. Graph from the Wall Street Journal.

DKI Takeaway:  I understand why companies are doing this. It’s hard to staff a store with knowledgeable helpful but expensive salespeople when Amazon is selling the same products cheaper. These businesses hope that customers will pay more for a good customer experience, but too often, those businesses can’t recover the additional expenses involved in providing high-quality service. The other side of this is that as customers, we’re all doing a lot of extra work. In so many cases, we’re using self-checkout, bagging our own groceries, and being asked to tip store staff for work we did ourselves. Software companies used to have to send out completed product because it was delivered via physical disks. Now, buggy software gets sent and is patched over time. With constant debates over whether the problem rests with a device, a wireless carrier, the operating system manufacturer, or the app maker, we’re all now acting as our own tech support. Consumers are being asked to do more, and have reached the point of increasing frustration. What do you think? Are you having better or worse experiences with the companies in your life?

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