Alan's Alert 7-2-2021

 

This morning employment situation data was released including the unemployment rate and nonfarm payrolls. The unemployment rate ticked up .1% to 5.9%. This was a shock to the bank research teams who had a consensus estimate of 5.7%. Nonfarm private payrolls increased by 662k; this surpassed the consensus estimate of 600k. The labor participation rate was also released and it showed it holding steady at 61.6%.

And while this may sound confusing that unemployment would go up while jobs are being added my attention was elsewhere:

Above are the average hourly earnings of all employees. I’ve added the red trend-line to show how much above trend we are currently running. The current average hourly rate is $30.40/hour. That is approximately $0.65 above the trend. The earnings rate increased at a rate of 0.3% month-over-month. This is funneling more money into workers’ pockets and is going to continue to put upward pressure on prices. I believe it will also incentivize more workers to search for jobs.

A wild card to keep in mind;

When the government unemployment bonuses officially end in September, employers will have difficult decisions to make. Some believe that wages will be suppressed when this happens. They believe that with an influx of new people hitting the job market, that this would put downward pressure on wages. I have a hard time believing this. New workers may be started at a lower wage but once a worker has been hired at a specific wage, employers rarely reduce that wage because they worry that the time and training that the employee has received will go to waste if they leave. What happens to employers when confronted by employees that do the same job and aren’t paid the same rate? Workers discuss their wage rates. It happens. Will employers feel obligated to match wage rates? Will there be strife and contention? That surely doesn’t make for a positive work environment. This is something to ponder as we move through the summer and see more states drop the federal bonus payments.

Every Friday the Fed posts the Assets and Liabilities of Commercial Banks. According to Mises (and Rothbard), bank credit to business is what generates the boom-bust cycle of the market. When banks are lending to businesses, businesses are expanding and generating income, which then fuels the fractional reserve system. Pairing the lending data with the money supply data gives me a better picture on what is going on with the economy. Unfortunately, the shutdowns have put a real wrench in the numbers:

Businesses borrowed PPP money, drew on their lines of credit, and did anything they could to withstand the long government shutdown. You see this in the big run-up with a peak in May 2020. These actions broke the trendline and have muddy the waters. Businesses now feel unsafe borrowing money until future economic conditions are more certain. Since the Fed updates this data late on Fridays, I’ll be spending more time on Monday mornings reviewing it.

Lastly, durable goods:

Orders have rebounded after the slight drop in April. They increased 2.3% month-over-month and are close to the pre-shutdown high of 255,924. It seems to me that consumers are continuing to purchase and are making up for lost time.

As a reminder, there will be no alert on Monday, July 5^th, as the market will be closed. Hope you all enjoy the 4^th of July weekend!

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 6-4-2021

By Alan Baerlocher

Employment Reports Volume 2

Today the unemployment rate and labor force participation rate were posted.  Now, something to keep in mind is that the market is keeping a very close eye on the employment picture.  The general consensus is that a good employment number means that the Fed will begin to taper its asset purchases and increase the interest rate, reducing liquidity.  So, bad news on the employment front mean good news for the stock market and good news on employment means bad news for the stock market.  Crazy world we live in, right?  You can see this play out in the last two days.  When employment looked to be on the rise according to the ADP report, the market sold off.  Now that the picture doesn’t seem as rosy, the market is up.  Looking at the payroll/employment picture, the economy needs to add 1M jobs per month to reach the pre-pandemic trend by late 2022.

 

The unemployment rate is at 5.8%.  Still well above the pre-pandemic low of 3.5%.

Labor force participation is at 61.6% and is below the pre-pandemic rate of 63.4%.  I think this is a big reason the unemployment rate fell because today’s BLS jobs report was disappointing.

 

The most interesting chart to me right now is the average hourly earnings chart.

Now earnings are always rising but I think we could be seeing this take-off. 

 

Here’s the earnings chart by percent change:

This gives us a better picture of the increases that are happening.  Typically, the month-to-month increase is in the .25% to .40% range, but what we are seeing now is a jump and stop kind of action.  This tells me those business owners, who need workers, are increasing wage rates to get workers back to work.  As competition for workers heats up, we could see some big jumps.  This leads to more spending money in the workers’ pockets, enticing them to spend more, driving up costs.

 

It’s telling to me that President Biden feels the need to address the nation on the employment picture today.  I’m not quite sure what he is thinking but I don’t intend to tune-in to find out.  Until the left wakes up from the idea that it’s ok to pay people to not work, we are going to struggle to get back to a full employment picture.  I think we could be easily confronted with a stagflation scenario, where employment stays sluggish and the Fed keeps the printing presses running hot.

 

Durable Goods

The financial press may make a lot of the chart above.  It shows new orders placed by manufacturers.  In an expanding and healthy economy, orders will rise.  With material shortages abound, a dip in the orders is of no surprise to me.  The list of commodities up in price and commodities in short supply from yesterday’s alert dovetails easily into the durable goods report. 

 

Gold and Silver

Yesterday we had a good sell-off in the precious metals but after today’s poor employment numbers gold and silver were back on the rise.  This situation is a lot tighter than I thought.  Neither gold, nor silver are at their high for the week but I am shocked to see such a quick turn-around.

 

Portfolio

I’m not comfortable yet giving a model portfolio.  I think there is a lot of factors that should be taken into account for each individual’s situation.  Are you willing to take on maximum risk and trade short-dated options and futures? Are you more conservative and want ETFs or individual equities to trade?  Is your portfolio your retirement nest-egg that should be guarded with great caution or do you have a Robinhood account where you spend your gambling money? Maybe you are somewhere in between?  For now, I’ll post what I’m doing in my own portfolio and you can make up your own mind.  Here’s my current breakdown:

 

39% Oil & oil drillers

30% Silver & silver miners

11% Uranium producers

6% Gold & gold miners

14% Cash