Alan's Alert 7-16-2021

 

Fed Chairman Jerome Powell sat down at his computer for the zoom call with the Senate Finance Committee.  It went off without a hitch.  He was grilled further about monetary policy and inflation but was able to run out the clock on any difficult questions.  Like a good government employee, he was able to avoid taking any blame and stressed that the shutdowns were “unique” and that “opening up” the economy caused this “transitory” inflation.  Nothing to see here people, move along.

Retail sales numbers came out this morning.  They are up month-over-month by 0.6%.  This beat expectations of -0.4%.  Consumers have money to burn in their accounts and they are looking to spend it.  I came across this article about this summer’s suitcase shortage.  I expect random shortages to be a regular occurrence.  Inputs have gotten expensive and so has warehousing.  Retailers and producers are trying their best to keep their businesses afloat and keep product on the shelves.  The port slowdowns were putting a real crimp in their supply chains but now the railroads are seeing “significant congestion”.  This will be a big boon for Warren Buffett, who owns the BNSF railroad.  Continued congestion and slowdowns will only exacerbate the bottlenecks in the economy. 

 

The University of Michigan also put out their preliminary consumer expectations report.  It came in at a five-month low of 80.8.  Low morale among consumers was “largely due to less favorable prospects for the national economy” according to Richard Curtin the chief economist.  Growing concerns about inflation was also a concern.  He went on to say, “Consumers’ complaints about rising prices on homes, vehicles, and household durables has reached an all-time record (see the chart).  Purchase rates, however, have benefitted from record increases in accumulated savings and reserve funds.”

Finally, I was going through the previous weeks’ worth of reports from Bank of America.  They put out a report on the 13^th of July titled, “Goldilocks and the Three Bulls”.  Included in the report is an insight that I found very interesting:

“Massive bank balance sheets are parked at the Fed today, instead of being lent out, and corporate bonds are enjoying the greatest upgrade cycle in history.  All that dry powder means the financial system is primed for productivity.  As employment stabilizes, the capex cycle will accelerate, and lending should pick up shortly thereafter.”

They see the current time as a calm before the storm.  That “dry powder” in the financial system is really inflationary powder.  When it finds it’s way into the system, big fireworks will be happening.  I agree with BofA and believe we will see a big lull before the powder ignites.  The CPI and PPI could flatline and begin to drop.  “Transitory” inflation believers will tout it as a big win and a “told you so” moment.  There could even be a big rush out of commodities and into the growth stocks.  This will be a prime buying opportunity.  The Fed will begin its victory lap but halfway through, the other shoe will drop.  When September comes around, the bonus unemployment relief will be ended.  The fall looks prime for something dramatic to happen.