Inflation in the USA, and likely Canada, is unlikely to fall to the Fed/and BOC goals of 2%. Yet, there is a solid potential for a softening or stagnant economy coming. Higher inflation with mundane economic growth is known as stagflation. I have been pounding the table on the probability of inflation remaining at or above 3% for the past couple of  years. A few reasons behind this:

Inflation is actually a simple thing when it comes down to it. Economics 101: Supply vs. demand. Simple!

Inflation in NA has been driven by too much supply of money chasing the same goods.

• Increased demand has many roots, including high immigration, rising wages, and a tight labor market.
• Both Canada and USA elected extreme left wing, money printing governments.  The “spend your way to prosperity” belief system was adapted, as government debt (money printing) flooded the economy with excess cash chasing the supply of housing, services, and goods. An economic policy known as Modern Monetary Policy (MMT) was adapted. Please read this blog to understand MMT.
• Increased money supply via MMT money printing  (M1/M2 supply), is chasing the the finite amount of goods and services available

The looming effect of maturing mortgages

Canada, in particular, has a very, very indebt populace. Highest debt/ capita in the developed world, largely due to the fastest moving real estate pricing in the developed world. Much of this debt surrounds mortgages – and many big buck mortgages were enacted during the 2020- 2021 post COVID buying frenzy. The average term for mortgages varies, but there are plenty of 3 year commitments that are about to roll from 3% to 6% in the coming year or so. This mortgage increase is an extra expense, on top of carbon-taxed gas pricing and all the implications of that cost (shipping of your groceries for example) that some people just wont have. Result: Workers want higher wages to pay those mortgages and grocery bills. A YouTube worth watching on the subject here.

What a surprise: Currently, we are witnessing a resurgence in labor union enrollment and power. Look at the dock workers in BC. The average wage, after the recent strike, went from an already high $120k/yr average to an average of $160k! This is corporate executive/ Harvard MBA graduate levels of income. This is happening on various levels with unions across NA.

Another example: The UAW just announced an intend to strike unless they get a 46% raise for workers! Can you imagine asking your boss for a 46% raise???

I’m just waiting for the never ending teachers and government worker strikes to inevitably start again. It all adds to more money chasing the same goods. More on this below.

From CNBC

 “Labor unions are pushing hard for double-digit raises and better hours. Many are winning. More workers across industries have taken a hard stance against companies for dramatic improvements in compensation and working conditions. More than 320,000 workers have participated in at least 230 strikes so far this year in the USA, according to data from the Cornell University School of Industrial and Labor Relations. UPS workers and airline pilots have won rich labor deals.” – CNBC

Higher wages enabled by unions increase inflation even more, creating a self-strengthening cycle.- Larry MacDonald

From BearTraps: The inflation spiral

Inflation empowers labor unions as more workers join the ranks when they’re getting slammed by declining purchasing power and a higher cost of living. Through each victory, the news spreads like wildfire across the union ranks around the USA. Higher wages enabled by unions increase inflation even more, creating a self-strengthening cycle. These events will make elevated inflation stick around for a long time and create a “hard-to-stamp-out” environment.

The ONLY way to stop this beast is 6-8% unemployment. A soft – NO Landing just strengthens this sustained inflation serpent. Now, Fed chair Powell must deal with an Atlanta Fed’s wage tracker is STILL up at 5.7% vs. the 3.1% mean from 2001 to 2021. It is showing a fresh bounce in the latest reading. Even as the consumer price index inflation came down this year, wage growth has remained high. The increased power of unions is starting to show itself in our politics. The approval rating of labor unions rose from a historic low of 48% in 2010 to a near-all-time high of 71% in 2022, most of that increase coming during the pandemic. What are the side effects?  The probability of a November rate hike is on the rise this week. 
Since February, ISM Manufacturing PMI has delivered FIVE prints BELOW 47. This is a rare bird and speaks to HIGH recession certainty. Over the last two years, consumer staples (XLP) are outperforming consumer discretionary names (XLY) by nearly 1500bps (15%), another high probability recession signaler.

At the same many retailers are in extreme pain (drawdowns – M Macy’s -66%, Foot Locker FL -75%, Nordstrom JWN -75%, Dick Sporting Goods DKS -28%, and Dollar Tree DLTR -30%, Advanced Auto AAP -72%). Consumer credit weakness is surging, household interest expense is now up $220 billion over the last 12 months. This is by far the biggest increase on record and nearly DOUBLE the 2008 peak. Large “money center” banks are 40% off the highs (US Bancorp, Citi, C, Bank of America BAC), clearly, the Fed is close to breaking things again.” 

Stagflation for the nation

The above factors points to the real possibility of sustained inflation, within a stagnant economy.  But … there is an opportunity in this mess for investors. Stagflation creates an outstanding setup for hard assets. The charts seem to be signaling this ahead of time. Commodities are turning the corner.

I posted this chart the other day: Note the breakout on the commodity chart:

Here is a commodity vs SPX cycle chart I posted a while ago on a video. You can watch that video here:

Will Commodities Outperform Stocks In The Coming Years – ValueTrend

It outlines a long term cycle for the relative performance of stocks vs. commodities. This cycle, albeit a long termed picture (subject to lots of fluctuation during a phase) lines up with my thoughts above: that is, it’s time for the commodity train to leave the station.

Conclusion

Look, this is a longer termed projection, and there will be lots of fluctuations in hard assets going forward. I’m a mid termed trading kinda guy, as most of you know. But we need to keep these bigger developments in our heads. ValueTrend has been adding to our commodity exposure a bit at a time over recent months. We’ll continue to trade other sectors with neartermed targets, but we do feel that its not such a bad thing to be buying metals, energy, and related hard assets as the above trends show their presence.

Reminders:

BNN MarketCall: Tuesday September 5th at 12:00 noon

I’m on Bloomberg BNN MarketCall Tuesday Sept 5th. Its a call-in show, and I’m happy to answer your questions on individual stocks, or discuss Technical Analysis techniques. I do appreciate it if you mention you read my blog when you call in. My shows have been getting above average call-in volumes, so you should make a point of calling near the beginning of the show to get priority.

Note:  Calls are prioritized over emails.

Last week, the Moneyshow asked if I would swap to a 12:15 talk. But then they changed it back again to 3:00. So…..I’m speaking live at the MoneyShow at the Metro Toronto Convention Center on Saturday Sept 9th at 3:00pm. There, I will be covering my “money management” rules – which include rules incorporating sector allocations, position sizing, hedging, understanding stock beta, amongst other factors. So it will be a bit different than the typical Technical Analysis stuff I talk about on this blog.

I call the presentation “Profit in any market”. That’s because a vital part of investing goes beyond good analysis. You need to establish rules as to how and when you will position your portfolio so you don’t get caught in a firestorm!

I love to personally meet my readers in person at the show. So come out if you live in southern Ontario – I try to have a chat with individual attendees after my talk.

I’ll also have my books available at a special discount price, and will be happy to sign them for you. Of note: SmartBounce is now off the market. So if you want a copy, it will likely be your last chance to get one! I am editing and updating my book Sideways, and it should be back on Amazon in a couple of months. Meanwhile, I will have the original books on hand at the show.

BTW – its really helpful if you register for the show ahead of time. It doesn’t cost anything to register, but it does save you lineup time – you get to go to the pre-registered line if you register ahead of time. Here is the link (this allows you to attend any presentation):

Richards, Keith (moneyshow.com)