Alan's Alert 7-16-2021

 

Fed Chairman Jerome Powell sat down at his computer for the zoom call with the Senate Finance Committee.  It went off without a hitch.  He was grilled further about monetary policy and inflation but was able to run out the clock on any difficult questions.  Like a good government employee, he was able to avoid taking any blame and stressed that the shutdowns were “unique” and that “opening up” the economy caused this “transitory” inflation.  Nothing to see here people, move along.

Retail sales numbers came out this morning.  They are up month-over-month by 0.6%.  This beat expectations of -0.4%.  Consumers have money to burn in their accounts and they are looking to spend it.  I came across this article about this summer’s suitcase shortage.  I expect random shortages to be a regular occurrence.  Inputs have gotten expensive and so has warehousing.  Retailers and producers are trying their best to keep their businesses afloat and keep product on the shelves.  The port slowdowns were putting a real crimp in their supply chains but now the railroads are seeing “significant congestion”.  This will be a big boon for Warren Buffett, who owns the BNSF railroad.  Continued congestion and slowdowns will only exacerbate the bottlenecks in the economy. 

 

The University of Michigan also put out their preliminary consumer expectations report.  It came in at a five-month low of 80.8.  Low morale among consumers was “largely due to less favorable prospects for the national economy” according to Richard Curtin the chief economist.  Growing concerns about inflation was also a concern.  He went on to say, “Consumers’ complaints about rising prices on homes, vehicles, and household durables has reached an all-time record (see the chart).  Purchase rates, however, have benefitted from record increases in accumulated savings and reserve funds.”

Finally, I was going through the previous weeks’ worth of reports from Bank of America.  They put out a report on the 13^th of July titled, “Goldilocks and the Three Bulls”.  Included in the report is an insight that I found very interesting:

“Massive bank balance sheets are parked at the Fed today, instead of being lent out, and corporate bonds are enjoying the greatest upgrade cycle in history.  All that dry powder means the financial system is primed for productivity.  As employment stabilizes, the capex cycle will accelerate, and lending should pick up shortly thereafter.”

They see the current time as a calm before the storm.  That “dry powder” in the financial system is really inflationary powder.  When it finds it’s way into the system, big fireworks will be happening.  I agree with BofA and believe we will see a big lull before the powder ignites.  The CPI and PPI could flatline and begin to drop.  “Transitory” inflation believers will tout it as a big win and a “told you so” moment.  There could even be a big rush out of commodities and into the growth stocks.  This will be a prime buying opportunity.  The Fed will begin its victory lap but halfway through, the other shoe will drop.  When September comes around, the bonus unemployment relief will be ended.  The fall looks prime for something dramatic to happen.

 

 

Alan's Alert 7-15-2021

 

Yesterday, Fed Chairman Jerome Powell sat (on zoom) before the US House Committee on Financial Services.  He was peppered with questions ranging from crypto (especially the rumored Fed-coin) to rolling back MBS purchases.  It was a marathon, but he held strong to his prepared remarks and deflected any questions that would show the Fed’s hand.  He is an expert at running out the clock on difficult questions.  There were a couple Congressmen that had very direct questions to Powell concerning inflation and what he means exactly when he says, “still a ways away” from reaching the Fed’s goals.  He was able to reiterate that the Fed won’t be removing their “accommodative” policy and would give plenty of advance warning when they would.  Mr. Powell sits in front of the Senate’s Financial Services committee today.  I expect it to be a re-run of yesterday. 

 

Unemployment stats were released this morning and initial claims continued its slow downward trend.  We are down 26k claims from last week.  This slow pace will keep the Fed in “accommodative” mode.  After yesterday’s hearing, it is strongly believed, by most of congress and the Fed, that the goal is an unemployment rate at 3.5%.  I think this is extremely foolish.

 

Here’s the full picture of the change in the unemployment rate since January of 1948:

The unemployment rate bottomed out at 4.4% at the lowest in the last cycle (March 2007) and 3.8% on the cycle before that (April 2000).  Then the rate didn’t break below 5.0% in the preceding two cycles.  To think that we’ll see an unemployment rate at or below 3.5% is ambitious at best and negligent of history at worst.  I’m of the mind that unemployment is still elevated but juicing the money supply isn’t the way to get it down.  This fact was brought up during yesterday’s hearing but nothing came of this insight.  There was no follow-up to ask who really benefits from the accommodative monetary policy if it doesn’t improve unemployment.  Our big fireworks moment was again, shelved for a different day. 

 

Looking in at the continued claims section of the unemployment report, you can see that people are still moving off the pandemic related unemployment assistance.  We have almost 10.4 million people using the assistance but every week, more are moving off.  I put together the below graph to illustrate the point:

 

The amount of people moving off the assistance is down from last week but the trend is higher.  At some point this trend will stall as all the states ending the emergency relief early will be exhausted and the rest of the states will hold out until September.

 

 

As I reflect on yesterday’s hearing, I am shocked at how flippant the Fed and Congress are at the sheer volume of money that they talk about.  Their talk is full of rosy outlooks with no worries in sight.  They have no idea of the tidal wave of inflation that could be staring them directly in the face.  Maybe some of them feel differently behind closed doors but they do a good job masking it.  As inflation is allowed to run hotter, higher interest rates will be needed to stem the tide.  If we are at 5% annual inflation, we’ll need the Fed funds rate at 6-7% to stop it.  If inflation runs at 8%, 10% or greater would be needed.  Currently, with the Fed funds rate at 0.0% to 0.25%, the Fed is a long way from even thinking there is problem.  It simply reinforces my view that we are still very early in this trend.

 

A friend and fellow subscriber mentioned to me that PBS Frontline put a documentary together called “The Power of the Fed”.  It aired on Tuesday and it’s certainly worth a watch.  The people that put the production together get some big players to sit down for interviews and ask them great questions.  It highlights the period from the 2008 crash through current day.  Its comical that some of these players (particularly Sheila Bair and Peter Fisher), have a completely different views of the Fed’s actions after they leave their cushy government posts.  A few have truly drunk the Kool-Aid.  Neel Kashkari is especially cringe-worthy.  He is a mirrored reflection of Arthur Burns and struggles to understand that the Fed’s monetary policy is reckless and exacerbates the income inequality we see today.  Neel is of the mind that printing vast sums of money is great for low-income individuals.  He is a dangerous individual because he has been given way more power than he should have and he wields it in a way that, he believes, benefits all people.  It reminds me of a C.S. Lewis quote:

 

Alan's Alert 6-7-2021

 

I was going to talk about uranium today but after some crazy inflation comments coming out of the Fed members and one former Fed chair and current Treasury Secretary, all eyes are on the CPI release that is scheduled for Thursday.

 

The first comments came from Cleveland Fed President Loretta Mester addressing the poor labor report saying;

“Fed policy needs to be patient right now” and the “economy has more progress to make on hiring”. 

 

Next NY Fed President John Williams stepped up the rhetoric saying;

“I just don’t think the time is now to take any actions” and “The economy has improved and I think it’s on a good trajectory. But to my mind, we’re still quite a ways off from reaching the substantial further progress, you know, we’re really looking for”.

 

As if this wasn’t clear enough, Janet Yellen, the former Fed chair and current US Treasury Secretary had an interview with Bloomberg in which she stated:

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view.” And “We’re seeing inflation but I don’t believe it’s permanent. We at least on a year-over-year basis will continue, I believe, through the rest of the year to see higher inflation rates – maybe around 3%.”

 

Now Janet didn’t get to be where she is because she’s a dummy.  She’s a smart.  She’s well educated (Brown, Harvard), and has a work history that reflects a long tenure in government finance (Fed chair, SF Fed pres, chair of Council of Economic advisors).  The catch here is, she doesn’t work for us, the people.  Her employer is the big banks and the Biden administration.  Her goals are to pass these large programs (infrastructure, Biden’s budget).  Inflation worries are not her worries.  She’ll embrace inflation until it gets out of hand.

 

The same goes with the rest of the Fed.  They simply believe that all factors point towards “transitory” inflation.  They are willing to let things run hot for a while.

Now is Yellen right about inflation being good for society?  Inflation being good for the economy is a very Keynesian idea.  If there is a steady stream of inflation, all prices go up; producer prices, capital goods, land, wage rates, earnings on assets go up and those assets rise in value (which is what the big banks want).  The value of the dollar decreases, meaning imports are expensive but the export business is booming. 

 

Now you might be thinking, well Alan, this doesn’t sound so bad and Janet seems pretty smart but I warn you, this is a distortion of the true market forces which always prevail in the end.  You can only push on a string for so long before it comes snapping back.

 

Goldman Sachs put out their spin on the situation and raised their near-term inflation forecast.  The bank also analyzed returns in high and low inflation environments finding that the median real return was higher under a low inflation environment (1.1% & 1.3% vs .3% & .7% monthly returns).  They discovered that the best returns in a high inflation environment was health care, energy, real estate, & consumer staples.

 

Sorry that this was a Debby-downer/chicken-little kind of a post.  Be thankful that I didn’t wade into the deep waters of Austrian vs Keynesian business cycle theory.  I guess this is a warning of sorts, there is going to be a lot of tension in the market until the CPI is released Thursday pre-market.  Protect yourself and be positioned for the coming wave.