"Who Ya Gonna Call?”
Investors have exhausted potential market saviors - the Fed, the government, and big corporations in search of a market recovery. The lone savior is the consumer, who is getting weary. Utility bills are skyrocketing, inflation is still high, and the housing market is in contraction.
The bulls are left wondering, "Who are we gonna call?" The movie "Ghostbusters" debuted in 1984 and cost an estimated $30 million to make. The TV trailer for the movie was shot similar to the fake commercial that appears in the movie. They used a real 1-800 number and actually received approximately 1,000 calls per hour, 24 hours per day, for several weeks leading up to the movie. The total worldwide gross for the film was $296 million, an astounding success. In fact, it was the highest grossing comedy film of all time until "Home Alone" in 1990.
Here's what we're seeing so far this week...
Everything Was Fine Until The Power Grid Was Shut Off. In one of the pivotal scenes in the movie, uber-antagonist Walter Peck turns off the power to the Ghostbusters' containment unit that housed the captured ghosts.
Peck's action leads to the release of all the ghosts across the city. In case you missed it, the power grid isn't exactly functioning at peak performance these days. Roving "brownouts" in California and Texas this summer during stifling heat has caused critics to question the state of the U.S. electrical grid. To top that, utility bills for consumers have risen 47% on average versus one year ago.
In Memphis, my utility bill has risen 66% year-over-year, with no material change in consumption. In fact, we've run the air conditioner at a higher temp, been conscientious about turning off the lights, and installed a couple of energy-saving appliances. Still, the bills are higher. The cost per kilowatt hour has risen significantly in the U.S. over the last two months (+33%). The price of natural gas, used in steam and gas turbines to generate electricity, is at a 3-decade high. This is causing the amount of overdue utility balances to spike, as 1 in every 6 American households are behind on their utility bills. Major U.S. retailers are warning that they are seeing lower-income consumers scaling back on purchases as inflation is affecting their pocket books. The rise in price for electricity and natural gas adds further pressures on consumers and could diminish the possibility of a "no inflation" reading in August's CPI report.
Don't Cross The Streams. In the first scene of "Ghostbusters" where the team uses the Proton Packs, Dr. Egon Spengler (played by Harold Ramis) warns the team, "There's something very important I forgot to tell you." Dr. Venkman (played by Bill Murray) asks, "What?"
Spengler tells them not to cross the streams from their respective Proton Packs as the result would be the end of life as we know it. Venkman sarcastically responds, "Right. That's bad. Okay. All right. Important safety tip. Thanks, Egon." A quick trivia note, Harold Ramis and Dan Aykroyd wrote the script for "Ghostbusters" (with uncredited assistance from Rick Moranis). They did not intend for Ramis to play the part of Spengler, but they agreed he should do it when no one else seemed right for the part. The economy works a lot like a proton pack - one element of contribution has an opposite element of contraction. For example, a lot of consumer spending fuels growth, but that same spending leads to higher inflation. Everyone wants to "have their cake and eat it, too" but life rarely works out that way. In order for businesses to spend more money, they have to make more money. This means they have to charge consumers higher prices or find ways to cut expenses. The passage of the "Inflation Reduction Act" is expensive, with an estimated $430 billion price tag.
It calls for significant increase in IRS agents, which will add labor costs to the government, meaning government spending will likely increase inflation. According to data from the CBO, IRS and Joint Committee on Taxation, taxes for lower and middle-income households will increase the most over the next 8 years (+26.5% and +29.6%, respectively). If we add on forgiveness of student loan debt and continued delay of loan payments through 2022 that was recently announced by the President, we can expect more inflation. Penn Wharton estimates that the top 60% of earners will be relieved of debt and a Goldman Sachs study shows that most student debt is held by middle and upper-income households. The relief of this debt will allow for more discretionary income in the hands of those most able to spend it, which is likely to add to current inflationary numbers. We can't "cross the streams" and expect lower inflation. We either have to stop government spending or the economy proceeds into recession. The later may be inevitable at this point.
You're Not Gonna Lose The House. As the Ghostbusters initially go into business, Peter Venkman convinces Ray Stantz (played by Dan Aykroyd) to mortgage his house to help finance the business. Venkman tells Stantz as they leave the bank building, "Ray, you're not gonna lose the house, everybody has three mortgages nowadays." "But at 19%, you didn't even bargain with the guy," states Stantz.
That's a brief window into the mortgage & loan rates in the early '80s. Mortgage rates aren't that bad today, but the 30-year mortgage fixed rate has risen to 5.13% versus 2.65% at the beginning of 2021 (almost doubling). Speaking of housing data, it's not good. As I pointed out last week, the NAHB Housing Market Index is showing the the housing market in contraction.
Since October of 2020, New Home Sales are down 49%, while Pending and Existing Home Sales are each down 30%. The inventory of one family houses has reached the same level as 2008. The share of homes on the market with a price drop has reached between 50% and 69% in key market areas such as Denver, San Diego, Tampa, Boise, and Salt Lake City. The manufacturing data is equally troublesome. Last week, the NY Empire State Manufacturing Index plummeted into negative territory. This week, both the Richmond and Kansas City Fed Indices moved into negative territory. This morning, both Personal Income and Personal Spending were lower than expected and down considerably from the previous month. We are back into the cycle of "bad news is good news" as the market initially moved higher this morning. In Jackson Hole, Wyoming, however, Fed Chairman Powell has provided a hawkish tone while stating, "History cautions against prematurely loosening policy." Noted market strategist Michael Hewson commented before Powell's speech this morning, “The reality is that the Fed will want to be sure that inflation is falling at a sustainable enough pace before it signals any sort of dovish shift or pivot. This puts Powell in the rather tricky position of having to let markets down gently.” It seems each time markets ease higher, investors need to be reminded that there is no Fed pivot on the horizon.