CWS Market Review – August 15, 2023

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July Retail Sales Rose 0.7%

We had some good news this morning regarding consumer health. The Commerce Department said that retail sales rose by a seasonally-adjusted rate of 0.7% last month. Expectations were for an increase of 0.4%. The figure for June was revised higher by 0.3%, and May was revised upward by 0.1%.

It’s hard to have a recession when people are out there shopping!

If we exclude autos, then July’s sales were up by 1%. Bear in mind that these numbers are not adjusted for inflation. Here are some details.

July’s numbers were boosted by a 1.9% jump in spending at online retailers, while sporting goods and related stores increased 1.5% and food service and drinking places rose 1.4%.

On the downside, furniture sales slumped 1.8% and electronics and appliance stores reported a 1.3% drop. Gas station sales rose just 0.4% on the month despite rising prices at the pump.

The report adds to the narrative that the U.S. economy may be able to avoid a much-predicted recession brought on by a series of Federal Reserve interest rate hikes aimed at controlling inflation.

These numbers are important to watch because consumer spending accounts for roughly two-thirds of the U.S. economy which is now $27 trillion.

The Federal Reserve doesn’t meet again for another month, but the emerging conventional wisdom is that the Fed will pause again and hold interest rates at 5.25% to 5.50%. Short-term rates are at their highest level in more than 20 years.

The outlook for the economy has changed a great deal over the last few months. Not too long ago, markets were expecting the Fed to have started cutting rates by now. What a difference a few months can make.

After September, the futures market thinks there’s a one-in-three chance that the Fed will hike again at its November meeting. Frankly, I’m skeptical but if the data changes, then it’s a strong possibility.

Over the last 12 months, retail sales have increased by 3.2%. That sounds impressive until you realize that that’s the same rate of inflation. Another report today said that import prices increased by 0.4% last month. That was double expectations.

Earlier today, the Atlanta Fed’s GDPNow forecast for Q3 GDP growth jumped to 5.0%. That’s up from 4.1% from last week. That’s a very strong number.

Obviously, this is just a model and we’re only halfway through Q3. Looking at the details, consumer spending added 3% to Q3 GDP growth, and the change in inventories added 1.17%.

That’s very impressive and it’s more evidence that the most widely-expected recession in decades is still taking its sweet time. A lot of well-paid economists were very, very wrong.

Argentina’s Fed Hikes Rates to 118%

In the United States, people are worried about high interest rates. Since March 2022, the Federal Reserve has increased interest rates 11 times to a range of 5.25% to 5.50%. That’s (finally) higher than the rate of inflation.

But that’s nothing compared with our friends in Argentina. Their central bank just hiked rates by 21% to 118%. The country is on the brink of its sixth recession in the last decade.

Here’s a look at the peso versus the dollar. Notice the jump at the end.

This is due to the fallout of Sunday’s stunning primary win by Javier Milei, a libertarian economist. Milei won 30% of the vote in the presidential primary which was far more than expected.

I should explain that Milei isn’t exactly your typical presidential candidate. Milei isn’t merely a small-government conservative; he’s a full-throated anarcho-capitalist. Two of his dogs are named Milton and Murray, in honor of Friedman and Rothbard.

I don’t want to give you the impression that Milei is somehow odd or unusual. For example, he wants to legalize the selling of organs and children. He also refuses to comb his hair. Additionally, he’s a tantric sex instructor. After that, things frankly start to get a little odd.

Still, none of this held back voters. Milei won by far the largest share of the vote. This is only the first round of voting. Any candidate who got more than 1.5% will be able to compete in the next round in October. There may also be a runoff in November. Still, it’s obvious that Milei is the leading contender.

The real story here is less Milei’s triumph, though that is important, and more that things are so bad that voters are willing to give politicians outside the mainstream, like Milei, a hearing. This is when you find out that outside the mainstream is now the mainstream. Of course, we’ve had similar outcomes in our elections.

For a land of such beauty and promise, Argentina seems to go from one self-induced crisis to the next. Yet it’s that frustration that’s driving Milei’s popularity. You think 9% inflation is bad in America? It’s projected to hit 140% in Argentina. In the last decade, Argentina has had five recessions and a sixth may soon be here.

I bring this up not to discuss politics, but I do want to focus on an important dynamic, and that’s how the reaction of financial markets impacts policy. The worry is that a Milei win will cause investors to flee Argentina. Argentina’s bond and currency markets are in freefall.

That happened in France after Mitterrand’s stunning socialist victory in 1981. A lot of French money quickly found a new home in New York.

Liz Truss faced a similar crisis last year, leading her to resign after just seven weeks as U.K. Prime Minister.

In the 1990s, James Carville famously said, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” He’s right.

Argentina’s central bank responded to Milei’s showing by devaluing the peso by nearly 18%. The bank said it would hold the peso at 350 to the U.S. dollar until October. The central bank also hiked interest rates by 21% to 118%.

If he wins, Milei said he wants to cut taxes and implement large spending cuts. He also wants to ditch the central bank and “dollarize” the economy. Milei claims that replacing the peso with the dollar would help calm inflation.

A Milei presidency could have a major impact on global commodity markets. Of course, Argentina is famous for its beef, but it’s also the world’s fastest-growing lithium producer.

Milei won big in the country’s farm belt, and he’s promised to take the axe to farm taxes. That could make Argentina’s agricultural sector more competitive. The country also has major deposits of copper and shale oil.

There are 15 Argentina-based stocks that trade on the U.S. exchanges. Most of the companies are financial or energy stocks, with a few utilities. These stocks had a rough day on Monday. Banco Macro and Grupo Financiero Galicia were both down over 6%. Grupo Supervielle was down over 7%.

I’m far from an expert on Argentine politics, but I would take Milei’s showing as a sign of how fed up voters are with business as usual. I’m skeptical that he can get so much of his program passed. Still, it’s another indication that voters aren’t happy with high inflation and corruption.

If he wins, Milei will be able to go as far as the bond and currency markets let him. They can intimidate everybody.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on August 15th, 2023 at 6:33 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.