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David Robertson: Market Review And Update Q3-2021

Market review and update for the third quarter of 2021.

After a solid performance in both July and August, the S&P 500 was considerably weaker in…

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This article was originally published by Real Investment Advice

Market review and update for the third quarter of 2021.

After a solid performance in both July and August, the S&P 500 was considerably weaker in September. It was more than just passing weakness, however. The stock market looked much less the cocksure prizefighter than the contender who took a shot to the jaw that wobbled his knees.

There are plenty of explanations for the market’s diminished presence. Oil prices have remained stubbornly high. GDP estimates are coming down. Stagflation is a common topic again. The problems with real estate debt in China are metastasizing. But, perhaps most importantly, rates are going up again, and because of inflation concerns, not better than expected growth. This witches brew may be entertaining for those caught up in the Halloween spirit, but long-term investors wonder if this will bring trick or treat.

Rising prices

Much of the concern starts on the energy front, where prices from oil to natural gas to coal have all risen. The outstanding question is, “How much should we make of this?”

Robert Armstrong from the FT caught up with Jason Bordoff, the director of Columbia University’s Center on Global Energy Policy, to provide some context on energy prices:

The only thing that helps the climate is if demand falls with supply. Demand falls because of policy, and because technology drives the costs of the alternatives down, and capital goes into them. Some will say higher [fossil fuel] prices are what cause higher investment in alternatives. But they are going to cause a backlash against the climate policies that we really need.”

“What this [crisis] shows is how difficult, disruptive and messy this transition is going to be. Who thought we could replace the lifeblood of the world economy and that would be easy? It’s going to be super volatile.

The Economist also addressed the policy of decarbonization and its effects on energy markets. However, it also reached a similar conclusion: “The age of abundance [of energy] is dead.”

Slowing growth

At the same time, GDP estimates for the third quarter have been falling precipitously to where the Atlanta Fed’s GDPNow estimate is only 1.3%. Not only is this a striking change from only six months ago, but the deterioration in the last month has also been substantial. Are higher energy and food prices already constraining other spending?

If a marked slowdown in the world’s largest economy wasn’t enough of an issue, the world’s second-largest economy is also slowing down. As Zerohedge reports:

“Having already suffered the fastest drop on record, Chinese junk bond markets – where property developer issuers dominate – were routed once again as fears about fast-spreading contagion in the $5 trillion sector, which drives a sizable chunk of the Chinese economy, continued to savage sentiment.”

The unsurprising conclusion is, “Evergrande’s contagion risk is now spreading across other issuers and sectors.” With the property market being ground zero for China’s economic growth, all signals point to a slowdown.

Stagflation

Combine stubbornly rising prices and rapidly slowing growth in the world’s two largest economies, and the subject of stagflation suddenly begins to take hold. The emergence of stagflation as a scenario to be considered gets depicted in the graph from themarketear.com (Oct 10, 2021).  

While the merits of the stagflation concern can get debated, those of us who experienced it in the 1970s remember it vividly. The heightened sensitivity is partly due to the unusual confluence of conditions and partly due to the devastating effect on financial assets.

Transitional transitory

While the Fed’s line has been for only “transitory” inflation, new indications of inflationary conditions keep popping up, and something more seems to be at work. This week, Atlanta Fed President Raphael Bostic characterized the price increases resulting from supply chain disruptions as likely to last, implying they are not transitory. The CPI for September also came in very warm at 5.4% and 4.0% on a core basis. In that number, the owner’s equivalent rent (OER) jumped to 0.4% month over month, indicating higher home prices are beginning to filter through into inflation.

In addition, the ability of supply to adjust to demand conditions is being constrained by more than just supply chains. As Jason Bordoff intimates, energy production gets constrained by public policy. However, the challenge is even worse than that, as activist investors are pressuring Exxon Mobil and Chevron to reduce investment in oil fields. If supply cannot respond to demand by way of price signals, words such as “difficult,” “disruptive,” “messy,” and “super volatile” are appropriate for describing the energy transition.

Not to be left out, the labor market is also showing signs of transitioning awkwardly from transitory issues to more persistent ones. What we know is voluntary quit rates are up. The Washington Post reported:

“Some 4.3 million people quit jobs in August — about 2.9 percent of the workforce, according to new data released Tuesday from the Labor Department. Those numbers are up from the previous record, set in April, of about 4 million people quitting, reflecting how the pandemic has continued to jolt workers’ mindset about their jobs and their lives.”

Widespread reasons

The reasons are widespread. Many jobs are getting tougher. Videos show flight attendants getting punched by unruly passengers. Restaurant servers are hassled for slow orders – because there aren’t enough restaurant servers. Healthcare workers, no strangers to adverse work conditions, have had to endure multiple waves of Covid. They are now getting rewarded for their (sometimes heroic) efforts by exceedingly ill-tempered patients.

Southwest canceled 1900 flights over the weekend and hundreds more early in the week in what does not appear to be an exclusively weather-related incident. So is this an aberration or the beginning of a disturbing trend? We’ll have to wait and see, but signs point to more takes on the sickout theme.

Jeremy Rudd tackles yet another issue in his recent paper on inflation expectations:

“Likewise, the survey evidence on why people dislike inflation reported in Shiller (1997) indicates that a major concern is that their wages won’t keep up with price increases—which certainly doesn’t suggest that they view themselves as having much bargaining power with their existing employer.”

In other words, in many situations, you have to quit a job and get a better one to get a raise. Many employees do not have the bargaining power to get raises, even if they are deserved.

Other paths

While there are several indications of pricing pressure across various dimensions, there is also evidence deflation may be the more significant threat. Rising commodity prices have stoked recent concerns about inflation, but Gary Shilling outlines eight reasons why the rally in commodities is likely to end soon in his latest newsletter. Slower growth globally and in China are the top two reasons. Excess supply and the strength of the US dollar also contribute. All the ideas are sound.

In addition, while longer-term interest rates have been trending up since early August, they have reversed the last few days. This flattening of the yield curve, while still very preliminary, presents troubling evidence for the inflation case.

So, where does this leave investors? The most obvious conclusion is the environment is becoming considerably more muddled than “The Fed has our back.” As a result, the prescription must be more nuanced than “Buy the dip.” As The Market Ear described on Oct. 13, “The aggregate psychology of this market is very complex and interesting right now.”

Implications

Investors who have profited by riding the wave of ever-higher stock prices should probably read “complex” and “interesting” as “harder.” One of the most powerful tailwinds for both stocks and bonds has been declining interest rates. If rates continue rising, much of the old playbook is going to get reconsidered.

For one, protection or risk management will have a valuable role to play again. On Wednesday, at the Global Independent Research Conference, Jim Grant explained, “the muscle memory of four decades of declining rates conditioned people to expect anything but inflation.” As a result, he thinks people have become conditioned to “disregard the usefulness of margin of safety.” So, it’s a good time to bone up on the margin of safety or to take a refresher course.

Dylan Grice (on the same panel at the conference), along the same lines, “all roads lead to duration.” In other words, the phenomenon of declining interest rates has been an enormous tailwind for a vast array of investment strategies. But, given the many miscues on inflation the last several years, he suggested: “we should have learned some humility.”

His investment answer is to avoid taking a big bet on the inherently uncertain prospect of inflation altogether. More specifically, he prefers to “sit on the fence” and avoid taking the big duration bets inherent to owning stocks and bonds. His point is, “it is easier to find duration-free investments than picking the direction of rates.”

Conclusion

Since early September, the S&P 500 has looked uncharacteristically lethargic. Yet, even with a big pop on Thursday (10/14/21), it is hard to deny the landscape is becoming more “complex.”

A big part of the problem has been the persistence of inflationary forces. So while it may be tempting to determine the most likely direction of price pressures, some of the most brilliant people are advocating for humility. Indeed, the avoidance of purely directional plays, and implementation of risk management, are pages from a different playbook.

The post David Robertson: Market Review And Update Q3-2021 appeared first on RIA.












Author: David Robertson

Economics

New Zealand cash rates – the canary in the coal mine?

My son, Angus, ventured into the Sydney residential market at the beginning of the year acquiring a small apartment, with what I considered to be an enormous…

My son, Angus, ventured into the Sydney residential market at the beginning of the year acquiring a small apartment, with what I considered to be an enormous loan from one of the Big Four. At the time the fixed four-year home loan rate was around 1.95 per cent per annum. Today, the advertised rate has jumped 1.0 per cent per annum to around 2.95 per cent. This reflects the Australian four-year Government Bond yield moving up from 0.20 per cent at the beginning of 2021 to the current 1.32 per cent.

The likely response to this change from property buyers today is that a much higher proportion of their mortgage will be attributed to a variable home loan. This rate typically reflects the Reserve Bank of Australia’s (RBA) cash rate, and at 0.10 per cent per annum it is currently at a record low, and well below the “emergency low” of 3.0 per cent per annum implemented during the Global Financial Crisis (6 months to September 2009).

Across the ditch, the Reserve Bank of New Zealand (RBNZ) has raised its official cash rate for the second time in two months by 0.25 per cent to 0.75 per cent per annum to counter growing inflation, which hit 4.9 per cent in the September 2021 quarter, and is expected increase to 5.7 percent in the March 2022 quarter.

RBA vs RBNZ cash rate

Markets are currently pricing in five more 0.25 per cent increases by the RBNZ over the next twelve months to a targeted 2.0 per cent per annum. Will New Zealand be seen as a canary of the coal mine moment given inflation has become a global problem? Only time will tell, however if cash rates happen to jump by 1.5 per cent and this filters through into the rate for variable home loans. The tailwinds currently being enjoyed by asset owners (with debt) – close to nil interest rates – could easily become headwinds.

The US inflation figure for October 2021 hit 6.2 per cent, a 30 year high.  Selected CPI subcategories saw the following 12 month changes: Beef +24 per cent, gasoline +51 per cent, natural gas +28 per cent and used cars and trucks +26 per cent. The UK was not far behind, with an inflation rate of 4.2 per cent for October.

ds-us-inflation-2021-2

Global supply chain bottlenecks and shifting consumer demand from services to goods could well be transitory, but as the Founder of Bridgewater Associates, Ray Dalio, warns, “raging inflation” is eroding people’s wealth today – particularly those who have their money in cash.




Author: David Buckland

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Economics

Dow Jones, the S&P 500, and Nasdaq price forecast after sell-off on Friday

Wall Street’s three main indexes ended sharply lower on Friday as news of a new COVID variant worried investors around the world. The World Health Organization…

Wall Street’s three main indexes ended sharply lower on Friday as news of a new COVID variant worried investors around the world.

The World Health Organization (WHO) on Friday designated a new COVID-19 variant detected in South Africa, and a lot of people didn’t want to hold risk assets on Monday morning or are afraid of what that could look like Monday morning.

Markets are reacting negatively because it is unknown at this point to what degree the vaccines will be effective against the new strain and would it initiate new lockdowns around the world. David Kotok, chairman and chief investment officer at Cumberland Advisors, added:

All policy issues, meaning monetary policy, business trajectories, GDP growth estimates, leisure, and hospitality recovery, the list goes on, are on hold. The new strain may complicate the outlook for how aggressively the Federal Reserve normalizes monetary policy to fight inflation.

The new Omicron coronavirus is detected in Britain, Italy, Netherlands, Germany, Israel, Belgium, Botswana, Denmark, Hong Kong, and Australia for now.

Britain has already imposed travel restrictions on southern Africa, while the European Commission is considering suspending travel from countries where the new variant has been identified.

The upcoming week will be busy, and investors will pay attention to Fed Chair Jerome Powell and U.S. Treasury Secretary Janet Yellen’s appearance before Congress to discuss the government’s COVID response on November 30.

S&P 500 down -2.3% on Friday

 S&P 500 (SPX ) weakened by -2.3% on Friday and closed the week at 4,594 points.

Data source: tradingview.com

If the price falls below 4,500 points, it would be a strong “sell” signal, and we have the open way to 4,300 or even 4,200 points.

The upside potential remains limited for the week ahead, but if the price jumps above 4,650 points, the next target could be around 4,700 points.

DJIA down -2.5% on Friday

The Dow Jones Industrial Average (DJIA) weakened -2.5% on Friday and closed the week below 35,000 points.

Data source: tradingview.com

The Dow Jones Industrial Average remains under pressure as news of a new COVID variant worried investors worldwide.

The current support level stands at 34,500 points, and if the price falls below this level, the next target could be around 34,000 points.

Nasdaq Composite down -2.2% on Friday

Nasdaq Composite (COMP) has lost -2.2% on Friday and closed the week at 15,491 points.

Data source: tradingview.com

The strong support level stands at 15,000 points, and if the price falls below this level, it could be a sign of a much larger drop.

Summary

Wall Street’s three main indexes ended sharply lower on Friday after the news that the World Health Organization designated a new COVID-19 variant detected in South Africa. All policy issues go on hold currently, and investors will pay attention to the government’s COVID response on November 30.

The post Dow Jones, the S&P 500, and Nasdaq price forecast after sell-off on Friday appeared first on Invezz.







Author: Stanko Iliev

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Economics

Wind Power Becoming too Cheap for Industry to Sustain Itself

The price of generating wind power has gotten so low, that companies may soon be unable to invest in additional
The post Wind Power Becoming too Cheap…

The price of generating wind power has gotten so low, that companies may soon be unable to invest in additional technologies for the sector.

According to major turbine-making company Siemens Gamesa, the cost of wind power has recently dropped to such a low level that it can finally challenge the fossil fuel industry, mostly due to an abundance of investments in renewable energy. “What we’ve clearly achieved is that wind power is now cheaper than anything else,” said the company’s CEO Andreas Nauen as quoted by Reuters.

However, Nauen warned that “we shouldn’t make it too cheap,” because it could hinder the influx of additional investments in the green space. Across Europe, both wind and solar are substantially cheaper that natural gas, coal, and even nuclear power. And, with governments’ strong ambitions to adopt a climate friendly agenda, the demand for wind turbines has reached a record-high; but, the relatively lower prices and increased competition have also eroded away at producers’ margins.

“We have probably driven it too far,” said Nauen, adding that if prices continue to decline, the sector won’t be able to invest in further innovations. To make matters worse, accelerating global inflation for raw materials, coupled with supply shortages, also threatens to squeeze turbine makers’ margins. Moreover, governments around the world have begun eliminating generous wind subsidies in favour of more competitive contracts submitted by the lowest bids.

“We need to change auction systems in the future,” said Nauen, suggesting that local job creation should be governments’ top priority, rather than just the lowest price.


Information for this briefing was found via Reuters. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

The post Wind Power Becoming too Cheap for Industry to Sustain Itself appeared first on the deep dive.

Author: Hermina Paull

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