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The Fed Speaks Loudly And Carries a Feather

The Fed Speaks Loudly And Carries a Feather

 "Speak softly and carry a big stick" President Theodore Roosevelt on foreign policy.

In other words,…

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This article was originally published by Real Investment Advice

The Fed Speaks Loudly And Carries a Feather

 “Speak softly and carry a big stick” President Theodore Roosevelt on foreign policy.

In other words, let your actions, not your words set the tone.

It appears the Fed may be taking the opposite tack. Many Fed members are vocal about tapering soon, but there is reason to believe the Fed will not back their words with action.

Might the Fed be speaking loudly and carrying a feather?  

Expectations for the Fed to turn “hawkish” and announce a tapering schedule at the next meeting or two are high. A recent Wall Street Journal article hints at an announcement at the September 2021 meeting and tapering in November. The solid economic recovery, coupled with gains in employment and a higher than the target inflation rate, supports such an action.

We think the Wall Street Journal timetable is correct. However, an analysis of the composition of the Fed by voting status and their degree of influence leads us to keep an open mind.

Hawkish Winds Are Blowing

The quotes below from various Fed members speak to a sense of urgency to begin tapering QE.

  • “It would be my view that if the economy unfolds between now and our September meeting … if it unfolds the way I expect, I would be in favor of announcing a plan at the September meeting and beginning tapering in October,” Robert Kaplan Dallas Fed August 2021
  • My preference would be to get to a decision in September and start sometime after that,” Bullard told reporters on Friday after giving a virtual speech. “My main goal would be to get done by the end of the first quarter.”– James Bullard St. Louis Fed per Bloomberg July 2021
  • We should go early and go fast, in order to make sure we’re in position to raise rates in 2022, if we have to,” Fed governor Christopher Waller August 2021
  • Philadelphia Federal Reserve Bank President Patrick Harker said on Friday that he still supports tapering the central bank’s asset purchases sooner rather than later.” Reuters- August 2021
  • Fed’s Bostic Urges Faster Bond Taper as Economy Strengthens” Bloomberg August 2021
  • “I’m less precise about amounts and dates, and really more focused on saying: Sooner rather than later,” Esther George Kansas City Fed August 2021

Why So Hawkish?

The most recent Fed’s Beige Book, describing economic conditions in each of the 12 Federal Reserve Districts, explains why many members are concerned with inflation and eager to taper.

The document starts with a one-paragraph highlight from each district. As shown below, all the summaries include a statement on labor shortages and or wage pressures. The topic is top of mind at the Fed, as it should be. If there are widespread job shortages and intense hiring pressures, as seen in the record number of job openings, wages may continue to rise and foster more inflation.

Boston: “inability to get supplies and to hire workers.”

New York: “businesses reporting widespread labor shortages.”

Philadelphia: “while labor shortages and supply chain disruptions continued apace.”

Cleveland: “Staff levels increased modestly amid intense labor shortages.”

Richmond: “many firms faced shortages and higher costs for both labor and non-labor inputs.”

Atlanta: “wage pressures became more widespread.”

Chicago: “Wages and prices increased strongly while financial conditions slightly improved”

St. Louis: “Contacts continued to report that labor and material shortages.”

Minneapolis: “hiring demand continued to outstrip labor response by a wide margin.”

Kansas City: “Wages grew at a robust pace, but labor shortages persist.”

Dallas: “Wage and price growth remained elevated amid widespread labor and supply chain shortages.”

San Francisco: “Hiring activity intensified further, as did upward pressures on wages and inflation.”

Fed Composition

Recent market gyrations highlight investors are paying close attention to the quotes above and many others like it.

The cries for taper are easy to justify. Justification is one thing, but monetary policy decisions are based on the decisions of the Federal Open Market Committee (FOMC).

The FOMC currently has 18 members, but only 11 are eligible to vote on monetary policy. The other members can only influence the committee.

The chart below, from InTouch Capital Markets, provides the names and positions of the 18 members.  Importantly it shows their voting eligibility and sorts them by their policy stance.

There are six members Intouch deems dovish or more willing to continue an excessive monetary policy. They seek more affirmation of economic recovery before changing policy.

There are two members deemed neutral, leaving the FOMC with ten hawkish members. Many of the hawks are outspoken about the need to taper QE sooner rather than later. At first glance, it appears the hawks can steer policy.

Hawks vs. Doves

The hawk/dove breakdown favors the hawks and their calls to taper. Nevertheless, we must also consider voting eligibility and influence.

When only contemplating the 11 voting members, the doves have the majority. Five of the six doves can vote this year, while only four of the ten hawks can vote in 2021.  The two other voters are neutral.

More important than the number of hawkish or dovish votes is the level of influence each member has on policy decisions. Chairman Powell, a dove, is the lead decision-maker at the Fed. While he may aim for a strong consensus, he ultimately makes the decisions.

Next in line behind Powell is the neutral Vice Chair, Richard Clarida. Behind him, the New York Fed President John Williams is dovish and wields clout. The New York Fed manages the trading operations supporting Fed policy and influences the largest banks and brokers. Lastly is another dove in board member Lael Brainard. She is a candidate to replace Powell when his term ends next year. Beyond the Chair, Vice-Chair, and President of the New York Fed, Brainard probably has the most influence on the committee.

Of the four most influential voters, one is neutral, and three are dovish.

Dissension in the Ranks

The analysis thus far argues the loud tone from the hawkish Fed members is secondary to Chair Powell and the other Fed influencers. The markets acknowledged this with a strong rally following Chair Powell’s dovish address at the Jackson Hole Symposium. While some thought he might take a step toward announcing a taper time frame, he was non-committal, preferring to wait for more economic data.

The Fed meets on September 22nd.  They may acknowledge some concern about inflation. They will also discuss the continuing recovery of the labor market. Despite grossly exceeding their inflation goal and making significant progress toward their employment goal, they may hold off announcing a tapering schedule.

If this proves to be the case, the number of dissenting voters is meaningful. Voters would dissent because they want to taper immediately. Many hawks are satisfied that the job market is on the road to recovery and are concerned about inflationary pressures.

Will they dissent? One or two dissents, while not frequent, are not uncommon either. The market reaction might be muted to a bit of friction. Where we offer caution is if the number of dissenting voters totals four or five or even more.

Summary

It’s apparent by market behaviors investors care much more about the amount of Fed liquidity than economic data, valuations, and fundamentals. The graph below from Bridgewater shows Fed liquidity trumps fundamentals at a level not seen in at least the last 50 years.

Stocks are now more sensitive to Fed liquidity than economic growth.

As we wrote in AMC Foolishness Comes At A Dear Cost:

Bad economic news is good news for share prices because it ensures the Fed will provide stimulus for longer.”

Most investors agree delaying tapering is good for the market. Conversely, removing liquidity via tapering, given such high valuations, portends risks. While Powell and his dovish clan may put off tapering, investors will not take multiple dissensions lightly.

Powell, in the last few months of his term, must thread the needle. He likely wants to avoid a market meltdown so he can be reappointed. At the same time, he needs to show he has complete control of the Fed.

If he can corral the hawks and get them to agree on a later time frame for taper, he might accomplish his personal goal of another term while keeping markets afloat a while longer. If investors believe he is losing control of the Fed, he not only faces market volatility but the potential to lose his job.

The post The Fed Speaks Loudly And Carries a Feather appeared first on RIA.

Economics

US Hog Herd Hit By Largest Monthly Drop Since 1999

US Hog Herd Hit By Largest Monthly Drop Since 1999

US hog herds experienced the most significant monthly drop in two decades, according to…

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US Hog Herd Hit By Largest Monthly Drop Since 1999

US hog herds experienced the most significant monthly drop in two decades, according to new data from the USDA. The reason behind the drop is because farmers decreased hog-herd development over the last year due to labor disruptions at slaughterhouses plus high animal feed. 

USDA data showed the US hog herd was 3.9% lower in August than a year ago. It was the largest monthly drop since 1999 after analysts only expected a decline of about 1.7%, according to Bloomberg

On Monday, hog futures soared in Chicago after the news of tightening supply. Since contracts hit a seven-year high in June, they have plunged from $120 to $80 but have since recovered in recent days to $90. 

Supply chain woes at slaughterhouses, and declining cold pork storage in US warehouses, have pushed up pork consumer prices to record highs. 

Farmers are experiencing a challenging environment of skyrocketing feed prices and other commodity prices used to maintain and growing pig herds, along with the labor disruptions at slaughterhouses that sometimes force them to cull herds. 

Soaring supermarket meat prices have been devastating for working-poor families who allocate a high percentage of their incomes to basic and essential items. The Biden administration spent most of the year ignoring the dramatic increase in food prices and only addressed the issue earlier this month by blaming meatpackers. The administration even had the nerve to say that if meat prices are taken out of the equation, troubling grocery inflation would be lower. 

To sum up, shrinking hog herds means pork prices will stay high. 

Tyler Durden Tue, 09/28/2021 - 20:25
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Economics

Volatility Roars Back

The surging 10-Year Treasury yield spooks tech investors … watch out for Evergrande default volatility… another debt ceiling showdown

It’s like…

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The surging 10-Year Treasury yield spooks tech investors … watch out for Evergrande default volatility… another debt ceiling showdown

It’s like when you’re flying, feel a few jolts of turbulence, then see the “seatbelt” sign flash on.

Investors are experiencing some market turbulence – and buckling up is probably a good idea.

There are three things troubling markets right now. Let’s look at them to get a sense for how significant they might be.

As I write Tuesday morning, the markets are deep in the red thanks to the soaring 10-Year Treasury yield.

After falling under 1.2% in early August, the yield on the 10-Year Treasury has been pushing higher over the last two months.

That “push” turned into a full-blown “leap” last week, as the yield jumped from roughly 1.3% to over 1.5% as I write.

I’ve circled this one-week spike of about 18% on the chart below.

Source: MarketWatch.com

This is significant because the yield on the 10-Year Treasury is a major barometer for how traders are feeling about the market and inflation-risk.

A rising yield also serves as a major headwind for technology stocks. Given this, it’s no wonder that our hypergrowth tech expert, Luke Lango, has been monitoring this surge.

From Luke’s Early Stage Investor update yesterday:

The 10-year Treasury yield broke above 1.5% today, continuing its sharpest ascent since February.

Yields have now risen about 20 basis points since the Fed’s meeting last week, as investors are bracing for the Treasury market’s biggest buyer to become a seller before year-end.

This move makes sense, and more importantly, it’s nothing to worry about.

***Why Luke is urging a levelheaded response

Luke points out that while yields might have further to climb, they should return to lower levels due to a handful of reasons.

Back to Luke with those details:

The fact of the matter is that yields were too low, so now they’re correcting higher, but they won’t go much higher from here because there are structural forces in place that will keep them lower for longer.

For one, you have secular deflationary pressures via the expansion and improvement of productivity-boosting and cost-reducing technologies, like automation, artificial intelligence, and virtualization platforms.

For another, you have persistently strong demand for risk-free assets from risk-adverse funds like pension funds – in a market where “cash is trash” and valuations are a bit too stretched to attract major allocations from these risk-adverse funds.

You also have the fact that the labor market will face long-term headwinds from automation technology threatening to disrupt large swaths of the labor market. That will put a floor on how low the unemployment rate can go, which will keep the Fed on the sidelines.

Not to mention, the Fed serves the U.S. government, and the U.S. government has accumulated a lot of debt over the past few years (especially the past 24 months) … so, in order to keep interest payments low for its “boss,” the Fed is incentivized to keep rates lower for longer. Same with every other central bank in the world, for that matter.

Long story short, there are simply too many secular forces at play here for yields to rise much higher. Make no mistake. They will move higher. But at a very slow and gradual pace

The second reason why Luke isn’t alarmed by the yield spike is because he’s focusing on what matters – the long-term growth story, along with earnings.

Back to Luke:

Near-term movements in the yield curve will dictate near-term price action.

But the long-term value of our stocks will be driven by the long-term earnings growth trajectories of our companies.

So long as our companies produce lots of earnings over the next few years, our stocks will move higher – regardless of where yields end up.

Even though the long-term is what matters, for now, the short-term is volatile – and painful. But Luke stresses this is a temporary problem that’s actually an opportunity:

All in all, things look great.

Let the yield volatility resolve itself in the coming weeks. Let tech stocks chop around. Buy the dip when the volatility settles.

Let’s move on to the second source of today’s volatility.

***The threat of a broader fallout from Evergrande is also worrying investors

Let’s begin with yesterday’s update from our Strategic Trader team of John Jagerson and Wade Hansen:

The Evergrande situation in China is continuing to put traders on edge.

A default seems very likely, and most of the world’s major financial institutions have material direct or indirect exposure to that risk.

To make sure we’re all on the same page, Evergrande is an enormous Chinese real estate company that is failing to meet its debt payments.

Last Thursday, the troubled company missed an $84 million payment. It owes another $47.5 million tomorrow.

The broader fear is that this could be a “Lehman Brothers” meltdown for China. Real estate makes up roughly 30% of the Chinese GDP, so a collapse would have a very real impact on their broader economy. It’s reported that Evergrande alone helps sustain more than 3.8 million jobs each year (directly employing about 200,000).

Yesterday, legendary investor, Louis Navellier, also updated his Accelerated Profits subscribers on this situation. Here he is speaking to this broader fear:

A housing bust would have a pretty big impact on the Chinese economy.

Some economists are even predicting that if Evergrande fails, it could cause China to slip into a recession — and, of course, these fears are part of the reason why the stock market sold off hard last Monday.

The good news is neither Louis nor our Strategic Trader team believe significant economic contagion from a default will reach the U.S. However, we could be in for market volatility. Given this, it’s impacting where John and Wade will be looking for trade set-ups.

Back to their update on this note:

We should be cleareyed about the risks and potential for volatility as we get closer to 3rd quarter earnings season in October.

We expect volatility to rise, and we don’t plan on targeting any trades in energy or basic materials, but we also don’t see much risk of a major drawdown yet.

As I write Tuesday, the latest news is that Beijing is urging government-owned property developers to buy up some of Evergrande’s assets. So, it’s not a direct bailout, though it’s a bailout.

From Reuters:

Authorities are hoping, however, that asset purchases will ward off or at least mitigate any social unrest that could occur if Evergrande were to suffer a messy collapse, they said, declining to be identified due to the sensitivity of the matter.

We’ll update you as events unfold here, but don’t be surprised if markets suffer another mini-panic if we get bad news from China.

***Finally, partisan politics could upset markets

The debt ceiling deadline is this Friday.

Last night, Senate Republicans voted against a House-backed bill that would have suspended the debt limit. They objected to how the bill was attached to a broader spending bill pushed by Democrats.

From Bloomberg:

Without a shift in position by one of the two parties, the decision to combine the temporary funding measure and the debt ceiling leaves the U.S. on course for a government shutdown and defaults on federal payments as soon as next month.

According to the Bipartisan Policy Center, without a suspension or raising of the ceiling, there will be a risk of default between Oct. 15 and Nov. 4.

Moody’s Analytics suggests that a prolonged shutdown, were it to happen, would cause another recession, destroying approximately $15 trillion in household wealth and 6 million jobs.

Our politicians are aware of this and don’t want to be responsible, so what we’re seeing is partisan brinksmanship. However, the closer we get to Friday without that solution, the greater the risk of more market volatility.

But remember, we saw this in 2011, when the debt ceiling showdown led to a downgrade in U.S. AAA sovereign credit, and again in 2018 as U.S./China trade tensions were growing. Both times brought plenty of anxious hand-wringing, yet both times we moved past it.

Bottom-line, fasten your seatbelt as these three issues work themselves out. It could get worse before it gets better – but it will get better.

Have a good evening,

Jeff Remsburg

The post Volatility Roars Back appeared first on InvestorPlace.

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Economics

Owner-Equivalent Rent Shock On Deck As Actual Rents Surge By Most On Record

Owner-Equivalent Rent Shock On Deck As Actual Rents Surge By Most On Record

Another month, another record surge in US rents to a new all time…

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Owner-Equivalent Rent Shock On Deck As Actual Rents Surge By Most On Record

Another month, another record surge in US rents to a new all time high.

According to the Apartment List national index, US rents increased by 2.1% from August to September, and although month-over-month growth has slowed slightly from its July peak when the sequential growth rate was 2.6%, rents are still growing much faster than the pre-pandemic trend. Since January of this year, the national median rent has increased by a staggering 16.4%. To put that in context, rent growth from January to September averaged just 3.4% in the pre-pandemic years from 2017-2019.

While even the smallest cooldown in rent growth is a welcome change for renters, Apartment List's Chris Salviati notes that it’s important to bear in mind that prior to this year, the national index never increased by more than 0.9 percent in a single month, going back to 2017. "Furthermore, we have now entered the time of year when rents are normally declining due to seasonality in the market. In September of 2018 and 2019, for example, rents fell by 0.1 percent and 0.3 percent, respectively."

That said, we have a ways to go before US rent - where the median just rose above $1,300 for the first time ever - decline; and with rents rising virtually everywhere, only a few cities still remain cheaper than they were pre-pandemic, and even these remaining discounts are unlikely to persist much longer. At the other end of the spectrum, Apartment List finds 22 cities among the 100 largest where rents have increased by more than 25 percent since the start of the pandemic. That said, there are some early signals that tightness in the market may be beginning to ease: the vacancy index ticked up this month for the first time since last April. And in Boise, ID, which has seen the nation’s biggest price increase since the start of the pandemic, rents finally dipped slightly this month.

The chart below visualizes monthly rent changes in each of the nation’s 100 largest cities from January 2018 to September 2021. The color in each cell represents the extent to which prices went up (red) or down (blue) in a given city in a given month. Bands of dark blue in 2020 represent the large urban centers where rent prices cratered (e.g., New York, San Francisco, Boston), but those bands have quickly turned red as ubiquitous rent growth sweeps the nation in 2021. In 2020, 60 of these cities saw rent prices rise from August to September, but this year, 97 cities got more expensive in September.

In a glimmer of hope for Americans locked out of not only the housing but the rental market, one of the few markets where rents did not increase this month was Boise, ID. Since last March, rents in Boise are up by a staggering 39%, making the city the archetype for rental market disruption amid the pandemic. This month, however, the median rent in Boise fell by 0.1%. While such a small dip certainly doesn’t offer much relief to Boise renters, it may at least signal that the market is finally starting to stabilize. Spokane, WA, another city that has experienced skyrocketing rent growth this year, saw an even more notable decline this month, with rents down 1.8 percent.

Unfortunately, Boise and Spokane represent the exception rather than the rule -- in most of the cities where rents had been growing quickly, that growth is continuing. Tampa, for example, saw rents jump by another 3.9% this month, and the city now ranks 2nd for cumulative rent growth since the start of the pandemic at 36%. Excluding Boise and Spokane, the other eight cities in the chart above experienced rent growth of 3.5%, on average, from August to September, as affordable Sunbelt markets continue to boom. Of particular note, four of the ten cities with the fastest rent growth since last March are suburbs of Phoenix.

A more tangible indicator that demand destruction may be setting in, is that vacancy rates have posted their first increase since March. Indeed, as Apartment List notes, much of this year’s boom in rent prices can be attributed to a tight market in which more and more households are competing for fewer and fewer vacant units. The vacancy index spiked from 6.2% to 7.1% last April, as many Americans moved in with family or friends amid the uncertainty and economic disruption of the pandemic’s onset. Since then, however, vacancies have been steadily declining. For the past several months, the vacancy index has been hovering just below 4%, significantly lower than the 6% rate that was typical pre-pandemic.

This month, however, the vacancy index ticked up slightly, from 3.8 percent to 3.9 percent. Although this is a very minor increase, it represents the first increase of any magnitude since last April. While a few more months of data would be needed to confirm an inflection point, if vacancies are back on the rise again, it would signal that tightness in the rental market is finally beginning to ease and that rent growth will also continue to cool.

Finally, where there may be light at the end of the tunnel in real-time data, we have yet to see the pig even enter the python when it comes to the CPI's Owner Equivalent Rent data series. As shown below, the Apartment List data normally has a 4 month lead to the OER series, which means that as actual rents soar by over 15% Y/Y, OER is either going to skyrocket in the coming quarters or the BLS will have to come up with some very fancy hedonic adjustments why rental inflation should exclude, well, rental inflation.

Tyler Durden Tue, 09/28/2021 - 18:25
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