Inflation Update and Recession Realities

          When inflation first became a topic of conversation, I stated my view that unless we saw real positive, net interest rates, inflation would not be controlled.

          If you are a new reader, that simply means that the interest rates have to be higher than the inflation rate.  If the inflation rate is higher than credited interest rates, the incentive to save disappears and inflation is fed not tamed.

          So far, it seems, that opinion is spot on.  Despite increasing interest rates, inflation is now officially hotter than at any time in the last 40 years.  This from Wolf Richter (Source: on the topic:

Nearly two-thirds of consumer spending goes to services. And they’re now the driver of inflation. The CPI for services spiked in September for the 13th month in a row, and by the most since 1982, and it accelerated month-to-month. Housing costs spiked, but also all kinds of other services, such as health insurance (+2.1% month-to-month and +28% year-over-year).

“Core CPI,” which excludes food and energy, was the worst since 1982. Food prices spiked again, but spiked slightly less than the prior month which had been the worst since 1979. But some relief came from a decline in prices of used vehicles and consumer electronics, and from gasoline, which plunged.

Overall inflation as measured by the year-over-year Consumer Price Index (CPI-U), released today by the Bureau of Labor Statistics, jumped by 0.4% in September from August, a sharp acceleration from the prior two months, and by 8.2% year-over-year. What held down overall CPI was the plunge in gasoline prices and the drop in used vehicle prices.

The Social Security COLA for 2023 was also determined with today’s inflation data. It is based on the average of the year-over-year increases in the Consumer Price Index for All Urban Wage Earners and Clerical Workers (CPI-W) in July, August, and September. For 2023, the COLA will be 8.7%, the highest since 1981, but in 2021 and 2022, the COLAs got crushed by raging inflation.

Services Inflation spiked for the 13th month.

The CPI for services spiked by 0.7% in September from August, a sharp acceleration from the prior two months; and by 7.4% year-over-year, the worst increase since August 1982. This is where nearly two-thirds of the money goes that consumer spend, and consumers are getting whacked.

I split services into two groups: categories where prices rose year-over-year and categories where prices fell year-over-year.

Service categories where CPI rose year-to-year.

In some categories, the CPI declined on a month-to-month basis but was still up year-over-year. Note the massive month-to-month increases in insurance, medical services, motor vehicle maintenance, and delivery services.

          With inflation continuing to rage, it’s not surprising that spending on some items, especially discretionary items is down.  Admission to sporting events is one good example.

          It’s also not surprising that consumer spending on retail, services and other general merchandise was down in September as consumers are using more of their income to meet basic living expenses.  This from CNBC (Source:

Consumer spending was flat in September as prices moved sharply higher and the Federal Reserve implemented higher interest rates to slow the economy, according to government figures released Thursday.

Retail and food services sales were little changed for the month after rising 0.4% in August, according to the advance estimate from the Commerce Department. That was below the Dow Jones estimate for a 0.3% gain. Excluding autos, sales rose 0.1%, against an estimate for no change.

Considering that the retail sales numbers are not adjusted for inflation, the report shows that real spending across the range of sectors the report covers retreated for the month.

A Bureau of Labor Statistics report Thursday indicated that consumer prices rose 0.4% including all goods and services, and 0.6% when excluding food and energy.

Miscellaneous store retailers saw a decline of 2.5% for the month, while gasoline stations were off 1.4% as energy prices declined.

A slew of other sectors also posted drops, including sporting goods, hobby, books and music stores as well as furniture and home furnishing stores, both of which posted a -0.7% drop, while electronics and appliances were off 0.8% and motor vehicle and parts dealers fell 0.4%.

          I continue to be of the opinion that the Federal Reserve will eventually choose to reverse course and once again pursue easy money policies.  While that may fuel inflation in the near-term, ultimately deflation due to massively excessive debt levels will be the primary economic trend in my view.

          That’s why I also believe its important to use the Revenue Sourcing™ planning process to manage your nest egg and plan your retirement income and allocation strategies.

          Meanwhile, as we approach election day, there is another strong economic headwind being created by the Fed’s tightening policies.  Interest rates on a 30-Year mortgage now exceed 7%, up from 2.75% at the beginning of the year.  This fact reported by CNBC (Source:

          This will be a huge obstacle for the artificial economy created by Fed policy in the first place. 

On a $400,000 mortgage, the interest costs are now about $17,000 per year more than they were in January.

          That’s an increase in monthly interest cost of more than $1400! 

          That is taking many buyers out of the market and quickly taking the wind out of the sails of a once red-hot real estate market.  If you have plans to buy real estate, there may be much better buys down the road as higher interest rates and an economy in recession are rapidly slowing the real estate market.

            If you or someone you know could benefit from our educational materials, please have them visit our website at  Our webinars, podcasts, and newsletters can be found there.

Is Deflation Here?

            I have long stated my opinion that, at some future point, the Federal Reserve will reverse course and begin to pursue loose money policies again reducing interest rates and once again engage in quantitative easing.

            I have discussed the reasons that I believe this will happen in detail in past issues of “Portfolio Watch” so, in the interest of brevity, I won’t recite the reasons in detail again but suffice it to say that debt levels are too high to allow for interest rates to be increased to a level that would subdue inflation.

            Ultimately, the economic path on which we find ourselves leads to a predictable destination.  I have often also quoted Thomas Jefferson who told us that if we put private bankers in charge of monetary policy they would destroy the economy first by inflation and then by deflation.

            Inflation, succinctly defined, is an expansion of the currency supply.

            Deflation, accurately described, is a contraction of the currency supply.

            Price increases are a symptom of inflation while a decline in the price of assets is a symptom of deflation.

            At this point in time, we have seen inflation in consumer prices and we’ve seen evidence of deflation as stock prices have collapsed this year.

            Now, however, there are more signs of deflation becoming more apparent.

            Used car prices are beginning to decline perhaps signaling that deflation is beginning to emerge.  This from “Zero Hedge” (Source:

Used car prices appear to moderate as the latest report from auction giant Manheim found that wholesale used-vehicle prices recorded the first annual drop in more than two years. 

Manheim’s wholesale used-vehicle prices fell 3% in September versus the prior month. The index declined to 204.5 and is down .1% from a year ago, the first annual drop since May 2020.

Prices are still elevated but down about 13.5% from the all-time high of 236 in January. 

In April, we asked the question: “Are Used Car Prices About To Peak For Real This Time?” Followed by a note one month later titled “Used Car Prices Are Crashing At A Near Record Pace.” And by August, we found that “Used-Car Market Cools As Prices Plunge To One Year Low.”

Unpacking today’s report, compact cars had the most significant yearly increase last month at 5.9%, followed by vans and pickups, both of which increased by 0.8%. Increasing demand for smaller, more fuel-efficient cars could be due to consumer shifts away from gas-guzzling SUVs. Meanwhile, midsize car prices were marginally lower, but what caught our eye was the significant decline in luxury vehicles, down 4.8%. 

            Over the past couple of weeks, I’ve noted that real estate is beginning to show signs of weakness.  This week, “The Epoch Times” reported that mortgage applications are at 25-year lows.  That’s a remarkable statistic when you consider it.  (Source:

The pace of mortgage applications has fallen to a multi-decade low amid high housing interest rates, according to the latest data from the Mortgage Bankers Association (MBA).

The Market Composite Index, a measure of mortgage loan application volume, declined by 14.2 percent on a seasonally adjusted basis for the week ended Sept. 30, 2022, compared to a year earlier. The Refinance Index fell 18 percent from the previous week, while the Purchase Index registered a decrease of 13 percent.

Joel Kan, MBA’s associate vice president of economic and industry forecasting, pointed out that overall mortgage application activity dropped to its “slowest pace” since 1997, according to a press release on Oct. 5.

For the week ended Sept. 28, 2022, a 30-year fixed-rate mortgage was 6.70 percent, which is more than double what it was a year ago, at 3.01 percent.

“The current [mortgage] rate has more than doubled over the past year and has increased 130 basis points in the past seven weeks alone,” Kan said.

“The steep increase in rates continued to halt refinance activity, and is also impacting purchase applications, which have fallen 37 percent behind last year’s pace.”

Mortgage numbers were also affected by Hurricane Ian hitting Florida last week, as it triggered widespread evacuations and closures, he noted. Mortgage applications in Florida alone fell by 31 percent.

Construction spending in the country, an indicator of total spending on all types of construction, had fallen for the second consecutive month in August, according to a U.S. Census Bureau report, signaling that the housing market is slipping further into a recession.

In July, the National Association of Realtors (NAR) had warned that the United States was in a “housing recession,” as existing home sales fell by 5.9 percent.

            I expect that deflationary forces will soon take over and the fact that the economy is in a recession is a fact that I believe will soon become widely accepted.  I also expect the recession to be deeper than anything we’ve experienced in recent memory.

            Keith McCullough, who is CEO and founder of Hedgeye Risk Management recently did an interview with “Market Watch” (Source: in which he makes a similar forecast.

            Here are some excerpts from the interview:

Recession today is what “transitory” inflation was a year ago. The Fed is as wrong on recession risk as they were on inflation.

I’m about as bearish as I’ve been since 2008. Instead of the economy having a soft landing, I think the landing is going to be hard. The recessionary economic data keeps getting worse, not just in the U.S. but in Europe as well.

Free money forever created behavioral problems and a behavioral bubble for the markets and investors. You believe you’ll have unlimited access to easy money and your behavior, whether you’re building profitless growth companies through storytelling or cryptocurrencies that also are just stories. You’re coming from the mother of all behavioral bubbles that now will be addressed with tighter money. When you’re printing money and the economy is accelerating to the fastest growth rate ever, you’re going to have the mother of all bubbles. Now, GDP is going to slow to zero, and you get the opposite.           

           Unfortunately, I believe Mr. McCullough is spot on.

            If you or someone you know could benefit from our educational materials, please have them visit our website at  Our webinars, podcasts, and newsletters can be found there.

Credit Card Use and Inflation

          During this week’s “Headline Roundup” newscast (broadcast live every Monday at noon, then posted at, I expounded on a trend I discussed previously.  That trend is that consumer spending is being increasingly funded by debt accumulation, primarily on credit cards.

          This from “Zero Hedge” (Source:

The US personal savings rate is near a five-year low as pandemic fiscal stimulus savings run dry. 

But consumers are still spending with credit.

How long can consumers keep spending with revolving credit at the highest level in decades?

The risk is that equity markets have a lot more room to the downside.

The danger is that consumer spending, which drives some 70% of GDP, will soon be tapped out.

Lower spending, lower earnings with lower economic growth, while inflation is still running hot, will likely leave equities nowhere to go but down.

          Consumers are tapped out, with many using credit cards to fund spending.

          One has to realize that many of these consumers who are using credit cards to fund spending would rather not, they just don’t have any other choice as inflation continues to intensify.  This from “The Washington Examiner”  (Source:

Inflation as measured by producer wholesale prices ticked up to a red-hot 11.3% for the year ending in June, according to a report Thursday from the Bureau of Labor Statistics, near the highest on record.

Thursday’s report comes a day after headline inflation as measured by the consumer price index exploded to 9.1% for the 12 months ending in June, the highest level since 1981 and a bigger increase than expected.

The new producer price index numbers are just another indicator that prices are wildly out of control even as the Federal Reserve moves ever more aggressively to jack up interest rates to rein in the country’s historic inflation.

The PPI gauges the wholesale prices of goods, which are eventually passed down to consumers.

“Despite a modest improvement in supply conditions, price pressures will remain uncomfortable in the near term and bolster the Fed’s resolve to prevent inflation from becoming entrenched in the economy,” economists with Oxford Economics said.

The high rate of inflation has politically damaged President Joe Biden and undercut support for spending proposals from the White House and congressional Democrats.

Last month, the central bank hiked its interest rate target by a whopping three-fourths of a percentage point for the first time since 1994. The Fed typically raises rates by a quarter of a percentage point, or 25 basis points, so the June hike was analogous to three simultaneous rate increases.

The Fed is set to meet again later this month, and it will likely raise its rate target by another 75 basis points, although some analysts think that the central bank could act even more aggressively and raise interest rates by a full percentage point.

Nomura, a major Japanese financial holding company, is now predicting that the Fed will raise rates by 100 basis points, given Wednesday’s hotter-than-anticipated inflation reading.

Atlanta Fed President Raphael Bostic said that “everything is in play,” including a full percentage point hike, after June’s CPI report, according to Bloomberg.

There are concerns that the Fed’s aggressive cycle of rate hiking will knock the economy into a recession, fears that worsen as inflation keeps growing higher and the Fed keeps having to take a more hawkish approach to monetary policy.

          I have stated that I believe we have been in a recession since the end of calendar year 2021.  I have also stated that inflation will likely not be subdued until real positive interest rates exist, in other words, interest rates are higher than the inflation rate.

          We are a long way from that.

          As the chart below illustrates, the current Fed Funds rate is hovering just under 2%.

        Even if the Fed raises interest rates by 1%, inflation will probably not be affected but financial markets may be.

          I expect that before the year is over the Fed will reverse course on the interest rate increases so the ‘economy can be supported’.  I should also point out that there are some analysts who disagree with me on this arguing that the dollar would be devalued to an even greater extent, further threatening it’s use as an international currency.

          I believe that is the outcome that the Fed will choose given that that other choice is a painful deflationary period.

          Ironically, the painful deflationary period will probably not be avoided.  In fact, we may be witnessing the onset of such a period presently.  Stocks are down significantly year to date and I believe real estate will soon follow. 

          Take a look at this chart illustrating US housing prices versus wage growth.  Seems apparent that this housing bubble is bigger than the one at the time of the financial crisis.

If you or someone you know could benefit from our educational materials, please have them visit our website at  Our webinars, podcasts, and newsletters can be found there.

The Current State of Stocks

          About one week ago, I completed the June Special Report which is titled “Mid-Year Market Update:  What to Consider Now for Your Money”.

          This week’s holiday issue of “Portfolio Watch” is a preview of that Special Report.

          As I have often stated, the potential problem with a time-sensitive special report written 3-4 weeks before delivery, is that so many things can change by the time the delivery happens.

        The June Special Report examines the state of many markets and offers a forecast as to where they go from here.

          Interestingly, the stock forecast offered seems to be playing out already.  Here is a bit from that report which can be ordered next week for those with an interest in reading the entire report.

          Last year, when we forecast a high probability of a stock market correction, we pointed to a commonly used piece of fundamental data, something known as “The Buffet Indicator”. 

          The Buffet Indicator is actually a measure of the total value of stocks as compared to economic output.  Put another way, this indicator is a measure of market capitalization (the total, combined value of stocks) divided by Gross Domestic Product (total economic output).

          Last year, we published this chart, noting that the indicator showed that stocks were extremely overvalued.

          There are three important points of reference on the chart.  The first is the calendar year 2000 when the Market Cap to GDP indicator stood at 159.2%.  That means that in approximate terms, the total value of stocks was about 1.6 times the economic output of the United States.

          From those levels, stocks fell more than 50%.

          The second important reference point is in 2007 when stocks peaked just prior to the financial crisis.  At that point, stocks were valued at 110% of US economic output.  From that point, stocks once again fell more than 50%!

          Then, late last year, the Buffet Indicator rose to 216%, a level never seen previously.  The total value of stocks was more than twice the total economic output of the United States.  At those levels, it was easy to predict a stock decline was inevitable.  As a side note, for stocks to return to the historic average of the Buffet Indicator, they would need to fall 70% from those lofty levels.

          As of this writing, we have now seen about a 20% correction.

          Technically speaking, as long-term readers of our newsletters and special reports know, we called the top in the market in December.  While forecasting where stocks go is dangerous business in an artificial economy abundant with newly created currency, it seemed like a December 2021 top was likely for a couple of reasons.

          The chart above is a chart of an exchange-traded fund that tracks the movement of the Russell 3000, a broad stock market index

          There is another technical indicator that we use to potentially detect major turning points in the market.  While the indicator itself isn’t unique, the way that we use it is unique.

          The indicator is something called a MACD, often pronounced, “mac – dee”.  It is a technical indicator developed by Gerald Appel in the 1970s.  MACD is an acronym that stands for moving average convergence-divergence.

          The MACD is often used with a daily or a weekly chart to determine trend changes.  The chart above is a weekly chart and the MACD indicator has been drawn across the bottom of the chart.

          The MACD indicator has two lines moving up and down across the bottom of the chart.  These lines, one orange and one blue occasionally cross each other.  It is these crossovers that many traders use to trade and determine potential trend changes.

          The orange line on the bottom of the chart is drawn by taking the 12-period moving average of price and subtracting the 26-period moving average of price.  If you look closely at the labeling on the right-had side of the MACD indicator, you’ll see a zero line.  When the orange line crosses the zero line, it is at that point that the 12-period moving average of price and the 26-period moving average of price are the same. 

          Here’s what one can discern using a moving average of price:  the 12-period moving average of price is the market’s consensus of value over the 12 periods.  On the chart above, which is a weekly chart, the 12-period moving average of price is the market’s consensus of value over the past 12 weeks.  The 26-period moving average is the market’s consensus of value over the past 26 weeks.

          When the orange line on the chart above is over the zero line, it tells you that the 12-period moving average is higher than the 26-period moving average.  That means that if the moving average of price over the past 12-periods is greater than the moving average of price over the past 26-periods, the market may be bullish.

          The blue line on the chart is a 9-period average of the difference between the 12-period moving average and the 26-period moving average. 

          When the orange line on the MACD chart crosses over the blue line to the upside, it means that the trend may be turning positive or bullish.  When the orange line crosses over the blue line to the downside, it means the trend may be turning negative or bearish.

          This indicator, like any other indicator, is far from perfect.  In a market that is not solidly trending, the MACD line and average line crossover can lead to false signals.

          Notice also within the MACD indicator above, there are some vertical lines drawn.  These vertical lines are known as a histogram.  They plot the difference between the MACD line (the 12-period moving average line minus the 26-period moving average line) and the average line.

          On a longer-term chart, like a monthly chart, the ‘ticks’ up or down of these lines can signal a strengthening or a weakening market.

          Looking at the chart above, I’ve drawn a downtrend line on the chart.  Notice how far the current price (as of one week ago) is from the down trend line drawn on the right-hand side of the chart.  If this Exchange Traded Fund (IWV) doesn’t close over about $253 (from a present price as of this writing of $225), the trend will remain down.

          That means that stocks could rally by up to 12% or so from here and not change the primary trend from down to up.  Last week, stocks made up half that gap.  I look for the trend line to hold and the downtrend to remain intact.

          That means stocks can rally from here by another 5% or more without a trend change occurring. 

If you or someone you know could benefit from our educational materials, please have them visit our website at  Our webinars, podcasts, and newsletters can be found there.