Postcards From the Florida Republic - July 17, 2022

1. Market Prediction:?Bank stocks don’t continue Friday’s momentum – reflecting the ugly numbers reported Thursday and Friday. There’s too much chatter about a “brilliant” plan to “cut rates” in 2023… or is that just another "inflation" delusion?
2. Odds of a Recession: 87.04159830201666%
3. General Outlook:?While we should probably hike interest rates by 125 points in July, the Fed goes with 75, only to forget that energy prices will heat up again due to winter supply problems, gas prices are going up ahead of the election, and rental prices aren’t slowing down soon (See the new Case-Shiller chart below).?
4. Economic Outlook:?Putting faces of various Federal Reserve voting committee members on tarot cards, shuffling for the “best energy,” and expecting to draw a reverse “Death” card, signaling?Stagnation. Long setup for that joke.
5. Current Mood:?Elated that my four-year-old was thrilled about the Orioles' outcome on Saturday Night.

Dear Future Florida Republic Residents,?

We start this weekend…?outside the United States.?

This week, central banks around the globe will make decisions on whether to jack up interest rates and formally end the era of cheap global money.

Will they follow the Fed’s moves higher??

Most people will gloss over the Bank of Nigeria’s decision on Tuesday (although it’s essential given its population growth) and turn right to Thursday. That’s a hectic day.

The European Central Bank (ECB) is expected to make its first interest rate hike in more than ten years by 25 basis points.

Considering the problems across the continent, they struggle to avoid impacting certain EU members. The EU is looking at either addressing price stability or arranging bailouts…

On the Bank of Japan – likely no hike is coming whatsoever. The BoJ’s situation requires an entirely different postcard. The chart below is from Bloomberg.

So, the story today centers around the problems with the dollar’s strength – not its weakness due to domestic inflation.

Nobody gets a monopoly on the term Great Dollar Crisis or Dollar Financial Crisis, but the thesis is starting to pop up around various media outlets in my world.

It’s worth discussing…?

A strong dollar can create severe problems.

Start with U.S. companies that operate abroad.

ServiceNow – an overvalued cloud computing stock, saw its shares plunge earlier this week after its CEO warned that the company would face global challenges from a rising dollar.

“You’re going to see the dollar headwind right now against well-known technology brands,” Bill McDermott said to CNBC. “No one’s going to outrun the currency right now.”

Here’s Tuesday’s drop:?

Companies operating abroad convert those currencies back into a surging dollar. If they stink at managing Forex, it eats into their profits. ServiceNow is one of the few I even think about. I’m usually talking more about McDonald’s (MCD), Phillip Morris (PM), Texas Instruments (TXN), and PepsiCo (PEP).

But then there’s the impact of dollar-based debt on nations that borrowed to the tilt during the 2020 COVID crisis and before…

This problem existed in the early 1980s, hit again in 2003, and has jumped around multiple times in the last few decades in tiny bumps. But this could become the worst on record, as up to 75 nations face potential reckoning due to a strong dollar and higher U.S. interest rates while they struggle with debt and currency woes, says the WEF.?

This trend is why I don’t foresee any short-term solution by the Federal Reserve or stabilization in the next six months, as so many investors continue to believe.

The so-called “Dollar Financial Crisis” – happening right now in Sri Lanka – will spread like wildfire if the U.S. remains VERY behind on inflation and must raise rates quickly.?

It’s not just Sri Lanka, Pakistan, or Argentina. It hits nations facing severe debt problems like Italy, oil importers like China, and other commodity nations…?

Wall Street is warning about this, but not with the same fervor we usually see around commodity prices. Bank of America and Wells Fargo noted that emerging market currencies took a big hit. You’ve now got a Euro at parity. The Yen is collapsing against the Dollar.

Wells Fargo isn’t worried about a recession so much as something that triggers a familiar problem when the Fed hikes fast.?

“We’d see a “credit event,” the bank said, as soon as November, unless the U.S. markets reverse.

Remember this chart?

Look at 1974, 1981, 1988, 1994, 1997, 1998, and 2018. These are credit events abroad…

But this wouldn’t be one or two nations.?

It could be dozens, and the International Monetary Fund would face chaos in handling these crises.?

Already, I know that many people are thinking about the role of the U.S. dollar as an instrument of trade. However, we’re already seeing nations try to move away from it...

I’ve talked at length about BRICS +2 (Brazil, Russia, India, China, South Africa, Iran, and Argentina.) They are 30% of the global GDP and 42% of the population and produce hard commodities.?That alliance is building in the wake of the latter two nations' application to join the bloc. While the G7 "financialized" everything - these are commodity producers.

A trading instrument will ultimately come for that bloc, as it only makes common sense to cut out the dollar; it’s just a matter of when not if. And it’s part of the broader deglobalization trend that will accelerate.?

Regarding the U.S., we’ve outsourced inflation for four decades to Asia. Now, that’s coming home to roost. The Fed now must raise rates, address wage growth from spiraling, and do it all without creating a dollar that swallows other global currencies.?

For years, I’ve read many experts talk about a dollar collapsing into hyperinflation. The Fed would overprint, and we’d look like the Weimer Republic. That’s Peter Schiff's narrative… and how gold will go to $5,000, $10,000, something ending in “-illion.”

Some of the voices I’m following talk about the opposite. Syz Group has enough data to tell the full story.?George Gammon has discussed?this in a terrific presentation.?

It’s popping up across my LinkedIn chats more and more…??

One statement I liked?came from Paul Lobosco?– who asked a great question to complement Gammon’s commentary.

That last point is critical.?

They’re discussing that the post-Gold-based system instrument may grow TOO STRONG – and it could effectively collapse economies that can’t afford to keep up with the dollar’s surge.?

Other nations would either face default, hyperinflation as they try to print their way out of debt, or other forms of destabilization.?

As I said, we need to pay close attention here. Look at the chart above – one annual crisis like Mexico in 1994 is plenty.?

The thought of multiple at the same time is probably not something that anyone considered even six months ago.

“Peak Inflation”

I have also long explained that we are not done yet with inflation…

And since we’re not, the Fed will need to get aggressive.?

I want to see how the media has treated this story. They’ve predicted that “peak inflation” has arrived almost every month… for NINE months.?

It turns out “peak inflation” was just as big of a lie as “transitory inflation.”

Look.

In November, as the Fed warned it would need to raise interest rates, CNBC suggested that one metric said that inflation “might be peaking….”

It didn’t.?

In December, Bloomberg speculated about small rate hikes to get inflation back under control. It didn’t peak inflation. See the date: 12/10/21.

By January, momentum went negative for the first time, and the markets started panic attacks over rate hikes in March. And not just any rate hike… a whopped 25 basis points at first. CNBC was back with the “peak” tale.

That story came on January 12, three days after a negative momentum switch sent stocks into freefall. Chatter surged to expectations for a 50-basis point hike instead of 25.

By February 14, we were trading negative momentum total swing… but inflation didn’t peak, as the New York Times suggested…

By March, the media started to recognize the severity of the situation. It waited for the Fed to raise interest rates by 50 points, and then we’d view the damage.

As I was stating, we would see much higher inflation because of fuel prices, the Ukraine War, terrible energy policy here in the U.S., supply chain weakness, and more.?

By April, however, the media was back at it again.?

Bloomberg said on April 10 that inflation might have peaked. That was also in time with the second adverse momentum event of the year - April 6.

Despite the April dive in the market, investment banks also got in on the peak inflation calls. Anything to reach a bottom and no longer must dump stocks.?

A week later, we saw the most significant outflows from ETFs in four years.

By May - come on. They had to have learned their lesson, right?

CNN Business had outdone CNBC’s headline in November. This author had THREE indicators that prices could soon decline.

Hmm…

Over to you, Bloomberg… four weeks later.

Nope.?

Come on…?

Financial Times, June 5?

Okay… seriously. Three days later, momentum went negative again as markets collapsed over expectations for a 75-point hike during the June Fed meeting.?

The following week, we saw the most significant selloff among hedge funds in 15 years and the largest shorting against energy producers since 2008.

So now what??

What did you expect…

This time… July 12, it’s?Axios.

This time, guys! This time. This is it… right?

RIGHT?

The CPI data showed we didn’t… and I’ll show you the Case-Shiller CPI number that suggests we aren’t here yet…?

But this was from yesterday…?

It’s NEVER going to end.

The State of the Market

Look at these awful graphs…?

Every time I do, they make me laugh.

Let’s chart… it… up.

CHART 1: Raise Rates to Cut Rates

Forecasts for the Fed Funds rate have increased to 3.65 in January. The Fed reportedly has inflation under control as the economy faces pressure. Then…?

The market expects that the Fed will start to slash interest rates to provide support to the economy. And this is the type of madness that makes my head hurt.?

As I’ve said, inflation remains hot because of supply problems. And if the Fed crushes aggregate demand in the months ahead, we will have a combination of low supply and lower demand thanks to higher borrowing costs.?

What happens when the Fed cuts rates – and we haven’t solved our supply problems? Inflation returns. You can’t lift aggregate demand if it outpaces an increase in supply.?

That will push rates higher again as the Fed struggles to reach its 2% target. This will create some volatility in 2023, frustrated business owners, and extend stagflation.

This "raise to lower" narrative feels like the next delusion to prop up equity prices.

CHART 2: Recession Predictions

Bank of America is throwing the towel on the U.S. economy in 2022.?

The bank officially declared the U.S. is in a technical recession, projecting negative REAL growth will decline five straight quarters – and finally come out positive in Q2 2023.

CHART 3: What Is a Recession?

I’ve shown Shadow Stats inflation for June pointing north of 15%, a statement echoed by Peter Schiff. The “official” CPI number from the Labor Department was 8.7%.

But check this out…

The Case-Schiller CPI number is another alternative – and likely more accurate – measurement of U.S. inflation.?It incorporates his rent measurements to offer an alternative metric that shows real-time inflation on the ground. Rents numbers, everyone...

Rent is the figure people are ignoring. Gasoline prices are too volatile...

CHART 4: Economic Pitfall

Manufacturing numbers for the U.S. – six months out – look incredibly weak. We haven’t seen a projected downturn like this since the Dot-Com collapse or the Great Financial Crisis.

Keep in mind that we’re still very early in this global challenge.

CHART 5: Everyone is Shorting. Everyone.?

The other day, I read an interesting interview suggesting that the VIX wasn’t elevated due to so many investors sitting in cash.?

That’s what you should be doing when momentum is red. At that point, people don’t need to buy much insurance.

That said, short interest… is very high. Thanks to Syz Group for pointing this one out.

Correlations

As a mathematician by trade, I am always taught to look for correlations.

For example, there has been a direct correlation between the Federal Reserve’s balance sheet since 2009 and the rally in the S&P 500 through 2000…?

This means that for every dollar the Fed’s balance sheet increased, there would be a statistically significant increase in the index. That makes sense, right?

But please be aware that not all correlations are pure. Sometimes, data aligns for entirely random reasons.?

In the case of the chart below, the divorce rate in Maine from 2000 to 2009 had a 99.26% correlation to the nation’s per-capita consumption of margarine.

That said, one of these things does not cause the other… Fewer people did not get divorced in Maine because Americans cut back on margarine consumption…

I hope?

Quick Hits

• The next leg of the European crisis hit full tilt this week. Italian Prime Minister Mario Draghi - the former head of the European Central Bank - offered his resignation. Although the nation’s president didn’t accept it, it’s another sign of collapsing European leadership.?
• So, that housing price appreciation was a lot higher than I thought. In Q1 2020, the median home sale price was $329,000. In Q1 2022, it was $429,000,?the Federal Reserve says. So, maybe it was a good idea to try to get someone to buy this house in December.
• I’ve known AXS Investments and their great team for a while. They’re the company that bought Tuttle Innovation Fund (SARK) - which provides inverse returns of Cathie Wood’s ARK Innovation Fund (ARKK). It ALSO runs an ETF called the AXS 2X Innovation ETF (TARK), which provides 2x returns on Cathie Wood’s funds.?Well, they’re at it again. Innovation in the ETF space should be exciting for traders.?These are leveraged ETFs around single stocks.?They’re the first of their kind. Instead of buying puts on a stock, you can purchase a leveraged bearish ETF on an individual stock. It’s innovative in that you don’t need to pay a steep premium in times of higher volatility - and you don’t have to pay the borrowing cost when shorting over a longer duration. The roster:

§??A daily bear and daily bear ETF for Tesla?(TSLQ/TSLU)

§??A 1.25x levered daily bear and 1.25x daily bull ETF for Nvidia (NVDS/NVDB)

§??A 2x levered daily bear and 2x daily bull ETF for Conoco Phillips (COPQ/COPL)

§??A 1.25x levered daily bear and 1.25x daily bull ETF for Boeing (BAS/BAT)

§??A 1.5x levered daily bear and 1.5x daily bull ETF for PayPal (PYPS/PYPT)

§??A 1.25x levered daily bear and 1.25x daily bull ETF for Wells Fargo (WFCS/WFCT)

§??A 2x levered daily bear and 2x daily bull ETF for Pfizer (PFES/PFEL)

§??A 1.5x levered daily bear and 1.25x daily bull ETF for SalesForce.com (CRMS/CRML)

§??A 2x levered daily bear and 2x daily bull ETF for Nike (NKEQ/NKEL)?

I know it might not be for everyone, but it creates many opportunities for day traders using Volume Weighted Average Price, especially around earnings season. This will be fun.

Post Cards from the Florida Republic

Everyone has their “pandemic purchase.”?

Is it an unreasonable amount of pasta??

Did you buy a Peloton that now acts as a place to hang laundry??

It’s usually… gym equipment or exercise related, right??

For me… it’s this.?

A gazebo.

Doesn’t it look inviting??

A place where you can entertain friends??

Have dinner with your family? Look at the craftsmanship.?

It’s lovely, isn’t it??

Well, that’s not what mine looks like.?

Here’s mine.

I began construction on this in?November 2021.

The guide contained no English instructions.?

Chinese,?check. Japanese,?check. But English? No way.?

This thing came in more than 100 pieces with hundreds of screws.?

The frame and foundation took about a day to put together.?

But the roof panels – are awkward.?

They don’t slide in correctly. I tried putting a few in, but I hurt my back. I fell off the ladder once. It reminds me of pain.

We hired two contractors to put the last six panels up.?

Both quit in the first 45 minutes.?

We hired another contractor. He didn’t show up.

No one on Angi’s List wants this job because all Angi’s List exists for is to send salespeople to your home to sell you a bunch of stuff that you don’t need (Hello, Leaf Filter!)

And so, it still sits in the backyard…

Looking like that.?

It’s been there for more than eight months. And we haven’t even bothered to try to assemble the remaining pieces.?

The curtains remain folded in the closet, never once touching the Florida sun.?

Today, I think about why we bought it in the beginning.?

It was something that we?wanted.

My wife had visions of hosting family cookouts. We discussed sitting outside at night and watching our daughter play from under that gazebo. I believed I’d be able to occasionally put some camera equipment out there, film my shows, or conduct interviews in that tent.?

But who was I kidding?

It was an?ultimate want?– something built up in our minds.?

This thing cost more than $1,100. It now feels useless.?

But then I realized…?we didn’t want it?that much.

Every weekend we said we’d work on that roof. We didn’t. Every weekend we said we’d bolt it down in case a hurricane came.

We haven’t.

So, did we want it? Because we weren’t doing everything possible to ensure that it was brought across the finish line.

We wanted something convenient. We probably would use it a few times and then fade off… like so many other pandemic purchases that sit in closets, take up space, or just add to the extensive list of stuff that hopefully someone buys in a yard sale.

Then, two days ago, I realized I could buy a popup Gazebo tent on Amazon for about 1/5th?of the price. It’s the same size, it has curtains, and we can put it up and take it down any time we want. It’s cheap; it’s portable, and it’s convenient.?

That product opened the conversation to more – the ability to take it places when we travel or go to our daughter’s sports events. It works for the beach… It becomes a source of adventure – not being stuck at home during the pandemic.

That’s what we wanted… and needed…?some freedom.?

An escape from the indoors…?

But I still have this 10 x 13 metal frame in my yard.?

So, I started to think about how to throw this thing out.?

Or donate it.?

Or melt it and create the early currency of the Florida Republic.?

But I started to think?about how to adapt this to good use.?

After all, it has a steady steel frame and a solid foundation.?

I have been putting together a small farm in my backyard that I will plant in September as the weather cools.?

I’m very concerned about the global markets, supply chains, unrest, and the stronger dollar. So, a small sustainable farm is essential to me. It’s something we need… and we’re building.

What I need and not what I want are two very different things.?

And for a successful property transition, I need?a greenhouse?to grow certain vegetables in a particular environment. It turns out that a 10 x 13 greenhouse – prefabricated – can cost north of $8,000. That won’t work. And I’m not assembling that either.

But a converted Gazebo – with just $500 more in clear Greenhouse Plastic Sheeting – can create a stable environment for plants at a fraction of the cost. I just need a good foundation.

That is the plan.?

And that’s my message out of the future Florida Republic today.?

Nothing wacky. Nothing over the top.?

It’s incredible what you can build with a solid foundation.?

It can turn into something far more valuable and useful.?

At a time when uncertainty, whether it’s your job, business, or family, think back to the foundation of it.?

What makes it suitable? What makes it strong? And – if that needs work – focus on improving it… or possibly adapting it for something far better…?

Don’t try to get ahead of yourself.?

In the months ahead. We will likely experience a dramatic period of economic turbulence that we haven’t witnessed before – something that doesn’t have precedent in our lives.?

If you have a good foundation – you can adapt that business, your career, and much more. You’ll be okay. I assure you.

The Week Ahead?

If you loved last week… you’ll?love?all 168 hours of this upcoming nonsense.?

Monday

• Options volume has exploded around this Canoo (GOEV) stock thanks to its deal with Walmart Stores (WMT). If the future is driving around in these cars, I buy Pfizer (PFE) stock because they manufacture Zoloft.?
• Jeffries hosts a semi-annual report on consumer finance and consumer spending. There will likely be some chatter around Affirm (AFRM) and Sofi Technologies (SOFI). These companies are getting crushed this year.?
• The National Association of Home Builders/Wells Fargo reports the July Housing Market Index. Economists think it will fall by a percentage point in July.
• Look for earnings from Goldman Sachs (GS), International Business Machines (IBM), Bank of America (BA), and Charles Schwab (SCHW).

Tuesday

• Look for earnings from Netflix (NFLX), Johnson & Johnson (JNJ), Halliburton (HAL), Lockheed Martin (LMT), Cal-Maine (CALM), and Ally Financial (ALLY).
• Microsoft (MSFT) will host an event for its cloud partners. I wasn’t even aware they had partners. I figured they’d just run everyone out of business and then create some puppet companies to do their bidding.
• The Bloomberg Crypto Summit happens in Manhattan. That should be awkward for anyone with a Celsius badge.
• The day before Tesla reports earnings (and talks about the impact of COVID lockdowns in China once again), Twitter (TWTR) will kick off its first hearing on a motion to expedite its trial to force Elon Musk to purchase the company. That’s clearly on purpose, right?

Wednesday

• Tesla (TSLA) will report earnings, and investors are focused on the company’s projects in Germany, China, and Texas.?
• Look for other earnings reports from Biogen (BIIB), United Continental (UAL), Abbott Labs (ABT), Las Vegas Sands (LVS), Kinder Morgan (KMI), and Suncor Energy (SU).

Thursday

• It’s going to be a volatile day for natural gas prices. We’re watching natural gas inventories. Can we trade KOLD and BOIL, please?
• Look for earnings from AT&T Corp. (T), Snap (SNAP), CROCS (CROX), American Airlines (AAL), Phillip Morris (PM), DR Horton (DHI), Dow (DOW), Domino’s Pizza (DPZ), and Capital One (COF).
• Also, look for big moves in Boston Beer (SAM) and SVB Financial (SIVB) around their earnings reports.

Friday

• Twitter (TWTR) reports earnings. Drink every time Elon Musk’s name is brought up on a conference call. Try to survive.
• GameStop (GME) will start trading at a 4-1 split-adjusted level after the bell. Can this stupid company just split into a million pieces instead?
• Look for earnings from American Express (AXP), Verizon Communications (VZ), Cleveland Cliffs (CLF), Schlumberger (SLB), NextEra Energy (NEE), and Precision Drilling (PDS).

One Last Drink and I’m Out

Finally,?Nancy Pelosi’s husband bought 20,000 shares?of NVIDIA (NVDA), alongside Apple and Visa stocks.

Critics call this insider trading case as the House of Representatives prepares to vote on a bill offering $52 billion in subsidies to the U.S. semiconductor industry.

We get the leadership that we deserve.

That said, the purchase date coincided with Quad Witching, when shares of NVDA traded at a near-term low. But here we are, still having these conflicts of interest. Throw them all out.

Enjoy your Sunday,?

Garrett Baldwin