December 6, 2024 – In today's Smart Macro edition of the Financial Sense Newshour, Chris Puplava provides his analysis on recent consumer and manufacturing data, noting a jump in both consumer confidence and auto sales. This, along with a look at our Financial Sense Wealth Management Stimulus Index, projects a manufacturing rebound through 2025, supported by lower energy prices and easing interest rates. As many of our prior guests have forecasted, should investors be prepared for an ongoing Roaring 2020s into next year or will rising inflation and interest rates spoil the party? Listen in as we discuss all of this and more in today's show.
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Discussed on today's show:
- Consumer Sentiment Hits 7-Month High, But Inflation Fears Divide Democrats, Republicans
- Car sales jump to 3 1/2-year high. Big incentives for buyers are back.
- Manufacturing activity jumps ahead of Trump's second term: ISM
FSWM Stimulus Index and ISM Manufacturing
Transcript
Cris Sheridan:
Well, today we're going to look at the recent consumer data that just came out, as well as our Financial Sense Wealth Management Stimulus Index and what that is projecting for the manufacturing sector, and then also discuss two competing scenarios that we may be looking at for the second half of this decade. Whether or not that is going to be a continuation of the "Roaring 2020s" thesis, as many of our guests have suggested, we'll see, or a stagflationary ’70s and the way to navigate that moving forward. Joining us on Financial Sense Newshour for today's Smart Macro Edition is, as always, our Chief Investment Officer Chris Puplava. So, Chris, what are we seeing from the U.S. consumer front? And of course, let's point out that consumer spending drives nearly 70% of U.S. GDP. So, the consumer is obviously very, very important to take a look at when we think about the future outlook.
Chris Puplava:
What we got today was the University of Michigan Consumer Sentiment Index, and this is the preliminary reading for December. They do have additional readings that come out when they have their final numbers in, but they provide a couple of releases. And what we just got today was the preliminary for December. The prior number was 63.9, and for the current Economic Conditions Index, what we got for December was 77.7. So this was roughly a 14-point jump over November's survey. Economists were expecting a modest increase from 63.9 to 65.2. The actual was 77.7. So this was a massive jump—one of the biggest single monthly increases we've seen. And again, you know, what happened from November to December? Obviously, the election. So it'll be really interesting to see if this carries forward into January and subsequent months. But it's really encouraging to see such a boost to confidence because that's obviously huge for consumer spending.
Cris Sheridan:
What are we seeing from the Financial Sense Wealth Management Stimulus Index that you've created, and also with the manufacturing data?
Chris Puplava:
Currently, what we're basically tracking is monetary policy abroad and domestically in the U.S., because essentially what helps to boost an economy is when you lower taxes and you have more monetary stimulus. You can measure that through a decline in financing costs for the economy with a decline in interest rates. So typically, when you see interest rates fall, that tends to boost economic growth down the line. Conversely, when interest rates rise significantly, that generally cools economic growth, particularly manufacturing.
Secondly, there's the tax on the economy from energy. Energy filters into everything in terms of all sorts of costs and inputs. So when energy prices are rising, that's a tax on the economy and it slows it. And when energy prices roll over, that is actually a tax cut on the economy. When you look at energy prices, they remain relatively low, particularly compared to 2022. Most central banks are still cutting interest rates. So we’re already sowing the seeds of a recovery. The question is the timing of when it starts to manifest.
When you look at the S&P Global PMI for manufacturing, that's at 49.7. So we are literally a whisker away from 50. Anything above 50 denotes growth. So we're almost getting back into growth after being in contraction since early 2022. We’ve been in a manufacturing recession for over two years now. When you look at the ISM PMI, that came in at 48.4. So that also is not that far off from moving back into expansion territory. That surprised the consensus survey, which was looking for a lower number. So we are seeing improvements in manufacturing. When you look at the stimulus from short-term rates plus the decline in energy prices, I think we’re going to continue to see that. I would not be surprised if, let’s say, by January, we're in full-blown growth mode or back into growth territory in manufacturing—whether you're looking at the S&P PMI or the ISM.
Cris Sheridan:
And if I look at this Stimulus Index again, that is projecting a rebound in the manufacturing sector. That's what you've been telling us on Smart Macro. So the data is now starting to align with that. It does appear as if we've probably put in a trough, both on the global manufacturing data and on the ISM U.S. manufacturing data and the stimulus.
Chris Puplava:
The index I created is projecting that this recovery will continue throughout the entire year of 2025 and into the first half of 2026. These are typically long-leading indicators, and they give us a pretty good lead time toward swings in manufacturing. So I think this is literally just the beginning of a recovery in manufacturing that should continue further.
Just as I mentioned that consumer sentiment broke out, related to consumer sentiment and also manufacturing are auto sales. Auto sales are a huge cyclical part of the economy. When you look at U.S. auto sales—and we get those monthly, but they annualize the numbers—the numbers for November, the survey was for 16.1 million vehicles sold. It came in at 16.5, so almost half a million more vehicles were sold.
The reason why this is a really key number is we have seen a peak in auto sales for the last two years. There wasn’t a single month that annualized north of 16 million in 2023 or even this year. So we were basically stuck at that level, just idling around 16 million annualized sales per month with the monthly data. And we came in at 16.5. This is the highest amount of vehicles sold since the middle of 2021. So we’re talking about a three-and-a-half-year high of a breakout in auto sales.
More auto sales mean a boost to manufacturing. It means those inventories on dealerships are being worked through, and they’re going to have to place orders with manufacturers to produce more autos. So that means we could see industrial production in the automotive sector pick up and obviously boost manufacturing overall. I think we’re just starting to get some traction, Cris, on the upside for the economy, which again is why our firm was cautious and defensive last year. We have thrown that caution aside and are actually outright bullish, believing the economy will see a pretty nice uptick here in the coming months.
Cris Sheridan:
All right, so again, we’ve seen the Consumer Sentiment Survey’s preliminary data come in shooting positive. That’s a good sign. The Stimulus Index that you’ve discussed is also projecting a rebound in the manufacturing sector. The data does seem to align with that view. You also mentioned increasing auto sales. That’s also a very good, leading indicator for the economy—highly cyclical. So those are a number of things that we’re looking at here.
Let’s talk about a potential scenario that we’ve discussed a number of different times on the show. Many guests have given a "Roaring 2020s" thesis for the stock market. We’ve seen that over the first half of this decade. Ed Yardeni and a number of other people we’ve spoken with on our show believe that’s going to continue through the back half of this decade. However, we’ve also discussed with a number of other guests this stagflationary ’70s-like scenario, where you see higher-than-average inflation and compressed growth.
Chris Puplava:
Well, I can certainly understand that backdrop in thought in terms of a productivity boom and just an overall surge in growth. The problem that I have, Cris, is when you look at things in terms of, okay, what was the ultimate platform and foundation from which that growth began? When you simply look at leverage—how leveraged was the economy? How susceptible was it to spikes in interest rates?
Inflation in the 1920s, Cris, came after the end of World War I. U.S. debt-to-GDP was roughly around 30 to 35%. That was the peak at about 1920, and it continued to decline all the way until we hit the Great Depression in 1930 at a low of 16%. But throughout the 1920s, we saw a boom where the economy was growing faster than our debt growth. So we saw a reduction in debt-to-GDP. Given such a low level of 20 to 30% debt-to-GDP, the economy really wasn’t impacted by a spike in interest rates—at least at the federal level.
Then, obviously, we had World War II, where debt-to-GDP saw a huge surge north of 100% in terms of total public debt-to-GDP. That subsequently declined into a bottom in the 1980s at around 30%. When you look at where we are today, we are well north of those levels we saw in the 1920s, as well as even World War II. We have to bear that in mind. You know, we could be susceptible to strong growth. We could have a situation where too much of a good thing is a bad thing because strong growth means higher interest rates and higher inflation. Given our debt levels, we may not be able to sustain strong growth.
We may not want a "Roaring Twenties" because that could push rates too high. Going into next year, one of my biggest concerns is if long-term interest rates in the U.S. economy begin to tick up, that will basically kill any recovery in housing. That could really start to hurt the rebound we’re seeing in manufacturing. If you’re financing an automobile at 6–7%, you may not be able to refinance, lease, or buy at 9–11% interest rates for auto loans. That is definitely something to bear in mind, and it could be a huge limiting factor to any Roaring Twenties-type scenario.
Cris Sheridan:
So again, a large part of that is going to have to do with whether or not we see an ongoing productivity boom. That was what Ed Yardeni had said—that we have seen an increase in productivity, and he believes that’s going to continue here in the U.S. He’s doubled down on that thesis in light of Trump winning the election, given the deregulatory, pro-growth, low-tax policies that he’s going to be implementing. So those are some important factors. But again, it sounds like a lot of this is going to depend on whether or not that productivity can keep inflation down.
Chris Puplava:
That’s absolutely correct, Cris. I mean, in the 1920s, the U.S. could have doubled our debt relative to the economy and still not be anywhere close to where we are today. Can you imagine doubling the U.S. debt? We’re talking about adding another $35 trillion. There’s no way we could afford that.
The problem, and something I think will actually happen next year, is we have so much debt. We have just too much of it. The supply of U.S. Treasury debt is so large, and the demand is dwindling. Our biggest creditors right now are hedge funds. How is that healthy? So that’s another concern of mine and a prediction I’m making: I believe at some point next year, the Fed will not only stop shrinking its balance sheet, but I think it will do a reverse, like it did in 2019 with the repo crisis, and be forced to step in as the buyer of last resort. It may start buying government debt to cap interest rates from moving too high and, more or less, basically function as some sort of yield curve control.
Cris Sheridan:
So as we close, what are we doing currently in client portfolios, broadly speaking, and what are some of the things that you think our listeners and clients should be keeping in mind for our approach for the second half of this decade?
Chris Puplava:
Well, I think—and I agree with what other people have said, particularly Felix Zulauf, who made this prediction years ago, I think back in 2022—he said this whole decade, going into the early 2030s, would be a horrible period for buy-and-hold investors but a great decade of volatility, which is a ripe environment for traders. I think he’s absolutely right, and he’s been proven right.
When you look at the volatile swings we saw in 2022—the ups and downs—I think we’re going to continue to see that. The reason for that is the debt. There’s so much debt that basically the economy starts to grow, and it gets into trouble when rates get too high. It causes disruptions, bankruptcies, and defaults. You get a downturn, the central bank comes in, stimulates to save the day, and then pushes it up higher again until it gets to that point where rates get too high again. Wash, rinse, repeat.
So I do feel that buy-and-hold is dead, in my opinion. I think you’re going to continue to see this kind of boom-bust cycle period for at least the next five to ten years.
For right now, our firm is bullish. We’ve definitely stepped up our risk. As mentioned, mid-year we were more neutral. We’re now pushing a more aggressive stance on the market. But at some point—likely early to mid-next year—we’ll dial that risk back because I do think we’re going to be prone to a spike in interest rates and inflation that could cause the market to cool off a bit and have a correction. For now, we are bullish, but I’m not seeing anything yet to signal that rates are moving into a period that would cause some market disruption. But that’s definitely something we’ll be looking for.
Cris Sheridan:
And of course, along those lines, one of the key things to look at is not just the Stimulus Index that you’ve created, but along with that is liquidity. That was something we discussed with Michael Howell on FS Insider a couple of weeks back—on that being the "secret sauce" that drives markets and the economy.
So, if you’d like to take a look at the Financial Sense Wealth Management Stimulus Index again, how that correlates to the manufacturing sector, and some of the other things when it comes to liquidity and how to navigate the markets, we will have a series of links that you can click and charts that you can look at where this interview is located at Financial Sense.
But as we close, Chris, if any of our listeners would like to get in contact with you to come on board with Financial Sense Wealth Management—obviously, we provide comprehensive financial planning and asset management. We’re mainly geared toward high-net-worth investors but are willing to speak with anyone that’s out there. If they’re listening today, what would be the best way for them to get in contact with you?
Chris Puplava:
They can email me at chrispuplava[at]financialsense[dot]com, or they can give me a call at 888-486-3939.
Cris Sheridan:
Well, Chris, always a pleasure to have you on the show, and we look forward to speaking with you in another two weeks.
That concludes our weekend edition of the Financial Sense Newshour. To speak with our financial planning and wealth management team, give us a call at 888-486-3939, or you can also visit us on our website, Financialsensewealth.com. If you aren’t already a subscriber to our weekday podcast and would like to listen to more of our content, where we regularly interview book authors, industry experts, and market strategists from around the globe, go to financialsense.com and hit the subscribe button. On behalf of Financial Sense NewsHour and the Financial Sense Wealth Management team, we hope you have a pleasant weekend.
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