The U.S. economy may well be in the midst of a soft patch due to a very stubborn COVID-19 virus and some persistent inflation brought on by the ongoing global supply chain disruptions. Friday’s Producer Price Index (PPI) reading put a spotlight on the bottlenecks producers are contending with to manage profit margins.
The PPI for final demand increased 0.7% month-over-month in August (consensus 0.6%) after increasing 1.0% in July. On a year-over-year basis, the Producer Price Index for final demand was up 8.3% on an unadjusted basis, versus 7.8% in July. That has lifted the index past its record increase from last month. The index for processed goods for intermediate demand rose 1.0% in August and was up 23.0% year-over-year, its highest increase since February 1975. (Source: briefing.com)
For the second time in the past four weeks, Goldman Sachs has lowered its U.S. gross domestic product (GDP) forecast for 2021, down to 5.7% from 6.2%. For the third quarter, Goldman slashed its growth forecast to 5.5% from 9.0% due to the impact of the Delta variant, but also raised its outlook for the fourth quarter to 6.5% from 5.5%, citing expectations of fears over the virus diminishing and some supply chain shortages getting rectified.
This lowered growth outlook from Goldman was issued just as investors were coming off of a long Labor Day weekend, triggering a four-day bout of selling that saw the S&P give back 1.7% and the tech-rich Nasdaq retreat 1.9%. The selling pressure was not offset by rotation into the Treasury market, as is usually the case. Instead, the 10-year yield rose to 1.34% in anticipation of this week’s Consumer Price Index (CPI) report for August, where a survey of economists is forecasting an increase of 0.5%.
Some late selling pressure Friday could also have been attributed to the 20-year anniversary of 9/11 happening over the weekend, but the week had already taken on a tone of distribution, especially in the home-building stocks, where supply chain disruptions have analysts lowering projections. There was really nowhere to hide as all 11 sectors closed down on the week, marking the biggest drop since February.
Aside from the Delta variant, supply chain issues and wage inflation, it’s my view that market participants are most concerned about what the plan forward is for Fed policy. From the Beige Book released on Sept. 8, there are some key takeaways that suggest Jerome Powell will continue to maintain a wait-and-see posture. From the transcript, a few comments seem to provide a few tea leaves for investors.
Overall Economic Activity
Economic growth downshifted slightly to a moderate pace in early July through August.
The deceleration in economic activity was largely attributable to a pullback in dining out, travel and tourism in most Districts, reflecting safety concerns due to the rise of the Delta variant, and, in a few cases, international travel restrictions.
The other sectors of the economy where growth slowed or activity declined were those constrained by supply disruptions and labor shortages, as opposed to softening demand.
Looking ahead, businesses in most Districts remained optimistic about near-term prospects, though there continued to be widespread concern about ongoing supply disruptions and resource shortages.
Employment and Wages
Demand for workers continued to strengthen, but all Districts noted extensive labor shortages that were constraining employment and, in many cases, impeding business activity.
Some Districts noted that return-to-work schedules were pushed back due to the increase in Delta variant cases. With persistent and extensive labor shortages, a number of Districts reported an acceleration in wages, and most characterized wage growth as strong — including all of the midwestern and western regions.
Several Districts noted particularly brisk wage gains among lower-wage workers. Employers were reported to be using more frequent raises, bonuses, training and flexible work arrangements to attract and retain workers.
Inflation was reported to be steady at an elevated pace, as half of the Districts characterized the pace of price increases as strong, while half described it as moderate.
With pervasive resource shortages, input price pressures continued to be widespread. Even at greatly increased prices, many businesses reported having trouble sourcing key inputs.
Some Districts reported that businesses are finding it easier to pass along more cost increases through higher prices. Several Districts indicated that businesses anticipate significant hikes in their selling prices in the months ahead.
These notes are, in my view, not the stuff of a Fed ready to pull the punch bowl when there is no major positive data that suggests the Delta variant is withering away, supply chains are returning to normal and dislocation in the job market is getting worked out. As long as these conditions persist, it’s going to drive prices higher for everything and negatively impact consumer spending in the current and fourth quarter.
Additionally, Congress remains in a stalemate about getting the $1 trillion infrastructure package passed anytime soon. The infrastructure legislation faces an uphill path in the House, where Nancy Pelosi has repeatedly said she will not take it up until the Senate clears the $3.5 trillion reconciliation bill. Again, I don’t see Powell and the Fed embracing the talk of tapering when Congressional pandemic stimulus has effectively run out, federal unemployment checks have expired and Congress can’t reach a deal.
Until these collective headwinds are addressed and satisfied, the chances appear remote that the Fed will add more uncertainty to the mix. Therefore, this current pullback the market is undergoing will likely result in a relief rally when the Federal Open Market Committee (FOMC) statement is released on Sept. 22. But investors should be prepared for another 2-3% downside leading up to this next Fed gathering, providing the 5% correction that has been the talk of Wall Street for the past week. If so, it will arguably be the best buying opportunity of the year.inflation policy fed
All Eyes On Inventory
You’ve heard of the virtuous circle in the economy. Risk taking leads to spending/investment/hiring, which then leads to more spending/investment/hiring….
You’ve heard of the virtuous circle in the economy. Risk taking leads to spending/investment/hiring, which then leads to more spending/investment/hiring. Recovery, in other words.
In the old days of the 20th century, quite a lot of the circle was rounded out by the inventory cycle. Both recession and recovery would depend upon how much additional product floated up and down the supply chain. Deflation, too.
On the contraction side, demand might fall off a bit for whatever reason(s), retailers getting stuck with a small inventory overhang. If they think it more than temporary, or don’t have the internal cash to finance it, the retail level scales back pushing inventory to wholesalers who then cut orders from producers.
Serious enough, producers begin to cut back their own activities, maybe to the point of forgoing new hires, perhaps laying off some workers already employed. Whatever necessary to equalize reduced order flow with cost structure and input utility.
When those layoffs hit, almost certainly it cuts further into demand (unemployed workers are far more careful and constrained consumers), more inventory stuck at retailers and wholesalers, then even fewer orders for producers who must sharpen their payroll axe all over again. This vicious cycle is what used to make up the balance of any recession.
But what if inventory first accumulates for other reasons?
It may be a different look to the cycle, though not necessarily an entirely different outcome. Suppose retailers (outside of automobiles) grow concerned about supply availability or shipping times. They might naturally react by boosting their current order flow if only to increase their chances some product makes it through the clogged shipping channels.
As that increased order flow unrelated to demand continues to move back through the supply chain, it probably would only make the transportation issues that much worse. It’s already a mess, and because it’s already a mess the entire supply chain tries to stuff more goods through it rather than less, rather than giving the system some time and space to work out enough kinks.
This, of course, would probably convince retailers to do it all over again, ordering even more they don’t need now or in the near future, now more desperate to try and raise their chances of receiving anything. More trouble for the shippers and so on.
Having intentionally over-ordered, and then over-ordered again (and again?), this time what happens when the logistics get more sorted out and then deliveries rather than trickle through come pouring out? This is the cyclical question for early 2022, not the unemployment rate.
Some companies have said they are ready, and have confidently declared how they will be able to manage holding such excessive levels of product. Maybe they can. But what happens to orders down at the lower reaches? Having received all this extra inventory, retailers and wholesalers aren’t going to keep double and triple ordering.
Before even getting to demand considerations, the orders are going to drop and producers are going to become less busy. The inventory glut having been forwarded up to the retail level, maybe wholesale, it will have to be worked down over time.
This is where demand comes into it. If demand stays as robust as some might currently assume, it might not take that much time to normalize inventory, then get past the whole issue and imbalance with nothing much lost.
And if demand isn’t as good, then we’re right back into the 20th century again.
The way the supply bottlenecks of 2021 have worked out, there is going to be an inventory overhang at some point. When it does come about and how bad it will be, that’s really the demand question. There seems to be quite a bit of optimism about it, to the point of complacency while corporate CEO’s bark in the media instead about all the massive inflation they plan on throwing your way.
Inflation today (therefore not inflation) but potentially too many goods tomorrow. However the inventory cycle manifests, the one thing each would have in common is its trough – disinflationary at the least.
Manufacturing PMI’s, for what it’s worth, remain elevated as if the upward segment of that unusual cycle remains relatively intact (note: ISM for September won’t be released for another week). With ships still stacking up on the US West Coast, this makes sense. Regardless of current levels of demand, these supply problems would only feed the imbalance for another month.
IHS Markit’s manufacturing index retreated again for the flash September 2021 estimate, but it remains above 60 therefore still in the post-2008 stratosphere. At 60.5 in the latest update, it is down, though, for the second month in a row since hitting the high of 63.4 back in July. And the index was 62.6 back in May, meaning it’s been four months treading.
It is the services side which has materially declined, leading many to assume it must be due to delta COVID if goods flow is largely uninterrupted at the same time. Markit’s services PMI dropped to 54.4 in September from 55.1 in August, while its employment component fell back to just 50.
This meant the composite, accounting for both manufacturing and services, declined to a very similar 54.5. Using this measure as a guide for possible GDP in Q3, that’s working down to a very disappointing 3% or less which might otherwise raise suspicions when it comes to the sustainability of demand.
If this more serious setback really is pandemic-related, then thinking it a temporary one might keep up the order flow as well as the logistical nightmare. Then the artificial inventory cycle gets even more artificial.
It could very well be that manufacturing remains high because of inventory and not because current potential weakness is only about delta.
Should it turn out to be unrelated, or only somewhat attributable to renewed disease measures, then inventory stops being a pesky annoyance of shipping bottlenecks and potentially starts being more like its old self. While that wouldn’t necessarily mean recession in early 2022, even a substantial downturn (chances would have it globally synchronized) having yet fully recovered from the last two would be enough trouble.
This Has To Be A Mistake
This Has To Be A Mistake
While we were digging through the data for today’s household net worth report we stumbled upon something that seem…
While we were digging through the data for today's household net worth report we stumbled upon something that seem beyond ridiculous: the ratio of Household Net Worth to Disposable Net Income. At 786% in the latest quarter, the chart at first appears to be a mistake but we triple checked it, and... well, here it is.
The latest, all-time high print is an increase from 698% in Q1 and also represents the biggest quarterly increase in history!
This number is so ridiculous, it is almost 50% higher than the long-term average of 540%. More importantly, it means that the total net worth number we reported earlier today, which in Q2 hit a record high of $142 trillion, is massively inflated on the back of what is obviously the biggest asset bubble on record.
It also means that if one were to strip away the asset bubble, and net worth was purely a reasonable function of disposable income, then total net worth worth be haircut by 31%, or some $43 trillion, which incidentally, is equivalent to the net worth of the top 1% of US society...
... and which as we showed earlier today is a record 32% of total household net worth.
As an aside, the fact that the top 1% have gained $10 trillion in wealth since the covid pandemic outbreak, is probably just a coincidence, and yet...
Covid has been the best thing ever to happen to the wealthy and powerful. No wonder they don’t want it to end— Hipster (@Hipster_Trader) September 23, 2021
As for the chart which clearly has to be a mistake, we are sad to report that it isn't, and as politicians of both the Democrat and Republican party pretend to fight for the common man, all they are doing is enabling and accelerating the greatest wealth transfer in the world but not for nothing: they too want to be in the top 1%.
“Culture As An Asset”
#CKStrong Stunning. Hedge funds hoovering up trading cards as an “alternative to equities” with the same passion Brooks Robinson hoovered up ground…
Stunning. Hedge funds hoovering up trading cards as an “alternative to equities” with the same passion Brooks Robinson hoovered up ground balls.
This is usually a sign of the endgame for markets, i.e,, the precursor to a bear market. Think the “Great Beanie Baby Bubble” of 1999.
In general, there are two types of assets,
- They can be rare—gold bars, diamonds, houses on Victoria Peak, bottles of 1982 Pétrus, Van Gogh paintings, stamps, beanie babies, or baseball cards or
- They can generate cash flows over time – GaveKal
Creating An Illusion Of Scarcity
Scarcity relative to the money stock is what its all about now, folks.
It probably won’t be long before the Fed has to bailout the baseball card market, no?
Full disclosure, I do own a Mike Trout rookie card.
Given the extreme valuations of all most all asset classes, coupled with the massive amount of money in the global financial system, markets are now really stretching, looking for, and actually attempting to create scarcity as a useful delusion to justify, rationalize, and drive speculation.
Maybe I will start collecting poop as an “anthropological asset,” put it the blockchain and super charge the price ramp by snapping a few pictures of each sample, converting them to NFTs to load up to the internet.
Then again, maybe all this is signaling the start of a big, big inflation cycle and the markets are looking to get out of cash and protect their purchasing power. But that’s too rational.
Can you believe what markets have become, folks? It is hard to see clearly when everybody is making money.
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