We're Screwed: The Next Inflation Shock Just Started

The next inflation shock has just started as ocean container freight costs explode, now rivaling covid era highs. Now over the weekend Bank of America's retail analyst Lorraine Hutchinson warned in a note on Saturday that ocean freight rates have jumped 201 percent. This is approaching the 250 percent spike seen back during the 2021 container ship shortage where we saw the consumer price index go straight up. Now let's take a look at the research note here because let's go back to May of 2020. This is right where the CPI bottom and you can see the year-over-year freight rate took off and then hovered somewhere right around 240 some percent. Now keep in mind there was a red sea crisis that happened a little bit later but this didn't impact consumer prices for good I want you to see is what we're facing right now at a 201 percent increase is likely to parallel what we saw post pandemic and what this is going to do over the next several months is feed right into consumer prices. Now let's take a look at the CPI because I want you to remember that May of 2020 again that was the bottom of the consumer price index and on top of the energy shock what happened we saw consumer prices rise and the CPI got all the way above eight percent year-over-year and now the problem is we're facing this again but the issue is this isn't going to happen for the next couple of months because today we're facing gasoline and diesel this is impacting consumers today. We could already see on the horizon that food prices are going to rise and then in a double whammy the shipping costs are going to hit because according to Hutchinson she says most contracts are set in the spring but we're watching this for those using spot rates as a potential headwind for 2027 and if this continues through fall and winter and I want to suggest that based on everything we're seeing right now this is highly likely that we're going to see energy costs stay up shipping costs stay up look at what's about to happen these higher shipping costs could intensify inflationary pressure squeeze corporate margins and weaken growth and together these factors raise the risk of broader economic shock particularly if diesel prices remain elevated and based on all data it tells us that's highly likely because of the global shortage but let's pick this report apart because she said look this could be really negative for corporate profits but look at this post pandemic they shot up but there's a good reason they did and this is unlikely to happen again so if you're thinking this could be bullish for the stock market hang tight because when you overlay average hourly earnings of production and non-supervisor employees in red against that earlier chart of the consumer price index what was enabling consumers to afford higher prices well they had money from covid they had rising wages and that transmitted into rising consumer profits but today the exact opposite scenario is happening when we take a look you can see average hourly earnings are in a continued decline and expected to further drop so at this stage if we see consumer prices rise what we can face is a massive shock to the economy one that consumers can't handle but it's not just stopping it's shipping let's take a look because beyond container rates because beyond container rates the baltic dry index which tracks freight rates for several vessel classes including cape size panamax and supermax vessels has all jumped to december 2023 highs so you can see that red sea spike it got reversed very quickly where you're seeing a steady build here in rising prices due to the global energy shock that is likely to remain sticky and what the issue at hand is it takes a couple of months for this to pass through to consumer prices but once it hits what are we likely to see prices going up we're going to see a lot of those extra energy surcharges show up and for consumers it's the worst possible thing at the worst possible time and throw the stone shipping analysts validate this as they say the current surge in shipping is something of a perfect storm with vessel supply tightening and demand firing in both basins at the same time and this is why we saw from bank of america they said very clearly this could lead to a broader economic shock particularly if prices stay elevated because consumers at this point cannot afford higher prices and when consumers can't afford higher prices it opens opportunities in the market now you may remember yesterday i pointed out this is trade setup that we showed all of our subscribers now i didn't tell you the symbol because you can get it for absolutely no charge right now and look at this would you have picked up this trade now we told our subscribers to buy in the open right here and what did we cite a rising nine day rising 21 day and a flattening 50 day moving average right where there was volume support and the price has gone up now breaking through its 100 day moving average today on its way to the 200 day with an upside target right here at that red line that's a volume profile and these are trade sets that we're looking for each and every day for subscribers and here's the best part you could join in too and we make it so easy i give you the symbol i tell you exactly when to buy it and i give you every risk control level you need now it's so easy i won't want you to miss out on trades like this all you have to do is grab that link description below use a coupon code for your free 30-day trial and get in there with us and start making money in the market i'll see you there and what we're facing as we head into 2027 is that a prolonged freight price shock could carry today's shipping squeeze all the way into next year contracting the cycle exposing businesses to higher transportation costs and increasing pressure to pass those costs on to consumers at a time we are hearing from more and more businesses particularly the small and mid-sized businesses saying look we cannot absorb any more costs we're passing every penny on setting up the stage here where consumer prices could start to climb rapidly and we're already seeing signs of this spilling over into other parts of the transportation sector old dominion announced on monday that they're pulling forward a 4.9 percent gri as ltl carriers are accelerating rate hikes and what this means is that percentage increase represents an expected average of adjustments to base rates across different lanes and weight classes the increases are used to offset cost inflation and fund capex projects but it's not just old dominion we've seen now other carriers are saying yes we're coming in line with increases somewhere around five percent and again remember those fuel surcharges that showed up from fedex and dhl and ups well they're coming again because these freight costs are going to be directly passed on consumers and the issue is they're likely to go higher because the average nationwide prices have now risen to 651 a gallon for diesel but prices rising almost every day and surging beyond the peak set in 2022 and you can see the perfect storm that's coming for consumers because they cannot afford higher energy prices higher shipping costs higher food prices at the same time wage growth is starting to slow further and further than it is already but the problem is the fuel that goes into trucks agricultural equipment and power generated boats trains and home heating systems it touches nearly every part of the economy so as we head into the fall and winter season demand for diesel fuel oil it's all going to go higher and again we're talking about timing here because again the next stages we see food prices start to increase and then shipping prices start to hit consumer prices and then it's game over because this is all going to transmit back into what we see at the factory level let's take a look at the producer price index by commodity for final demand that's shown in blue against diesel prices and what i want you to see here is that as we look at the producer level these rising diesel prices and then you tack on raising shipping prices it's all going to lead to higher producer prices at the factory level and of course we already know they're being squeezed at the margin too all that likely to get passed on to consumers as well sign up for again a surge in consumer prices that doesn't seem like there's anything that can stop it and yet all this is now spurred speculation that the trump administration may impose export curbs to keep fuel at home and yet interior secretary doug bergum who leads the president's national energy dominance council he said that u.s ban on shipments wouldn't bring prices down because the issue at hand is there's a massive global shortage so even if overnight we started cutting out exporting there's still such a huge shortage that there's going to be a priority to refill all of the inventory that's been drained down and according to lloyd brine while this would be detrimental to global stability and would have economic ramifications for the u.s the global power is increasingly prioritizing national interest there's a potential for the u.s to follow suit so what he's suggesting here is if we do say hey you know what we're not going to export diesel we could push the entire global economy right into a recession just to try to save ourselves the problem is it would not work so as we turn now to city banks u.s economist veronica clark she says look we're still hesitant to conclude there will be substantial pass through as long as real income growth remains soft and this is one of the cases that i've made you can have rising prices but the issue is if consumers can't afford them you get a very transitory increase now let's go back and take a look at this chart we've got gas prices in blue now we're going to overlay that against average hourly earnings of production and non-supervisor employees that still shown in red so what we're facing here with rising shipping costs food prices across the board is you get this increase due to inflation gas prices rise and what happens consumers say look we just can't afford it so that increase in rising prices here in gasoline it rolls over and heads down and you can see that every time consumer paychecks don't keep pace the problem is right now they haven't been keeping pace so what veronica clark is saying is look we're not sure how much is this going to pass through because we're seeing a huge drop in demand because it's not just energy we've been talking about food price inflation as well here you can see now the cbi for food in blue again you look back to every recession what do you see rising food prices slowing income growth and next thing you know prices come back down because consumers cannot afford higher prices so the issue we're facing here at the shipping level is that's expected to hit in a matter of months but that's going to come right after food prices start to go up and if energy prices stay elevated you see a triple storm hitting for consumers here and for wall street now if you think this leads to higher stop prices we're going to go through a ton of charts here in a moment but wall street is saying look we're turning our back on consumer stocks is fuel cost store and yield surge because what wall street is waking up to the reality is they realize the truth here and that is consumers cannot afford higher prices and that means for certain parts of the stock market stock prices are going down and that's going to back feed all across the market let's take a look because while part of recent weakness can be attributed to higher crude prices and rates the sharp sell-off across apparel retail and restaurant names suggest that investors are looking beyond those factors again they're seeing massive demand destruction and for good reason now the first place to look is restaurant stocks if you've been to out to eat anytime recently you realize prices are just getting absolutely ridiculous where it's unaffordable for many families to even consider going out at the pace they used to let alone continue to go out to eat and what we're seeing is those stocks are weakening more sharply than a broader consumer discretionary sector signaling growing concern ahead of midterm elections as consumers pull back but the key thing is it starts with restaurants so if we see them start to fall then we're going to look at consumer discretionary stocks they're likely to go and i'm going to show you all across the board we're going to go through a ton of charts but look what dollar general ceo todd vasos offered in a downbeat assessment of the customer base saying even that middle to upper middle is acting more like lower income shopper these days where they're coming in less frequently and buying things on sale so as we look to the second half of the year everybody was expecting a huge rebound and we're now running into the same old problem we see right before every recession is businesses face rising costs while consumers they're not just reluctant to spend they would love to spend if their wages were keeping pace the problem is they cannot at all now many of you have been asking see when's the smp8000 hat coming back well it's on the shelf over there but let's take a walk through the markets i want you to see the impact this is having let's take a look at the smp500 and the reason i haven't been wearing the hat is i'm not convinced we get to 8000 i'm going to show you the case here for a moment but how about this recent rally of the last day well it's all due to price holding that six-month volume profile squeezing some of these shorts higher but i think we're going to run into a wall and i'm going to show you why but let's take a look at the triple q's here again these are tech stocks again we see the same setup that six-month volume profile act like a springboard to higher prices but remember we've been watching this as it's been trading across these two zones and up here we've seen sellers i'm watching very closely to see if tech stocks reverse now if they break out from here what this is setting up for is what i would see as an opportunity where i would be looking to short at some point not just yet but why do i think the market's running the wall we'll take a look at the fix you can see it's absolutely plunged down to right near a six-month low suggesting there isn't a whole lot to drive stock prices higher because we have to get the vicks down even lower and i think at this stage it gets very difficult for market participants particularly if we start to see pieces of the market start to fall apart now let's turn to consumer discretion this is xly this is the consumer discretionary etf and again now we got this on a one-year chart you see that red line that's the one year volume profile this is where most of the shares were traded so you can see buyers way down here but sellers completely selling because they know the impact that inflation has on weaker wage growth so you can see this is a warning for the economy but what about energy well let's take a look because remember i've made some weird call about how i think it's going down because ctas are running oil longs while the downside asymmetry is running relatively large reversal through key trend levels could trigger systematic selling and exasperate of more serious move lower i remember we're gonna look at this chart again it's just odd that i was completely right about this can't make every call right but this one we're spot on but look at the ctas in a down big move they're massive sellers here so as we look back into july all the way through august they were big buyers they were pushing oil up and so what we can see is across wti and brent any move down to the this big we're going to see sellers and look at this i said remember this trend line i said if it breaks down here look the price tends to drop and sure enough happened once twice and now we're seeing the early signs it's likely to fall and again that six month volume profile acting as support but when we pull back and take a look at energy producers we see the same thing the market saying wait a minute we don't like what's happening here we think consumers pull back support being again that six month volume profile breaks there you're looking to 200 day moving average but what about the long bond here because many people are saying wait a minute i saw in the comments you said there was gonna be a short squeeze and it didn't happen and remember i said look there was one headwind that we had to get through because in order to break a short position out you've got to get people to stop selling they're not there yet but anytime you see a chart where there's all this heavy volume and price isn't dropping but it's holding fairly steady that's an indication that there's a lot of people buying at the same time there's people selling so when does the selling end well let's zoom into the 90 day chart in fact i zoomed in even a little bit more see that red line there that's a 90 day volume profile what happened is we saw as soon as it touched that sellers started to show up and again you've got to break that level before we get to the next one i think that's where the short squeeze triggers i think it's coming pretty soon because when you start to look at the big picture here you've got an energy shock gas diesel both up you've got food price shock on the horizon and right after that shipping prices are set to head higher and for consumers you look at the timing of this and you look at where things are headed and just as bfa said this means growth expectations are coming down and when they do rates and the market tend to follow with that i'm steve van meter thanks for watching thanks for being fans bye now