As evident in our Bubble Monitor dashboard for the week ended Thursday, July 28, 2022, the stock market is on the mend! To the best of our knowledge, it is because the Fed raised the discount rate by another +75 bps with plans for many more rate hikes to combat inflation. Wait, maybe it is because the Fed is not going to raise rates anymore because we are in a recession… It could be that the Fed will start cutting rates soon to combat the second consecutive quarterly GDP number in the red (admittedly an outdated definition for a recession). No matter, we have the Fed to thank for the market rebound! But stocks have nothing on crypto, with Ethereum up by half for the month. We even had an inflation rally for commodities while real estate continues to climb higher despite spiking mortgage rates. At least there are no inflation worries for bonds investors who are piling into Treasuries, dragging yields (along with the $US) steadily lower. Finally, let’s not pay too much attention to declining profits at Walmart & McDonald’s – these are likely “transitory” as consumers gear up for a spending spree. In conclusion, someone is buying everything, and we can all enjoy the ride until they stop.
In classical economics, price acts as a clearing agent for the production and demand of goods & services. If prices increase, demand declines while supply increases (as more companies get in on the profits) until equilibrium is reached. Classical economics may work for discretionary goods & services (like vacations to the Islands and luxury cars) but cannot be applied to the demand for services & goods necessary for human survival. Society requires the supply of a sufficient quantity of affordable necessities. This point is highlighted by Walmart’s most recent pre-announcement for its fiscal 2Q23 results in which it now expects its adjusted EPS to decline by -8% to -9%, reflecting not just higher costs but a substantial markdown of its apparel inventory (with consumers apparently substituting the purchase of clothes for necessities like food and gas). This contrasts with Chipotle which recently noted that most of its customers are higher-household-income consumers who have increased their dining frequency (possibly trading down from more expensive restaurants). As the government struggles with the definition of a recession, it occurs to us that this term may have a very different meaning depending on whether you are talking to a Walmart or a Chipotle customer. Hopefully, what we see happening in The Netherlands (new government regulations designed to lower the supply of protein) doesn’t eventually aggravate the situation here in the States. Let them eat cake!