Soapbox: Black Friday’s mixed signals

This year’s Black Friday and Cyber Monday – conventionally the days when consumers chase supposed bargains and spend, spend, spend – has sent some mixed signals this year. Those signals have added to the dilemma facing the Federal Open Market Committee (FOMC) when it next meets on 13-14 December; the FOMC sets US interest rates and it will need to decide if it has pushed rates up high enough, or more is needed to slow spending and help ease inflation of more than 8%. The meeting will be of especial interest as it is also due to give an outlook for the economy.

Forecasts before Black Friday differed. The US National Retail Federation (NRF) predicted that retail ‘holiday spending’ across November and December would grow by 6%-8%. Deloitte, the big accountancy firm, did a survey of 1,200 US consumers and anticipated a 12% rise in spending on the day itself over 2021. The marketing software company Emarsys, also basing its results on a survey of spenders, thought the day’s year-on-year rise would be even higher, at 16%. Given that the past 10 years have averaged an annual increase in spending of 4.9%, and that this year consumers have become spooked by rises in the cost of living, interest rate rises, and low levels of confidence, then anything above that 10-year average ought to be taken as another indication that the Federal Reserve needs to keep putting up interest rates in order to cool the economy. As for Cyber Monday, early reports suggest that spending hit a record $11.2 billion.

As it turned out, spending on Black Friday rose by just 2.3% over last year, setting a fresh record of $9.12 billion from on-line shoppers. In-person shopping rose by 2.9% year-on-year.

Doves & Hawks

As always statistics are open to divergent interpretations. Covid-19 vaccines have reduced the mortality fear this year, but the cost-of-living crisis has hit many households. Poorer households spend a proportionately higher amount, around 82%, of their income on basic needs, against high income households which spend two-thirds of their budget on basic needs. And incomes are failing to keep up with the rising cost of living. The Federal Bank of Dallas says that between mid-2021 and mid-2022 American workers faced the biggest decline in real (i.e. adjusted for inflation) wages in about 25 years. Yet in broad brush terms – which is all that economists have to go on – Americans still feel able to spend.

For the Federal Reserve this is a puzzle. Yet it shouldn’t be. Thanks to President Joe Biden’s astonishing largesse during Covid-19’s worst days, American household wealth surged by $20 trillion since the end of 2019, according to ING bank. Even though Americans are famous spenders, that sort of money takes a long time to get used.

The Federal funds rate in the US – which acts as a benchmark for everything else including business loans, credit card and mortgage rates – is currently 3.75%-4% after spending a year at 0% during the Covid-19 pandemic. The Federal Reserve has raised interest rates by 0.75% on four successive occasions; its chairman, Jerome Powell, has dropped plenty of hints that at December’s meeting it will raise rates again, this time by 0.50%. James Bullard, president of the Federal Reserve Bank of St Louis and a member of the FOMC, gave a very hawkish speech recently, in which he said the rate may have to rise to 5%-7% in order to stifle inflation. Loretta Mester, president of the Cleveland Federal Bank, has echoed Bullard; according to her the Fed is “just beginning to move into restrictive territory”.

There are doves (who don’t favour higher interest rates) on the FOMC, including Esther George, president of the Kansas City Federal Bank. She has said “I have not in my 40 years with the Fed seen a time of this kind of tightening that you didn’t get some painful outcomes”. The Federal Reserve is still walking a tightrope – raise interest rates too far and job losses will result and probably assets such as houses and stocks will drop in value; don’t raise them high enough and perhaps inflation will become ’embedded’.

Stagflation and China

It may seems a remote possibility at the moment, but stagflation still seems to us to be the biggest economic threat, and not just for the US.

Germany’s ministry for economic affairs and climate protection is certainly convinced that Europe’s biggest economy is headed for stagflation, a combination of sluggish economic growth and rising prices.

Rabobank in June this year dubbed the UK ‘stagflation nation’ thanks to what it called “many ‘American’ characteristics: rising inactivity, unemployment falling to as low as 3.8%, a high vacancy rate, recruitment difficulties and elevated pay pressures”. Catching the mood, the Swiss bank UBS joined in, saying in June that the Eurozone was headed towards stagflation.

And the world is not out of the woods as far as Covid-19 is concerned. A report by UNCTAD, the United Nations Conference on Trade and Development, reckons that global trade fell by some $2.5 trillion in 2020, 9% lower than 2019. While much of the world has adjusted to living with Covid-19, thanks to the roll-out of effective vaccines, China still has a policy of zero-Covid, shutting down cities, towns, factories on a single incident of a Covid-19 infection, even if the person is asymptomatic. Lockdowns keep springing up; Foxconn Technology Group, the Taiwanese company that operates Apple’s manufacturing hub at Zhengzhou in China, has lost thousands of workers who are fed up with lockdowns and quarantines, and has offered bonuses of some $1,800/month for workers staying at their job through December and January. The plant is likely to lose 20% of its expected sales in this quarter. Street protests in Beijing and other big cities have now started to call for an end to lockdowns and also for democracy. This will not be tolerated by President Xi Jinping, but such is the extreme level of surveillance in today’s China that the security services will be able to round up protesters at their home, rather than confront them on the streets.

China’s zero-Covid policy has disrupted the global economy. China is the world’s global manufacturer; according to the United Nations Statistics Division China accounted for more than 28% of the world’s manufacturing output in 2019.

Yet its zero-Covid attitude is in one sense understandable. China has 1.4 billion people, about 32 million of which are aged 80 and over. Of that group, only 40% have been given a (reputedly unreliable) Covid vaccine; millions of Chinese are, in other words, vulnerable to a potentially lethal virus.

The longer that China maintains its zero-Covid policy, the longer it will take for the global economy to rediscover its pre-Covid self, and the trickier it will be for the Federal Reserve to make up its mind about the direction of inflation. For although there have been signs that inflation may be easing, it may get a second wind if protests and work stoppages spread in China, upsetting supply chains once more.

On a precautionary basis, let’s suppose forecasts of stagflation (there are plenty of them around) are correct. The chart above suggests that gold is the best-performing asset in stagflationary periods. Between 1973 and 1975, gross domestic product (GDP) in the US declined in real terms, while inflation grew from 7.4% to 10.3%. Simultaneously, gold enjoyed a price growth of 73%, before doubling in value during another stagflationary period in 1979, when inflation peaked at 10.75%. Is inflation in the US dying, or will it persist at a high level into 2023 – when Americans may have finally exhausted their Covid-19 stimulus payments and the economy thus be poised for stagflation. Perhaps we will learn more when the FOMC next meets on 13-14 December.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.