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 6-30-2021

 

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.