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We’re in the midst of what is so far a moderate selloff in the equity market. And as usual, in such circumstances (at least in the past decade or so) there…

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This article was originally published by Califia Beach Pundit

We’re in the midst of what is so far a moderate selloff in the equity market. And as usual, in such circumstances (at least in the past decade or so) there is no shortage of bad news. China is ramping up its military threat to Taiwan, Congress is struggling to pass damaging tax hikes and massive and wasteful social spending, equities have soared by almost 550% since their March ’09 bottom, 10-yr Treasury yields have jumped by 30 bps in the past two months, the Fed is about to start tapering it bond purchases, Biden’s popularity is plunging, and our southern border is being overrun. In the background is the growing sense that we don’t know if anyone, even Biden, is in charge. That in turn contributes to a global policy vacuum which our rivals and enemies are unlikely to ignore. 

That’s an uncomfortably long list of things to worry about—no wonder the stock market is uneasy. Indeed, it’s a wonder it has done so well of late.
I won’t pretend to be able to predict whether now is a good time to buy or not. But I can offer some charts and thoughts which are reassuring in the sense that they offset at least some of the bad news, and also because they are not being talked about much these days (the things the market is overlooking can often be very important). Meanwhile, I’m pretty sure that inflation is going to be a lot higher for longer than the Fed currently predicts, and the eventual realization that we have an inflation problem (sometime next year?) will pose a threat to the economy because it eventually will lead to some serious Fed tightening. That just so happens to be the scenario that has preceded every recession in my lifetime save the last one (which was entirely the fault of Covid and politicians’ overreactions to it). 

Chart #1
Chart #1 shows the level of M2 less currency in circulation. It’s the total of all the retail bank savings deposits and checking accounts, plus a small amount of retail money market funds. This is money that the public has socked away, and it is money that is easily spendable. What we see here is a shocking and totally unprecedented increase in the money supply immediately following the Covid lockdowns. The amount of spendable money in the economy is almost $4 trillion higher than it would have been had the money supply grown at its long-term rate of about 6% a year. Notably, the Fed’s three waves of Quantitative Easing in the 2009-2018 period hardly register on this chart. It’s remarkable indeed that this explosion of money (a REAL BIG quantitative easing!) is hardly mentioned in the press these days.
It’s hard to see the economy stumbling when liquidity is super-abundant and borrowing costs are incredibly low. It will take a looonnng time for those conditions to reverse.
Chart #2
I didn’t just make up the 6% growth rate shown in Chart #1. Chart #2 shows the same 6% growth rate trend going all the way back to 1995. For the past year, M2 has grown by about 12%, and the annualized growth rate of M2 over the past three months has been about 12% as well. Money continues to grow about twice as fast as it ever has before! It’s hard to imagine, given this explosion of money, that the inflation we’ve seen so far this year is going to prove transitory. This is a big deal that is not getting much news. For more color on how inflationary psychology works, see my post from last June on my experiences with inflation in Argentina.
Chart #3
Chart #3 is one of my all-time favorites, since it makes clear that every recession in modern times (except for the last one) has been preceded by a prolonged period of Fed tightening. The blue line is the real Fed funds rate (the Fed’s policy target minus the year over year change in the Core PCE deflator). Note that it rises to at least 3-4% just prior to every recession but the last one. This is the best measure of how “tight” Fed policy is, because high real interest rates equate to very expensive borrowing costs; the Fed raises this rate in order to discourage banks from lending and to discourage the public from borrowing—this results in a shortage of liquidity and that in turn puts downward pressure on inflation. The red line is the slope of the Treasury yield curve from 1 year to 10 years. Note that it falls to zero or less just prior to every recession. A flat to negatively-sloped yield curve is the bond market’s way of saying that Fed policy is so tight that it threatens the economy; that will eventually force the Fed to ease in the future—thus making long term interest rates lower than short-term rates.
In the meantime, even if the Fed finishes its tapering and starts raising its target funds rate well before anyone currently expects them to, they will still have to counteract the super-abundance of bank reserves. In the past, Fed tightening meant a shortage of bank reserves and a general lack of liquidity–conditions that proved lethal to over-extended borrowers. It would take extraordinary measures and a lot of time for those conditions to return in the future. So the threat to the economy of Fed tightening today is not nearly as imminent as one might think based on past experience. 
Chart #4
Chart #4 compares the price of gold (blue) to the 3-yr forward yield on eurodollar futures contracts. This latter is a good proxy for what the market expects the Fed’s target overnight rate to be 3 years in the future. There is a strong inverse correlation between the two (I’ve plotted the eurodollar yield in inverted fashion). When the Fed is expected to ease in the future, gold prices tend to rise. Today, the market is pricing in future Fed tightening, and gold is declining. Gold today is not reacting to rising inflation; on the contrary, it is reacting to the expectation that the Fed will eventually have to tighten policy in order to rein in inflation. Flat to falling gold prices today suggest the gold market is pricing in a future of Fed tightening and an eventual return to lower inflation. 
Chart #5
Chart #5 shows the inflation-adjusted price of crude oil futures contracts. This price has averaged about $55/barrel for the past 47 years. Today, crude is trading just under $70/barrel. The big jump in crude prices in the early 1970s was triggered by Nixon’s decision to take the dollar off the gold standard. Both gold and crude prices (and nearly all other prices) rose following this effective devaluation of the dollar. 
Chart #6
Chart #6 shows the ratio of gold prices to oil prices. This ratio has averaged about 20 (i.e., one ounce of gold tends to be worth 20 barrels of oil. Today the ratio is in the mid-20s, which suggests that oil is somewhat cheap relative to gold. In any event, gold and oil prices seem to be in rough equilibrium these days, and neither one is out of line with historical experience.
Chart #7
Chart #7 shows the level of capital goods orders in both nominal and real terms. Capital goods orders are a good proxy for corporate America’s confidence in the future: more orders mean greater productivity for workers in the future. Business investment hasn’t been this strong for many years (but it was even stronger in the late 1990s). Strong business investment today suggests a stronger economy in the years ahead. This is a very optimistic sign, and good evidence that we are not facing a future of stagnant economic growth. We may have a lot of inflation, but the economy is still likely to grow. High inflation is eventually destructive of an economy’s growth potential, but that might take years to play out. In short: in may be premature to worry about “stagflation.”
Chart #8
Chart #8 is very important, since it shows how inflation expectations are built into bond prices. The green line is the difference between the yield on nominal and real 5-yr Treasury notes, and thus it is the market’s explicit expectation of what consumer price inflation will average over the next 5 years (currently 2.7%). That’s near the high end of historical experience, which tells us that the bond market is only just beginning to believe that the Fed is wrong to predict that the current spurt of inflation will prove transitory. It also tells us that if future inflation expectations rise to the 4-5% level that exists currently, the bond market will have an awful lot of painful adjustment to endure (e.g., nominal yields will have to rise significantly and/or real yields will have to hold steady or fall). 
Chart #9

Chart #9 compares the level of housing starts (blue) with an index of home builders’ sentiment. Sentiment tends to lead starts, not surprisingly, so the current level of sentiment points to continued strength in the housing market. One reason home prices have been so strong of late is that the nation has acquired a meaningful housing deficit after the collapse of new home building which began in 2006. It could take years to make up for this. The major risk facing the housing market today is rising mortgage rates, which are currently still incredibly low (~3% for 30-yr fixed rate mortgages). Borrowers may well be intimidated by soaring home prices, but the prospect of borrowing cheap money in a rising inflation environment is very appealing. What we are seeing today (rising housing prices and cheap borrowing costs coupled with rising inflation) is a virtual replay of what happened in the 1970s. Recall that mortgage rates eventually topped out at double-digit levels in the early 1980s. 

And by the way, it took the Fed quite a few years to break the back of double-digit inflation back in the early 1980s. 

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US markets scale fresh highs on upbeat earnings, housing data

S P 500 and Dow Jones closed at record highs for the second consecutive day on Tuesday October 26 while Nasdaq rallied as quarterly results kept the…

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S&P 500 and Dow Jones closed at record highs for the second consecutive day on Tuesday, October 26, while Nasdaq rallied as quarterly results kept the markets in high spirits.

The S&P was up 0.18% to 4,574.79. The Dow Jones Industrial Average rose 0.04% to 35,756.88. The NASDAQ Composite Index gained 0.06% to 15,235.71, and the small-cap Russell 2000 was down 0.72% to 2,296.08.

Traders were further encouraged by the Commerce Department’s positive economic data, which showed new home sales jumped 14% to 800,000 units in September, the highest level since March. However, higher home prices still remained a major worry.

Energy and utility stocks led gains on the S&P 500 index, while industrials and communication services stocks were the bottom movers. Nine of the 11 sectors of the index stayed in the positive territory.

General Electric Company (GE) stock rose 2.19% in intraday trading after reporting its third-quarter earnings. Its adjusted profits were 57 cents per share, above the analysts’ estimates of 43 cents a share. However, its revenue fell by 1% YoY to US$18.4 billion in the quarter.

Shares of United Parcel Service, Inc. (UPS) were up 7.38% after reporting better-than-expected results. Its revenue increased by 9.2% YoY to US$23.2 billion in Q3, FY21.

Lockheed Martin Corporation (LMT) stock tumbled 12.48% after it trimmed its revenue forecast. Its net sales fell to US$16.02 billion in Q3 from US$16.49 billion in the year-ago quarter. In addition, it lowered its revenue forecast for FY2021 due to supply woes.

In the energy sector, Exxon Mobil Corporation (XOM) surged 2.30%, EOG Resources, Inc. (EOG) rose 1.39%, and Occidental Petroleum Corporation (OXY) gained 1.28%. Devon Energy Corporation (DVN) and Baker Hughes Company (BKR) rose 2.37% and 2.88%, respectively.

In utility stocks, NextEra Energy, Inc. (NEE) increased by 1.57%, Southern Company (SO) jumped 1.03%, and Exelon Corporation (EXC) rose 1.10%. DBA Sempra (SRE) and AES Corporation (AES) advanced 1.24% and 1.59%, respectively.

In the communication sector, Alphabet Inc. (GOOGL) rose 1.33%, Facebook, Inc. (FB) fell 4.52%, and Twitter Inc. (TWTR) declined 1.27%. Match Group, Inc. (MTCH) and News Corporation (NWS) plummeted 2.51% and1.17%, respectively.

Also Read: General Electric Co (GE) revises guidance upward after Q3 profits

Also Read: Raytheon (RTX) raises sales guidance, 3M (MMM) narrows EPS outlook

Nine of the 11 sectors of the S&P 500 index stayed in the positive territory.

Also Read: Eli Lilly (LLY), Novartis (NVS) profits up on robust sales growth

Futures & Commodities

Gold futures were down 0.70% to US$1,794.10 per ounce. Silver decreased by 1.55% to US$24.212 per ounce, while copper fell 0.71% to US$4.4958.

Brent oil futures traded flat at US$85.44 per barrel and WTI crude was up 0.85% to US$84.47.

Bond Market

The 30-year Treasury bond yields were down 2.06% to 2.042, while the 10-year bond yields fell 1.55% to 1.610.

US Dollar Futures Index increased by 0.15% to US$93.953.

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Failure To Bury “Transitory” Inflation Narrative Risks Sparking Biggest Fed Error In Decades: El-Erian Warns

Failure To Bury "Transitory" Inflation Narrative Risks Sparking Biggest Fed Error In Decades: El-Erian Warns

Authored by Tom Ozimek via The…

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Failure To Bury “Transitory” Inflation Narrative Risks Sparking Biggest Fed Error In Decades: El-Erian Warns

Authored by Tom Ozimek via The Epoch Times,

Failure on the part of the Fed to toss its stubbornly-held “transitory” inflation narrative and act more decisively to rein in persistently high price pressures raises the likelihood the central bank will need to slam on the brakes of easy money policies much more forcefully down the road, risking avoidably severe disruption to domestic and global markets, according to Queen’s College President and economist Mohamed El-Erian.

In stark contrast with the mindset of corporate leaders who are dealing daily with the reality of higher and persistent inflationary pressures, the transitory concept has managed to retain an almost mystical hold on the thinking of many policy makers,” El-Erian wrote in an Oct. 25 op-ed in Bloomberg.

“The longer this persists, the greater the risk of a historic policy error whose negative implications could last for years and extend well beyond the U.S.,” he argued.

Consumer price inflation is running at around a 30-year high and well beyond the Fed’s 2 percent target, to the consternation of central bank policymakers who face increasing pressure to roll back stimulus, even as they express concern that the labor market hasn’t fully rebounded from pandemic lows.

The total number of unemployed persons in the United States now stands at 7.7 million, and while that’s considerably lower than the pandemic-era high, it remains elevated compared to the 5.7 million just prior to the outbreak. The unemployment rate, at 4.8 percent, also remains above pre-pandemic levels.

At the same time, other labor market indicators, such as the near record-high number of job openings and an all-time-high quits rate—which reflects worker confidence in being able to find a better job—suggest the labor market is catching up fast. Businesses continue to report hiring difficulties and have been boosting wages to attract and retain workers. Over the past six months, wages have averaged a gain of 0.5 percent per month, around twice the pace prior to the pandemic, the most recent jobs report showed.

Besides measures of inflation running hot, consumer expectations for future levels of inflation have hit record highs, threatening a de-anchoring of expectations and raising the specter of the kind of wage-price spiral that bedeviled the economy in the 1970s. A recent Federal Reserve Bank of New York monthly Survey of Consumer Expectations showed that U.S. households anticipate inflation to be 5.3 percent next year and 4.2 percent in the next three years, the highest readings in the history of the series, which dates back to 2013.

El-Erian, in the op-ed, argued that the Fed has “fallen hostage” to the framing that the current bout of inflation is temporary and will abate once pandemic-related supply chain dislocations will abate.

“It is a framing that is pleasing to the ears, not only to those of policy makers but also those of the financial markets, but becoming harder to change,” he wrote.

“Indeed, the almost dogmatic adherence to a strict transitory line has given way in some places to notions of ‘extended transitory,’ ‘persistently transitory,’ and ‘rolling transitory’—compromise formulations that, unfortunately, lack analytical rigor given that the whole point of a transitory process is that it doesn’t last long enough to change behaviors,” he wrote.

El-Erian said he fears that Fed officials will double down on the transitory narrative rather than cast it aside, raising the probability of the central bank “having to slam on the monetary policy brakes down the road—the ‘handbrake turn.’”

“A delayed and partial response initially, followed by big catch-up tightening—would constitute the biggest monetary policy mistake in more than 40 years,” El-Erian argued, adding that it would “unnecessarily undermine America’s economic and financial well-being” while also sending “avoidable waves of instability throughout the global economy.”

His warning comes as the Federal Open Market Committee (FOMC)—the Fed’s policy-setting body—will hold its next two-day meeting on November 2 and 3.

The FOMC has signaled it would raise interest rates sometime in 2023 and begin tapering the Fed’s $120-billion-a-month pandemic-era stimulus and relief efforts as early as November.

Some Fed officials have said that, if inflation stays high, this supports the case for an earlier rate hike. Fed Governor Christopher Waller recently suggested that the central bank might need to introduce “a more aggressive policy response” than just tapering “if monthly prints of inflation continue to run high through the remainder of this year.”

“If inflation were to continue at 5 [percent] into 2022, you’ll start seeing everybody potentially – well, I can’t speak for anybody else, just myself, but – you would see people pulling their ‘dots’ forward and having potentially more than one hike in 2022,” he said in prepared remarks to Stanford Institute for Economic Policy Research.

The Fed’s dot plot (pdf), which shows policymakers’ rate-hike forecasts, indicates half of the FOMC’s members anticipate a rate increase by the end of 2022 and the other half predict the beginning of rate increases by the end of 2023.

For now the market is pricing in a more hawkish Fed response in 2022

Tyler Durden
Tue, 10/26/2021 – 16:49

Author: Tyler Durden

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Kimberly-Clark Forecasts Price Increases as Inflationary Pressures Accelerate, Supply Chain Disruptions Worsen

In yet another sign that inflation pressures are proving to be a lot more than just transitory, Kimberly-Clark (NYSE: KMB)
The post Kimberly-Clark Forecasts…

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In yet another sign that inflation pressures are proving to be a lot more than just transitory, Kimberly-Clark (NYSE: KMB) — the maker of staple household goods such as Kleenex tissues, Huggies diapers, tampons, and toilet paper— has sounded the alarm over impacts of rapidly accelerating prices and supply chain headaches.

Shares of Kimberly-Clark tanked to a six-month low after the company cut its annual forecast due to rising inflation and supply chain disruptions. Third quarter net income stood at around $469 million, which equates to approximately $1.39 per share, against the $472 million— or $1.38 per share reported during the same period one year ago. The company reported an adjusted earnings per share of $1.62, which failed to meet consensus estimates calling for $1.65.

“Our earnings were negatively impacted by significant inflation and supply-chain disruptions that increased our costs beyond what we anticipated,” said Kimberly-Clark CEO Mike Hsu. As a result, Hsu warned that the company will be implementing price increases across a variety of goods in an effort to offset implications of supply chain woes and subsequent acceleration in commodity costs. “We are taking further action, including additional pricing and enhanced cost management, to mitigate these headwinds as it is becoming clear they are not likely to be resolved quickly,” he added.

However, Kimberly-Clark is far from being the only households goods company to sound the alarm over the effects of global supply chain disruptions and a persistent inflationary macroeconomic environment. Recall, General Mills, P&G, among others, have all issued warnings about impending cost-push inflation, as companies contend with margin compression that is further exasperated by ongoing labour shortages.

Information for this briefing was found via Kimberly-Clark. 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 Kimberly-Clark Forecasts Price Increases as Inflationary Pressures Accelerate, Supply Chain Disruptions Worsen appeared first on the deep dive.

Author: Hermina Paull

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