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 6-11-2021

 

By Alan Baerlocher

The University of Michigan puts together a survey of consumer sentiment on a monthly basis but they will also put out a preliminary survey around the middle of the month to prepare investors for what their report will reveal. Consumer sentiment can, sometimes, tip us off to the beginning of a recession. Here’s the chart:

You can see the recessions in the gray shaded area. Consumer sentiment usually takes a dive right before the economy hits the brakes. There is no one chart that will warn us of an impending recession. You need to be able to view the economy as a whole, but when consumers lose confidence, bad things happen.

The preliminary survey was posted this morning and the results were unsurprising:

The University of Michigan's consumer sentiment for the US increased to 86.4 in June of 2021 from 82.9 in May, beating market forecasts of 84, preliminary estimates showed. Expectations soared (83.8 vs 78.8) and the current conditions gauge also edged up (90.6 vs 89.4). Meanwhile, inflation expectations for the year ahead fell to 4% from 4.6% and the 5-year outlook declined to 2.8% from 3%. 'Stronger growth in the national economy was anticipated, with an all-time record number of consumers anticipating a net decline in unemployment. Rising inflation remained a top concern of consumers, although the expected rate of inflation declined in early June', according to Surveys of Consumers chief economist, Richard Curtin.

None of what Richard Curtin said was groundbreaking. However, an interesting thing happened in the survey that caught my eye and Richard’s attention.

Consumers have become downright demoralized at the prices they are paying for homes, vehicles, and appliances. Richard Curtin goes on to say, “Spontaneous references to market prices for homes, vehicles, and household durables fell to their worst level since the all-time record in November 1974 (see the chart). These unfavorable perceptions of market prices reduced overall buying attitudes for vehicles and homes to their lowest point since 1982. These declines were especially sharp among those with incomes in the top third, who account for more than half of the dollar volume of retail sales.”

Soaring prices are frustrating consumers. This could mean they avoid making purchases. This looks terrible. The stimulus giveaways are ending and consumers will have to live within their means. This means that prices will have to come down or fewer goods could be sold. These scenarios do not bode well for the economy. We could be staring stagflation directly in the face. This will be something to keep a close eye on.

But I do have good news

Next week is going to be a big one. We’ve got the producer price index, retail sales, and manufacturing reports coming out on Tuesday, as well as the FOMC meeting notes on Wednesday.