Living in La-La land

The only item in our Key Market Metrics chart that went up greatly this week was Bitcoin. Almost everything was hit hard, including gold and silver, when two non-voting Fed member bank presidents said they favored a 50-basis point rise in the last FOMC meeting, and Peter Boockvar wrote on Friday that “While the comments yesterday from Fed presidents Mester and Bullard (who don’t vote this year) got notice that they each wanted a 50 bps hike at the previous FOMC meeting, we had more than enough guidance going into the last Fed hike from others that do vote that 25 bps was going to be the new norm and that won’t change. So, if the Fed is going to hike another 2-3 more times (with the 3rd being something new being partly priced in), it will be in 25 basis point increments. 

“Again though, considering the 450 bps of hikes already done, another 50 or 75 bps really doesn’t matter at this point but it does hammer home this new rate world we’re in that some still seem to be in denial about. The Treasury market quickly took notice over the past two weeks but the stock market up until yesterday has been in LA-LA land. 

“We know consumer product companies have been very aggressive in raising prices at the expense of volumes as we heard a lot about low elasticities. But there are limits to this strategy and at least Kraft Heinz believes they have reached it. After raising prices by a whopping 15% in 2022, the CEO on their earnings call Wednesday said, ‘As we look to the rest of the year, we have no current plan to announce new pricing in North America, Europe, Latin America and most of Asia.’ So at least from Kraft, their ‘inflation’ will be zero y/o/y in 2023 and that is what the Fed and markets care about, but the cost-of-living bar is still up sharply. 

“Under pressure too from falling real wages didn’t stop a better-than-expected UK retail sales figure for January. Ex auto fuel sales rose .4% m/o/m instead of falling by 2 tenths as forecasted. That though was partially offset by a 3 tenths downward revision to December. As seen in the U.S., January is a big discounting month and all those gift cards given in December are used.” 

David Stockman has been talking about the “stickiness” of underlying inflation. While volatile sectors like food and energy helped moderate the most recent CPI number, when viewed on a stacked or rolling 2-year basis, you can’t see much of a decline, as evidenced by David’s numbers recently reported in February 15 Contra Corner missive. Yes, the January print of 7.0% is down from the 7.1% number in June 2022, but as David said, even the Fed is not about to pivot in the face of this real and dangerous inflation number. The Fed wanted higher inflation because it thought that would be good. Next time, if there is one, they want to be more careful about what they wish for.

As Peter Boockvar said, equities are continuing to live in La-La land. But I would suggest Bitcoin was the La-La land champ of this past week. In summary, I would say that this week underscores the likelihood that rates will remain higher, longer than the equity markets are expecting. And when that dawns on them, capital will flow back into the industries that are most essential to retaining life on Earth and a return to real money—gold and silver—with capital flowing to the producers of those monetary metals.