September 15, 2023

Stocks have been pretty directionless since the nasty month of August. 

I’ve mentioned before, September can be just as nasty. 

And so far it hasn’t disappointed. 

But once the summer lull is over and traders get back to their desks, what can we expect in the coming months? Are there forces lurking in the economy that could derail things and send stocks back into the tank?

Don’t be silly! Of course there are. 

Since it was a bit of a quiet week… I thought I’d share a couple. 

Here we go…

1) Inflation’s Back!

Well, pretty much at least…

CPI was out this week and the numbers were not really surprising.   

The headline print rose 0.6% month over month — an annualized rate of 7.2% and way up from last month’s 0.2% rise. Twelve month inflation rose to 3.7% from 3.2% which officially begins a trend of inflation rising again.

The core number was up 0.3% month over month while the 12 month measure came in at 4.3% — down from 4.7%.

Mixed bag? Not necessarily. Yes, ex-food and energy has started to come off. But it still remains sticky at over twice the Fed’s “mandated” goal.  Not good. 

And on the headline side, monthly energy prices spiked 5.6%. I don’t want to sound alarmist but… that is ENORMOUS. This was something I warned about last month. 

It’s worth keeping an eye on the price of oil. Should West Texas Intermediate (WTI — the US benchmark) breakout above the $85 level, significantly higher prices would be likely. And if energy prices start to spike, the only thing holding inflation in check will be out of the box, and headline prices will be soaring once again.

WTI is now trading above $90, so if the impact of energy is coming back, things could still get pretty rough for Jay and Co. 

The Fed has said over and over they will not stop until they get inflation back on the road to their 2% goal. 

Their preferred inflation measure (PCE) for August won’t be out until September 29. (Previously PCE headline came in at 3.3% while core was 4.2%.)

That means the “higher for longer” chant will be as sticky as inflation itself. ZIRP-addicted markets will give in at some point. And indexes could move to test the lower end of the ranges they appear to be trading in.

2) Pummeled Consumers

It’s no secret that consumer spending drives over two-thirds of our GDP growth. And when consumer spending dries up, it’s a bad sign all around. And the Wall Street Journal just delivered some bad news this week…

Of course this is something we’ve been harping on here for the better part of a year…

• Believing Their Own Spin: How the Fed’s Wage-Price Myth Will Tank the US Economy
• Suffocating Economies and Zombie Consumers: The Dire Effects of This Dwindling Resource
• “Zombie Consumers” Are Clinging to Life (and Prepping for the Worst…)

…so it shouldn’t come as a surprise.

The other item we’ve been going on about is consumer credit card bills reaching all time new highs as folks try to make ends meet. The August 30 report from the Fed indicated that revolving consumer credit on banks books reached $1.01 trillion. (If you include the debt that’s been securitized, you can add another $270 billion to that number!)

And while that’s unsettling in its own right, another more shocking datapoint is how much of that debt is not getting paid off. 

A new survey conducted for CreditCards.com by YouGov found that among Americans who carry over credit card debt from month to month, 60 percent have owed their creditors for at least 12 months.

Additionally, 40 percent of these Americans say they’ve had their credit card debt for at least two years, 28 percent for at least three years and 19 percent for at least five years. Another 8 percent said they don’t know how long they’ve been in credit card debt.

And savings are back down.

Whether or not you think these folks are living beyond their means, this clearly indicates that people are definitely struggling to get by. 

A last resort for consumers with their backs to the walls could come in the form of retirement fund withdrawals to make ends meet. (Something we saw in 2021 and 2022.)

The picture says 1,000 words…

3) The Black Swan

January a year ago (that’d be 2022) my partner Bob wrote you about a “too big to fail” sector that few people (if any) were thinking about: Too Big to Fail — The Tech Edition. In it he noted that the mega-cap tech sector made up roughly 30% of the total capitalization of the S&P 500.

Like their TBTF banking industry cousins, any serious trouble in this group of stocks could have a significant impact on the market as a whole. But what could possibly cause any shake up like that? As Bob noted:

These companies are all massively profitable. They all have great prospects for continued growth. We live in the age of technology. These companies are as essential as oxygen to the average human being (that’s a sad analogy because it’s probably true).

So what could possibly be their downfall? 

Antitrust lawsuits!

There have been numerous lawsuits (and settlements) filed against these giants over the past few years. So many we noted:

With the number of antitrust lawsuits currently underway, you’d think the people getting the richest off of these tech giants are the lawyers.

In fact they just resolved a google play deal last week…

The suit, stemming from 2021, accused Google of operating as a monopoly with its Play Store. 

Alphabet and the states, led by Utah, told a California federal judge on Tuesday that they have reached an agreement in principle to settle claims that Google has monopolized the distribution of apps on mobile devices that run the Google-owned Android operating system.

No word on the terms yet.

But no sooner does one action get settled, than another one kicks off in court. And this one promises to be a heavyweight championship-caliber fight.

So far it’s been called a “landmark” case. The biggest since the government took on Microsoft back in 1998 over its web browser monopoly. (Remember Internet Explorer?)

This week the Department of Justice opened its case (which it initially filed in 2020) claiming that it maintains an illegal “monopoly in online search and related advertising markets.” According to the Journal:

Google has about a 90% market share in search and maintains its dominance through restrictive agreements with browser and phone partners such as Apple, Mozilla, Samsung and Verizon, according to the Justice Department. … Google’s separate agreements with Android-based mobile-device manufacturers forbid pre-installing or promoting rival search engines if they opt to take a cut of Google’s search revenue.

DOJ lawyer Kenneth Dintzer summed it up a little differently:

“This case is about the future of the internet, and whether Google’s search engine will ever face meaningful competition.”

What’s the big deal?

With this kind of search dominance, Google gets all the data. And in the tech world, data is pretty much gold. Take the budding AI revolution… The entire value of any AI model is predicated upon how much data you can feed into it. So while searches used to get monetized by serving ads, now the collection of data itself may make eyeballs even more valuable!

There’s quite a bit at stake for Google. 

What’s their defense? (We’ll have to see what they say. But in the meantime we can make an educated guess.) Let’s call it the Sally Field defense…

Google will likely claim that they just serve up the best search experience. That their bundling deals with Apple and others simply provide customers want: a top-rated, default search option. Microsoft users, they’ll likely claim, who don’t get any Google apps bundled into their products choose Google for that exact reason. 

They get all the eyeballs because they’re the best and people like them!

Their other secret weapon is their chief legal officer, Kent Walker. Walker was a lawyer for Netscape when they and the government sued Microsoft (and won). Who says you can’t buy a better game?

What Would a Loss Mean For Google…?

Arguments just started this week. Court watchers don’t expect witnesses to take the stand until October. Closing briefs expect to be delivered in November and a ruling won’t likely come down until early next year. And if a verdict against Google is rendered, another trial would start to determine the penalty. So lots to watch between now and then. 

But what would happen if the court sides with the state (other than the years-long appeal process)?

According to those in the “legal-know” there could be one of three remedies on the table: financial, behavioral or structural. 

A financial penalty would fine the company some amount commensurate with the crime. The problem with this route is that Google has been fined billions upon billions in past actions and those fines haven’t done much to discourage Google from doing whatever they want. 

A behavioral penalty would limit certain actions they could take in running the business. For example, the court could place restrictions on (or eliminate altogether) the kinds of partnerships they currently maintain. No more billions to Apple for being the default search engine on Macs and iPhones. 

The problem with this option is that the court (i.e. the judge) would be responsible to make sure that Google is following the rules. No judge wants to get stuck in the middle of a company’s day to day operations. 

That leaves the court with the biggie… a structural re-work. In other words, some sort of break-up of the company — spinning off their Chrome browser division for example. This would be the most draconian step the court could take (and would almost certainly be met with a fierce counter by Google).

…And the Markets?

It’s hard to predict the specific impact of the outcome of this trial. 

A Google win would be precedent for other big tech companies that are being eyed as possible monopolistic threats to the market. 

On the other hand, it may get Congress (who no doubt enjoy political contributions from the defendant) more personally involved. 

Google has a $1.75 trillion dollar market cap — 4.7% of the S&P 500 index! Any serious finding against a company of Google’s size would almost certainly be a negative for the market — at least initially. 

Longer term, however, it probably won’t be the end of the world. A Google break up could result in an “AT&T Effect.”

In 1984, as a result of another antitrust action, Ma Bell (AT&T) gave birth to eight “Baby Bells” to offer consumers local phone service thus breaking up AT&T’s monopoly. The spinoffs immediately became hugely successful in their own rights. Like being born with the proverbial silver spoon, they were launched into well-established markets and had ready infrastructure built around them. 

And initially there were some great benefits for consumers. But as time went on, the government began to loosen its telecommunications regulations. The spun companies began to re-merge and by 2018 nearly all were back together as AT&T. Bigger and better than ever.

So what’s the moral? 

Google has been spending billions settling suits for years with no ill effects. This showdown may end up being the same kind of nothing burger. 

On the other hand, maybe it will live up to the hype.

Worth watching…

Humbly yours,

Tim Collins
Editor, Streetlight Confidential