Exploring the Economic Jungle: From Inflation to Global Influencers

Get ready to strap on your explorers hat and journey with us into the intriguing financial landscapes of the US and China, as we discuss the current rally in markets, the impact of inflation on stocks and bonds, and how COVID has affected job growth, wages, and consumer spending. We'll be joined by our insightful guest, Mr. Keith Lante, who'll be helping us unpack the mysteries of the financial markets. We'll also be looking at China's growing influence in the global economy, their declining birth rates and immigration trends, and how these factors are shaping the labor market and wage trends.

In the next part of our adventure, we'll be navigating the fascinating terrain of the Chinese economy and its role in global inflation. We'll be discussing how China's currency devaluation and manufacturing overcapacity have influenced the prices of their exports, and how that's turning them into a powerful deflationary force in the global market. We'll also be chatting about the rising popularity of Chinese electric vehicles and their domination in the global market. Towards the end, we'll be brushing up on a variety of current affairs, from the rising oil prices due to Middle East tensions, the election of Javier Milay in Argentina, to the controversial comments by Elon Musk and their impact. We'll also be predicting that the S&P 500 might just hit a record high by the end of the year. So, why wait? Grab a seat, and let's get started on this exciting expedition!

** For informational and educational purposes only, not intended as investment advice. Views and opinions are subject to change without notice.

For full disclosures, ADVs, and CRS Forms, please visit https://heroldlantern.com/disclosure **

To learn about becoming a Herold & Lantern Investments valued client, please visit https://heroldlantern.com/wealth-advisory-contact-form

Follow and Like Us on Youtube, Facebook, Twitter, and LinkedIn | @HeroldLantern

Transcript

Alan Eppers: 0:00

And now introducing Mr. Keith Lanton.

Keith Lanton: 0:04

Hi and good morning. Today is Monday, November 20th abbreviated week this week for Thanksgiving. Wish everyone a wonderful Thanksgiving day celebration. Hopefully everyone who's listening has lots to be thankful for this year. So Mark closed on Thursday and Friday is an abbreviated trading day.

Keith Lanton: 0:28

Nevertheless, there is a whole lot to talk about this morning financial market having a really powerful rally the last few weeks on the heels of some encouraging inflation data, and we will talk about why inflation has been coming down, talk about the overall effects of inflation on financial markets, give us some context of where we are in terms of the overall trajectory of the equity markets and speak about interest rates, the bond market, some opportunities in treasury securities and, of course, brad will join us to give us some further insights into markets, with an emphasis on fixed income markets. So this morning let's talk markets bond markets, stock markets and let's talk about the 800 pound gorilla that influences markets, and that's the US. And I think what we've got to think about is the new or really not so new, but continually growing five or 600 pound gorilla. Depending on your perspective. You may even think it's a 700 pound gorilla or 400 pound gorilla, but it doesn't matter the effect of this new participant, which is China, is something that just a decade or two ago that this gorilla in the room really did not have a significant effect, as this gorilla was a lot smaller, because if you go back 20, 25 years, the world was comprised of 1 800 pound gorilla. That was the US, and the actions that the US took had a profound effect on financial markets all over the world. And the US is still very powerful and still probably the most economically powerful economy in the world. But the Chinese economy is getting larger and more influential and, as a result, the actions that the Chinese take, or the Chinese consumers take, are having a significant impact, not just in China but throughout the world, and this is something that those of us who are under 40 may appreciate. Those of us over 40 may have somewhat of a recency bias and may not fully appreciate the effects that the Chinese have on the markets and the effects that they have here in the US, even though they are secondary effects in many cases. Nevertheless, we are feeling the effects of the actions that take place halfway around the world, and this is something that the older cohort here in the US is not as used to.

Keith Lanton: 2:58

So let's take a look at what's taken place in financial markets in the past few months, past few years. Really. Let's take a look at COVID. So one of the factors that we're all very well, keenly aware of and want to wrap our heads around is the inflation that has taken place since about December of 2020, once the effects of the monetary stimulus that the US provided to the economy here have begun kicking in. And the question is what were the impacts of those stimulus and what took place? So, since December 2020, prices here in the United States are up 18%, not surprisingly. As a result of that inflation, equity markets and bond markets once the full effects of that inflation about a year later were regarded no longer as transitory has started to decline. So, once the markets acknowledged that that inflation was real, that prices were not going to be coming down any soon, at the end of 2021, we saw financial markets both stock and bond prices decline as bond yields have started moving higher. And the question is why did inflation accelerate and why are prices up almost 20% in three years? And in a word you know the word it's COVID and the government's financial response to COVID.

Keith Lanton: 4:17

So let's take a look back in 2021, with vaccines and in government stimulus flowing, growth and non-farm payrolls here exploded to an average gain of $605,000 per month. 2022, things started moderating a little bit, but we were still looking at blistering job growth of $399,000 a month $399,000 in perspective. In order for the US economy to not have a higher unemployment rate, we need to create about 100,000 jobs per month. So when we're still creating 400,000 jobs per month, that is a powerful number and even today, in 2023, we're seeing numbers closer to 200,000. That's still about 100,000 above levels that will lead to a significant increase in unemployment. In fact, the unemployment rate you may be saying to yourself well, it did go up. It went from about 3.5% to 3.9%, but that's not because of a lack of job creation. That's because of the fact that we had people coming back into the workforce and looking for jobs.

Keith Lanton: 5:19

So the demand for workers has enhanced wages, which are now growing faster than inflation. That's a good thing for US consumers, also potentially inflationary. At the same time, we're seeing these rising wages, we're seeing falling birth rates here in the US, we're seeing lower immigration and we're seeing baby boomers retiring into this tight labor market and therefore we are seeing this wage growth become reinforced by the fact that some of the factors that are competing with Workers are the fact that we are seeing less workers and therefore we are seeing higher wages. So, at the same time we're seeing these higher wages, we're also seeing the fact that there's less competition for jobs and therefore we're seeing folks have more job security. And what's that translating into? Well, that's translating into consumer spending, which is one of the reasons that we are seeing the economy the fire expectations. Despite the fact that the feds been raising rates, we are seeing increasing spending by consumers. Now consumers also have another leg to this stool, another reason that they're feeling good, and that's because during covid, we got a lot wealthier. The average households are their net wealth increased by about 37 percent from 2019 to 2022.

Keith Lanton: 6:34

Once again, we ask ourselves why. Well, one of the main reasons why is 814 billion in stimulus spending by the federal government, basically, you know, giving out money to folks who are affected by covid. That led to rising stock prices, increased wealth again. That led to rising real estate values, again increasing wealth. So the average american not only receiving some of this large s, at the same time, a period in time where they couldn't spend it.

Keith Lanton: 7:00

So we saw the average savings of american households increase and, in fact, during the covid, the american households generated about 2.1 trillion dollars in excess savings, part of that due to that $800 billion in government aid and the other part due to the fact that the americans weren't spending the money that they got. So Americans got and saved 2.1 trillion dollars and, at the same time, americans, during the covid crisis, were Reducing their credit card debt, they were refinancing their mortgages because rates were very low and the consumer was getting in better and better shape. Even today, estimates are that about 9 percent of that 814 billion that was the government distribution About 9 percent or 190 billion of that excess spending remains. So perhaps this is a reason why we are still seeing the consumer pretty strong. So, against this backdrop of good news, perhaps equaling bad news, good news is lots of money, strong consumers. Bad news is that led to lots of inflation, yet less few weeks We've seen markets increase about 10 percent.

Keith Lanton: 8:08

We've seen reports that inflation are coming down. We've seen 10 year treasury yields fall from 5 percent to 4 and a half percent. We see equity markets approaching year highs. Once again, we ask ourselves the question why? Well, what's been going on here in the united states is the commentary from our fed Chairman, jerome Powell, stating that the fed is close to the end of their rate hike cycle. We've also seen inflation Decelerating.

Keith Lanton: 8:34

Last week we got the good news that headline cpi in october was unchanged for the month of october, while the core, excluding food and energy, was up two tenths of one percent. After further stripping away housing expenses, inflation for october was almost zero Overall from one year ago, cpi was up 3.2 percent, getting close to that fed target of two percent, while core was up 4 percent. But again, if you strip out housing, we're looking at year over year inflation of 1.4 percent. Why are we stripping out housing? Well, the feeling is that housing inflation is really significantly moderating. It was still elevated over the past year and perhaps therefore we are seeing inflation running a lot Lighter than it was at its peak, which was close to 9 percent. So all this inflation news gets run through the wall street churning mill and we have analysts coming out and saying that in that, given this positive inflation data, that wall street now sees a deceleration of Inflation, is pretending much anticipated end of the federal reserves, interest rate hikes and in fact wall street is now expecting to see interest rate reductions next year. Now, wall street's been predicting this for a while and has been pushing this out, but at the moment, federal fund futures are currently pricing in four 25 basis point cuts by the end of 2024. So this all begs the question.

Keith Lanton: 10:00

And now we're getting back to the 800 pound gorillas the united states and we've got this other big gorilla, however many pounds you want to call it, which is china. So where, how does this all come full circle? Well, why are we seeing some of this deflation here in the united states, or a lack of inflation? Deflation, probably, is a strong word, but there is deflation going on in china and that deflation Is coming over here and is being exported to the united states in this, in the capacity of providing us with lower inflation. Many of us don't recognize the fact that the beneficiary of some of the chinese weakness Is us here in america enjoying lower inflation because the chinese are selling their goods at lower prices and this perhaps could explain some of this backup in treasure yields, some of this backup in the CPI. So china is once again Exporting falling prices.

Keith Lanton: 10:56

If you remember, just a couple of years ago, pre-covid, chinese were paying higher and higher wages to their workers cost to do business in China were increasing and the Chinese miracle of exporting lower and lower prices was with something of a memory. And now here we are and China has once again become a global disinflationary force, at least for the time being. Again, why? Well, the Chinese currency, the Remnimbi or Yuan, is down 3% in the last 12 months. This lower currency translates into strong a dollar, which means that our dollar can buy Chinese goods for a lower price.

Keith Lanton: 11:35

But perhaps the biggest reason is that Chinese manufacturers geared up for a reopening rebound from their COVID shutdown and that reopening rebound did not materialize. And what did that leave? That left tremendous overcapacity. And what are the Chinese doing? They are selling this excess capacity abroad at discounted prices. In fact, the overshoot that some of these Chinese companies wound up experiencing was massive. So if you look at steel exports out of China, they have soared 80% in volume and the prices of the steel exports that the Chinese have exported down 40%. Solar cells out of China volume up 50%, prices down 40%. So Chinese deflation is happening against the backdrop of rising industrial prices here in the US and Europe.

Keith Lanton: 12:27

So the Chinese perhaps at the moment are one of the primary factors for the improved inflation outlook here in the United States. So if you want to look at the trend and you want to look at what may be influencing our inflation outlook going forward, you can't just look here in the United States anymore. You also got to look at what's taking place overseas, and if you want to look forward and if you want to look where the ball is going and starting to get more and more attention, one of the other products that the Chinese are very aggressively exporting internationally are autos, and we don't see it here in the United States, because here in the United States, we impose a 27.5% tariff on Chinese cars, something that the Trump administration put into place and that the Biden administration has kept in place. But throughout the world, the Chinese are becoming increasingly competitive in autos, especially electric vehicles. Ask yourself the question what is the country that is now the largest exporters of autos in the world? Most of us would guess Japan. The number one exporter of autos in the world right now is China. So China has become very competitive in the electric car value chain. In fact, one of three cars in China being sold today is an electric vehicle, versus single digits here in the United States, and therefore they are able to mass produce these cars at a lower cost than cars of electric vehicles are manufactured here in the United States.

Keith Lanton: 13:57

Now, certainly, some would argue that's because of state assistance, but what the Chinese are clearly doing is they are producing cars at the moment and selling them at a price that's well below the price that here in the United States, the price that's in Europe, the price that's in other Asian countries, and the Chinese are exporting lower auto prices. Deflation, perhaps with state assistance? Perhaps unfairly? That's the question that has to be resolved. But nevertheless, at the moment, lower electric vehicle prices are being exported by the Chinese throughout the world. They are making significant inroads in Europe, australia and Southeast Asia, and some are worrying that the Chinese may eventually dominate the global electric vehicle market.

Keith Lanton: 14:41

In the first eight months of this year, passenger car exports out of China have surged 72% to 2.3 million vehicles, of quarter of which were electric. Chinese companies exported nearly 350,000 electric vehicles to nine European countries in the first half of the year. That's more than they exported in all of 2022. By 2030, chinese car makers could see their share of the global market double from 17% to 33%, with European firms suffering the biggest loss of market share. According to recent estimates by UBS, auto analysts say a handful of Chinese electric vehicle makers are emerging as new global champions. Aside from the low tax that when the Chinese import into Europe, which is 10%, one of the main reasons that the Chinese are so focused on the European market is the fact that the Europeans have set up to ban internal combustion car sales by 2035. So the Chinese are getting ready for 2035 and are laying their plans on the table to continue to sell the vehicles that the Europeans need in order to no longer Produce internal combustion engines.

Keith Lanton: 15:56

Chinese cars gaining popularity not just in Europe but all over the world. In the first half of 2023, sales of Chinese cars in Australia nearly doubled from a year ago, market share in Australia up to a 16%. And I said electric cars sold in China are 40% cheaper than those sold in Europe, fifty percent cheaper than those sold in the United States. Average price of an electric vehicle in China's $34,000 compared with Fifty nine thousand in Europe and sixty eight thousand dollars here in the United States. And consumers perceptions about Chinese cars are changing as well. Those countries where consumers have access to Chinese vehicles are starting to view them as a higher quality alternative. So when we think about US economy, where the world is going, we got to think about the US and then we got to think about the rest of the world and who is having that influence on our economy, and it's not something that many of us are used to.

Keith Lanton: 16:54

Alright, changing gears to what's going on specifically today, on November 20th, well, dow futures modestly lower down about 25 points. S&p futures down to NASDAQ futures are now up about two points. Not a lot of conviction In equity markets, participants hesitant following big gains, coming into this holiday short and weak. Looking at Treasury market, we are seeing the 10 year up about three basis points to a 447. On a related note, we are also going to have a 16 billion 20 year bond auction today. Results will be released at one o'clock and that is something that the Treasury market will be very focused on Morning.

Keith Lanton: 17:32

We are seeing oil up over two percent of dollars sixty a barrel. Perhaps some tension in the Middle East contributing to that rise in oil. Reports that the Iranians of the ship and there's some concerns that that ship, which some had said perhaps they thought was related to Israel, but Israel is denying any relation to that ship. Nevertheless, concerns that natural gas and oil prices may be affected by increasingly uncertain militaristic activity in the Persian Gulf and the Red Sea. In China, the people's bank of China left the one in five year loan prime rates unchanged in company news. Big news over the weekend was that Sam Altman, the founder of chat GBT, and Greg Brockman will be leaving that company and will be joining Microsoft. Microsoft stock is up about five points or one point three percent. Boeing, in the news, was upgraded to buy from hold a Deutsche Bank.

Keith Lanton: 18:31

Overseas news Washington Post is reporting that Israel and Hamas are close to a deal to release hostages in exchange for a five day pause in fighting in Argentina. This is significant results from their presidential or their prime minister election. Javier Milay has won elections in Argentina. He plans to eliminate Argentina's central bank switches currency to the US dollar, which is significant and also more closely aligned the Argentinian economy with the US versus China. So this is perceived as someone who is at the moment friendly to the United States and Elon Musk in the news over the weekend making controversial comments regarding replacement theory and Jewish folks, where he commented on a tweet and several advertisers have paused spending on X following those controversial comments. Since then, elon Musk has posted some some other comments on X in a perhaps an effort to convince those that are accusing him of being anti-semitic that that is not the case, but nevertheless advertisers are sticking to, at least temporarily, halting their advertising on X.

Keith Lanton: 19:41

Overseas Asia Pacific region began the week on a mostly higher note. Major European indices trade near their flat line. Spain is outperforming in Europe this week. What's going on? Today the conference board releases its leading economic Index for October. Consensus estimate is for a six tenths of one percent month over month decline. The leading economic indicators have fallen for 18 consecutive months, and that's despite strong DGDP growth this year. Conference boards still expects a shallow recession in the first half of 2024. 18 consecutive months of falling LEI is an incredible statistic and typically is Highly correlated with the recession, but the US economy has remained resilient.

Keith Lanton: 20:26

Tomorrow, tuesday, in video report third quarter fiscal 2024 results. Video is the poster child for this year's AI driven NASDAQ rally of 35 percent. We're expecting earnings of 337 a share sales of 16.2 billion. That would represent 481 percent year-over-gear earnings per share growth and a hundred and seventy fifth three percent revenue growth, and video this year is up 237 percent. It is the best performer in the S&P 500.

Keith Lanton: 20:56

Federal open market committee on Wednesday Releases the minutes from its early November monetary policy meeting, where they kept the Fed funds rate unchanged, and Wall Street will be looking for confirmation of their view that the Fed is done hiking rates in the minutes of that meeting. Thursday, as I mentioned, equity and bond markets closed in observance of Thanksgiving. Looking at where Markets may go by end of the year, specifically equity markets, barons in the trader column wrote a column Entitled the stock market's momentum can help the S&P 500 to scale new heights. The November stock market rally has been convincing, so much so that we, meaning barons, are now convinced that the S&P 500 can hit a record High by the end of the year. The S&P 500 gained 2.2 percent last week. The Dow advanced 1.9 percent. Nasdaq rose 2.4 percent. Much a lift came on Tuesday when October CPI came in lower than expected, solidifying the thesis that the Federal Reserve will stop raising interest rates. Chances of an interest rate hike in December have fallen to just two tenths of one percent, according to CME Fed watch, which also shows a 28 percent of a cut in March of next year.

Keith Lanton: 22:09

The S&P 500 has now advanced 10 percent over the past three weeks, it's largest three-week gain since 2020 and if you want to think to yourself about trying to market time, hartford Mutual Funds came up with this fact for the financial markets this year. The S&P 500 it's up almost 17 percent year-to-date. Yet nearly all of those gains can be attributed to nine trading days of this year. So if you missed some or all of those days, your returns dramatically lower, and we just saw 10 percent over the past three weeks. So if few weeks ago you lighten your exposure, you missed a lot of that. Upside, the S&P 500 at 4514 has now broken above key levels and isn't showing any signs of backing off. It has cracked every important level as is risen from its recent low and now just one sticking point remains from a technical perspective. That's 4520. The index has run into resistance around that level before and it is struggling to break through it now. Still, the fact that it hasn't dropped meaningfully suggests that market participants are optimistic enough to continue buying stocks and perhaps push through this 4520 level. J Woods chief global strategy that Freedom Capital Markets set up, that Suggests that the market is set up to make a run at its year high, saying there's too much Momentum and, specifically, too much fear of missing out to, to stop the market from possibly scaling those year-end heights.

Keith Lanton: 23:44

For a turn over to Brad, I'll just make the transition to buy markets, fix income markets and talk about a Treasury security that doesn't get as much attention. As you know. Treasury bills, treasury notes, treasury bonds, perhaps treasury strips man this is a once obscure area of the treasury bond market that today is generating significant interest, especially from individual investors as they seek to capitalize on high short-term rates, and this is Treasury floating rate securities. Treasury floating rate securities have two-year maturities and they have a rate that adjusts each week based on the weekly auction of three-month T-bills. So they are an alternative to US Treasury bills. So instead of having to consistently buy Treasury bills, you buy this floating rate Treasury. It's got a two-year maturity and it adjusts based on the three-month T-bill. The current yield on these Treasury floaters is around 5.4%. How can you buy them? You can buy them at the regular monthly Treasury auctions at the Treasury direct website, or you can buy them at your bank or through your financial advisor. Next auction on Treasury Floaters is tomorrow, november 21st to. 26 billion will be issued. They're only about 600 billion in total of Treasury floaters currently outstanding an increasingly popular way to invest in floaters is through two exchange Traded funds.

Keith Lanton: 25:07

The 18.8 billion dollar wisdom tree floating rate Treasury ETF symbol is US United States. F is in float. Are is in rate US FR and a 10.7 billion I shares. Treasury floating rate bond symbol is TreasuryT. F is in float, l is in Lima, o is in Oscar. Funds are very similar. Both yield about 5.4%. Both have fees of about 15 basis points.

Keith Lanton: 25:34

The Treasury floaters the way they work, as they pay a yield premium of about 15 basis points above the T bill rate, or about point one five above the T bill rate, giving it its current level of about 5.4%. There is very little price risk because it does have an ultra short duration, because they do reset every week and they have a short two-year maturity. The price range, for example, on the BlackRock ETF has been about 1% in the past year. One of the advantages of the floater ETF relative to the underlying bonds is that you get monthly income as opposed to semiannual payments on the debt. So you buy the bonds, semiannual payments, you buy the floaters. They pay monthly and interest is exempt from state and local taxes but is subject to federal income taxes like all treasury debt. Get a turn over to Brad.

Brad Harris: 26:22

Good morning Keith. Good morning everyone. I hope everyone had a great weekend. I'm going to keep this short this morning because I'm essentially just reiterating a lot of what I discussed last week. First of all, tax law swaps have dominated the municipal bond market. The whole business has been tax law swaps and rollover for called bonds. I'm not seeing a lot of new money coming into municipals at the moment. As Keith mentioned, there are other sectors of all markets that investors are also finding opportunities to invest in. If you're considering tax law swaps, I would strongly recommend that you get these done in the next couple of weeks. I've been working with investors and reps for tax law for over 30 years.

Brad Harris: 27:05

Understand that these take thought and time to execute properly and keep your investors' original goals as intact as possible while creating these losses. Any losses created can be carried forward indefinitely. Second, if you are investing new money or rollover money 3% coupons in the 8 to 12-year range with better than 4% yield to maturity when buying these, you will need to understand the true yield, given the small to minimus tax that you need to pay on these discount bonds, because so many of these bonds originally bought at par are being tossed out. On tax law swaps, an opportunity is being created for new money buyers while keeping your maturity relatively short. Additionally, because there's so much pressure on this particular maturity range in the marketplace, these bonds are pricing very cheap relative to their evaluations. Not that that's a sole reason to buy them, but I always like to see bonds priced cheap to the evaluations. I also like these because, although sentiment has turned on a dime the last couple of weeks regarding the direction of rates, if markets stay too strong and the economy too hot, the Fed may consider keeping rates higher for longer or even get back to hiking. So we really do need to keep all possibilities in mind, even though the talking heads have said that are starting to talk about rate cuts now. But the Fed has been. They've had faked us quite a few times here Last.

Brad Harris: 28:36

It's imperative this is an op-ed it's imperative that the government get a grip on our debt. Interest income alone is approaching a trillion dollars a year on 30 trillion in debt. So if they are wise and, in my opinion, find a happy compromise of severely cutting expenses without affecting military, social security and Medicare and simultaneously raise taxes I know it won't be popular for that comment, but it's the truth If we don't figure out what's going on with our country's debt, we're really going to be in a lot of trouble, and we can kiss a lot of things goodbye. I hope everyone has a great Thanksgiving. Such a great holiday, please don't overeat this week. Or maybe a couple of ozempic before mealtime? That is not real medical advice, that's a joke. Have a great weekend. A great weekend, a great holiday, and I'll turn it back to Keith Thanks.

Alan Eppers: 29:33

Thank you for listening to Mr. Keith Lanton. This podcast is available on most platforms, including Apple Podcasts, Spotify and Pandora. For more information, please visit our website at www. heroldlantern. com.

Sophie Cohen: 29:51

Opinions expressed herein are subject to change and not necessarily the opinion of the firm. Past performance is no guarantee of future results. The information presented herein is for informational purposes only and is not intended to provide personal investment advice. It is important that you consider your tolerance for risk and investment goals when making investment decisions. Investing in securities does involve risk and the potential of losing money. The material does not constitute research, investment advice or trade recommendations.