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| U.S. CONSUMER SPENDING RISES: In May, U.S. consumers increased their spending by 0.3% from the previous month. May spending was 1.6% higher than May of 2022. This follows a 0.4% rise in April. Strong hiring and wage increases have been putting more money in consumers’ pockets. |
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| HOLD: The Federal Reserve Bank has raised its key interest rate during their last ten meetings, a period covering about 15 months. Last week, they met and did not raise rates. In announcing this, Chair Jerome Powell made it clear the the Fed is committed to battling inflation and to raising rates in the future if circumstances warrant. The Fed indicated that it envisions as many as two more quarter-point rate hikes before the end of the year. Said Powell, “We understand that allowing inflation to get entrenched in the U.S. economy is the thing that we cannot allow to happen for the benefit of today’s workers and families and businesses but also for the future.” I don’t think rates are coming down any time this year. Maybe next year. |
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| ECB RAISES RATES: On the other hand, the European Central Bank raised its key rate by 0.25%. |
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| FIVE WEEKS IN A ROW: The S&P 500 rose for the fifth week in a row, the longest such streak since late 2021. The NASDAQ Composite Index rose for the eighth week in a row. Investors are warming to the idea that the Fed can raise interest rates at the fastest pace since the early 1980s without tanking the economy. Consumer spending data (above) and the decision of the Fed to hold rates steady (for now) buoyed markets. |
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| LONGER-TERM PERFORMANCE: Below are the annualized three-year and five-year numbers for these same indices. |
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| A RESILIENT MARKET: It was just over a year ago that the Fed began raising rates, and they did so in ten straight meeting at a speed we had not seen since the Reagan administration. It was about a year ago that inflation topped out at an annual rate of 9.1%, and it has been 4.0% or higher since April of 2021. We’ve had a whopper of a banking crisis. And yet, the S&P 500 is now up over 20% in the last year and only about 8% away from the all time high. |
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| PAY DOWN DEBT OR INVEST IN GROWTH: U.S. companies are often faced with the choice of using cash flow to invest in growth or pay down debt. In the first quarter of 2023, interest costs for U.S. companies was 22% higher than a year earlier. Carnival Corp. amassed a lot of debt to get through the pandemic, and they are using substantial increases in free cash flow to “drive down our debt balances, alleviating interest expenses over time,” according the CFO David Bernstein. American Airlines saw its interest expense go from $463 million to $540 million. It is paying down its debt load significantly this year. |
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| CHINA FACES ITS DEBT ISSUES: For many years, China has used a massive amount of debt to finance projects ranging from bridges to apartment buildings. Total outstanding debt in the nonfinancial sector is currently about $50 trillion, about three times what it was ten years ago. Now China will have to face a protracted period of deleveraging, a process where borrowers prioritize excess income to go toward paying down debt over spending and investing. This slows economic growth. Total debt as a share to GDP is 295%, compared to 257% in the U.S. and 258% in the eurozone. Consumers, small businesses, and local governments are dramatically slowing their borrowing. After China ended its harsh COVID lockdown policies, China saw a burst in consumer spending, but that has slowed dramatically. Youth unemployment in China (ages 16-24) has risen dramatically to its current 20.8% rate. Japan faced a similar environment in the 1980s and 1990s beginning a long cycle of deflation and economic stagnation. China’s central bank has already begun lowering its interest rates, the opposite of the U.S. and Europe, and is considering other stimulus. |
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| IMPORTS: The cost of imports into the United States fell last month for the fourth time in five months, a good sign for inflation. |
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| INTERNAL MIGRATION: According to Bank of America data, Austin, Texas was the big winner in the internal migration race during the pandemic, and during the last four quarters. San Jose, San Francisco, New York and Boston are the biggest net losers. |
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| EXPLOITATION: According to an ABC News report this week, Zimbabwe has reported record sales of tobacco as it seeks to reestablish itself as one of the leading growers in the world. However, the local farmers are not benefiting. There is a contract system in place that locks the farmers into unfavorable loans and prices, usually with Chinese companies operating under China National Tobacco Corporation (CNTC), the largest cigarette maker in the world. CNTC loans seeds, fertilizer, food and money to the farmers. The farmers are obligated to sell their tobacco crop to CNTC which sets the price. 95% of Zimbabwe’s tobacco crop is financed through this system. Farmers often report that the loan terms are so harsh that each harvest season they are forced to sign another contract, effectively binding them for another season. The threat of losing their property hangs over their head. This sounds a lot like a medieval serf system. |
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| HAPPY FATHERS’ DAY!: From the moment my first son was born, I have loved being a dad. It’s a huge responsibility and challenge but worth every moment, the good and the difficult. I get to regularly spend time with my son and my son-in-law, both of whom are fathers of young children. I’m a father, so sometimes I can’t help giving advice (and telling great dad jokes). I recently told my son-in-law, father of my newest granddaughter, two things he needs to do to be a great dad (knowing that from what I could see so far, he’ll be a great dad without any meddling from me). I told him 1) love your daughters’ mom, and 2) make sure your daughter knows, no matter how busy you get, that you can’t wait to see her. |
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| PARENTAL TEAM WORK: When dining with my daughter and son-in-law recently, they did a good job of working together to feed a bottle to the baby while allowing Guido to continue drinking his ale. |
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Our mission is to help you see the objective, find the path, and navigate past the obstacles to a more prosperous future.
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Douglas R. MacGray, J.D., C.F.P. ®
President
Stonecrop Wealth Advisors, LLC
Direct | Cell | Fax
(610) 628 4545
dmacgray@stonecropadvisors.com |
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“Eat at a local restaurant tonight. Get the cream sauce. Have a cold pint at 4 o’clock in a mostly empty bar. Go somewhere you’ve never been. Listen to someone you think may have nothing in common with you. Order the steak rare. Eat an oyster. Have a negroni. Have two. Be open to a world where you may not understand or agree with the person next to you, but have a drink with them anyways. Eat slowly. Tip your server. Check in on your friends. Check in on yourself. Enjoy the ride.” Anthony Bourdain
“Therefore I tell you, do not worry about your life, what you will eat or drink; or about your body, what you will wear. Is not life more important than food, and the body more important than clothes?” Matthew 6:25 |
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SOURCES:
IMPORTS: https://gritcapital.substack.com/p/happy-opex-day-to-those-who-celebrate?publication_id=90117&post_id=128594940&isFreemail=false
HOLD: https://www.npr.org/2023/06/14/1181946330/taking-a-breather-federal-reserve-holds-interest-rates-steady-inflation-battle
ECB RAISES RATES: https://www.axios.com/2023/06/15/europe-inflation-rate-hike
PAY DOWN DEBT OR INVEST IN GROWTH: https://www.thewealthadvisor.com/article/us-companies-scramble-cut-costs-pay-down-debt-interest-rates-surge?WT.i_asset_id=Morning%20News%206-15-23&WT.mc_id=431&WT.i_dcsvid=dmacgray%40stonecropadvisors.com
U.S. CONSUMER SPENDING RISES: https://www.census.gov/retail/sales.html AND https://www.wsj.com/articles/us-economy-retail-sales-may-2023-c9ddefcb?mod=article_inline
EXPLOITATION: https://abcnews.go.com/International/wireStory/zimbabwe-reports-record-tobacco-sales-china-farmers-deep-100106946
CHINA FACES ITS DEBT ISSUES: https://www.wsj.com/articles/fueled-by-long-credit-binge-chinas-economy-faces-drag-from-debt-purge-e4621859?mod=economy_more_pos11 AND https://www.reuters.com/world/china/chinas-economy-slows-further-may-weak-demand-drags-2023-06-15/
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| (c) 2023 A.D., Stonecrop Wealth Advisors, LLC, All Rights Reserved |
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*S&P 500: This is a measure of the performance of the 500 largest companies in the United States, and it a common index to track the performance of U.S. equity markets, especially the large cap markets.
*MSCI All Country World Index X US: This is a broad measure of the performance of worldwide equity markets excluding the United States.
*Bloomberg U.S. Aggregate: This is a measure of the U.S. bond markets. |
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Investment advisory services offered through Stonecrop Wealth Advisors, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission.
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