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Weekly Economic and Stock Market Commentary: August 1, 2022


As for the stock market specifically:

The heat of July fed the bulls and put the bears into hibernation. July 2022 was the strongest July since 1932. Each of the major market averages rose about 10% for the month. The earnings reports out so far this quarter is mixed. It was as if those who throw around big money decided the selling was overdone (S&P reached 70% oversold!), and they decided to pile into the buy-side (now 20% overbought, so don’t be too surprised by a pullback).

Nevertheless, the major market averages remain down substantially for the year. There has been some improvement in relative strength, but not enough to ring the “all-clear” bell. The bond market is showing strength, with interest rates down a good amount since early June.

“Our friends in Washington” decided to have a couple more parties at our expense. The Spending Party, which describes itself as the “Investment Party,” decided to turn a $52 billion dollar program for semiconductor manufacturing (a debatable proposition) into a $300 billion program with a multitude of programs that may or may not be of substantial value. I am putting my money on little to no substantial value. In a way that only “our friends in Washington” can do, they used the same bill to promote and inhibit simultaneously the same industries. Yes, you read that correctly.

A day or so later, the Senate announced “a deal” regarding what used to be the Build Back Better plan the administration proposed last year. This deal now is called the Inflation Reduction Act of 2022. We should hope that this bill if it becomes law – as it likely will – has more success than the countless laws over the past 50 years with similar names regarding balancing the budget.

The promoters say this bill is “responsible” because it has $300 billion in tax increases in it over a 10-year period. I did a little bit of math and, that averages out to $30 billion of taxes each year in an economy of about $17 trillion, or about 0.2%.

That brings us back to Rongo’s Rule of Tax Increases. Rongo’s Rule of Tax Increases suggests that the Spending Party will “invest” $1.32 for each dollar of new revenue. Of course, that isn’t spending, but investing.

The unanswered question by “leaders” is how much investment does the economy need to overcome the deficits of the prior investment?

As part of the Inflation Reduction Act, there are subsidies for certain activities, but there also are rules in the bill that restrict activities that qualify for subsidies. Go figure.

Overall, the pending Inflation Reduction Act has approximately $600 billion in new spending, with the aforementioned $300 billion in taxes.

Another kicker I learned this morning is once again the spending is front-loaded, while the taxes come later.

As for inflation reduction, I believe the inflation rate will go down over the next few months – and will accept being proven wrong if the opposite occurs – simply to the normal reactions of people to the increasing prices we experienced over the past 18 months. Stated simply, Americans will pull in their own reins of spending. The market will thus establish new equilibrium points for goods and services.

The buyers pushed the bullish percent levels significantly higher during the week. I continue to recommend WEALTH ACCUMULATION, but be very careful.

Remember, Xs mean OFFENSE or wealth accumulation, while Os mean DEFENSE, or wealth preservation.

Below is where our indicators stand as of July 29, 2022 (Courtesy Dorsey, Wright, and Associates).

On a general note:
The Department of Commerce announced its first read regarding economic output during the 2nd quarter. The Gross Domestic Product declined by 0.9% during the quarter, well below the anticipated estimate of 0.5% growth. This number will be revised in August and September, but it wasn’t good. As it is defined by normal people, we are in a recession. For those who have advanced degrees in finance and/or economics, “We are in a transition period from strong growth to sustainable growth.”

The reality is that growth transitioned from a strong growth period (expansion of a low base of 2020 and early 2021) to going backward – also known as receding, or the action verb form of recession.

The recession is coming at a time of high inflation. In economic terms, that is known as stagflation.

The Federal Reserve met last week and announced an increase in short-term interest rates of 0.75%. They anticipate raising rates to approximately 3.00 – 3.50% to combat inflation.

Quite frankly, I wouldn’t want to be a central banker at this time. They are stuck with the dilemma of raising interest rates to slow the economy further to defeat inflation or keep interest rates steady to resuscitate the economy with the typically accompanying inflationary pressures, not to mention the above-discussed multi-hundred billion spending bills. I wish only the best of luck to Mr. Powell (Jerome Powell – Chairman of the Federal Reserve).

Want to talk? Email me at philip.rongo@ibexwealth.com.