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 7-22-2021

 

It’s Thursday, which means employment data was released this morning.  Initial claims came in up 51k to a total of 419k.  Continuing claims came in at 3,236k.  This is down 29k from the prior week.  However, my eyes were fixed on the pandemic relief numbers.

 

Over 1.1M people left the pandemic assistance this past week!  This is great news but we still have a long way to go as over 15M people are still using it.  Here’s what the graph of 1.1M people leaving pandemic assistance looks like:

Now, initial claims came in up but I still believe we are trending in the right direction. 

The financial news media was shocked at the rise in initial claims.  The consensus was going to be an 18k claim drop.  So, when it came in up 51k, it provoked a wild ride in the S&P500 today.    

 

 

And thanks to Goldman Sachs, we have this little graph:

It was, and still is, obvious to those with the most basic level of economic common sense that paying people extra unemployment to stay home will encourage them to…. stay home!  It continues to be a terrible policy to drag these bonus unemployment benefits out to September.  The states that continue to do so are only hurting their own economies and small businesses. 

Joe Biden was at a townhall meeting in Cincinnati last night.  He told the audience that workers are seeking better wages and working conditions, and those businesses desperate for workers should simply offer higher wages.  He called rising wages a “feature” of his economic plan.

What happens when the bonus unemployment runs out?  What happens when these millions of workers flood back into the labor market?  Will Joe’s “feature” of rising wages run out of steam?

I put the question of downward adjustments to wage rates to professor Don Boudreaux, who runs the blog Café Hayek.  Don Boudreaux is a professor of economics at George Mason University.  He writes a great blog that is a must follow.  I asked professor Boudreaux what would happen to wages once these workers came back to the labor market.  Would wages decrease?  His answer was spot on:

“I'm quite sure that, as the supply of low-end labor rises (with the end of the leisure subsidies) (1) workers who continue to be worth their current wages will be paid those wages, (2) many newly hired workers will be paid wages lower than are being offered now, and (3) as always, workers who cannot produce enough hourly output to justify being paid even as little as the minimum wage will remain unemployed.

 

Many workers hired during the labor 'shortage' might well find that they have to take pay cuts as more workers start to compete for jobs. (Most of these pay cuts will come in the form of taking new jobs at lower wages.)”

 

 

Smart low-wage workers should take advantage of this opportunity.  Unfortunately, many find it too easy to do nothing.  Wake me up when September ends.

Alan's Alert 7-7-2021

 

JOLTs (Job Openings and Labor Turnover Survey) data came out of the BLS (Bureau of Labor Statistics) today and we have a new record.  

Total nonfarm job openings have hit another record high.  At this pace, help wanted signs are going to be the next shortage.  The number of job openings in the US rose to 9.209 million.  Job openings increased in a number of industries with the largest gains recorded in services, followed by education and educational services.  Employers have been opening their businesses and searching for help but help is hard to find.  In fact, total nonfarm hires were down by 85,000 over the previous month.

In addition to the record high in job openings, we also have a new record in layoffs and discharges which have never been lower.  The labor market remains in a disconnect.  With many potential workers still getting emergency unemployment through the federal government, wages need to come up for them to be motivated to find work.  I find this to be another arrow in the ‘inflation is perpetual’ quiver.  As a reminder, here is a rundown where states have ended the pandemic related unemployment;

Something to keep in mind, this JOLTs data is from May.  None of the data related to the above states ending the emergency benefits have been reflected in this most recent report.

Alan’s Options Primer 

I had some interest in options trading and how it works.  I thought I’d put together a series and see how it goes.  I’m planning on breaking up this topic into 3 posts.  Today is post 1 of 3. 

 

I have only two rules when it comes to trading options.  They are hard to follow but there is only two of them.  My first rule of trading options, do not trade options.  My second rule of trading options, DO NOT TRADE OPTIONS.

 

Options are highly volatile derivatives based on the underlying stock that the option contract represents.  You might not understand what this means yet but understand this, you can lose money very quickly with options.  Never buy options with money that you aren’t prepared to lose.

 

Now that we’ve gotten that out of the way, I would recommend viewing this video by Robert Shiller.  It is part of his recorded lectures on Financial Markets (ECON 252) at Yale.  He gives a great overview, history, and breakdown of option pricing formulas.

 

Another good resource is Option Alpha.  Their Beginner Course series on options is well put together.  As a disclaimer, I have not watched this entire series.  I’ve watched many of their videos and they do a great job explaining the ins-and-outs of options trading.

 

With these videos as a base, I’ll start to give my perspective and overview tomorrow.

 

 

Alan's Alert 6-1-2021

 

By Alan Baerlocher

 

Wow, so much to get to in the first alert.  First let’s take a look at the M2NSA data that was released last week.

 

13-week Annualized M2NSA Money Supply Growth

 

Money supply came in hot at 16.93%.  It is still showing as being highly elevated.  This growth in the money supply is fueled by stimulus payments, CARES act giveaways, Federal unemployment money, the US Treasury drawing down its reserves, and soon, an infrastructure bill, as well as, Biden’s $6T budget.  It’s not unusual for it to begin a dip here through the end of July.  We’ll see how this plays out when the M2NSA is released at the end of June.  Classically a dip plays into the idiom, “sell in May and go away”.  I’m not so sure that will be the case this year.

 

 

Federal Unemployment Benefits

The federal unemployment benefits are putting a real wrench in the unemployment rate.  When the government pays you more than you would make working, there is real incentive to stay on the couch.  24 GOP-led states have figured this out and are ending the federal unemployment benefits early.

 

·  June 12: Alaska, Iowa, Mississippi, Missouri

·  June 19: Alabama, Idaho, Indiana, Nebraska, New Hampshire, North Dakota, West Virginia, Wyoming

·  June 26: Arkansas, Florida, Georgia, Ohio, South Carolina, South Dakota, Texas

·  June 27: Montana, Oklahoma, Utah

·  July 3: Tennessee

·  July 10: Arizona

Ending these benefits will encourage workers to get back to work.  Many of the bottlenecks in the economy could begin to be resolved.  However, the D-led states will holdout until the Feds end the benefits. 

 

In addition to the unemployment benefits, soon money will rain down on those that have kids.  Earlier this year, the Child Tax Credit was enhanced.  Payments will begin to be sent in mid-July.  It will be $250 per child per month for kids aged 6-17 and $300 per child per month for kids less than the age of 6.  This will add pressure to the M2NSA.

 

 

 

Personal Consumption Expenditures comes in hot

 

More signs that the inflation wave is on, personal expenditures rose to 3.1% Y/Y.  You have to go back to June and July of 1992 to find a comparable reading.  This summer is going to be hot, but inflation will be hotter.

 

 

Economic Policy Uncertainty Index

 

The EPU index continues to resolve to the pre-covid baseline.  This indicates to me that the news is starting to move on and this will cause consumers to be ready to get back to normal.  When inflation begins to become prevalent, I expect this index to begin to rise.

 

 

Important and Potential Market Moving Events This Week

Tuesday, June 2

10am Construction Spending

10am ISM Manufacturing Index

 

Thursday, June 3

8.15am ADP Employment Report

10am ISM Services

 

Friday, June 4

8.30am Employment Survey

10am Factory Orders