Author: Gary Brode

On the day that the United States celebrated declaring independence from the British, the UK elected a new Labor government. Is this a coincidence – definitely yes! Bitcoin falls on temporary trading issues. Hodlers shrug and don’t panic. DKI approves and sides with the hodlers. Chairman Powell comments on inflation and appears determined not to make the Arthur Burns mistake like Canada just did. I keep saying I won’t report on the jobs numbers because the data is unreliable. Instead, we report (again) on how unreliable the data is. Do I have macroeconomic OCD – possibly. Americans understood why restaurants needed to raise prices during Covid and many of us did all we could to keep our favorite local places in business during tough times. However, reduced spending power and constantly higher prices has led to declining restaurant sales. Yet again, DKI points to a bifurcated economy where the aggregate numbers are supported by massive government spending and a limited number of wealthy people. Most of the country isn’t doing great at the moment.

This week, we’ll address the following topics:

• Fed Chairman, Jerome Powell, provides the obligatory hat tip on disinflation. Then, he said inflation won’t get down to 2% for years!

• The jobs “data” is a predictable mess. Regular 5 Things readers are not surprised.

• Mt. Gox and the German government pressure the dollar price of Bitcoin (CRYPTO: BTC). Hodlers shrug.

• The UK votes in a new Labour government in a massive landslide.

• Restaurant sales are declining. Is it higher prices, a tapped-out consumer, or both?

Yet again, DKI interns, Andrew Brown and Alex Petrou, come through doing most of the heavy lifting for this week’s edition. I’ll be handing almost everything related to next week’s 5 Things to them. Based on their work so far, I expect they’ll put together something great. Is anyone else impressed that they’re taking over this level of work so quickly without any drop in quality?

Ready for this week’s fireworks? Let’s dive in:

• Disinflation but not Enough to Cut:

Fed Chairman, Jerome Powell, spoke at the ECB Forum in Portugal. With Japan sticking with ultra-low rates and both the European Central Bank and Canada already cutting rates, the Fed remains an outlier. Powell noted that economic growth and a strong labor market combined with sticky inflation have led the Fed to keep rates steady. Powell echoed the DKI caution against making the Arthur Burns mistake (explained in last week’s 5 Things) and said that he’s concerned that cutting too soon will cause another inflationary spike. Powell thinks the strong economy gives the Fed time to proceed with caution. 

A friendly reminder that many started calling for rate cuts more than two years ago.

DKI Takeaway:  DKI has been critical of Powell and the Fed in the past, but think he has this one right. For the first time, he addressed the huge and unsustainable budget deficit giving voice to what DKI has called the secret war between the Fed on one side and Congress and the Treasury on the other. Massive government stimulus is creating GDP growth and causing inflation without creating value. Powell also said he didn’t think the Fed could get inflation down to the 2% target before the end of next year. The market is expecting rate cuts to start in September, but given Powell’s comments and the desire of the Fed to avoid appearing politically motivated, DKI thinks that absent a severe economic collapse this summer, the Fed won’t cut before the November election.

• The Employment “Data” Gets Even Worse:

On Friday, the new jobs data showed June nonfarm payroll growth of 206k jobs beating expectations of 200k. That sounds good until you notice that the May data was revised down by 54k jobs and the April data was revised down again by an additional 57k jobs. Yet again, the historical downward revisions dwarf the current month “beat”. The chart below shows the magnitude and direction of those revisions. Notice how the red line showing the initial data is almost always the highest and the dark blue line showing the final revision is almost always the lowest? That’s because the revised numbers are worse than the attention-grabbing positive headlines. Unfortunately, this isn’t even the worst of the situation.

This is why no one trusts the employment data.

Government jobs growing while the private sector is shrinking. That’s not sustainable. Graph from ZeroHedge.

DKI Takeaway:  DKI has been saying for months that Congressional overspending is crowding out the private sector economy. Credit to ZeroHedge for illustrating that thesis in one graph. They point out that more than 100% of growth in job openings are in government while private sector job openings are declining. The fiat and MMT (modern monetary theory) economists are lauding our strong economy. DKI reminds you that more government jobs add to reported GDP even if they destroy value. A weak private sector is a bad sign for future economic prosperity.

• Bitcoin and a Test of Strength:

The infamous Mt. Gox saga is finally nearing its conclusion. After a decade-long wait, 127,000 creditors are set to receive their share of 142,000 BTC starting in July. Mt. Gox, once the largest Bitcoin exchange, collapsed in 2014 following a series of hacks that resulted in the loss of 850,000 BTC. This long-anticipated pay-out is both a sigh of relief for formers users of the site and a potential market shaker for bitcoin holders. Alongside Mt Gox, the German government has been causing turbulence by offloading about 10,000 Bitcoin in recent weeks. This liquidation began on June 19th, 2024, with $130 million worth of Bitcoin sent to exchanges, followed by another $65 million on June 20th. The latest data reveals an additional $195 million worth of Bitcoin moved to various exchanges, including Coinbase and Kraken. Despite these sales, the German government still holds around 37,179 BTC, valued at approximately $2.4 billion. Although many Bitcoin enthusiasts view the German government’s decision to sell off its Bitcoin holdings as reckless, they are not alone in their concern. German parliament member Joana Cotar has also criticized the move, calling it “not sensible” and advocating for the government to retain Bitcoin as a strategic reserve currency. 

Bitcoin is absorbing some selling pressure, but it’s from one-time events.

DKI Takeaway:  Let’s not forget the Bitcoin ETFs. Approved by the SEC in January, these investment vehicles have seen massive inflows, signaling strong institutional interest. On March 12th alone, Bitcoin ETFs recorded an astonishing $1.05 billion of inflows in a single day. This surge in volume is a clear indicator of growing confidence in Bitcoin as a mainstream investment asset. Despite the recent price pullbacks and market jitters, the introduction of ETFs has provided a way for people comfortable with traditional finance to own and hold Bitcoin. The significant trading volumes following the ETF approvals far exceed those seen during the Mt. Gox repayments and the German government’s selloffs. Pullbacks of 20-30% are very common with Bitcoin, so the current market behavior is not unusual. Based on that and the continuing debasement of fiat currencies like the dollar and the euro, DKI maintains its long-term bullish stance on the future of BTC.

• The UK Has its First Labour Government in 14 Years:

The UK 2024 general election has delivered a landslide victory for the Labour Party after 14 years of Conservative rule. Despite this convincing result, the election was not so much won by Labour, but lost by the Conservatives. The Reform UK Party under its leader Nigel Farage, the architect of Brexit, siphoned off key votes from the Conservative base. Many high-profile Conservatives were ousted, including immediate past Prime Minister Liz Truss; the first former prime minister to have lost a seat in almost ninety years. Nigel Farage, on his eighth attempt, has finally entered the House of Parliament. He plans to fill the gap on the center-right of politics and aims to create a mass national movement to challenge the government in 2029. His party, Reform UK, is responsible for two-thirds of the seats lost by the Conservatives.

Nigel Farage (right) taking votes from the Conservative party leading to a Labour landslide.

DKI Takeaway:  Labour’s fiscal policies will increase taxes on the wealthy and large corporations to fund spending plans. New Prime Minister, Keir Starmer, has emphasized that “economic growth is our core business – the end and the means of national renewal”. This has echoes of the last Labour government of Tony Blair and Gordon Brown. Their focus on economic revitalization through increased public spending on education and health, is credited with substantial economic growth with low unemployment rates. However, the economic climate is much changed from 1997 and the decade that followed. With a cost-of-living crisis, higher debt-to-GDP levels, and high interest rates, the battle for economic growth and stability will be more challenging in the years ahead. The Labour government will need to navigate these complex issues to achieve their ambitious goals. (Credit to DKI Intern, foreign correspondent, and British Subject, Alex Petrou for this analysis.)

• Restaurant Sales are Down:

One of the first areas where consumers have finally begun cutting back on spending is dining out at restaurants. While the impact might not be immediately apparent, some restaurants are raising concerns. Due to increasing food and labor costs, many restaurant chains are closing locations as staffing and other costs become more challenging. As we mentioned last week, overall customer experience has declined in various sectors, from airlines to retail. Many sit-down restaurant chains, including Cracker Barrel, Red Lobster, Hooters, Applebee’s, and TGI Fridays, have started to close stores.

It’s not tragic, but that dip down at the end isn’t encouraging.

DKI Takeaway:  This isn’t even close to a disaster yet, but updated menus (with updated prices) have been a recurring trend over the past few years. Higher prices are driving customers to cook more at home. A clear indicator of this shift was seen in Walmart’s $WMT earnings, which showed growth in their grocery sector due partly to the rising costs of restaurant food including at fast food/quick-service restaurants. While sales are still historically high, inflation is a contributing factor to recent relative weakness. As we pointed out in last week’s 5 Things, inflation is a benefit to the wealthy, who are less affected by food costs, while the less affluent face greater challenges.

Information contained in this report, and in each of its reports, is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied.  DKI makes no representation as to the completeness, timeliness, accuracy or soundness of the information and opinions contained therein or regarding any results that may be obtained from their use. The information and opinions contained in this report and in each of our reports and all other DKI Services shall not obligate DKI to provide updated or similar information in the future, except to the extent it is required by law to do so. 

The information we provide in this and in each of our reports, is publicly available. This report and each of our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion in this and in each of our reports are precisely that. Our opinions are subject to change, which DKI may not convey. DKI, affiliates of DKI or its principal or others associated with DKI may have, taken or sold, or may in the future take or sell positions in securities of companies about which we write, without disclosing any such transactions.

None of the information we provide or the opinions we express, including those in this report, or in any of our reports, are advice of any kind, including, without limitation, advice that investment in a company’s securities is prudent or suitable for any investor. In making any investment decision, each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose. 

In no event shall DKI be liable, based on this or any of its reports, or on any information or opinions DKI expresses or provides for any losses or damages of any kind or nature including, without limitation, costs, liabilities, trading losses, expenses (including, without limitation, attorneys’ fees), direct, indirect, punitive, incidental, special or consequential damages.

We saw a weak and overstated GDP print combined with a higher inflation metric. The conclusion is that absent government spending, we’re heading for stagflation. One problem:  government spending is destroying value. Mish Shedlock warns that we can’t vote our way out of the problem. On the commercial real estate front, landlords are coming up with ways to delay dealing with problems. They’ll have bigger problems tomorrow. The FTC bans noncompete agreements, but what about the ones already in place?

This week, we’ll address the following topics:

• GDP comes in weak. DKI adjusted GDP is even weaker.

• PCE comes in hot. The Fed is about to face a dilemma.

• DKI Board Member, Michael (Mish) Shedlock explains we can’t vote our way out of our financial problems.

• Commercial real estate insanity:  Mall operators buying failing tenants. What could go wrong?

• FTC bans noncompete agreements. This one is going to get tricky.

Ready for a new week of higher inflation and slower growth? Let’s dive in:

• GDP Comes in Weak:

1Q reported GDP was up 1.6% which was far below expectations for 2.2%. Some economists were expecting even higher numbers. Adjusting for the change in private inventories because it reflects inventory stocking or dec-stocking as opposed to actual economic activity get us to about 2% growth. The market was concerned about the price adjustment of 3.1% because it’s much higher than last quarter’s report. I’m concerned about the price adjustment because I think it’s understated. If it’s off by only 1%, which I consider to be a conservative estimate, that would take actual adjusted GDP down to 1%. That’s not the worst of it.

Reported numbers declining. DKI adjusted GDP heading towards zero.

Government spending is destroying value.

DKI Takeaway:  I think actual GDP growth is somewhere around zero (or 1% at best). In the second graph, we can see how badly government growth is distorting the economy. Growth in GDP from last quarter was $328B. Growth in Federal debt was about $500B. That indicates some combination of government spending destroying value and weakness in the private sector. Neither is a sign of a healthy economy and we’ll all pay for more wasteful government spending through future inflation.

• PCE Comes in Hot:

The March Personal Consumptions Expenditures Report (PCE) came in at 2.7% which was above the 2.6% estimate and an increase from last month. The Core PCE, which excludes food and energy, was up 2.8% which was also above expectations of 2.7%. Personal income was up and spending was up more than both income and inflation. People are buying more, paying more, and using more credit.

Disinflation is dead for now and the Fed can’t get the Core number down.

DKI Takeaway:  We’ve been saying for two years that rate cuts will come later than most market participants expect. DKI came into this year insisting we wouldn’t see 6 cuts (for a total of 1.5%) this year. Expectations are now down to 3 cuts starting in September. Given sticky and increasing inflation plus continued multi-trillion-dollar fiscal stimulus out of Washington DC, DKI thinks “higher for longer” applies to both interest rates and inflation.

• Too Much Government Spending and Voting Won’t Fix It:

DKI Board member and economist, Michael (Mish) Shedlock, contributed an important guest post this week. He explains the Fed will struggle to contain inflation. As DKI has pointed out in many versions of the 5 Things, the government is running a massive deficit ($1.1T so far in 2024). CBO projections (which DKI has criticized in the past) show expectations that spending will exceed government tax collections for the next three decades. Mish notes that even those negative projections are too optimistic because they don’t factor in a recession between now and 2054. Do you believe that will be the case?

No matter who is in the White House or Congress, it’s multi-trillion dollar deficits.

DKI Takeaway:  Mish continues:  The debt is now over $34T. Interest on the national debt is over $1T and rising fast. Money that would go for investment now goes to bondholders while the government destroys value with excessive consumption (see the GDP vs Debt graph in Thing 1. Neither party will fix deficit spending. The Fed can’t fix it. Unrestrained fiscal stimulus created the mess we’re in, and nothing suggests a policy change no matter who wins the election. Please check out more of Mish’s writing at MishTalk.

• Mall Owners Buying Failing Tenants:

Hat tip to Wolf Richter of Wolf Street for reporting on the new insanity in commercial real estate. He notes that Express Inc, which owns Express, UpWest, and Bonobos filed for bankruptcy. After planned closures, there will be 435 stores. A group of buyers have a potential deal to buy the remaining stores and retail operations. That part is normal. The part that’s unexpected is the buyer group includes Simon Property Group and Brookfield, two mall operators and large creditors of Express Inc.

Not what you want to see if you own a shopping mall.

DKI Takeaway:  The US has had an excess of retail shopping space for decades. That worked when malls were popular places for shopping and entertainment. Now, online shopping is approaching $300B and malls are struggling because their tenants are struggling. For Simon and Brookfield, buying Express Inc. out of bankruptcy “solves” the current problem because they’ll be able to collect rent from the remaining 435 stores. However, if a retail operator can’t run those stores profitably, then the only thing the mall operators can do for them is reduce the rent which doesn’t improve landlord finances. To us, this looks like doubling down on a losing position and pretending you don’t have a serious business problem. (Again, HT to Wolf Richter for covering this well.)

• FTC Bans Noncompete Agreements:

This week, the Federal Trade Commission (FTC) announced its decision to prohibit non-compete clauses, with the ban becoming effective 120 days after publication. This decision will eliminate existing non-compete agreements and prohibit the formation of new ones. The FTC contends that one in five Americans is subject to non-compete agreements and believes that this action will encourage the establishment of new businesses, foster innovation, and raise salaries. DKI expects legal challenges, as numerous business groups have already filed lawsuits contesting the FTC’s ruling.

Photo credit: Canva.

DKI Takeaway: This presents a challenging situation for the government. From a business perspective, there’s concern regarding the protection of internal confidential information. Allowing employees to sign employment contracts and then depart with sensitive information poses a considerable risk. This ruling has implications for potential fraud, particularly in sectors such as aerospace, defense, and technology. On the employee side, the main argument presented by the FTC is that it will stimulate business growth. While innovation and business expansion are generally positive, is it necessary for the government to dictate what private companies can and can’t do? This issue should have been left to the states to decide rather than taken up by the federal government. (This “Thing” was written by DKI Intern, Andrew Brown. I’d add that the ruling also involves invalidating contracts previously agreed to by employers and employees. Forcing contractual changes after confidential information was shared adds additional complication.)

Information contained in this report, and in each of its reports, is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied.  DKI makes no representation as to the completeness, timeliness, accuracy or soundness of the information and opinions contained therein or regarding any results that may be obtained from their use. The information and opinions contained in this report and in each of our reports and all other DKI Services shall not obligate DKI to provide updated or similar information in the future, except to the extent it is required by law to do so. 

The information we provide in this and in each of our reports, is publicly available. This report and each of our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion in this and in each of our reports are precisely that. Our opinions are subject to change, which DKI may not convey. DKI, affiliates of DKI or its principal or others associated with DKI may have, taken or sold, or may in the future take or sell positions in securities of companies about which we write, without disclosing any such transactions.

None of the information we provide or the opinions we express, including those in this report, or in any of our reports, are advice of any kind, including, without limitation, advice that investment in a company’s securities is prudent or suitable for any investor. In making any investment decision, each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose. 

In no event shall DKI be liable, based on this or any of its reports, or on any information or opinions DKI expresses or provides for any losses or damages of any kind or nature including, without limitation, costs, liabilities, trading losses, expenses (including, without limitation, attorneys’ fees), direct, indirect, punitive, incidental, special or consequential damages.