August 12, 2023 | United Auto Workers, Gold, CPI, PPI and Don’t be too Tempted by High Savings Yields

United Auto Workers
I understand that unions want to try and provide benefits for their workers, but the United Auto Workers (UAW) seems to be asking for unachievable demands. The negotiations with Stellantis, Ford, and General Motors are underway and the UAW is demanding a 46% pay increase over the next few years. There would be a 20% increase effective once the new contract is signed and then there would be 5% raises annually until 2027. On top of the massive pay increase the list of demands includes the restoration of cost-of-living pay, defined benefit pensions for all workers, and restoring retiree health coverage. The President of the UAW, Shawn Fain, also brought up more paid time off and a 32-hour workweek. If the UAW was able to get their full list of demands this would destroy the US auto companies and limit their ability to compete. Bankrupting these companies helps no one. As of now the current contract is set to expire on September 14th and I believe there will be a strike as the two sides are likely very far apart.

 

Gold
26% of Americans believe gold is currently the best long-term investment, which is an increase from 15% one year ago. Unfortunately, people are investing in gold near the all-time high of $2,069/oz hit back in 2020. It is strange to me because gold is supposed to be a very good inflation hedge, but the risks of inflation seem to be subsiding. The Wall Street Journal recently did an article on gold and they mentioned a gentleman who lost thousands of dollars in his retirement plan by betting on biotech shares in early 2021. He has now invested in gold and feels comfortable and says he can now sleep at night. It makes no sense to me why someone would do a risky investment in biotech and then turn around and put all their money into a single commodity such as gold. This is why the average investor only earns on average around 3% per year. During periods like this, people tend to forget when investing in gold you can still lose money. In fact, if we look at GLD which moves with the price of gold, in 2013 shares fell more than 28%. The 10-year average return on GLD is also extremely lackluster at just 3.48%. At the end of the day gold is a just a piece of metal that is only worth what the next person will pay for it. Ultimately, I would not be investing in gold at this time.

 

CPI
The Consumer Price Index (CPI) continued to show positive signs in the month of July as the headline number of 3.2% was below expectations for 3.3%. Core CPI which excludes food and energy was still higher than the headline number at 4.7%, but it was the lowest reading since October 2021. Shelter continued to be a heavy weight on the report as prices were up 7.7% compared to last year. This increase in shelter costs accounted for more than 90% of the increase in the CPI report. Other areas that remained troublesome included motor vehicle insurance (+17.8%), motor vehicle maintenance and repair (+12.7%), and food away from home (+7.1%). Food at home was much less problematic as it was up just 3.6% compared to last year. Energy continued to be a major positive as prices were down 12.5% compared to last year and regular unleaded gasoline in particular was down 20.3%. Overall, I’d say this was a great report, but I will say oil prices have increased as of late and I do worry they could become problematic for inflation as a whole if they do not stabilize.

 

PPI
The Producer Price Index (PPI) showed wholesale prices in July were up just 0.8% compared to last year. Some may point to the month over month gain of 0.3% being higher than expectations of 0.2% as a problem, but considering the year over year number is under 1% I still believe it’s a good report. Looking at core PPI, which excludes food and energy, prices were up 2.4% compared to last year. This was tied for the lowest annual increase since January 2021. Services were a problem in the report rising 0.5% in the month. This was the largest gain since August 2022, but much of the increase came from a 7.6% surge in prices for portfolio management which likely can be attributed to the increase in stocks we have seen this year. There’s nothing in this report that leads me to believe the Fed needs to continue on its rate hiking path.