The RedBlueprint

Fiscal Stimulus is Still Loose

If you looked all around the news, I am sure you heard that Wall Street is screaming for rate cuts because credit is tight and needs to be loose again. However, on May 10, 2024, national financial conditions have been loosed, it sits at -0.53 (negative value means quantitative easing while positive value means quantitative tightening.)

So, despite the fact that interest rates are between 5.25% – 5.50%, the fiscal policy is still loose. One of the many, obvious, reasons why the Fed hasn’t been able to reach the 2% inflation target, which is still a fantasy, is because there’s no way to reach the magical 2% inflation target.

Reaching 2%, means they have to tighten the fiscal policy, doing that will bring a crisis to the US economy and, most likely, a global economic crisis for the ages, while at the same time loosening fiscal policy means that inflation will keep rising which is already burdening all of the people in America, especially, the middle and lower class with more debt and rising prices for essential items.

The feds are caught in a damned if you do or damned if you don’t decision, there’s 0% chance of soft landing or rosy outcome. It’s not possible unless they start doing deep cuts to the social security, Medicare and military budget, which is not happening, no matter who is elected.

Big banks such as JP Morgan Jamie Dimon, billionaires such as Stanley Druckenmiller and, even, the federal reserve Jerome Powell are already giving strong warning that the US government fiscal spending needs to be reduced drastically.

Everyone seems to be agreed that spending deficit needs to be reduced except the US government. They just keep borrowing and borrowing with no end in sight. The end justifies their means or, whatever else, they are led to believe.

This is a problem that started during the 2008 financial crisis, when the federal reserve went too long on loose stimulus policy, leaving interest rate at rock bottom for many years and companies started piling on debt because it was cheap to borrow and most companies didn’t use that debt to create new products and/or services, otherwise, they wouldn’t need the federal reserve to bail them out.

As the saying goes “you reap what you sow” and boi, does it show.

The US economy is addicted to cheap debt. Companies need to refinance their debt to sustain themselves but with current interest rate at 5.25% – 5.50%, its hitting companies rock bottom hard. Companies profit margins are shrinking, customers are being cautions with their spending, sales are weak and inventories such as cars keep piling up. Companies are forced, due to their bad financial decisions, to layoffs employees and/or shut down unprofitable department or projects which leads to more strain on the US government budget cause unemployment cost will rise which leads to less tax’s revenue for the US government, which means more borrowing to cover the social security, Medicaid and military budget. It’s a vicious cycle.

This is just the economic part, there’s still a dire issue with global demographic. Who’s going to pay for social security when people retired? If young, working people aren’t paying enough payroll tax to cover the cost of social security benefits, are global leaders going to raise the age of retirement eligibility? Can the social security system be balanced, or will it fall apart due to insufficient funding? All eyes are in Japan since they have a dire situation with an aging population. Japan is, literally, disappearing right before our eyes!

With so many variables, one thing is consistent, and that is America’s debt will continue to rise.

Credit card delinquencies is rising, maxing out Gen Z borrowers while dwindling savings accounts is at its lowest since beginning of 2023.

Shocker……. this is a result of reckless spending from the Federal Reserve and US government from giving aids to foreign countries to contracting the US economy with, at best, misguided economic policies, at worst, destructive economic policies.

What’s the, predictable, outcome? Increased inflation. Oh, and the public can feel the burden as essential items are increasing prices while wages stay stagnant.

As you can see, Gen Zs’ are struggling just to get by and are submerged with debt which is not surprising since Gen Z are starting out their careers with entry-level position, so their credit report is non-existent and, most likely, receive the lowest credit balance of the bank.

Having a low credit balance can make any person, even with discipline fiduciary duty, go beyond its limit. Have you seen the cost of going to the hospital or getting your car repaired because of mechanical issues, especially for electric vehicle (EV)? Yeah, it can make anyone’s heart skip a beat. In addition, interest rate from credit card debt has risen to 20.66%, pushing borrowers into a deeper hole.

To be crystal clear, it’s not just Gen Z that’s struggling, everyone is struggling.

Unfortunately, Gen Z and the following generations are going to be the ones to shoulder the consequences of world leaders spending cause the spending is not going to stop, quite the contrary, they are going deeper into debt to pay for the old debt.

If you look at the post of the consumer price index (CPI) that I posted, CPI report increases overall by 3.4%. This percentage is not seasonally adjusted, its percentage could be higher than 3.4% when adjustment is made.

Moreover, personal saving accounts is at the lowest since the beginning of 2023, at $671 billions. Down from March 2021, $5 trillion. That’s an 88% decrease.

Delinquencies have been steadily rising since 2021 and it shows no sign of slowing or reversing the trend. Whether Powell going to keep its current rate for much longer or cutting rates remains to be seen.

Physical Gold is not a stock

You can look at the report here.

Gold is not a stock. You can’t just sell a gold in a pinch and expect to make a profit, unless the person willing to buy from you is desperate, don’t expect to make a quick buck.

If you read my previous post, gold is highly liquid, in case, of an emergency. However, gold is not for get rich scheme. If that’s your aim with gold, you will have a hard time selling it.

You have to understand that gold dealers operate with very thin profit margins. So, for gold dealers to make a profit, they will always offer your gold less than what it’s worth in today’s market price because they need to make profit when they sell it. There’s always a cost when you buy gold such as a premium and there’s always a fee when you sell gold.

From the report, a person name Adam Xi bought some Costco gold bar to rack up points with his credit card and sell the gold bar to make a profit. Unfortunately for Mr. Xi, he had to sell the Costco gold bar at a slightly loss. Mr. Xi bought the Costco gold bar at $2,000 and sold it for $1,960.

Now, it could be many reasons why the gold bar didn’t make a profit for Mr. Xi from Costco not buying it back, to Costco gold bar not being as recognizable as golden Maple leaf coins or golden America eagles coins, which makes Costco gold bar not highly liquid. However, I suspect, that the reason why it didn’t make a profit is because gold needs a certain amount of holding period before selling it.

In 30 of January 2023, gold prices were $1,933.80. In 30 of January 2024, gold prices were $2,046.00. That’s a small increase, but with the printing of the fiat credit and central banks buying gold with no sign of stopping, it’s only a matter of time before gold prices reaches $2,500 or more before the end of the year.

Gold pricing increases slowly due to various factors pushing gold prices down. There are many institutions that wants to keep gold prices down because it doesn’t benefit them. So, there’s forces pushing prices up and forces pushing price down.

Always remember that the main purpose of gold is for insurance and, in case you forgot, remember what happened to Zimbabwe hyperinflation period. When leaders spend beyond their means and resort to borrowing, based on historical evidence from old empires, they never stop. They keep spending and spending until there’s no more. A trend in motion doesn’t stop until it reaches a crisis.

Disclaimer: I am not a financial advisor, and I am not recommending any investment decision for anyone. If you want to invest, seek a financial advisor. I am just writing this for educational purposes and because I enjoy writing about it. Please, please, please seek a financial advisor for any investments. This is not a recommendation to buy or sell any stocks or securities, just my opinion. I often lose money on positions I trade/invest in. Do not make decisions based on my blog.

US Industrial Production Index stays stale, while total capacity slightly contracted for the month of April

US Industrial production Index (IPI) remains unchanged. Expectations were 0.1%. Since elections 2024 are coming around the corner, current administration would like to see some growth, unfortunately, it didn’t. It stays plateau.

Meanwhile…….

Capacity contracted, slightly, for the month of April from 78.49 last month to 78.40 with Manufacturing lowering from 77.19 to 76.88 while Utilities rose from 69.23 to 70.99.

For a clear understanding of Industrial Production Index (IPI), you can go here.

As far as April is concerned, there was no growth.

Consumer Price Index (CPI) came slightly below expectations

As you can see here.

Expectations for CPI range from 0.3% – 0.4% MoM. CPI came at 3.4% (0.34%) MoM, slightly below the 0.4% expectations.

Not seasonally adjusted:

Food, overall, came at 2.2%. The only food price to go down was dairy and related products -1.3%. Eating out/takeout increased by 4.1%.

Energy went up by 2.6%. Fuel oil went down by -0.8%, however, gas prices at the fuel pump increase by 1.2%.

Energy services rose up to 3.6% with electricity going up by 5.1%.

Core CPI (All items less food and energy) rose to 3.6%, in line with expectations between 3% – 4%.

Core goods (Commodities less food and energy) went down by -1.3%.

Core services (Services less energy services) rose to 5.3%.

Shelter (Housing), rent rose by 5.4% and owners’ equivalent rent of residences rose by 5.8%. Housing rose, in general, by 5.5%.

Medical care services rose to 2.7% while hospital services rose by 7.7%. Wow……………

Transportation services rose up by 11.2% while motor vehicle insurance rose by 22.6%.

Overall, inflation is ticking up. If you exclude Housing and transportation services, inflation looks to be under control, unfortunately, when you take CPI as a whole, inflation is out of control.

The adjustment report will tell us another story, however, since CPI came within expectations, the Feds will be leaning more towards rate cuts

Producer Price Index came hotter than expected

You can find the chart here.

Goods, energy, service and trade went up.

Goods up by 0.4% compared to last month (March) which went down by -0.2%.
Energy went up by 2.0% compared to last month (March) which was -1.3%.
Service went up by 0.6% compared to last month (March) which was -0.1%.
Trade went up by 0.8% compared to last month (March) which was -1.0%.

While food and transportation and warehousing came down in April.

Food went down -0.7% compared to last month (March) which was 0.4%
Warehousing and transportation came at -0.6% compared to last month (March) which was 0.2%.

Overall, April Producer Prices rose 0.5% MoM vs 0.3% expectations.

The final demand less food and energy rose to 0.3% while final demand services, which has the biggest jump in April, rose to 0.6%. While Gasoline prices rose at 274.957 (Not adjusted) in April compared to March which was 257.311.

Based on the report, inflation is rising and is not going down. There’s still Consumer Price Index (CPI) for tomorrow to see the full extent of the inflation. The April PPI report suggest upside risks to April CPI report.

How the Fed sees the CPI tomorrow will determine whether rate cuts or hike are still in play.

Sweden shifting from cashless to cash

You can read the report here, here, and here.

Sweden, suddenly, doing a U-turn on the trend away from cash. The reasons for the sudden shift are numerous from young people supporting cash due to privacy concerns, war in Ukraine, power outage, cybersecurity risks and so much more.

Sweden has been pursuing digital only payment systems since 2008 and has been on that tide for the last decade, however, all of a sudden, electronic only payments have some rough edges and risks that were not taken into account or, more likely, were completely ignored.

These issues were increasingly becoming severe due to the consequences of the Ukraine war. They have seen how critical infrastructures can collapse any day, especially electricity. It is common to lose electricity to natural disasters or, in Ukraine case, to war. However, when you have a society that rejects cash and, feverishly, wants digital payments then the whole economy of Sweden is disrupted, to put it mildly.

Now, it is not a doom and gloom scenarios, since all they have to do is circulate notes and coins back in the economy. However, it is easier said than done. Banks have completely rejected cash and, since 2021, have reintroduced certain basic cash services. However, those basic cash services are becoming difficult since cash circulation is less than 1% of gross domestic product in Sweden.

Banks aren’t the only one, retails, supermarket and many other businesses preferred digital payments, such as credit card and chip payments over cash. Tourist that travels only with cash to Sweden will find it difficult to receive changes in many businesses.

There’s such a trend against cash that there is a Swedish business called Biohax that, literally, implement a microchip on your hands, under the skin to make digital payments.

For all the hoopla and propaganda of eliminating cash and going fully digital, this development was a surprise.

Sweden was about as cashless in a society as it can be, but they realized that putting all your eggs in one basket was a mistake and, obviously, a pushback from many citizens in Sweden as they feel marginalized and concern over privacy matters when using digital payments.

This reminds me of Newton’s 3rd law: For every action there is an equal and opposite reaction.

Cash will be there when there’s a power outage, cash will still be there when there’s a cyber-attack and, most importantly, cash does not need electricity to function. Sweden hopes is to have balance between cash and digital payment. Although, not sure whether that’s feasible or not, due to the increase momentum for digital currencies from various central banks. Central banks will push harder for digital currencies, known as CBDC. As usual, they can push hard for CBDC, but there will always be setbacks, you can count on it.

For example, in 2021, The Central Bank of Nigeria try to launch the eNaira (CBDC) in Nigeria and the result were atrocious for the central bank as citizens in Nigeria completely rejected the digital currency due to the fact that citizens in Nigeria have concerned about privacy and just, flat out, don’t trust the government despite all the incentives and promotion of using eNaira. The outcome was a complete surprise, since 32% of Nigerian citizens used cryptocurrencies. Unsurprisingly, the Central Bank of Nigeria started to freeze bank accounts that are related to crypto transaction in Nigeria, in order to “protect” citizens from scams and volatile prices. However, using cryptocurrency-backed CBDC was allowed. As of 2024, the takeup of eNaira has been dismal and failed to gain any traction among its citizens.

So, as far as transitioning from cash to CBDC, it still has a long way to go. Obviously, the level of trust of the government will vary from country to country but, at the moment, cash is still king.

30-year Treasury auction was spectacular

30-year treasury auction on May 9, 2024, was spectacular. Total amount sold was around $25 billions. High yield 4.635%, was the same as the 3- and 10-year treasury auction, impressive. Median yield was 4.585%

Bid to cover was 2.409%.

Direct bidders were awarded 19.8% while indirect bidders were awarded 64.9%.

Dealer were left with 15.4%, slightly above average.

With this auction, clearly there’s a strong demand for long-term US government debt.

Here’s the complete auction report.

10-Year treasury auction solid

10-year treasury auction sold a total amount around $42 billions on May 8, 2024. High yield was 4.483%, is again, impressive. I am actually still surprised that yields are still below 5% due to the fact that the US economy is flirting with stagflation. Median yield was 4.422%.

The bid to cover was 2.486%.

Direct bidders were rewarded with 18.7% while indirect bidders were awarded with 65.5%.

Leaving Dealers with 15.7%, which is slightly above the average. However, given the conditions, it was still solid.

Overall, a boring yet solid auction.

Here’s the complete auction report.

3-year treasury auction solid

The total amount sold of 3-year treasury auction on May 7, 2024, was around $58 billions. Most importantly, high yield was just 4.605%. Given the circumstances, that’s impressive. Median Yield was 4.550%

You can read the auction report here

Bid-to-cover was 2.632%.

Dealers took 14.9% which is around the average.

Direct bidders took 19.6%, while indirect bidders took 65.5%.

This was a solid auction due to the fact that yield was not as high as it should be, and direct & indirect bidders come out and play and took a substantial amount.