I was recently watching a movie about the FBI trying to bring down a terrorist cell in the U.S. During their investigation, their evidence board became more and more cluttered with people, evidence, and locations as they attempted to track down the “cell.” At first, the clues were disparate, and they didn’t provide a clear path to the end goal. But as more clues were obtained, the bigger picture emerged eventually leading to the successful ending of the terrorist threat.
It got me to thinking about what is currently happening in the markets. As stocks rang new highs last week, there were several disparate stories that caught my attention. Individually, each story is nothing to be overly concerned about, and are regularly dismissed by investors. However, when you begin linking these stories, a picture is beginning to emerge that suggests investors may be ignoring the evidence at their own peril.
Story 1: CPI Remains Weak
Despite three hurricanes and wildfires over the last couple of months, core CPI (ex-aircraft) failed to register much inflationary pressure. One would have expected given the surge in demand for goods and services needed to rebuild destroyed communities.
However, despite the Fed’s hopes for a surge in inflationary pressures to justify further hikes in interest rates, inflationary pressures have been on the decline for the last several months.
Story 2: Real Wage Growth Slumps Along With Employment
Of course, the lack of inflation leads through to a decline in inflation-adjusted wages. While the chart below only goes back to 2008, wage growth has been non-existent since 1998. (For more detail read this.)
But as I discussed previously, even those wage numbers are skewed by the top 20% of income earners versus the bottom 80% which continue to see wages decline.
Story 3: Auto Originations Crash
As Wells Fargo announced this past week, the decline in auto loan originations continued tumbling 47% Y/Y to only $4.3 billion, the lowest print since the bank started disclosing this item back in 2013.
The problem is that it is not just Wells having this problem, but all banks. As shown in the chart below the number of banks reporting strong auto loan demand has been in decline for quite some time.
