Shapiro – June 2024 Market Insights

June 14, 2024

CONSUMER BUYING PRICES

A VIBECESSION OR A RECESSION?

What do Americans call an economy that has emerged from a downturn and is showing signs of strength, but people still feel they are worse off today than they were 4 years ago? They call it a bad economy. A better description is a “vibesession,” the word coined by Kyla Scanlon back in 2022.

“It’s difficult to be happy about positive economic news when I feel financially squeezed each month.” This was the predominant comment from a recent Harris Poll by 70% of the respondents. They also believe that the economy was worse than the media made it out to be. This is the definition of vibecession.

Here are other recent opinions from the Harris Poll along with facts that I have learned along the way. We live in a VUCA world: Volatile, Uncertain, Complex and Ambiguous. I consistently find VUCA as the best way to explain what is going on, and why people have these views.

POLL. A majority of Americans believed that the United States was in a recession.

FACT. The economy has been growing ever since the very short dramatic pandemic recession that ended with the stimulus package in the second half of 2020.

POLL. 49% of Americans believe the S&P 500 stock market index is down for the year.

FACT. The index went up about 24% in 2023 and is up more than 12% this year.

POLL. 49% of Americans believe that unemployment is at a 50-year high.

FACT. 28 million new jobs have been created since April of 2020. Employment is near a 50-year high and the unemployment rate has been under 4%, a near 50-year low.

POLL. 72% of Americans believed inflation was increasing.

FACT. This is correct, but inflation is increasing at a much slower pace. Inflation has dropped from 9.1% in June of 2022 and is less than 4% on an annual basis.

Why is it that so many Americans are uninformed on these key issues?

VUCA is causing much of the vibecession.  Kyla Scanlon said, “Inflation is a pressure cooker. It hurts over time. You had a couple of years of pretty high inflation, and people are really dealing with the aftermath of that.”

I get it. I remember the nightmare of the 2020 pandemic. 22 million workers lost their jobs. Unemployment went up to 14.8%.  Covid killed 350,000 Americans in 2020 and the total of Covid deaths eventually exceeded 1 million. A vaccine was approved by the end of the year but not readily available until 2021.

In 2020, President Trump passed 2 stimulus bills that paid out $3.1 trillion to help the economy. In 2021, President Biden passed another stimulus program that paid out $1.9 trillion.  Without these stimulus payments, I believe the country would have been in a serious recession with high unemployment similar to the 2008 recession that lasted for years.

Did the $ 5 trillion stimulus plans cause inflation? It certainly was a factor, however the rest of the world which did not have generous stimulus programs had higher inflation than the US. The US growth over the last 4 years is also better than the rest of the world. Considering those facts, would you rather be in a recession with high unemployment, a declining economy and low inflation or the economy we have with plentiful jobs, strong growth, higher interest rates and some inflation?

INFLATION

Inflation looks slightly better 

At the Federal Reserve meeting on June 12, officials voted unanimously to keep the benchmark federal funds rate in a range of 5.25% to 5.5% — a two-decade high first reached in July. They agreed on one rate cut this year and possibly 4 next year. We will see.

Core PCE for April, the latest month reported, came in slightly better than March.  That measure doesn’t put as much weight on shelter as the CPI does. That’s part of the reason why the PCE is trending closer to the Fed’s 2% target. The other CPI measures also improved slightly.

• The Consumer Price Index (CPI) for May was essentially flat. The core CPI gauge, which excludes volatile food and energy prices, was 0.2% for the month and on an annual basis was down to 3.4% from 3.6% last month. This annual pace was the lowest in 3 years.
• The Supercore CPI measure, services prices excluding energy and housing costs, that the Fed has highlighted, was unchanged again in May and the smallest increase this year. In the last 12 months, May fell 0.1% to 4.8% annually.
• Personal Consumption Expenditures, PCE, the Federal Reserve’s preferred measure of inflation, April was similar to March and slightly better as measured by the Supercore. It rose 0.3%, bringing the twelve-month comparison to 2.7%, and has risen at a 3.8% annual rate in the past three months. Core prices, which exclude the ever-volatile food and energy categories, rose 0.2% in April and are up 2.8% versus a year ago. These changes are almost identical with March. “Supercore,” is services only (no goods), excluding food, energy, and housing. That measure fell slightly from March to plus 0.3% in April and is up 3.4% versus a year ago.

MANUFACTURING

Signs of weakness 

The Manufacturing PMI® [ISM] dropped 0.5% to 48.7 percent in May. Although this is in contraction, according to PMI, ® anything above 42.5 percent, over a period of time, generally indicates an expansion of the overall economy. Using this criterion, the overall economy has been in expansion for the 49th month after one month of contraction in April 2020. The New Orders Index remains in contraction territory, registering 45.4 percent, down 3.7 percentage points. The May reading of the Production Index 50.2 is down 1.1 percentage points. The Prices Index also fell to 57 percent, down 3.9 percentage points and the Backlog of Orders Index also fell 3 percentage points compared to the 45.4 percent recorded in April.

• ITR is a highly accurate economic forecasting company that uses a 12-month moving total or average. They are forecasting US non-defense capital goods new orders, excluding aircraft, will plateau with a downward bias this year and then rise through at least 2026. New Orders 12MMT will rise by 3.5%–4.4% for the next three year-ends.
• Orders for nondefense core capital goods, excluding transportation, rose 0.4% in April, versus a consensus expected +0.1%. Orders have been up 1.7% in the past year. Orders for business equipment rose by more than expected in April, though prior months were revised lower, signaling that companies continue to invest cautiously amid higher rates and an uncertain outlook.
• Shipments of core non-defense capital goods excluding aircraft, an essential input for business investment in calculating GDP and a leading manufacturer indicator, rose 0.4% in April. If the pace of these shipments remains unchanged in May and June, core shipment growth would decline at a 0.4% annualized rate in Q2 versus the Q1 average.
• New home sales fell 4.7% in April as high prices and high mortgage rates kept buyers on the sidelines. The supply of new homes rose to 480k, the highest since 2008. New home sales have stabilized over the past year, though affordability issues have left buyers restrained. Meanwhile, existing home sales fell 1.7%.
• Car and light truck sales rose in May for the third straight month to 15.9 million units.
• U.S. Nonresidential Construction spending in April dipped slightly but is still near its high.
• The Shapiro Nonferrous Scrap Activity Index tracks our daily purchases from the duplicate accounts across our ten locations and a diverse industrial base. Based on our twelve-month trailing average, May volumes fell 3%.

CHINA

The export strategy will not fix Chinas’ economy  

I visited China in 1989 exploring some business opportunities. Bicycles were the dominant form of transportation in the cities for well over 90% of the population. There were very few cars. The Shanghai airport had 6 gates and reminded me of a Greyhound bus depot in a very small city. Trains were not air conditioned and smoke was everywhere. This was right after the Tiananmen Square massacre.

China then began to change rapidly as the US, Japan, and Europe poured money and technology into China to gain access to low-cost goods. This worked for about 30 years as China’s economy grew. The good news was that China supplied the world with low-cost clothing, furniture, commodities, and other manufactured products that lowered inflation all over the world. The bad news was that many countries’ manufactures were devastated.

China’s wealth grew and it began funding huge infrastructure projects with its enormous trade surpluses. Once Covid hit, the world’s economy slowed. However, the Zero Covid policy crippled China’s economy. I called it Post Traumatic Covid Disorder (PTCD). To date, China hasn’t come up with an effective strategy to turn things around.

China has created a dead-end economy of weak domestic consumer demand, an aging population and slowing growth. Its currency has been getting weaker, which makes their exports cheaper. Their exports have been growing and China believes that they can export their way out of this by flooding the world with their underpriced goods. The world has learned that cheap exports, subsidized by government subsidies, harm their economies and destroy their industries. The rest of the world will not let this happen again.

More tariffs are being placed on Chinese goods. The world does not trust them anymore. As China’s economy continues to slow down, it will reduce metals demand. They cannot export their way out of this. Unfortunately, there are no easy answers to this.

Meanwhile, the official PMI (Purchasing Managers Index) fell slightly in May to 49.5 from 50.4 in April, which is back in contraction.

METALS

Sell in May and go away did not happen

Prime and scrap prices for all nonferrous metals rose. Aluminum scrap has gone up the last 10 months even when prime dropped. Copper and nickel also rose. The main reason for the recent prime aluminum increase has been the hedge funds speculating on aluminum and copper.

I just attended the Harbor Aluminum Summit in Chicago with over 1000 attendees. This is the only meeting I go to where most everyone comes to hear the analysis and not just to network. Harbors’ analytics are some of the best in the industry. Their forecasting has been close to the most accurate for the past 2 years. According to Harbor, there will be ample metal availability due to demand contraction and increased production of prime for some time. More prime capacity is coming into the market because it is very profitable to produce at these prices. Demand has stopped receding but will not improve until 2026. Chinese demand is expected to stabilize in 2025 but is not forecasted to grow for some time. The surplus is expected to grow over the next 2 years.

There is a massive expansion in rolling mills, slabs, and billet makers taking place in the US over the next few years. The total increase for the US and the rest of the world is 6.6 million MTPY (metric tons per year). China alone is forecasted to bring on 15.2 million MTPY. Some of these projects might be postponed or canceled but it is still an overwhelming amount of metal coming into the market. It looks to me like we will be experiencing a buyers’ market.

After 22 months, the bear market ended on a technical basis 2 months ago. On a cash LME basis Harbor sees the market capped at $2200 to $2500 average through 2026. On the 3-month LME basis, Harbor stated, “As long as $2728 is not surpassed, $2200-2700 range should remain.” I was very impressed with the degree of analytics presented at the summit. This forecast will be affected by many existential risks in geopolitics, energy, climate change and who knows what. Put on your seatbelts!

I was fortunate to hear Nando Parrado, author of Miracle in the Andes, speak at Harbor. Even though I had already read his book, his in-person story of survival, resilience and determination was exhilarating. I encourage you to read it or watch the Netflix film “Society of the Snow.”

“As we used to say in the mountains, breathe. Breathe again. With every breath, you are alive. After all these years, this still is the best advice I can give you: Savor your existence. Live every moment. Do not waste a breath.” ― Nando Parrado, Miracle in the Andes

“Life is good. Family and health are precious.” 

Bruce Shapiro

Thanks for Reading.
Not a subscriber? Sign up below.