12/06/2024
"The Future of Inflation: Navigating Predatory Economics and Consumer Investment in a Shifting Economic Landscape" by Eric Rory Oso (Financial Consultant, Honey Bear Asset Management, LLC)
After the latest job report numbers and the general trajectory of economic data over the first round of rate cuts in September and November, an economist or analyst would have to promote the idea that we are in a new era of economic growth. The theories of backward analysis over forward projections are beginning to pull apart and the dinosaurs of economic theories with a resilience towards forward ways of financial planning are dooming our path forward. The gaslighting of the employment numbers I mentioned in my previous analysis is becoming more than your average landlord’s paint job and the foothold on the economy is becoming extremely apparent as the floor is beginning to fall out. The looming uncertainty over the Presidential landscape in previous months halted production in the construction and manufacturing sectors and the golden goose of the recent jobs report is the results of the election did indeed ramp up these industries as a path forward in production has become foreseeable. This undermines the prehistoric economic data analysis the FED has shown as it consistently grapples and chokes to achieve its net 2% inflationary goals. This coupled with the fact that core inflation, which separates goods and services data from food data and convenient “disinflation” of the energy sectors, shows that as industry production and the economy begin to find their legs, keeping inflation to historic benchmarks is all but unattainable. This is especially true when the new presidential regime instills policies, that from a clear economic standpoint, will raise inflation.
I stand on a new path forward for our economic policy. This game of choking out and coasting on the inconvenience of the consumer has proven futile. Our economists must start looking forward in response to the inflationary crisis started by Covid-19 and accept a new benchmark for acceptable inflation. Consequently we must adapt new standards and acknowledge the “Predatorial Economic” landscape. We must invest in the consumer. We must offer the consumer a way out of debt, a higher wage, and a path towards outpacing inflation. Current promotion of normalcy in consumer investments in securities was an intelligent and thoughtful step forward, but we must also support wage growth as sectors start picking up steam. I believe this will be the only way to avoid an economic inflationary bubble and turn what could be a market crash into a slight correction when that narrative finally comes to fruition.
Skeptics may argue that an increase in wages will only further exacerbate inflation as corporate giants controlling the economic landscape will only increase the cost of their products as wages rise causing skyrocketing prices and subsequent inflation. This may be true in the past but this underscores the financial landscape we are evolving into. The Predatory Economics that we now face require an understanding of global economics.
Political enemies have manipulated the misunderstanding of tariffs to deter the public from supporting their political rivals. This manipulative political agenda is criminal in my eyes but that is a story for a political analyst. I tell my clientele that when it comes to politics, “don’t see red, blue, etc., see green” as in what the money is saying. Tariffs are an economic tool used mostly in global economics to support domestic growth. It is a business contract. In terms of the US economy and our use of tariffs, the overabundance of Chinese chipsets seen in the news is a valuable starting point for an understanding of tariffs and how they can be utilized by governments in import and export trading. Countries are growing in the utilization of chipsets in their products; therefore, all countries want to have a stable production so they are not overly reliant on imports. If we allowed just one country to support all chipset growth that is what we call a monopoly in global trade. This is what we use tariffs for. The cheap Chinese chipset production that flooded the global market undermined the production of other countries which in turn would drive many emerging companies out of business effectively creating an over reliance on imports and stalling domestic production. In response, many countries implemented tariffs in order to slow the flow of cheap imports into the manufacturing marketplace as companies looking to cut costs during the inflationary crisis might look to Chinese chipsets. Tariffs do not stop all chipsets from entering a country's domestic market, it is not a ban, and it does not necessarily “raise” prices for the consumer. This is a tool utilized to support manufacturing in your own country by keeping a balance in trade and costs; however, how aggressively you weaponize tariffs could cause inflation as it could deter imports effectively raising prices if your country has low production in the sector the tariffs are implemented. Tariffs being used aggressively and increasing inflation is the main issue to be worried about. As for who “foots” the bill, like all contracts it is based on negotiations and there is no real winner or loser if used correctly.
What does the tariff issue have to do with support for the consumer and the future of inflation? The use of tariffs support my views on Predatory Economics and the current economic path. Although historical data has shown otherwise, I do not believe that an increase in support for the consumer will increase inflation. This is because we are more aggressive towards other nations on the strength of our currency. Japanese Yen, as an example, has historically been used as a carry trade currency when different countries conduct business. This is because historically the Yen is stable in its evaluation against other currencies. The currency of other countries tends to rise and fall against each other usually in response to economic strength and liquidity. The US has been overly aggressive recently towards other currencies which is why I believe a turn towards higher salaries coupled with lower interest rates would not inherently raise inflation to an uncontrollable rate. In terms of currency, when it is more easily assessable, that is what is referred to as a weaker dollar. Interest rates, when they are lowered, make access to liquidity which is more accessible through loans, securities, debt restructuring and other forms of borrowing therefore subsequently “weakening” the currency. I think in the global realm the US will want to keep a strong dollar even with falling rates; therefore, a turn towards support for the consumer would not have negative economic implications because subsequent inflation caused by growth would be offset by consumer financial strength and input in the economy boosting corporate bottom lines and supporting a stable GDP. This is especially true if we balance the relationships between corporate and the consumer and employee. This, in turn, would help support and stabilize the economy, as well as strengthen sectors where the US has been competing with other nations by weaponizing tariffs and other measures to maintain dominance.
The strength of the dollar and the consumer support contributes to another necessity for a dominant domestic economic future. This is the understanding of financial statements. The main risk of inflation being carried away without the consumer is the evaluation of our mega cap companies. The stock market uncontrollably inflating is a source of economic strength until what is referred to as a bubble pop. This is usually because of terrible ratios in corporate financial statements. Financial statements show ratios including but not limited to Debt to Equity, Assets to Liabilities, and the almighty Price to Equity ratio. These ratios can throw salt into your portfolio if the market comes to a bubble, and you are invested in too many “overvalued stocks.” Supporting the consumer would allow the economy to effectively “walk on water” and if there is a pop, limit to a correction over an economic crisis. If consumer spending rises with inflation in a controlled measure, the consumer has a healthy financial situation, and the consumer contributes to the economy and corporate bottom lines, the financial statements will show the price of the stock is rising at a more stable rate and holds a healthy intrinsic value. This will reduce the possibilities of a bubble pop and a subsequent market and economic correction which at worst could lead to a recession.
However we choose to ride into our future with Donald Trump under the helm, I encourage everyone to “think green.” There is money to be made under Trump and if played right, an increase in inflation is not necessarily the enemy if all economic evaluations are considered and are kept under control.
For more financial analysis and advice, please reach out and as always education, diversification, financial planning, and debt management are the best responses to financial uncertainty. Call Honey Bear Asset Management today and reference my previous articles for more clarity on this analysis.
