So Much Going On – Another Rapid Rundown

For those of you who would prefer to listen:

I couldn’t focus on just one topic this week. There were so many events that matter taking place. The Bay Area drew the most attention. It wasn’t due to the Niners’ resurgence, although that in and of itself is no small development. Fast and furious activity is a constant these days, some scale large, others small. But things are so intertwined. With so much going on, I try to weave them all together in this week’s rapid rundown. 

The highly anticipated meeting between Presidents Biden and Xi Jinping took place this week at the illustrious and expansive Filoli Estate in Woodside. The location was kept secret for obvious security purposes. You might have recognized this historical site as the mansion in the TV show Dynasty or you may recall Warren Beatty throwing footballs in the garden in the 1978 film “Heaven Can Wait.” Filoli has a storied past. This week added to its legend.

The high-profile engagement in the Northern California hills ended with agreements to restore military communications, cooperate on climate change and commit to curbing the crisis of the fentanyl spread. Low expectations were met. President Biden reaffirmed the US will abide by the “One China” policy, while President Xi reiterated the Taiwan reunification is unstoppable and urged the US to stop arming the island. The Chinese President requested that the American President lift sanctions and provide a non-discriminatory environment for Chinese companies. Neither were granted. China would need to scale back its aggressive actions for that to happen. Both leaders agreed on the need to maintain high-level engagement. President Xi said he wants a peaceful coexistence. President Biden reiterated the US is not looking for confrontation. 

Ian Bremmer summed it up well: “Open up lines of communication. Put a floor under the deteriorating relationship. Avoid a war in Taiwan. Get back to business.”

But clearing that low bar is not insignificant. Re-establishing military communications is critical when Chinese planes and ships are dangerously buzzing American vessels in international waters near Taiwan. An accident could trigger a nightmare scenario. Direct lines of communication matter. And they made progress on stopping the deadly fentanyl export problem. President Xi also hinted at a return to “Panda Diplomacy.” I covered that subject last week. This was a major reboot of sorts. It’s a start. It’s merely a start, but it’s going back in the right direction. 

Other issues went unresolved, and tensions were still apparent. They didn’t get much done on rules surrounding Artificial Intelligence, semiconductors, or efforts to help stop the war in the Middle East. The White House wants Beijing to lean hard on Iran. There’s no indication that will happen. Taiwan continues to be the primary topic of contention between the 2 nations, which is destined to fester. Taiwan has an election in January. So, as Bremmer stated: “This ain’t no thaw. Oh, and, Biden called Xi a “dictator” immediately after their sit-down.” So there’s that…

Later in the evening, President Xi attended a dinner at the Hyatt Regency in San Francisco with a who’s who list in Corporate America. Tim Cook, Satya Nadella and Elon Musk were in attendance, among so many others. The Chinese President told the American executives he wants friendly relations with the US and has no interest in fighting a cold or hot war. He urged both countries not to bet against the other. President Xi pledged to make it easier for foreigners to invest and operate in China. That’s been a growing issue for a while. American companies want access to the vast Chinese market. But it has not been a fair and free environment for business and trade. It’s far from clear if anything will actually change here. 

The fact is, China needs growth, plain and simple. The Chinese Economy has been reeling, never fully recovering since Covid. Actually, it was slowing even before, as the Communist party has emphasized state control over free markets. It’s hurt Chinese innovation and growth. But China is still the World’s second-largest economic power, by a wide margin. It matters big time on a global scale. The summit showed that the economic links between the two countries are too critical to toss away. The Market will be paying close attention to developments here.

You know what else happened this week? The price of Oil collapsed. West Texas Intermediate (WTI) has now fallen over 20% from its last high of $95 at the end of September. Crude prices dropped 5% on Thursday alone, to below $73 a barrel. It’s now the fourth weekly loss for WTI. There are a combination of factors driving its fall. The geopolitical premium built up after the attack on Israel has completely burned off. Those fears have failed to materialize as the conflict appears to be contained between Israel and Hamas, without disrupting Oil supplies from nearby regions. Of course, there’s a major risk of escalation. That could happen at any moment.

With Oil, it’s always a function of supply and demand. It’s Econ 101. Supplies are up while demand slows. That naturally sends prices lower. It’s just been so surprising that it’s happening with war in the Middle East. Swelling inventories and rising US stockpiles have changed market dynamics. The United States is producing record levels of Oil and is the largest producer in the World. There are also clear signs of non-compliance within OPEC+ over the group’s recent production cuts. Western price caps meant to dent Russia’s Oil revenue have failed. And there have been no consequences. In addition, China is scooping up nearly all of Iran’s exports. China is the largest importer of Oil. Demand over there has been curbed as its economy continues to slow. Lower prices are welcomed with open arms in Beijing.

The fact is, the World still runs on Crude. Lower prices mean the rate of inflation is cooling. Inflation, as measured by the Consumer Price Index (CPI), did not increase in October for the first time in months. It was expected to climb by a slight 0.1%. The annualized number was a 3.2% increase, down from 3.7% in September. Energy prices were the big driver here, down 2.5% month-over-month and down 4.5% from a year ago. That’s key for America’s Economy. Lower prices at the pump mean more Dollars to spend elsewhere. It’s a welcome gift ahead of the Holidays.

Core CPI, which excludes food and energy, rose 4.0%. That’s the lowest annual rise since September 2021. Hotels, used vehicles, and plane tickets were amongst the areas of decline. That’s been helpful. But food prices are showing little sign of slowing. Restaurants are still gouging wallets big time. Food away from home up another 0.4% on the month. That might seem like a small increase. But that’s on top of the already high prices. Food prices keep inflating. The other area that’s getting us is car insurance. Premiums accelerated 1.9% month-over-month and up a whopping 19.2% from a year ago! You’ve no doubt noticed that. I had complete sticker shock seeing my car insurance double by adding my 16-year-old daughters to my policy. That really hurt.

Housing continues to squeeze budgets. Shelter growth was up 6.7% compared to last year. That accounted for 70% of the total annualized core increase. It’s still really expensive to buy a house in America. There’s very little supply. And many don’t want to sell with mortgage rates at multi-decade highs. Over 80% of mortgages outstanding have an interest rate of 5% or lower. Interest rates have come down in November. But a 30-Year fixed mortgage is still over 7%.

The Headline Inflation rate is down significantly from the 7% seen at the beginning of the year. It will take more time to go from the current 3% clip to the Fed’s desired 2% target. The elimination of the pandemic and supply chain disruptions were the low-hanging fruit to fighting high prices. But the underlying price pressures are proving stickier by showing some recent signs of stalling out. That means that even though the Fed might be done raising rates, actual cuts don’t seem likely anytime soon. It would take recessionary pressures to force that action. That’s a 2024 story in our minds.

October retail sales fell for the time since March. That was expected. And the decline was actually smaller than expected. But a decline is meaningful. The Economy keeps slowing. Auto sales were noticeably down. Other notable drops were found in sales of furniture, at department stores, and sporting goods. Online sales grew a bit higher. Other increases were found at restaurants and grocery stores. But that was mostly due to the higher prices, not increased volume. We Americans are still paying more for less. 

Remember the risk of another Government shutdown? Back in September, Congress passed a continuing resolution to keep the government open til mid-November, giving them time to come up with a longer-term deal. They didn’t do it. Congress kicked the can down the road again. The House passed a laddered government funding bill pushed by new Speaker Mike Johnson to keep government spending at current levels until January and February. It doesn’t include the $106 Billion that the White House requested for Israel and Ukraine aid. The bill passed with 209 Democrats and 127 Republicans voting in favor, while 93 Republicans and 2 Democrats opposed. 

According to our sources, Speaker Johnson used a significant amount of political capital to pass this bill. Challenges from House conservatives were present. It’s an interesting predicament because he was one of them. Now he has to represent all Republicans. The honeymoon is already over. Johnson said he won’t pass another short-term bill, instead focusing on a year-long continuing resolution, which is unlikely to pass in the Senate. As for the present deal, the Senate passed the bill and President Biden signed it, keeping America’s government open. None of the tough issues were addressed. They did the bare minimum, which seems to be the most we Americans can expect from our collective Federal government these days. 

These short-term deals Congress passes feels like Groundhog Day. It’s the same thing over and over again. Fittingly, there could be another shutdown deadline on Groundhog Day in 2024. You just can’t make this stuff up.

Moody’s broke news late last Friday by lowering its credit outlook for America to negative from stable. It happened just before I hit send on last week’s piece. Moody’s warned specifically that given the higher interest rates and political polarization in Washington, US fiscal deficits are likely to remain large. The credit rating agency maintained its credit rating at AAA, citing America’s exceptional economic strength and possible medium-term boosts from further positive growth surprises. Moody’s is the only agency that has America AAA-rated. Fitch lowered it earlier in the year and S&P has kept it at AA since its downgrade a decade ago.

Despite the credit warning, Treasury yields fell off the inflation data, which sent both bond and stock prices higher again. The Market blew off Moody’s move. Lower yields release the firm choke-hold on asset prices. Stocks recorded a 3rd consecutive week of gains as the year-end rally continued. The Market has completely priced out any December tightening and is now pricing in two rate cuts by next July. 

Small Caps saw a surge this week with a 5% one-day move alone. The price action has been unbelievably volatile for America’s smallest companies. They have not participated much at all in any 2023 rally. That’s actually been the case for most stocks, with the equal-weight S&P basically flat. 5 of the 10 S&P sectors are still in the red for the year. The recent surge has been driven by Tech and the mega caps yet again. In fact, both Apple and Microsoft, valued at nearly $3 Trillion each, are worth more than the combined total of the 2,000 stocks in the Russell small cap index.

Next week will be a shortened week as Americans will be in Holiday mode. Thanksgiving air travel is expected to reach record levels this year as demand remains strong despite the high inflation. Airlines for America, a trade group representing the major airlines, said US carriers expect an all-time high of nearly 30 Million travelers starting today (Friday). Roads will be busy as well. AAA estimates 55 Million travelers will drive 50 miles or more from home over the Thanksgiving holiday period. That would be a 2.3% increase from last year. Economic activity remains high. Weather could be an issue. Heavy rain, gusty winds and even snow are expected for many Americans this Thanksgiving as a pair of storms is forecast to join forces in the eastern half of the country next week. On the west coast, things look pretty smooth for a mild and sunny Thanksgiving week ahead.

Have a nice weekend. We’ll be back, dark and early on Monday.


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