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J.G. Collins
Summary
- First quarter GDP growth rate disappoints at 1.6%, below consensus estimates of 2.5%.
- Core PCE exceeds market expectations at 3.7%, above the Federal Reserve's target of 2%.
- The possibility of stagflation arises as economic stagnation and inflation are observed.
- An array of "gray swans" enhance downside market risk.
NEW YORK (April 25) - Gross Domestic Product, or GDP, for the First Quarter of 2024 ("2024Q1") printed this morning at a disappointing 1.6% rate of annual growth. Consensus estimates had put the figure at 2.5%. The print was 40 bps below the lowest point of our range of 2.25% (+/-25 bps)
At the same time, Core PCE (Personal Consumption Expenditures, which excludes food and fuel) printed at an aggressive 3.7% for the first quarter, above market expectations and some 170 bps above the Federal Reserve's target of 2%. The two figures raise the prospect of "stagflation," the portmanteau born of the Carter Administration's dual crisis of economic stagnation and simultaneous inflation. However, Investor's Business Daily points out that:
The price for portfolio management and investment advice services surged at a 31.8% annual rate in Q1. If not for that, the core PCE price index would have climbed 3.2%.
The disappointing GDP print, together with the weak-than-expected guidance from Meta Platforms (META), the inflation print, and the declining likelihood of a rate cut caused most indexes to fall more than 150 bps at the open. The 10-Year (US10Y) spiked about 10 bps on the morning news.
Let's look at the major components of 2024Q1 GDP:
Personal Consumption Expenditures ("PCE"), and the traditional champion of GDP growth, was the most disappointing of the four major components that make up GDP, printing at just 1.68%, compared to an average over the last 8 quarters of 1.53%. The PCE breakdown was overwhelmingly for services, as illustrated below:
The other big hit to anticipated GDP results was Net Exports ("NEX"), which printed at -86bps.
ANALYSIS & PROGNOSTICATION
Today's GDP print is only a snapshot, not a trend. It is too early to declare stagflation is upon us, but there is certainly enhanced risk as we see increasing evidence from forward earnings reports that sales are slowing despite enormous fiscal stimulus and sanguine hopes that it would restore pre-pandemic growth.
Simultaneously, we are seeing increased inflation. Taken together, were both conditions to continue to form a pattern, the pattern would be the definition of "stagflation."
But we don't know, for sure yet, if these circ*mstances are acute or the first instance of a chronic condition. The inflation is especially troubling given China's current condition whereby its excess capacity is effectively "exporting" disinflation, and even deflation, around the world. That likely means that goods inflation is substantially higher, in the aggregate, than is currently presumed.
We will need to wait until, perhaps, the third quarter print to see whether a pattern is discernible. At now, we put the likelihood at 70%.
"Grey Swans"
Grey Swans, our term for foreseeable severe disruptions of the national or global economy (to distinguish them from better known "black swans," which are, by definition, not foreseeable) continue to proliferate.
- The Israel-Hamas war, while seemingly contained after a tit-for-tat exchange between Israel and Iran, Hamas' sponsor, earlier this month, the matter could erupt again at any time, with the risk of threat to the Straits of Hormuz and Suez and even a wider Israeli/Arab war (Iranians are Persians, not Arabs).
- De-dollarization (Case A) a concern of ours for some time, likely to accelerate, particularly among the BRICS+ given the passage, last week, of legislation that will allow the Biden Administration to seize ownership of Russian financial assets in the U.S. to give them to Ukraine.
- De-dollarization (Case B) is also a concern as Secretary of State Antony Blinken contemplates sanctions on Chinese banks in the US for what the US believes is China's dealings with Russia in "dual use" technology (i.e., products that have military and civilian applications.) While there are no immediate plans to impose these sanctions, the threat enhances a dangerous risk of a "tit-for-tat" that would seriously affect global trade.
- Troubled clearings of Treasury Auctions - these sanctions, together with the enormous and increasing levels of debt, and no discernible plans by the White House or Congress to address spending or taxes, may cause the bid/ask on U.S. Treasuries to mismatch as demand decreases so that rates increase. This happened in November 2023 when a lack of demand caused an auction of the 10-Year Treasuries failed to clear, causing rates to increase. The risk is that rates could go out of control, causing a recession/depression.
- A large municipal bankruptcy could occur because several major cities are stressed by the influx of newly arrived immigrants who have no means of support. Cities' payments to provide for the newly arrived immigrants are enormous and unexpected.
- Civil unrest, and the potential for it to spread, is evident in the many protests about the Israel/Hamas war. Some of the protest leaders are anarchic Marxists hoping to leverage opposition to Israel's defense into a wider social uprising.
2024Q2 Prediction
We think the consumer demand will continue to be restrained and that we are at the first step of the "stagflation" pattern described above with about a 70% probability. The Fed is unlikely to affect any change in policy before the election (because, yes, the Fed is political, protestations to the contrary notwithstanding). We have preferred for some time now that the Fed step-up QT to better constrain inflation, but we see no evidence from board members that they are willing to do so.
MARKET SECTORS OF INTEREST
LONG: Consumer staples. Healthcare. Insurance.
SHORT: Regional banks, "Green" industrial companies, and ESG funds. "Magnificent 7." Consumer discretionaries.
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Note: Our commentaries most often tend to be event-driven. They are mostly written from a public policy, economic, or political/geopolitical perspective. Some are written from a management consulting perspective for companies that we believe to be underperforming, and include strategies that we would recommend for the companies of our clients. Others discuss new management strategies we believe will fail. This approach lends special value to contrarian investors to uncover potential opportunities in companies that are otherwise in a downturn. (Opinions here regarding whether to buy, sell, or hold such companies, however, assume the company will not change its current practices.)
J.G. Collins
Before establishing The Stuyvesant Square Consultancy, J.G. Collins spent some 30 years building a career in executive and consulting financial roles, with a particular emphasis in business taxation. His experience spans work for Fortune 100 companies, one of the former “Big Eight” international accounting firms, and client service for large middle-market public accounting firms. He has advised domestic and foreign clients in the tax-efficient structuring of legal entities, effective tax rate planning, mergers and acquisitions, corporate reorganizations, treasury operations, financial instruments, international taxation, tax accounting under GAAP, state and local taxation, and sales and miscellaneous taxes. He has managed countless federal and state tax audits to successful resolutions for clients. His experience spans a diverse array of industries, including private equity, motion pictures and music entertainment, fashion, real estate, publishing, technology development, retail, and oil and gas. Mr. Collins conceived and branded the specialty industry entertainment practice of one of the nation’s leading accounting firms and oversaw the business tax marketing program for business enterprises of another large regional firm. Mr. Collins’ marketing collateral and published articles have been extraordinarily well received because of his ability to present intricate and complex aspects of tax, business, policy, and politics in clear, concise, easily understandable prose devoid of jargon and irrelevant detail. An astute, data-driven observer of business, politics and economics, Mr. Collins has advised political candidates and public officials on campaign, political and policy matters for more than two decades, and has twice been a delegate to his political party’s national quadrennial convention to nominate the American president. His expertise as a champion debater and orator in his student days, along with his savvy marketing expertise, has allowed Mr. Collins to coach private and public sector executives and candidates on public speaking, speech writing, message development and successful business presentations. Campaign collateral he developed for political campaigns has been used in university courses as an “excellent example of persuasive campaign advertising”. Mr. Collins holds degrees in Economics and Accounting from the Stern School of Business, New York University. His elective coursework included a number of political science courses, including International Politics, International Organizations, European Politics and other more basic political science courses.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
The views expressed, including the outcome of future events, are the opinions of the firm and its management only as of April 25, 2024, and will not be revised for events after this document was submitted to Seeking Alpha editors for publication. Statements herein do not represent, and should not be considered to be, investment advice. You should not use this article for that purpose. This article includes forward-looking statements as to future events that may or may not develop as the writer opines. Before making any investment decision you should consult your own investment, business, legal, tax, and financial advisers. We associate with principals of Technometrica on survey work in some elements of our business.
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