Inflation Is Trending Lower. Now What?

Inflation Is Trending Lower. Now What?

The December inflation report had some encouraging news. It showed that consumer prices trended lower for the month, but more importantly, it confirmed that overall prices have been trending lower for the past six months.

Now the ball is in the Fed’s court. The Fed Governors need to determine how much further they need to go with higher interest rates, which have been used to slow the economy and tame inflation.

After the inflation report was released, traders quickly adjusted their outlook for what the Fed will do next.

In the table, you can see the traders now see short-term rates reaching a high of between 4.75% and 5% in 2023. Late last year, some feared that the “terminal” rate would be over 5%. Today, rates are between 4.25% and 4.5%

After reviewing inflation and other economic data, if the Fed concludes that it’s time to pivot on monetary policy, that decision would be expected to influence both the stock and bond markets. I’m keeping an eye on what’s going on with the Fed and will continue to provide you updates.

Happy Thanksgiving

Happy Thanksgiving

Thanksgiving is a time to appreciate what we value most, a time to cherish the many gifts we have, and the people that make life special. We can also be thankful that we live in a great country known for its prosperity and abundance.
As you gather to enjoy some good food and good company this holiday, I will be thinking of you. I’m thankful that you have selected us as the financial professional to help you plan your future. We wish you the very best this holiday.

Inflation Is Trending Lower. Now What?

The World’s Chip Crisis

This is the most important article you will read this year.  It is the details behind what we wrote about in Tuesday’s email.  China wants Taiwan.  Not to “reunite with the motherland”, and all the other BS reasons they dream up. There is one reason, and only one.  China wants the TSCM foundry.

The chart below is very scary.  Look at the comparison between semiconductor production by country from 1990 to 2020.  43% comes from Taiwan and South Korea. These chips are used in  the production for everything from computers, cell phones, defense weaponry to cars. Wouldn’t be a problem except that China wants to invade Taiwan, and North Korea uses South Korea as a test site for nukes!!

Also, in the detail you will read the other scary stat: TSCM is responsible for 20% of all worldwide production and 92% of the advanced chips.  I just don’t understand why the White House, the defense intelligence agencies, and the S&P 500 companies don’t have a high level working relationship to forecast these highly important manufacturing glitches that put the national defense and security of Americans first.  Obviously, China does!  You don’t need furniture from Vietnam.  But life as you know it is OVER WITHOUT SEMICONDUCTOR CHIPS!

Market Update

Market Update

Yesterday the RFS investment committee made the tough decision to sell  your “short” positions, SQQQ and SPXS.  So far it is working.  You’re probably wondering what has changed and why?  The S&P 500 index, our main benchmark, has put up 6 green bars out of 9 in the last 9 days.  Last Thursday we officially recorded a “crossover”.  You  likely remember what a crossover is from our prior emails; nonetheless, it is when one moving average “MA” crosses above or below another MA.  The  5 day MA crossed back over the 10 day MA, which is historically a positive “buy” signal.  Not a guarantee, but historically very accurate.  Simply put, the average of the last 5 days is now higher than the average of the last 10.

The “whys” are not easy.  I do not want to be accused of making a political statement, just reporting what is in all the news, including the  Washington Post,

Wall Street Journal , and the  NY Times.  Investors appear to be regaining confidence in the markets as we approach the mid-term elections, which is 2 weeks from today.  Putting aside a huge political or economic event, it appears the GOP will take control of both Houses of Congress.  President Biden’s approval rating is at an all time low, and he recently suggested he may not run for a 2nd term.  Investors and consumers alike are not happy with inflation, interest rates, food, and fuel prices.  As you scan and/or read the articles below, the residential real estate market is in a total collapse, as well as new home construction.  The 30 year  mortgage rate just hit 7%, more than doubling the cost of a mortgage, which was 2.5%,  20% down, last October.  Further interest rate increases are potentially in the near future  as the Federal Reserve tries to try to help quell inflation which will take another bite out of  your budget.  Further, most consumers cannot afford new or used car loans, and the auto industry is still suffering from two years of chip shortages.  In addition, Goldman Sachs reported yesterday that auto/truck loans are at a higher default rate than they were in July of 2009.  One of the articles below reports that real estate agents are leaving the business at a higher rate than in 2008.

The political environment is not great either.  President Xi of China just won reelection to a third term and consolidated his top 25 team with all staunch loyalists.  He even dismissed, or “retired”, his immediate predecessor.  Further, for the 1st time since 1947 there are no women on the top 25 team.  All of this is directly from the  New York Times.

Xi continues to have his eyes on Taiwan, where the big prize is the worlds largest semi-conductor foundry, TSMC.  The NYT further wrote that if Xi invades Taiwan and captures the foundry we will have a worldwide economic collapse.  A very good friend and client told me to buy and read, “The Avoidable War”, by Ken Rudd.  He is the former Foreign Secretary and Prime Minister of Australia.  Very scary stuff, as he knows what he is talking about.

And of course, Russia continues to wreak havoc in the Ukraine, and reducing many parts of the European economy to a standstill.

The realities of climate change aren’t helping either.  As in a historic drought has sent the Mississippi River level to record lows, plus the water level in Europe is so low that barges and tourist ships cannot pass from Budapest to Amsterdam.  Winter is coming and natural gas shortages  could leave millions of Europeans without heating fuel.

That is all for now.  We will continue to keep you posted.  As always, please call me or write me back, and thanks to the many already doing that.

Praying for a peaceful and prosperous end to this madness.

Home prices cooled at a record pace
https://www.cnbc.com/2022/10/25/home-prices-cooled-at-a-record-pace-in-august-sp-case-shiller-says.html?__source=androidappshare

50% of voters expect the economy will get worse in 2023, new NBC News poll says
https://www.cnbc.com/video/2022/10/24/50-percent-of-voters-expect-the-economy-will-get-worse-in-2023.html?__source=androidappshare

The fate of the world economy may depend on what happens to a company most Americans have never heard of
https://www.businessinsider.com/tsmc-us-china-tensions-may-dictate-fate-of-global-economy-2022-10?nr_email_referer=1&utm_source=Sailthru&utm_medium=email&utm_content=10_things_tech&utm_campaign=Post%20Blast%20sai:%20

A “Record” Number Of Real Estate Agents Will Quit Due To Economy, Realtor Predicts
https://quoththeraven.substack.com/p/a-record-number-of-real-estate-agents?utm_source=substack&utm_medium=email

Southwest Florida real estate expert gives outlook on market
https://www.winknews.com/2022/10/17/southwest-florida-real-estate-expert-gives-outlook-on-market/

Home asking prices tumble at record pace as mortgage rates surge: data
https://nypost.com/2022/10/17/home-asking-prices-tumble-at-record-pace-as-mortgage-rates-surge/

QQQ: U.S. ETF market contracts by $1.1T since it peaked back in March
https://seekingalpha.com/news/3892588-us-etf-market-has-shrunk-by-11t-since-it-peaked-back-in-march?mailingid=29423248&messageid=2900&serial=29423248.15777&utm_campaign=rta-stock-news&utm_content=link-3&utm_medium=email&utm_source=seeking_alpha&utm_term=29423248.15777

Mortgage demand drops to a 25-year low, as interest rates climb
https://www.cnbc.com/2022/10/19/mortgage-demand-drops-to-a-25-year-low-as-interest-rates-climb.html?__source=newsletter%7Cmorningsquawk

Recession-proof Microsoft lays off nearly 1,000 employees across the company  – Fortune
https://fortune.com/2022/10/18/recession-microsoft-software-tech-layoffs-staff-employees/

Market Update

Thoughts On The Market

The market’s having a trying month. Fortunately, we are attuned to the economic reports that are coming out daily and will safeguard your portfolios by adjusting to the news.

Jerome Powell, Chairman of the Federal Reserve, repeatedly has confirmed the intention to continue to raise interest rates in order to stem rampant inflation now running at close to 8%. The Fed seeks to achieve a target 2% inflation rate. Economist Steve Hanke, Senior Fellow at the Cato Institute and longtime professor at Johns Hopkins University, warned this week that we should expect a “whopper of a recession” in 2023. He bases his prediction on “unprecedented growth” in the money supply since the Pandemic.[1]

The Dow Jones, Standard & Poors 500, and NASDAQ indices all are down 3.5 – 4.5% this month, affecting all market sectors except energy, which has risen at the same time that prices at the pump have been on a steady decline.

On the other side of the coin is the news that the money supply has, in fact, leveled off since February. Volatility in the market has begun to trend downward, non-farm unemployment is just 3.5%,[2] and corporate profits have been fairly solid in the U.S. as well as in Europe. Although the market has been negative all week, the downward movement appears to be moderating today.

So what does this mean to you, the investor? Today there are many market sectors that appear to be attractively priced. As we believe that the risk of missing the upside recovery may be greater than the risk of missing the bottom of the market, we will continue to look for opportunities to place your funds where you can derive the greatest benefit. The bottom line is we have a plan and will continue to monitor and adjust your portfolios to navigate the difficult market we are now experiencing.

Motley Fool wrapped up Foolfest, its annual investment conference, yesterday, emphasizing optimistic views on a number of individual stocks. We also see some room for guarded optimism and continue to advocate that one should engage primarily in index and ETF investing. We will track the trends and invest your funds accordingly – on both the long and short sides of the Market. But we will continue to let the experts pick the individual securities that populate these funds.

As I write this at 3:00 p.m., the RFS Growth Model is ahead of the S&P 500 Index by greater than 7% for August.  Our triple short ETF positions comprise 45% of the Model and have significantly enhanced our performance. This is why you rely upon RFS. We thank you for your continued confidence and support.

[1] CNBC Interview, August 29, 2022
[2] United States Bureau of Labor Statistics news release August 5, 2022

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