Alan's Alert 6-30-2021

 

Job seekers are continuing to find employment, especially in the sectors of the economy that were hardest hit by the government shutdowns.  ADP’s National Employment Report was posted this morning and it showed an increase of 692k jobs from May to June.  624k of these jobs were attributed to the service sector.  Leisure and hospitality picked up the most workers at 332k, followed by education/healthcare at 123k.

Here’s the bigger picture:

Employment increased 0.6% month-over-month.  With May’s increase of 0.7%.  We are picking up jobs at a 7-8% annual basis.  At this pace, we’ll be back to the pre-shutdown employment around mid-January 2022.  With more states dropping the federal unemployment bonus, I expect this could happen sooner if it weren’t for…the massive amount of boomers leaving the workforce.  This graph from the Fed doesn’t do it justice:

According to the latest census data, the US has 328k+ people.  96.5M are 55 and older and their current participation rate is 38.4%.  Prior to the shutdowns, boomers were 40.3% of the workforce.  

 

I put together the spreadsheet below to highlight how significant this is:

As you can see, we have lost 1.8M of those 55 years of age and older from the workforce.  I expect many will not return.  As this age group moves into retirement mode, expect them to spend less as they live off their accumulated savings and investment holdings, putting downward pressure on inflation.  There will be a struggle between the spending of the boomers dropping off and the spending of the 25-54 age group increasing.  The upcoming times for this group could be particularly difficult if another market crash erodes the value of their 401ks or rampant inflation destroys their savings. 

 

But let’s look on the bright side, 692k jobs beat the consensus estimate of 600k.

OPEC+ meets tomorrow and the oil futures (/CL) price has been swinging wildly from $72.82 up to $74.12 in early trading.  Investors are weighing the odds of OPEC+ extending the oil supply cuts.  Russia has already signaled that they would like to increase production between 500k to 1M barrels per day.  We’ve seen how tight this market is when there were rumors that Iran was going to be bringing their production back online.  Prior to the shutdowns, OPEC went to war with US shale.  They pumped oil at an extreme pace to make US shale producers unprofitable and to hoard market share.  As OPEC has slowly allowed the price to rise, I expect they will be keen to keep a close eye on those shale producers.  If there is a signal that the cuts won’t be extended, expect the price to drop.  This will be a buying opportunity. 

 

It pains me to have to talk about this but I think it could have an impact on future market reactions.  The stock market discounts future events into the present.  Since the government has made serious in-roads into the economy by shutting down businesses due to virus infections, it’s important to keep an eye out for the possibility that it may happen again.  This is something that I don’t want to fathom.  However, my job as an investor is not to determine whether a certain government policy is good or bad, it is simply to understand what reaction the market would have to such a policy and front-run it.  The news media has really ramped up the rhetoric that this delta variant is something to be worried about.  For those who understand how variants work, this is nothing to be concerned about.  As viruses mutate, they will always mutate to being more infectious.  Thankfully, they never become more deadly and in fact, become less so.  While the infection rate will increase, hospitalizations and deaths will drop off.  I believe we are already starting to see this.  Unfortunately, there are 24 letters in the Greek alphabet giving the infotainment industry lots of fodder for more variants.  Thankfully, they’ve already wasted 4 Greek letters, let’s hope they get through the next 20 sooner rather than later.

 

Alan's Alert 6-29-2021

 

Things are going from hot to hotter across the board but especially in housing.  Today the S&P/Case-Shiller Index was released.  

This is an index that is based on the work of Karl Case and Robert Shiller.  These indices are calculated by using repeat sales of the same homes in an effort to study home pricing trends.  Robert Shiller used the index in his book Irrational Exuberance to analyze long term trends in home prices.  He came to the conclusion that the pattern of changes in home prices had no relation to changes in construction costs, interest rates, or population but that the difference in prices can be explained by inflation.  There’s a strong perception that house prices are continuously increasing and this can fuel bubbles in real estate.  Shiller went on to define irrational exuberance by stating, "Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others’ successes and partly through a gambler's excitement.”

Shiller’s insights are spot on and I highly recommend his book and the YouTube of his courses at Yale.  It’s a good reminder to get into position to take advantage of the trends in the market before the amplification process takes hold.  We’ve seen this most recently with “meme” stocks such as AMC and Gamestop.  Once the enthusiasm of these stocks was picked up by the news media, they spiraled outside the bounds of any basis in fundamentals, even if those fundamentals are based on the idea of a short-squeeze.

In staying with the housing news, the US Federal Housing Finance Agency posted the house price index.

I’ve adjusted the chart to reflect the percentage change from the previous quarter.  As you can see, similar to the Case-Shiller index, we are moving higher in prices for homes.  If we annualize the data and look at it as a percentage change it gives us this:

If Robert Shiller’s insights into the housing market are to be trusted, looking at the house price index in this fashion should give us the best picture of what inflation actually looks like.  Unfortunately, we only get a small peek into the latter part of the 1970s but that small window speaks volumes.

 

Overlaying annualized CPI data, we see that it tracks really well until 1998.

1998 is when the BLS made a “revision” to the way the CPI was calculated.  You can find more info on that here.  In short, they changed the way that the housing index influenced the CPI.  I touched on this topic yesterday with Stephen Roach’s article on Chairman Arthur Burns adjusting the CPI.  Now we see that it had happened again in 1998.  Even though the Fed has stated that they will tolerate higher inflation in the present to make up for the low inflation in the past, I would not put it past the Fed or BLS to “adjust” the CPI to downplay the tidal wave that is coming.

 

 

In other hot news items, the Consumer Confidence Index was posted by the Conference Board.

They revised last month’s reading up to 120.0 and posted the June reading at 127.3.  This was a complete about-face to the consensus estimate of 119.  Neither rises in prices, nor back-orders, nor shortages, nor bottlenecks stay consumers from their swift purchases of goods and services.  According to Senior Director of Economic Indicators at The Conference Board, Lynn Franco, “Consumer confidence increased in June and is currently at its highest-level sine the onset of the pandemic’s first surge in March 2020.  Consumers’ short-term optimism rebounded, buoyed by expectations that business conditions and their own financial prospect will continue improving in the months ahead.  While short-term inflation expectations increased, this had little impact on consumers’ confidence or purchasing intentions.  In fact, the proportion of consumers planning to purchase homes, automobiles, and major appliances all rose – a sign that consumer spending will continue to support economic growth in the short-term.  Vacation intentions also rose, reflecting a continued increase in spending on services.”

 

With consumers not discouraged by rising prices, the “transitory” story that the Fed is touting looks less and less believable.

Alan's Alert 6-28-2021

 

I re-watched The Big Short recently.  The movie was based on the book by Michael Lewis which follows the accounts of several people who predicted the housing market collapse.  Now I don’t think the book was Mr. Lewis’s best (see Flash Boys or The Undoing Project), and I don’t even think that it was the best movie based on one of his books (see Moneyball) but it holds a special place in my movie library.  This is mainly due to the movie’s portrayal of Dr Michael Burry.  

Dr Burry had accurately predicted that subprime mortgages (especially those with “teaser” rates such as 3/1, 5/1, 7/1, & pay-option ARMs) would adjust to higher rates causing homeowners to be unable to afford their mortgage.  This in turn would cause the bonds built on top of these mortgages to fall in value.  To trade this thesis, Dr Burry purchased credit default swaps against these subprime deals.  Between the time of his purchasing of the swaps and the eventual collapse of the subprime market, Dr Burry was under extreme pressure from the investors in his fund.  Many worried that his predictions were inaccurate and demanded to withdraw their capital.

 

So, why do I bring all this up? Two reasons.  The first is that Dr Burry saw something going on in the market, set up a trade in his favor, and then had the patience to see it through.  This all in the face of people telling him that he was wrong and the trade moving against him.  However, his perseverance paid off.  I feel we are encountering a similar time now as the Fed has just gone on a gaslighting tour that seems to have spilled over into this week. NY Fed Presidents Williams, Vice Chair Quarles, and Pres Barkins are speaking today. Barkins is also speaking tomorrow and Wednesday.  Bostic also speaks on Wednesday, as well as Thursday.  We’ve seen the tidal wave of inflation that is coming our way with high CPI and PCE readings.  I wouldn’t put it past the Fed to change the way they look at these statistics in order to downplay their significance.  In fact, this very thing has happened before.  Stephen Roach, who served on the research staff at the Fed from ‘72 until ‘79, wrote an opinion piece last month for Project Syndicate that was picked up by MarketWatch.  You can find it here.  In it, he details how the Fed chairman at the time (Arthur Burns), would argue that the inflation that was happening was transitory (!!).  He would purposely exclude items from the CPI because he argued that these items were experiencing increases that had nothing to do with monetary policy.  Things like oil, gas, and food.  This is how we ended up with the “core” CPI/PCE indexes.  Burns even argued that an El Nino event which decimated Peruvian anchovies was the cause of rising fertilizer, which in turn raised food prices.  Burns didn’t concede that monetary policy was the issue until 1975.  Now what does Mark Twain have to say about this?

 

The second reason I bring up Dr Burry’s story is that he reopened his hedge fund in 2013.  He is required by the SEC to disclose his holdings (13F reports) because he has over $100M in assets under management.  I know that he was bullish on Gamestop (GME) in 2019, so I looked up his 13F to see what he was up to now.  Anyone can do this by going to the SEC’s Edgar search found here.  Using the search, you can lookup public companies to review their quarterly statements and hedge funds who file the 13F reports, as well as a litany of other info such as merger/acquisition announcements and insiders buying or selling their stock.  Here’s the link to Dr Burry’s latest filing.

 

What jumped out to me was this:

Dr. Burry has put on a big bet that interest rates are going up.  He has put options against TLT which is the 20+ year treasury ETF, call options on the ultra-short 20+ year treasury ETF, 300k shares of that same ultra-short ETF, and calls on the -3x 20+ year treasury ETF.  For those of you who don’t trade options, I’ll put out a primer later.  In the meantime, this is quite a position against interest rates.  Dr. Burry, like myself, believes that the Fed has painted itself into a corner and will eventually need to raise interest rates.  The Fed wants to keep interest rates low but this feeds the inflation that is coming.

 

The problem the Fed faces is that by raising interest rates, the stock market will get crushed.  Especially the growth stocks and growth stock ETF’s like the QQQ and IWO (which Dr. Burry is also betting against).  This is because growth stocks are heavily reliant on high P/E ratios which discount future earnings.  These stocks look really good when interest rates are low but when interest rates are high, future earnings aren’t valued as high.

 

So, what’s an investor to do?

Important and Potential Market Moving Events This Week

 

Monday, June 28
6am NY Fed Pres Williams speech at the BIS
7.30am Dallas Fed Manufacturing Index (June)
9am Richmond Fed Pres Barking speaks at Rotary Club of Atlanta
10am Vice Fed Chair Quarles speaks at Utah Bankers Association
 
Tuesday, June 29
6am FHFA house price index (April) & Case-Shiller index (April)
6am Richmond Fed Pres Barkin speaks at MNI event
7am Conference Board consumer confidence (June)
 
Wednesday, June 30
5am Fed Pres Bostic speaks are Buckhead Coalition event
5.15am ADP employment report (June)
7am Pending home sales (May)
10am Richmond Fed Pres Barkin speaks at Northern Virginia Hispanic American Chamber of Commerce
 
Thursday, July 1
6.45am Markit manufacturing PMI (June)
7am ISM Manufacturing Index (June)
7am Construction spending (May)
11am Atlanta Fed Pres Bostic speaks are Habitat for Humanity event
 
Friday, July 2
5.30am Nonfarm payroll employment (June)

Alan's Alert 6-25-2021

 

One of the Fed’s favorite charts came out this morning.  The personal consumption expenditures index was posted by the BEA.  The Fed likes to tease out the food and energy components because they can be more volatile.  They then call this the core PCE index.  I think it’s just a way they can cheat the inflation numbers but take a look.

On a year-over-year basis we’ve hit 3.4%!  Now the PCE is supposed to represent the total value of personal consumption expenditures in a given month and is made up of goods (like food), durable goods (think cars, electronics, appliances, furniture), non-durable goods (make-up, gasoline, clothing), and services.  It also takes into account data acquired through business surveys which the Fed believes to be more reliable than consumer surveys (which are used by the CPI).  This is why the Fed favors it so much. 

 

Now we aren’t in uncharted waters, it’s just been 30 years since we’ve had a reading this high.

Will this accelerate the Fed’s plans to raise interest rates?  So far, the S&P500 says no.  It’s up this morning by more than a quarter percent.  Even the Nasdaq (QQQ), which would be much more prone to a rise in interest rates, is holding steady.  It seems the Fed’s tour of speakers was successful.  We’ll see how long it lasts.

 

 

One more chart before I leave you to your weekend.

Wage rates are continuing their month-over-month increase.  This will continue to put upward pressure on the CPI and PCE data as consumers will have more money in the pockets to spend.  I feel we are still at a slow boil stage on the inflation front.  It reminds me of the Ernest Hemingway quote from The Sun Also Rises, “How did you go bankrupt?  Two ways, gradually, then suddenly.”  How did we get inflation?  Transitory, then perpetually.

 

 

Next week we’ve got some housing data, the ISM manufacturing survey, and unemployment data.

Alan's Alert 6-24-2021

 

Memorialized in Stephen Hawking’s book, A Brief History of Time, Bertrand Russell was giving a public lecture on astronomy.  At the end of the lecture, a little old lady in the back stood up and said, “What you have told us is rubbish.  The world is really supported on the back of a giant tortoise.”  Bertrand, being astute, responded, “What is the tortoise standing on?” and the little old lady, without missing a beat, said, “You’re very clever, but it’s turtles all the way down”.  If you replace turtles with aggregates, that is exactly how I feel about Gross Domestic Product (GDP).  It’s aggregates all the way down.  GDP is the total market value of all the finished goods and services produced in a country.  It’s calculated on a quarterly basis in the US and is usually big talk in financial news.  It was released this morning by the BEA. Now, I have several problems with the GDP, for instance it’s a crowded mess of data, aggregates of aggregates.  Did the economy expand? Sure by 1.6% quarter over quarter.  Where did it expand the most at?  Was it government spending that pushed it up so high? What private sector businesses were the hottest? What does it mean to investors? 

The other problem I have with GDP is that it is released on a quarterly basis.  You are looking too far back in the rear view to be able to make estimates about future data.  By the time the 2020 Q2 data was released, everybody already knew that the economy contracted because of the shutdowns.  The market was already past the lows.

 

 

Weekly employment data was released this morning showing a small downtick in initial claims and continued claims.

Due to the continued federal government emergency unemployment bonus, we are still about twice where we were prior to the shutdowns in both categories.  If you remember from the alert on 6/1, some states were ending the emergency unemployment benefits early.  So far, we’ve gotten through 12 of the 24 states with only one hiccup, Indiana.  In Indiana there are two lawsuits against the governor for ending the benefits early.  To his credit Indiana governor Eric Holcomb hasn’t caved to the pressure.  At the end of this week, 7 more states will end the emergency unemployment (Arkansas, Florida, Georgia, Ohio, South Carolina, South Dakota, and Texas).  I expect this will have a big effect on the employment data over the next two weeks.

New orders for durable goods continue to look strong.  Manufacturers are struggling to get workers but not business.  Even with the bottlenecks and backorders in the economy, businesses are getting back to business.  Something to keep an eye out for will be the next set of ISM reports to see if businesses are still struggling with price increases and short supply issues.  The manufacturing report comes out on July 1 and the services report July 6.  This will be a key indicator if inflation is still bubbling under the surface or if it is truly transitory.

Alan's Alert 6-23-2021

 

The cat was let out of the bag on Tuesday at the second day of the Qatar Economic Forum.  Glencore’s CEO of commodities trading, Ivan Glasenberg, told the crowd that “commodity prices will stay strong for a long while longer”.  How does he know this? He pointed to two big catalysts for commodity prices, China and the US.  In China, Glasenberg sees a big investment in infrastructure spending.  He sees the same happening in the US.  While the US congress has been battling back and forth over how large the infrastructure bill should be, China has plowed ahead with it’s One Belt, One Road initiative.  Glasenberg was concerned about how long new mining projects would take to come online and meet the new demand.  He also thought the mining industry would struggle to keep pace with the new demand from “green” economy initiatives.  Something that caught my ear was when he admitted that China has been pushing their strategic stockpile into the market to hold down commodity prices.  

Unlike Canada’s strategic reserve pictured above, China has been stockpiling copper, aluminum, and zinc.  China rarely sells off its reserves, they don’t even publish how much they have.  Citigroup estimates that China has 2 million tons of copper, 800k tons of aluminum, and 350k tons of zinc.  They believe it to 16% worth of China’s annual copper consumption, 2% of their annual aluminum usage, and 5.2% of their annual zinc consumption.  The last time China announced that they were doing a sale from their strategic reserves of metals was 2010.  This makes it an infrequent event.  I believe the market has been pricing this in and once China can no longer talk the market down, we’ll start to see new highs in miners like FCX, RIO, BHP and associated futures contracts like /HG.

 

Speaking of strategic reserves…

Biden is moving forward with a Trump-era proposal for a US Uranium Strategic Reserve.  Last week Energy Secretary Jennifer Granholm told the Senate Energy and Natural Resources Committee that she is beginning to lay the ground work to establish a reserve and that the money had been allocated for it during the Trump administration.  Once established, the US will begin purchasing and stockpiling uranium.  Taking a quick peak at the last budget bill that passed, Congress allocated $75 million for the reserve and outlined a 10-year $1.5 billion program.  While the administration said they’ll be purchasing from US miners, this amount of purchasing will put a real floor under the price of uranium, boosting all miners.

 

The last time I talked yellowcake I mention that Buffett and Gates had teamed up to build a new reactor in Wyoming.  Not to be outdone, Jeff Bezos is backing a company in the UK that is set to build a nuclear fusion reactor in Oxfordshire.  The big boys are getting in this space in a big way and its time to pay attention.

 

 

 

Subscriber Questions and Comments

Q. Robert Wenzel’s book talked about his forecast of the 2008 real estate bubble that popped.  Do you foresee a similar “correction” in the current crazy real estate market?

 

A. In time I do believe we’ll see a correction but the madness of the Fed is preventing it with their printing press.  Here’s what Robert saw in 2008:

The maroon line is 2008.  I put on the previous four years so you would have a reference.  Money supply was running hot at 17% and 16% in weeks 16 & 17 but then it fell off a cliff.  It’s typical to see a slowdown in the money supply from weeks 16-30 (like I mentioned yesterday), but this slowdown was dramatic.  The supply had gone from a higher high to a lower low.  This is what triggered Robert’s response in 2008.  If you look back to the S&P in 2008, you’ll see that the market was having a tough time gaining momentum.  It had traded sideways from March to July.  Then it took a 7.5% month-over-month drop.  It held it together for two more months until October which had a 12.6% m/m drop, November had a 13.4% m/m drop and December a 15.2% m/m drop.  Even though the Fed only updates the M2 money supply on a monthly basis, we’ll have a good month or two head start towards the exit if something were to develop.

Alan's Alert 6-22-2021

 

I wanted to wait until the H.6 money stock numbers were released before I put out today’s alert. Below is the money supply growth data.

We have an early peak this year at 20%, which occurred on week 14. The money supply then hung at 17-18% for weeks 15-20, we have since declined to 13% and now 12%. Below is a close-up.

You can see that we typically have a decrease in the supply from weeks 16 through 30. This is the “sell in May and go away” adage on Wall Street. Week 16 lands in the middle of April and week 30 is the end of July. The doldrums don’t truly stop until week 41 which is the first week of October.

Here’s a chart, courtesy of LPL financial, that illustrates the point nicely.

The S&P struggles during the summer months. The elephant in the room is that giant spike in July in the past ten years. Do traders come back from vacation and bid up the S&P for a month or does that small spike in money supply do the trick to keep the markets going until the fall?

The Fed is on tour this week and the fireworks have already started. 

 Robert Kaplan the Dallas Fed President started with a bang saying, “If you wait too long to taper and your imbalances worsen, you may find yourself needing to take extra steps down the line.”; “It’s unrealistic to expect the US dollar to be the world’s reserve currency permanently.”; “It would be significantly healthier to make a change to asset purchases sooner rather than later”; and “The Fed’s overnight repo rate adjustment is mostly a technical problem.” 

Jim Bullard the St. Louis Fed President followed up the act with, ““This is a volatile environment, and there is upside risk to inflation.”; “We’re in a scenario where bubbles could form, which is part of a larger debate”; “The Fed should set up a taper that may be altered if necessary.”; “Markets are assuming the Fed won’t lift rates with tapering.”; “I don’t see how interest rates in the US could get substantially higher than they are in Europe and Japan”. 

NY Fed President John Williams then stated, ““The Fed reverse repo rate facility is operating perfectly.”; “It wouldn’t be a problem if reverse repo usage grew much more.”; “Following the FOMC meeting, there was no minor taper tantrum.”; “The average inflation target is not based on any methodology.”; “The economy has not sufficiently recovered for stimulus to be removed.”; “The economy is improving at a rapid pace and has rebounded faster than expected, with a very positive medium-term outlook.”

Wow. So far, the Fed has threated the reserve currency status of the dollar, admitted that bubbles could be forming in the economy, indicated that tapering the asset purchases may not stop even if interest rates get raised, and that the Fed doesn’t have a true inflation target or a method to their madness.

What could we possibly have for an encore? How about this:

“The Fed will do everything possible to help the economy recover for as long as it takes.” -Jerome Powell

Now we know that the Fed only has one tool in its arsenal, so let’s help decode what Mr. Powell was really saying.

“The Fed will do everything possible to help the economy recover print money for as long as it takes.”

For the Fed, money truly does grow on trees. I feel bad for the Fed speakers that chose to close out the week. They have a tough act to follow.

Alan's Alert 6-21-2021

 

The FED is going on tour.  After last week’s FOMC meeting, and the market’s subsequent reaction, the Fed is putting on a show for us this week.  The highlight of the week will be J. Powell’s testimony tomorrow at the House select subcommittee on the Covid crisis, although it’s doubtful he’ll say anything about the FOMC meeting or future Fed policy.  Today Bullard and Kaplan discussed the economic outlook and Williams speaks at a banking conference later today.  Tomorrow is Powell but before him SF’s Daly and Cleveland’s Mester will be speaking at separate events.  Wednesday, we hear from Bowman, Atlanta Pres Bostic, and Boston Pres Rosengren.

 

This is quite a line-up for the week.  Usually, we’re lucky to get a couple speeches but it looks like the Fed is going all out.  What gives?  Do you think the hot inflation numbers coming out and the market’s reaction to “talking about, talking about tapering” have anything to do with it?  The Fed did a good job last time calming fears over the high CPI print 6 weeks ago.  They are likely trying to play the same song again this week.

 

Below is a look at interest rates on the 1-year, 5-year, 10-year, and 30-year treasuries.

You can see in the left-hand third that the spreads were wide, meaning the banks were making a lot of money by loaning long and borrowing short.  Then in the middle-third, rates compressed, banks struggled, it looked like rates were going to rise.  There was a lot of talk in the financial news of an impending recession.  When banks stop lending, new money doesn’t make it into the system, causing the economy to tighten.  In the right-third, the shutdown had the effect of money looking for safety.  All the rates were bid down because everyone wanted the safety of a treasury.  Coming out of the lockdown, rates started to spread again, giving banks another opportunity to lend long and borrow short.  Since the FOMC meeting, however, rates have started to move the other way.  Is this just a breather before they resume their rise?  The Fed sure hopes so!  Otherwise, this tour they are going on will be for naught as no tapering of asset purchases will happen.

Important and Potential Market Moving Events This Week

Tuesday, June 22
6am Existing Home Sales (May)
7am Fed Daly Speech
9am H.6 Money Stock
10am Fed Chair Powell Testimony
12.30pm API Crude Oil Stock Change
 
Wednesday, June 23
5.10am Fed Bowman Speech
5.45am PMI Flash (Jun)
6am New Home Sales (May)
6.30am EIA Crude & Gas Stocks Change
7am Fed Bostic Speech
 
Thursday, June 24
7am Fed Williams Speech
 
Friday, June 25
4.30am Personal Income & Spending (May)
4.30am PCE Price Index (May)
6am Michigan Inflation Expectations
 

Alan's Alert 6-18-2021

 

It feels like the wheels are getting a little loose.  The Fed meets, raises the rate on their reverse repo function and what happens?  We have a record in the use of the facility.

NY Fed President John Williams assured investors weeks ago that the repo facility was functioning as it was supposed to.  This was reiterated by Jerome Powell at the press conference on Wednesday.  He said that the reverse repo facility “which is to provide a floor under money-market rates and keep the federal-funds rate well within its – well within its range. So, we’re not concerned”.

 

I know that this is not an easy concept to understand.  Wall street likes to make things sound as complicated as possible so that you’ll give up trying to understand them.  The less transparent and more complicated, the more money wall street firms can make.

 

What has happened is the Fed has stuffed the banks full of cash.  They were concerned that the government shutdowns would create a crisis.  When all you have is a hammer, every problem looks like a nail.  The Fed’s hammer is to create money and push it to the big banks.  Total reserves of financial institutions have skyrocketed.

Now the banks are pushing it back to the Fed.  Banks get interest on the reserves they hold at the Fed.  While the banks and the Fed would rather find a customer to lend these funds to, the market for commercial and industrial loans is running dry.

To recap; the Fed created massive new money and shoved it into the banking system because they were nervous about a market crash due to the government shutting down the economy.  The banks couldn’t find anyone to lend the money to so they are pushing it back to the Fed.  Its like a game of hot potato.

So, where do we go from here?  The Fed has created enough money to make inflation explode.  The government gave some of that money directly to consumers in the form of relief payments.  Some made it into the system through the PPP loans to businesses.  Due to the shutdowns, many businesses have collapsed.  Banks are having a hard time finding customers to lend money to, so they are doing what they can to earn a return.  Things are looking downright frothy.  We seem to be in slow boil mode.  I’m patiently waiting for a catalyst to set inflation to warp drive.  What would the catalyst look like?  There are many but a few of the big ones would be; bank lending picking up, wage rates running high, or a change in consumer sentiment. 

The Fed updates the M2 money supply next week.  This will be an important indicator to determine if the Fed will slow down the printing presses.

Alan's Alert 6-17-2021

 

Did someone get the number of the truck that just ran over my portfolio? 

 

The Fed FOMC met yesterday and made a very technical change on the interest rate on their reverse repo facility.  They have been having difficulty explaining what was exactly taking place and they hoped that by bringing up the rate, that use of the facility would relax.  There was talk about inflation, as expected, and chairman Powell said the Fed would stand ready to do what was needed to anchor inflation expectations at 2%.  Nothing surprising there.  There was no tapering of asset purchases and the soonest we are looking at raising the Fed Funds rate is 2023.  That’s two years down the road! The market’s reaction was that the reflation trade was back on (QQQ up), and sold off any asset that was inflation related (gold and silver down).  To me this is crazy talk.  The Fed announced no changes to their current policies and that we are only “talking about, talking about tapering”.  The Fed intends to buy $120 billion in asset purchases over the next 18 months (the approximate date of raising the Fed Funds rate).  This is $2.2 trillion in dollars that didn’t exist before and they will continue these asset purchases until “substantial further progress” has been made towards the Fed’s maximum employment and price stability goals.  Substantial progress was not defined.  This could mean that the Fed is buying even as it is lifting the Fed Funds rate.  The is recklessness.  So, what does that mean for me today?

I’m adding to my collection of PSLV, PHYS, UGL, AGQ and the precious metal miners CDE, FSM, and AUY.  I’m also looking at options on SLV.

 

Alan's Alert 6-16-2021

 

I have a running joke with a contractor friend of mine about the ridiculousness of the lumber industry.  We’ve traded memes back and forth.  Some of the best ones were; the most expensive place to take a girl on a date is the lumber section in Home Depot and that toothpicks could be sold as lumber seeds.  While lumber futures (ticker /LBS) have come down from their highs, they are still well elevated from what many would call normal.  We’ve seen similar reactions in futures markets for Corn (/ZC), Lean Hogs (/HE), Copper (/HG), and soybeans (/ZS).  While the lumber industry has its own unique quirks, it’s a bit of a shock to see the same scenario play out in unrelated markets.  Could oil and gas be the next markets to experience a similar run?

 

This morning the EIA (Energy Information Administration) released their gas and crude oil stocks report.

The report on crude oil inventories showed that it dropped by 7.355 million barrels during the June 11^th week.  This represents a fourth consecutive period of decline.

The gasoline report showed an increase of 1.954 million barrels.  This was opposite of market expectations of a drop but you can see from the chart of gasoline inventories that we are swiftly moving back to depleting inventories.  This comes as the summer driving season is beginning, as well as air travel increasing.  Here’s a summary report for TSA screened passengers on average by month:

We are well off the shutdown lows and as you can see below, oil futures (ticker /cl) have rebounded completely.

Now I’ve been holding Continental Resources (CLR) since 4/13/20.  I also have options on USO that were purchased 2/8/21 & 4/29/21.  I’m confident that this story isn’t over.  The Fed has pushed too much money into the hands of consumers for us to only be back where we began.  This money has made its way into the retail and real estate sectors of the economy.  We are seeing record prices for used vehicles.  I hear ads on the radio now about turning in your old RV because RV sales have gone through the roof.  I believe we will continue to see crude climb and I plan to be ready to add to my holdings when down days come.  I love buying on red days and selling on green ones.

 

As a reminder, the Federal Open Market Committee (FOMC) concludes their meeting today after which, they’ll release some economic projections, their interest rate decision and hold a press conference.  They hold eight of these meetings a year.  Only four of these meetings are associated with economic projections.  The market typically gets pretty excited about such matters but there is rarely anything groundbreaking that will be revealed.  The Fed doesn’t like to surprise the market, so they’ll announce well ahead of time what course they plan on plotting.  I’ll cover any details in tomorrow’s alert, in the meantime, here’s a sneak-peek into what the meetings look like.