Alan's Alert 7-27-2021

 

We are looking at a rough road ahead.  The Federal Reserve posted the H.6 Money Stock Measures this morning and it looks downright frightful.

Money supply growth has plummeted.  The last three readings are as follows;

6/21 – 6.36%

6/28 – 3.91%

7/5 – 3.26%

 

We have swiftly gone from a high in the 17-20% range to a low at 3%.  3% might not even be the low!  Typically, the low is around mid-July but we won’t see that data until August 24^th.  These low readings do not bode well for the capital goods sector.  The housing market and the stock market are in for choppy action at best.  I am very tempted to go short here.  In my mind, there is no way that back-to-back weeks of 3% money growth can keep this train on the tracks.  I’m afraid that the stock market will soon be looking for support and at its current dizzying level, support is a long way down.

The S&P/Case-Shiller Home Price Index was also posted today.  The S&P/Case-Shiller Index pushed itself to a new record.  It increased 2.1% over the prior month and 16.6% on a year-over-year comparison.  This is the highest year-over-year climb the index has ever seen.

 

Prior peaks happened in September 2005 at 14.5% and October 2013 at 10.8%.  The increase is housing prices has been dramatic. 

 

I’m a big believer in Robert Shiller’s theory on home prices and how they track inflation.  He spelled this out really well in his book, “Irrational Exuberance”.  Something to keep in mind while viewing this data, the Case-Shiller Home Price Index is a month behind.  We are looking at data from May when the housing market was really on fire.

 

 

 

Finally, I want to touch on the Conference Board’s Consumer Confidence Index which was posted this morning.  The index, which measures consumers’ assessments of current conditions of business and labor, rose to 129.1.  This is up from 128.9 in June.

This is the fifth consecutive month of gains in the index.  Lynn Franco, the senior director of Economic Indicators at The Conference Board stated,

“Short-term inflation expectations eased slightly but remained elevated. Spending intentions picked up in July, with a larger percentage of consumers saying they planned to purchase homes, automobiles, and major appliances in the coming months. Thus, consumer spending should continue to support robust economic growth in the second half of 2021.”

More confidence means more willingness of consumers to spend.  This is stated plainly by Franco.  Consumers are still sitting on a large amount of cash when you look at the deposits sitting at commercial banks.  I touched on this briefly in yesterday’s alert.  Bank of America was quick to use the data and run a trend line.  I covered that in a previous alert.  The bank had anticipated that these funds would be spent when a “sunny day” arrived.  It seems consumers are happy with a cushion in their bank account.  That or they are having trouble securing the products they want to buy due to logistical issues related to port slowdowns and train congestion.  To sweeten their bank accounts further, the Biden administration is now sending out advances on the child tax credits on a monthly basis.  We’ll see if consumers get motivated to spend and still feel confident when the next report is released August 31^st.  I have a feeling we’ll be looking at a completely different picture at that point.

 

Alan's Alert 7-19-2021

 

On Friday afternoon, the Fed released the H.8 Assets and Liabilities of Commercial Banks data. The numbers look terrible. The Fed has flooded the banks with funds and the banks have pushed it back to the Fed.

Commercial and Industrial loan figures continue their downfall.

Loans and leases have flatlined.

This signals to me that the Fed has failed to spur the banks to lend. The Fed printed absurd amounts of money and gave it to the banks, yet the banks have pushed the funds back to the Fed through the reverse repurchase (repo) market.

This has caused the repo market use to skyrocket. Its use continues to be at elevated levels.

Quality collateral is becoming scarce. Banks want short-dated treasuries, not dollars. They participate in the repo market to get their needs met. These are the charts that the Fed doesn’t want to look at.

Not only are the banks not spending money, consumers are stuffing the banks with their cash as well.

Bank of America had anticipated that these funds would be spent when a “sunny day” came along. I’m wondering now when that sunny day will arrive. These additional funds are reflected in the numbers as elevated personal saving rates. After hovering around 7% for a decade, American’s personal saving rates have risen considerably.

This is nightmare fuel for the Fed. Try as they might, they will be powerless to stop the downturn that is coming. What the Fed fails to realize is that they have created a failure of epic proportions.

They’ve suppressed interest rates for so long that they have distorted the banks’ incentives. Now they’ve printed a ridiculous amount of money and flooded the system with it. Banks are starved for yield yet, the banks know that if they borrow short and lend long, they will earn a negative return. This is because “real” interest rates are negative. What is the “real” interest rate? That would be the market rate minus the inflation rate. Below I’ve plotted the 10yr and 30yr treasury rates minus the CPI to give us an idea of what the “real” return for a bank would be.

It’s no wonder the banks don’t want to lend. It’s a losing proposition! This is why the repo market looks so good to them.

I was immediately curious how this compares to the 70s, lo-and-behold;

The 1970s and the early 80s both had a bout of negative “real” rates. This was a terrible time for the Nasdaq and a tremendous time for gold.

Typically, during a recession inflation will fall. This is because there is a demand to hold cash balances. This demand had been suppressed during the boom phase of the economy. Firms that have inventory will discount it to raise cash. There is low wage growth and increasing unemployment. Commodity prices drop due to reduced demand. Asset prices fall, especially the stock market and the housing market. The problem is, this will not be a deflationary recession. Businesses are hovering around all-time lows for their inventory to sales ratio. Wage growth is happening and there is a great demand for employees. Commodity prices are up and rising. Asset prices are reaching nosebleed levels. We are in the upside-down world which means we’ll see a recession and inflation. Buckle up, the ride back to the 1970s could be a bumpy one.

Important and Potential Market Moving Events

 This Week

Tuesday, July 20
5.30am Housing Starts and Building Permits (June)

Wednesday, July 21
4am Mortgage Applications (16/June)

Thursday, July 22
5.30am Initial and Continuing Jobless Claims

7am Existing Home Sales (June)

Friday, July 23
6.45am Markit Manufacturing, Composite, & Services PMI (July)

*all times Alan standard time (PST)

Alan's Alert 7-12-2021

 

The Fed released the H.8 Assets and Liabilities of Commercial Banks, Friday afternoon. Commercial and industrial loans continue to crash. They are down 2.4% month-over-month.   

You can see the spike at the beginning of the shutdowns. Many businesses drew on their lines of credit and participated in the PPP loan program. Since that time, lines are getting paid down, and new loans are not getting originated.

When you look at all loans that banks are creating and subtract the commercial and industrial portion, consumers are borrowing at a rate that is increasing at 2.3% month over month.

These loans would be mortgages, car loans, student loans, home equity and personal lines of credit.

Rothbard stated that business borrowing would expand the money supply. I’m not sure he ever thought the Fed would do what it has done to date to juice the money supply. It remains to be seen if businesses will come back to the table to borrow. I think that many are unsure of the future. When the future is difficult to predict, businesses don’t want to take a chance on borrowing money for expansions. In time, the full picture will develop. In the meantime, it will be important to keep an eye on the yield curve and the money supply.

Using Bank of America’s favorite stimulus money tracker, deposits at commercial banks are still well above the trend line.

Consumers are holding approximately $2.5 trillion above the pre-shutdown trend. Now, these “excess” holdings have come down 0.3% on a week-over-week basis. Bank of America stated that these consumers would be ready to spend when a “sunny day” arrived.

Consumers holding this much money also have high expectations of future inflation.

I don’t think we should be giving too much weight to this. It is interesting to see the up-tick in expectations. The rate increased to 4.8% in June. It’s a new high for the series and the eighth straight month of increase. I’m sure its just transitory guys. Nothing to see here. Just people who seeing rising prices in the grocery store, at the gas pump, and rent.

Important and Potential Market Moving Events 

This Week

Tuesday, July 13
5.30am CPI (June)

Wednesday, July 14
5.30am PPI (June)
9am Fed Chair Powell Testimony to Congress

Thursday, July 15
5.30am Initial Jobless Claims
5.30am Import/Export Prices (June)
6.15am Industrial & Manufacturing Production (June)

Friday, July 16
5.30am Retail Sales (June)
7am U of Michigan Consumer Sentiment (Prelim for July)

Alan's Alert 7-1-2021

 

Oil is acting erratically this morning. I had crude futures up to $76.22 this morning before taking a tumble. As I send this out, it currently stands at $75.14. The oil market is really tight due to an influx of swing/momentum traders. I believe the current volatility is here to stay and should be taken advantage of. Big one day drops can be great opportunities to go long. Ultimately, we are going to be running into a large market deficit because of supply constraints, lack of new well development, and OPEC. Current rumors are flying around about OPEC’s meeting. Previous production deals could turn out to be less than previously advertised. Also, there is a rumor that the current production cut will be extended to the end of 2022 (it was going to end in April 2022). OPEC could be testing the waters here to see if shale producers will administer a healthy dose of self-control in the face of higher prices. If so, this will give the cartel a green-light to keep edging the price higher.

ISM put out their latest report on Manufacturing and it’s a wild ride. While the top number edged down (60.6 in June vs 61.2 in May), we are still in expansion mode (remember, anything above 50 indicates expansion). The number that really stood out to me was the change in price pressures which surged from 88 to 92.1. Now this data is considered “soft” data, as opposed to “hard” data. The difference being that soft data is based on surveys and hard data is based on actual numbers of sales or price changes. Still, this price pressures reading was the highest since July 1979.

Backlog of orders also decreased from 70.6 to 64.5. Inventories also kicked up 0.3 percentage points. This tells me that bottlenecks are starting to be alleviated.

Timothy Fiore, the Chair of the ISM Manufacturing Business Survey Committee had this to say about the report, “Business Survey Committee panelists reported that their companies and suppliers continue to struggle to meet increasing levels of demand. Record-long raw-material lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy.” 

This continues to play into the perpetual inflation thesis. It also leads to the investment thesis that shipping companies like Costamere (CMRE) are the place to be. I know a lot of the easy money has already been made in the shipping companies:

I don’t think the story on these guys is over yet. We are still seeing high prices for sea freight, port backlogs, and long lead times for new ships to be built.

Finally, I want to discuss the article in Zerohedge from last night, “Welcome To the Post-COVID Luxury Spending Boom”. This article dovetails nicely with Bank of America’s analysis of the US Personal Savings rate data. BoA examined the numbers and estimated that Americans were sitting on $2.3 to $3.5 trillion in excess savings.  

All that stimulus money has been piling up in bank accounts. BofA explained it as consumers “saving for a sunny day”. Now that we are seeing more states opening up, sunny days are arriving. Robert Wenzel predicted this when he said that the real fireworks for the precious metals would be occurring shortly after the 4^th of July fireworks. I’m keeping a close eye on some of my favorite luxury goods brands as they could provide an opportunity for a good trade.

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