Pro Perspectives 9/10/21

September 10, 2021

Yesterday's speech by the President laid out a plan to raise the vaccination level. 

As we discussed, vaccine mandates for government and the healthcare industry, pose a threat to the employment situation.  We already have a labor shortage, driven by federal income subsidies and debt moratoriums.  Now we may see the labor shortage exacerbated by firings and walkouts.

With that, on the private employer front, for employers that would be forced to comply with either vaccine or testing mandates, we may find the return to office plans get pushed out even farther.

That probably doesn't bode well for the office stocks.  Let's take a look at a couple of those …

First, here's SL Green Realty Corp. (symbol SLG).  This is a REIT that primarily invests in office buildings and shopping centers in New York City.  As you can see in the chart, as of June, this stock had retraced more than 80% of the losses from the pandemic-induced restrictions.  Today it was down 3.8%, the biggest down day since February 25th. 

Next is Boston Properties (symbol BXP).  This REIT invests in office buildings in big U.S. markets like Boston, New York, San Franciso, Los Angeles and DC.  The stock also had retraced over 80% of the pandemic losses. It was down 3% today. 

What was UP, in a down market?  Maybe one of the favorite "work from home" stocks:  Zoom.   Zoom was up almost 2%.  Perhaps a dip to buy in this chart…
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Pro Perspectives 9/9/21

September 9, 2021

On Tuesday we talked about the interest rate market, as a spot to watch. 

The Fed meets in less than two weeks, and if we believe what they've been telling us, we should expect them to announce the schedule to dial down their QE program (beginning as early as October). 

With that, on Tuesday, rates were technically sitting on levels for a potential breakout.– trading around the 1.39% area on the benchmark 10-year government bond yield.  Of course, that would represent a Fed finally moving away from emergency level policies, and it would (related) represent confidence in the sustainability of recovery and reopening.

As you can see in the chart above, the breakout in rates didn't happen.  It's gone the other way.   Today, the 10-year traded back below 1.30%. 

This comes as stocks have four consecutive days of losses (albeit only 1.1% in total for the S&P 500).  

We may be seeing some uncertainty in markets heading into a prepared speech from Biden after the close today.  There have been a few hints on what it will cover, but the headline has suggested that he will present a plan on virus mitigation, which will include ramping up mandates to raise the population vaccination level.

So far the leaks point to mandatory vaccination of government workers and healthcare workers that participate in government healthcare programs (Medicare and Medicaid).   The risk here, is to the employment situation. 

Pro Perspectives 9/8/21

September 8, 2021

As we discussed yesterday, there is report due from the Fed this month on the viability of a central bank digital currency (CBDC/digital dollar).

I suspect this will determine whether or not the Fed Chair, Jay Powell, keeps his job.  

My view:  If this report favors the adoption of a digital dollar, he keeps his job.  If it doesn't, the Biden administration will appoint someone that does. 

On cue, the Wall Street Journal ran a piece today setting the table for a close call on Powell's future — saying there's an intraparty rift on the topic.

 
What's the big deal about a digital dollar?  Isn't money already digitized?  

Digitization of money is indeed already well adopted, at the wholesale (or institutional) level — digital currency already exists. 

So there are plenty of questions as to why the government and the central bank are looking into a CBDC.  In fact, one Fed governor has called it “a solution in search of a problem.”  

 
While the problems it solves are questionable, it can certainly create problems.  For one, it would take us a step closer to a cashless society.    That means the disrupted parties in this new digital monetary system would be small business and "retail" (i.e. the people).  The privacy of a cash transaction goes away.   

With that, bitcoin looks like the bastion of wealth security and transaction anonymity.  But this CBDC concept could allow governments and central banks to regain control on that front.

With that, as for the future of private crypto currency, don’t underestimate the rule makers appetite to change the rules when it fits their interest.  We’ve already seen government encroachment on crypto accounts. I suspect the government wants to, and can regulate private crypto out of existence.  

But haven't some of the very wealthy and sophisticated investors come out in favor of bitcoin and crypto?

 
Yes.  But allocating 1%-2% of their wealth as a hedge against an extreme outcome (ex: Bitcoin widely adopted) is a way to preserve their wealth relative to the rest of society.  They win, in both scenarios.  They win more if their 1%-2% allocation goes to zero (i.e. the private crypto markets go away). 
 

Pro Perspectives 9/7/21

September 7, 2021

We ended last week discussing a jobs report that showed weaker job growth, but hotter wage growth.

As we discussed, a return to stronger job growth will likely come this month, as incentives have shifted in favor of promoting a return to work, for the unemployed (as opposed to saying home).  And the wage growth, which has already trended hot for many months, we should expect to continue to trend "hot."

With that, we had a move in the interest rate market today, in anticipation of the Fed 'beginning the end' of QE, maybe as early as next month. 

As you can see in the chart above, we closed today testing the highs of the past month on rates.  This will be key to watch in the coming days for a potential break higher.   That would be, at least short-term, positive for the dollar, and likely negative for commodities.  We've seen this manifestation today. 

Another big mover today:  Bitcoin.
After climbing back to $50,000 over the past month, Bitcoin declined as much as 17% today. 

Was the decline influenced by rising rates?  Was it influnced by the news that a third world country (El Salvador) would be the first to adopt bitcoin as its national  currency?  Don't know. 

What is a risk to bitcoin, which is coming down the pike (soon), is the Fed's report on whether or not they see a viable path toward adopting a digital dollar (i.e. a central bank digital currency).  That report was promised by Jerome Powell, to be published and made public this month. 

Remember, we've talked about this over the past few months.  The Senate Banking Committee held a hearing on the prospects of a digital dollar back in June, where Elizabeth Warren described a central bank-backed digital dollar as "legitimate digital public money that could help drive out bogus digital private money (bitcoin, stablecoins, etc), while improving financial inclusion, efficiency, and the safety of our financial system." 

It's no secret that a consortium of 63 global central banks (the BIS – which includes every major central bank), has already promoted CBDCs as the "future of the monetary system." 

 
With that, expect some fireworks surrounding this report when it's released (again, sometime this month).  It's probably a good time to be long gold.   

Pro Perspectives 9/3/21

September 3, 2021

The jobs report this morning showed just 235,000 jobs added in August.  That was well below expectations. 

But as we've discussed the past two days, the conditions for job growth will only improve in the coming months.  For at least half of the country, we'll see the unemployed re-enter the workforce, as the additional unemployment compensation from the federal government has ended.  

More important than the jobs number this morning, was the wage number.

The change in wages from July to August was 0.6%.  That's an annualized rate of more than 7%!  

This "wage component" is like pouring gasoline on the inflation fire.  This is where the Fed's case for "transitory" inflation breaks down.  Sure the supply chain issues will ultimately work out, and relieve those price pressures.  But wages are sticky.  The government has reset the "living wage" through its federal unemployment subsidy.  And it's much, much higher.  The genie is out of the bottle. 

We know all of this.  We've been talking about this for a long time.  Now we're seeing it sustained and feeding into the inflation data.  It has led to higher input costs for employers, and those higher costs are being passed onto consumers (without hesitation) in the form of higher prices.  I've spoken to executives that raised prices not just once, but two and three times, already.

So we should expect the Fed to execute on an exit of QE, beginning maybe as early as October.  And then the big question will be, how soon will the Fed be forced to start hiking rates?  If we look at the quarterly annualized inflation rate running at close to 7%, with the prospects of hotter economic activity in front of us (not behind us), the Fed may be looking at double-digit (trailing twelve month) inflation, or close to it, by the end of Q1 next year. 

Bottom line, our cash continues to be devalued.  And that promotes the reset of asset prices we've been talking about for 17-months.  The price of stuff, relative to the money in your pocket, will continue to rise for the foreseeable future. 

Have a great Labor Day weekend!  As a loyal reader of my daily Pro Perspectives notes, I'd like to invite you to join me in my premium advisory service, where you can get all of my in-depth analysis on the bigger picture — and get exclusive access to my top stock ideas.  You can get started here. 
 

Pro Perspectives 9/2/21

September 2, 2021

The big jobs report comes in tomorrow morning. 

As we discussed yesterday, things set up for a disappointing number.  We have clues from the ADP data that we could see not only a weaker than expected nonfarm payroll number, but also a downward revision to last month's number. 

Supportive of that, the employment component of the recent ISM Manufacturing report dipped back into contractionary territory for the first time since November.  

And as we discussed earlier in the month, the consumer sentiment reading from the University of Michigan hit a 10-year low in July.  
So these are meaningful signals to acknowledge. 

The question is:  Will a weak number tomorrow be enough to shake the boom in asset prices, particularly stocks?  Likely. 

But as the dust settles, the realization should set in that weak jobs data only give the Fed cover to stay "easier for longer."  That's positive for stocks. 

Conversely, a strong jobs number tomorrow, means recovery is stronger.  That too is positive for stocks.  

With all of this said, tomorrow's report on August employment means very little in the bigger picture.  We all know that employment has been encumbered by policy disincentives.  And those disincentives have ended for half of the country, as of this month.  So the employment situation should only improve from here (from September on), and that will strengthen already hot economic growth (but also underpin inflation).  
 

Pro Perspectives 9/1/21

September 1, 2021

It's jobs week.  The ADP jobs report today showed a big miss for a second consecutive month.

What does this mean for the big jobs report due on Friday?  

Keep in mind, this ADP report (which is aggregated from actual payroll data from U.S. ADP payroll clients) tends to be better at predicing the final revision of the big government published jobs report (the BLS's nonfarm payrolls), rather than the first print.

On that note, in the July report, the ADP reported a big negative surprise.  A couple days later, the BLS reported a big positive surprise.

With that, should we expect the BLS to report a negative revision to their July number on Friday?  And if that's the case, reflecting a employment picture less optimistic than we thought from this prior report, will we get a negative surprise on Friday?  Maybe.  

There was indeed uncertainty surrounding the virus throughout the month of August.  And that may have weighed on new hiring.  And we know, from private jobs listings, there remains around 1.4 million unfilled jobs.

So the number may very well come in softer on Friday. 

 

But the jobs report, at this state, isn't a view on economic health.  It's a view on policy, and getting people back to work.  And with that, over the course of July and August half of the states have now withdrawn from the federal unemployment subsidy.  This means that September jobs data should start reflecting policy that is incentivizing people to get back to work (at least in half of the country).  

Pro Perspectives 8/31/21

August 31, 2021

Jim Bullard is the president of the St. Louis Fed.  He is one of several Fed presidents that the Fed rolled out on a media tour last week, to confirm their hawkish pivot.  

Bullard will become a voting member on monetary policy beginning in January of next year.   And he is one of few that has warned that the Fed may very well face an inflation storm — a storm they will be forced to fight. 

And he's one of few that has directly said that the current asset purchases, at this stage, are not helping the economy, but possibly fueling a housing bubble.  In fact, he said plainly, "the Fed doesn't need another housing bubble." 

On that note, let's take a look at the housing data from this morning. 

Thanks to a powerful formula of tailwinds for housing (largely including Fed policy), the July report showed a 19% rise in prices over the past year.  

This past year is, of course, only an acceleration of the bull trend in housing of the past ten years.  Here's a look at what this trajectory of the this housing price run looks like compared to the housing bubble of the early 2000s…

As you can see, if we measure the ten-year trend, in each case, the appreciation in house prices is spot-on, the same … up 92%. 

With that, it just so happens that the catalyst for an end of this run is here.  The Fed has been buying $120 billion a month of bonds, $40 billion of which have are mortgage backed securities.  That has ensured that the flow of credit into housing would be easy and plentiful.  As such, housing prices have boomed. 

 
But with the Fed now positioned to begin the end of bond purchases, expect their first move to be curtailing the mortgage bonds (cutoff the housing fuel).  That should put the brakes on the aggressively rising housing market.  But unlike the 2000s bubble burst, the economy still has room to run, employment has room to boom, and we don't have the cliff of mortgage rate resets that triggered the defaults in housing back in 2007.   
 

Pro Perspectives 8/30/21

August 30, 2021

During their respective tenures as Fed Chair, both Bernanke and Yellen said that economic expansions don’t die of old age (historically), the Fed tends to murder them — attempting to slow inflation by raising interest rates (tighter money … slower economic activity …  higher unemployment … slower economic activity …).

With this in mind, the Fed has now clearly telegraphed an end of emergency policies.  It’s likely to be a very gradual process, but nonetheless, it’s a distinct change in the direction of monetary policy.  And it is inflation, which is running hotter than was anticipated by the Fed, that is at the core of their decision to pivot.

But don’t expect this pivot to end the economic expansion anytime soon, nor end the bull market for stocks/asset prices.  Unlike the history referenced by the two former Fed chairs, this time, the Fed will be moving rates from the ultra-low level of zero.  And, interest rates adjusted-for-inflation remain deeply negative. 

Negative real rates mean that monetary policy, even as the Fed begins to raise rates, will continue to promote spending, not saving, for quite some time. 

This dynamic will continue to push money out of the bond market (an almost certain negative return asset class from this point) and into higher risk, higher returning asset classes.  Higher asset prices will continue to support new, higher record household net worth, which will fuel even more consumption, which will result in higher corporate earnings, which means higher asset prices (and so the cycle goes). 

Of course, it’s all a recipe for higher inflation.  And with that, we should expect the Fed, once again, to ultimately murder the economic expansion, with a far more aggressive interest rate tightening cycle than is now being anticipated.  But given that they are starting from such an ultra-easy level on monetary policy, the economic expansion and asset price boom has plenty of time to continue.  Returns will be there.  The question is, how much return will be there after adjusting for inflation? 

This is why it’s important to take the Fed’s cue, to pursue higher risk/higher return investments in this environment, as cash and asset class returns are already being eroded by inflation that is running at a near double-digit annual pace (annualizing the past four months).
 

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Pro Perspectives 8/27/21

August 27, 2021

As we've discussed, the Fed spends a lot of time manipulating the expectations of consumers and businesses, as part of their policy making.

They talk a lot, in attempt to manufacture stability in markets, and the path they would like to see, for the economy and for interest rates.  

Sometimes it works.  Last year, at the peak of pandemic and economic uncertainty, they managed to stabilize the treasury market by vowing to backstop the troubled corporate bond market.  Within months of the announcement, even crippled airline companies were able to sell billions of dollars of bonds.  All told, the Fed only had to buy $14 billion worth of corporate bonds – a tiny fraction of the total market.  It was the threat, that they would do "whatever it takes" that returned stability, not just to the corporate bond market, but to the treasury market and to all global markets (stocks, bonds, commodities … everything).  

Now they are trying to navigate the end of emergency policies.  And they are, once again, talking a lot.  As we know, the Fed chair had a highly anticipated prepared speech this morning, where he was due to telegraph a beginning of the end of QE.

He did, but with a healthy dose of expectation manipulation.  First, before Powell gave his speech, they rolled out Fed President after Fed President for interviews with financial media.  Their job was to confirm the market expectation that the Fed sees the economy in good shape, inflation as possibly a higher risk than the previously projected, and, indeed, that it was time to start winding down the QE program.  Perfect. 

So what did the most important Fed official say, the Chair?  He reigned it all back in.  He gave us five reasons that inflation wasn't going to run hot.  

With that, the interest rate market finished lower on the day.  And that was a victory for Powell and company.  After all, they want to remove accommodation on their schedule.  They don't want to see a run up in market interest rates, which would put them in a position where they would be forced to unwind emergency policies faster, and begin lift-off of the Fed Funds rate earlier.