Alan's Alert 7-30-2021

 

For the fourth month in a row the Federal Reserve’s favorite inflation indicator has been on the rise.  The Personal Consumption Expenditures excluding food and energy (Core PCE index) has risen to 3.5% year-over-year.  Amazingly, the Core PCE came in below the consensus estimate of 3.7%. 

 

On a monthly basis, the increase was 0.4% for the month of June.  This would translate to 4.8% on an annual basis if the Core PCE index would stay steady for 12 months.

 

You can see that the steepness of the curve has lessened.  I’m sure this will be talked up on the financial media and by members of the Fed.  We are still a long way from determining if the transitory inflation thesis will prove correct but the fact of the matter is, the Fed has gone all in on their transitory thesis. 

 

During this week’s FOMC meeting and press conference, Jerome Powell defined what “substantial further progress” meant.  Chairman Powell had been using the phrase over the course of the government shutdowns.  He had been stating that the Fed was administering an accommodative policy to aid in the economic recovery.  Now that the National Bureau of Economic Research has declared the recession over, the Fed has been dragging their feet in ending the purchases of treasury bonds, mortgage-backed securities, and raising the Fed funds rate.  To be able to drag his feet further, Powell came up with the phrase “substantial further progress” without defining what that meant.  This week he defined the term as being synonymous with maximum employment.  This has allowed Powell and company to continue to kick the can down the road.

 

Also, during this most recent FOMC meeting, Powell had admitted that progress had been made towards their goals.  This would seem to mean that we are getting closer to the moment the Fed will begin to taper their balance sheet expansion.  Bank of America ran a report looking at changes in option premiums and it came to the conclusion that the market believes the taper announcement will happen at Jackson Hole.  This is where the next Fed meeting will take place, which will be August 26^th -28^th. 

To me, this seems too early for the Fed to make that kind of announcement.  We will still have states paying pandemic related unemployment assistance until the beginning of September.  Which means the picture on employment won’t start to clear up until the end of September or beginning of October.  In an unfortunate twist, the latest unemployment figures that came out on Thursday showed an increase in the amount of people getting the pandemic assistance!

Initial claims dropped by 24k but continuing claims rose by 7k and over 211k people were put back onto the pandemic assistance doles.  In an effort to keep even more people on the government dole, a judge in Arkansas has ordered the state to resume federal pandemic unemployment benefits.  If the Fed has tied the tapering of asset purchases to the unemployment rate, we have a long way to go before “substantial further progress” will have been made.

 

 

 

Late last night, I got a tip from David at Live Better Now.  He alerted me to a tweet from Jack Posobiec.  Jack is a former military intelligence officer and a senior editor at the news website HumanEvents.com.  Jack is known for having an ear (or two) to the ground in DC.  He’s been accused of having a “mole” in the White House and seems to be in-the-know before the news media.  Last night he posted the following:

Anyone who has followed Poso for any length of time will know, he does not write click-bait styled headlines or tweets to get views.  While it seems like a stretch that another shutdown could happen, the truth is, those in power have enjoyed wielding it against those that aren’t in power.  If we see another lockdown, we could see another crash in the stock market and more “accommodative policies” by the Fed.  The CDC has really talked up the delta variant and has now “leaked” to the Washington Post their latest attempt to stir up fear.  My guess is that this supposed “leak” was an attempt to gauge if another lockdown could take place.  The problem those in power are facing is that Americans have grown Covid lockdown weary.  What happens if the government mandates another lockdown and Americans don’t cower in fear?  The government will look foolish and there is nothing that the narcissists in power hate more than looking ridiculous.  Which brings me to my latest meme!  In an effort to continue the power of memes over the narcissists in power I bring you…  COVID VARIANT BINGO!

 

Now I’ve already taken care of the popular and not-so-popular variants that have been posted to the WHO’s website.  What makes this exciting is that four new variants have been discovered (P.3, P.2, B.1.427 & B.1.429).  Will they get Greek labels?  Only the “scientists” at the WHO know for sure.  Keep me up-to-date with an email if I miss a new variant getting labelled.  I would hate to miss the opportunity to see a COVID VARIANT BINGO achieved.

 

 

One last thing…

Have a safe weekend.  We’ll see you next week!

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 6-17-2021

 

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.