“The relationship between the environment, resources and conflict may seem almost as obvious as the connection we see today between human rights, democracy and peace.”
– Wangari Maathai
When I learned that my colleague Neil Howe’s new book is coming out in July “The Fourth Turning is Here,” I started thinking about Fourth Turning events and triggers. One area front and center in my mind is the rising cost of food around the world. Everyone has felt the increase.
For me, it's my big bag of chips that's actually 75% air, and my McDonald's Big Mac meal (Dr. Pepper no ice) which now costs me ~$13. This meal used to cost under $10. Let’s not forget this isn't $13 dollars for a burger at a nice restaurant. This is $13 dollars for the lowest quality food that you can get. This impacts lower income people tremendously.
Just look at the obesity problem. People living in poverty have a higher chance of becoming obese than their financially better off counterparts. For most Americans living paycheck to paycheck, there's an understandable reliance on these cheaper, lower-quality foods.
The vast majority of us fortunate to work on Wall Street are disconnected from the way most of the country lives (forget the rest of the world). 11.6% of people in the US live in poverty which is an income of $35,801 with the median household income in the US being $67,521. Junior bankers at Bank of America, Morgan Stanley or Goldman have starting salaries of ~$100,000 and 57% of Wall Street Bankers make between $92,971 and $147,343.
Whether you like it or not wars, violence, unrest begin over resources. Specifically, when people can’t afford bare essentials like Food. This increases the probability of unrest among a nation's citizens.
Back to the Global Macro Grind…
Let’s get into the numbers because I believe that the mainstream media has been massively misrepresenting the most recent inflation data. Your typical headline reads something like this: “Inflation decelerates to +6.4%.” This is also the headline you will see on non-financial news as well (what goes to main street)!
This headline couldn’t be more disconnected from the truth.
Let’s not forget that an inflation rate of +6.4% YoY is the highest rate since 1982. But more importantly, for people living paycheck to paycheck, CPI going from +9.1% to +6.4% means nothing. What matters is that real average earnings have been negative since April 2021. Also to put some numbers on who lives paycheck to paycheck: it is said that 63% of Americans are living paycheck to paycheck, 45% of those making more than $100,000 say they live paycheck to paycheck; 47% of those making between $150,000 and $200,000-a-year; and 28% of those making over $200,000. I think it is safe to say, if you are making the median household income of $67,521, you are living paycheck to paycheck.
Even more importantly, we need to remember where we came from, and how looking at a one year number misrepresents what people on Main Street experience every day. For this let’s introduce the Chart of the Day below. Looking at 37 countries, the average inflation rate is +10.6% YoY, but the average cost increase since 2021 is +20.9%. Your Average hourly earnings since 2021 is up +5.1%. This is good for real earnings of down -15.8%. This is US real earnings, countries less affluent (most) are much worse off. Think about it as the US has median income (micro), then the entire world as a whole has a median income (macro) and the US is in the upper percentile when looking at the rest of the world.
But the issue doesn’t stop there. There are a lot of non-essential cost baked into those numbers. One area people care about a lot is the cost of food. While I have been reading through inflation reports from every country, the current main driver keeping inflation sticky high is food prices. Yes I am aware that fertilizer cost, which lead Food at Home cost by ~5m have been coming down since Sep 2022 which means we are approaching peak RoC food prices. But this Early Look isn’t about the headline number, it's about what everyday people feel when going to the grocery store.
So what are people feeling? They are feeling the third line (black bar) on this graph. This is the price of food in each country since 2021. The cost of food has been outpacing headline inflation.
On average, food inflation is up +26.2% since 2021.
One of the most notable countries on this list is Germany (4th largest country by GDP) where food inflation is +29.7% since 2021 and real earnings within Germany are down -3.7% YoY (negative since Sep 21). Also, two countries not on this graph (due to killing my formatting) are: Turkey, headline inflation of +57.7% YoY, headline inflation up +138.4% since 2021 and food inflation up +172.7% since 2021: Argentina, headline inflation of +98.8% YoY, headline inflation up +211.7% since 2021 and food inflation up +212.9% since 2021.
The next layer to this is adding the CPI-PPI divergence Z-Score to see which countries will continue to have the most upwards pressure on CPI (the basic premise is that PPI leads CPI as there is a lag from producers passing on price increases to consumers). The countries with a Z Score above 1.0 are: USA, Eurozone, Germany, UK, France, Australia, Netherlands, Norway, and South Africa (3 of the 5 largest countries by GDP are on this list). To get a sense of how long the process of lowering your divergence takes: the U.S. had a Z Score above 1.0 in Mar 21 with a peak Z Score of 4.0 in June 22 and a current Z Score of 1.0 (Jan). For China, they went from a peak Z Score of 3.1 in Oct 21 to a sub 1.0 Z Score by Jul 22, although to accomplish that they also shut down all demand via lockdowns.
In other words, this issue will remain with us for some time.
One question Keith has been asking is how does this data relate to the overall cycle? The answer is simple. What matters to people is not the headline inflation number, it’s their real earnings. As that number remains negative across the world, consumers are going to continue to get squeezed. As consumers get squeezed, the most essential product, food, gets harder to afford. When people struggle to pay for their bare essentials, the potential for your "black swan" events increases i.e. civilian unrest, inter-country tension, revolutions, and violence.
In terms of high frequency data this morning, I’m keeping it light. This morning we are waking up to US futures up +0.2% while Bitcoin is down -4.5%. Crude Oil down -0.63%, US Nat Gas +1.8% vs UK Nat Gas -3.3%. Real Time Alerts has 1 long to 4 shorts with 2 of those shorts being energy related.
The VIX is at the low end of the range, but let's see what 0DTE has in store for us today. $ITA is at the upper part of its range. The SPX has a pretty even fight of upside to downside with the downside potential having the slight edge. Bitcoin has downside potential of 8.0% vs upside of 6.3%. Crude Oil has downside of 5.9% vs upside of 1.2% and lastly Nat Gas has downside of 37% vs upside of 4.2% (also remains one of the most volatile assets in all of macro).
- China Services PMI comes in as an acceleration of 55 vs 52.9 last month.
- Singapore $EWS retail sales come in as a large MoM deceleration (-9.4%) and -0.8% YoY
- Largest MoM drop since May 20
- Eurozone Services PMI remain elevated while the Manufacturing PMIs remain negative and diverging.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.83-4.05% (bullish)
UST 10yr Yield 3.79-4.10% (bullish)
UST 2yr Yield 4.57-4.96% (bullish)
High Yield (HYG) 73.03-74.71 (bearish)
SPX 3 (bearish)
NASDAQ 11,192-11,732 (bearish)
RUT 1 (bearish)
Tech (XLK) 133-139 (bearish)
Defense (ITA) 114-118 (bullish)
Utilities (XLU) 63.51-66.91 (bearish)
Shanghai Comp 3 (bullish)
DAX 15,162-15,550 (neutral)
VIX 19.02-23.46 (bullish)
USD 103.59-105.54 (bullish)
EUR/USD 1.052-1.070 (bearish)
Oil (WTI) 73.67-78.83 (bearish)
Nat Gas 2.05-2.99 (bearish)
Gold 1 (bullish)
Copper 3.94-4.27 (bullish)
Silver 20.45-22.18 (neutral)
TSLA 182-211 (bearish)
Ryan Ricci
Macro
