There’s Something Strange In The Neighborhood.

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Wine Store

Mother’s Day is a traditional get-together for the family. As I’m not a good cook, it’s my responsibility to bring the wine for the festivities. Having grown up in California, it’s assumed that I know something about the fruit of the vine. An assumption that may not be fully justified!

So off I go to the local Wine Shop, all state-run here in Pennsylvania. I’m prepared for the higher prices I’m likely to see here. Inflation, you know.

Now I don’t buy many bottles, only around the holidays. And I have just a small selection that we all seem to like. So it really is a pretty good sample of how prices or at least wine prices are in this part of the country.

And it turned out to be a big surprise. Prices were most definitely not higher. In fact, many bottles were on sale. And the ones that weren’t were, if anything lower than I remember.

But how can this be? Inflation is everywhere we are told.

I started to look around. The first thing I notices was that Zero Hedge is reporting that used car prices are crashing. Falling at the rate they were going higher last summer.

Now, certainly, we have not moved away from an inflation base. At least not yet. But there are starting to appear indications that Inflation may not be as long-lasting as you and I thought.

Case in point. We had two measures of the price at the producer level last week. One for manufacturing, and one for non-manufacturing. For instance: manufacturing producer prices showed that they are actually starting to decline. While the non-manufacturing continued rising. Showing that inflation continues for non-manufacturing, but maybe begins to slow for manufacturing.

The same story was told in oil last week. While here in America oil prices continue higher. Inflation. I note that Saudi Arabia just cut their oil prices over the weekend. Indicating, perhaps, that in this all-important commodity we may be starting to see an easing in price inflation.

And as an Analyst that’s just the sort of thing, we’re looking for. The trends BEFORE they are fully developed. We’re looking around the corner, for the next great phase in the financial markets.

It’s the discounting mechanism in operation.

That’s what markets do. They discount future revenue and earnings. Trying to estimate what any given investment will return over time.

This brings us, to the most important indicator of all. An indicator that seems to be pointing to an end of inflation, ironically.

And that indicator is the financial markets themselves. The destruction of wealth that has occurred over the past few weeks has been incredible.

This past week alone saw the market leaders, the top 5 stocks fall 10%. Equities, in general, experiencing the worst week in 11 years. And bonds were certainly not immune, falling at the greatest rate in over 50 years.

All in all, it was one of the worst performances in a generation.

And most certainly a reverse “wealth effect.” The wealth effect is the condition that consumers experience when their basic assets are appreciated. People tend to spend more when they feel they’re becoming wealthier.

But we’re on the opposite tack right now. Can you say “poverty effect.” which, it seems to me will translate into demand destruction. As markets fall, people’s investment and retirement accounts do likewise. It seems reasonable to assume, that their spending patterns will also fall.

And that’s why, at some point, I’m looking for ultimately lower, not higher prices ahead.

David

PS

Really Interesting trade report coming out of China this morning. As you know China has closed its principal shipping port, Shanghai. And in spite of that, has managed to increase their goods exports over last year’s numbers.

After setting an all-time world record trade surplus in November of last year of nearly 95 billion (US).

In February the Chinese locked down its largest port, Shanghai. This dropped their worldwide exports to just one-third of the November level.

Then over then in March and now April, China has been steadily increasing its exports again. Add up these first four months of 2022, and China’s worldwide trade has reached nearly 2 trillion dollars. Up 10% over the same period last year. All this in spite of the lockdown.

Remarkable. And a clear indication that China remains the manufacturing hub of the world.

Turning to the US. A little later this morning we’ll get the latest report on Whole Sale Inventories. Expected for the 20th straight month, to show an increase.

Normally, I’d consider this a very positive move, as it would show that businesses continue to purchase goods in anticipation of higher sales ahead.

But beware of this one.

While this report is seasonally adjusted. It is not, I repeat not, adjusted for this incredible surge in inflation.

So take this report with a grain of sale. It tells me that any increase in inventories may actually be just an illusion of inflation. In real terms, we may actually be seeing inventories decline.

Also shortly we’ll get the latest survey of consumers’ expectations for inflation. It’s expected to show consumers expect better than 6% inflation in the months ahead.

So far this morning, some negative responses to the quarterly earnings. Leading off, unfortunately on the downside has been Palantir Technologies. Its stock is trading down over 10% in the pre-market. Also showing lesser declines currently on their reports are generic pharmaceutical company Viatris, and Elanco Animal Health. While Covid-19 Vaccine Maker Biontech is trading unchanged.

A little later we will have results from utilities Duke Energy and Excelon as well as Suncor Energy. Then after the markets close, will come the very interesting results of the leading Shopping Mall owner, Simon Property Group.