We already know, from reading the monthly ISM reports, that manufacturing business is booming. But they are dealing with record long lead times on raw materials, due to shorages. And the price of commodity inputs are ALL going in one direction — UP. 

With the fresh demand of a massive government funded infrastructure plan coming, the supply problems will only get worse, not better.  That means higher prices. 

Let's take a look at some charts …

With the spending blowout now reaching a crescendo, as we've discussed, the Fed has now fired the warnings shots on a reversal in the monetary policy path. 

Let's take a look at a couple of key charts …

Market interest rates have ripped almost a quarter point higher from the lows of last Wednesday …

Let's talk about the recent pivot from the Fed that continues to transform the theme for markets. 

We entered the year with a clearly telegraphed, massive fiscal spending agenda — and with a Fed, happy to keep the pedal-to-the-metal on monetary policy for the foreseeable future (until at least 2023).

So we are now eight months in, and the fiscal spending agenda is fully materializing.  And yet suddenly, the tune the Fed has been singing has changed.

It started with Powell's late July (post-FOMC) press conference, and continued with a well placed comment from the Fed Vice-Chair following last Wednesday's weak ADP number. 

Remember, in late July, with nearly $4.5 trillion lined up for approval on Capitol Hill, all advanced under the cover of the Fed's drumbeat that inflation is “transitory,” the Fed, conveniently, decided it’s time to explain its nuanced definition of transitory.

We heard for many months how the deflationary trend of nearly four decades, just "doesn't change on a dime" (in the words of Jay Powell).  Therefore, the drumbeat has been, that short-term inflation is simply a product of "bottlenecks" and "base effects."  Don't worry, when these supply chain disruption-related bottlenecks work out, "inflation is expected to drop back down to our longer-run goal," we were told.

Now, the in the span of two weeks, the Fed has told us that, sure prices have soared, but transitory means they just won't continue soaring at the same rate.  Slower rate-of-change, after what is tracking to be double-digit annual inflation, still means we've all been hit with a massive inflation.  And it’s forcing wages higher, which is a driver for higher inflation rates.  

Bottom line, the Fed has been doing what they do.  They've tried to manipulate expectations on inflation through their "guidance."  That doesn't necessarily have anything to do with reality.  When it's time to move, they move.  And it appears that they will be tapering into the end of the year.  And the Fed chatter has started about moving on rates next year.    

So, the Fed has pivoted.  Market interest rates are going up.

What does this represent for the global economy?  Does it represent the end of the pandemic and economic crisis?  On the latter, a change in the direction of the interest rate path in the United States, especially leading the way out of global economic crisis, will only draw capital out of global economies and into the U.S. (in search of yield and relative growth and safety). 

That especially won't bode well for emerging markets.  We've seen the movie before, following the great financial crisis.  Capital flees.  With that, if you've enjoyed the rewards of this chart, it's probably time to sell.  

The week has opened with more big earnings beats.  Expect more of the same.

This puts stocks back on new record highs, but the more aggressive growth in earnings simultaneously puts downward pressure on the P/E multiple on the stock market, making it cheaper even as stock prices are rising.

What about the delta variant?  The resurgence in covid doesn't appear to carry the risk of additional lockdowns.  The administration has dismissed it.  Jay Powell (last week) said the same, and added that each wave, thus far, has tended to have less economic implications.

So we should expect the economic boom to continue and the asset price boom to continue — only further bolstered by another $4.5 trillion coming down the pike from Capitol Hill.

Now, we talked yesterday about the Fed's shifty repositioning on the inflation outlook.  They now acknowledge big inflation, but dismiss any concern about it with the argument that the rate-of-change in prices, year-over-year, won't keep rising at the same aggressive pace.  That doesn't mean you and I won't be paying more and more for everything, for the foreseeable future. 

On that note, yesterday we heard from manufacturers in the ISM report.  The manufacturing index had a 14th straight month of expansion in July.  And the commentary included all of the same stuff we've heard for many months now:  strong demand, low inventories, labor shortages, supply chain reductions, rising raw material prices … have all led to higher labor costs, higher production costs and higher prices being passed along to end consumers.  There's no end in sight.  
 

For the better part of this year, the Fed has attempted to convince the world that increasing the money supply by more than 30% over the past year, is not inflationary.

The rising prices we're seeing everyday, Powell and company, have claimed are simply the result of "base effects" and "bottlenecks."  They have said that price data only looks high because it's measured against a very low base of last year, when the economy was virtually shut down ("base effects").  And they have blamed higher prices on supply chain "bottlenecks" — which will ultimately normalize.

With the above in mind, these inflationary effects, they have claimed, are "transitory." 

Keep in mind, the term transitory was introduced AFTER about $3 trillion of fiscal stimulus was already approved and working through the economy, to such a degree that the economy was already nearing a full V-shaped recovery (by late January) — and projected by the CBO (Congressional Budget Office) to grow at a 3.7% annualized rate (hotter than pre-pandemic growth), with an unemployment rate falling to 5.3% – about right at the average unemployment rate of the past 50 years.

But in January, the new Biden administration had a huge and very expensive agenda to roll out.  It included an immediate $1.9 trillion massive spend (quickly approved).  Conveniently, the politicians on Capitol Hill justified it by citing the Fed's view that inflation wasn't a threat.   And of course, this term transitory has continued to be used by the Fed, as the Biden administration has lined up another $4.5 trillion in deficit spending (all but a done deal).

So, only now does the Fed (Powell) start to move the goal posts.  In last week's post FOMC press conference, Powell stumbled through a definition of transitory, and suggested that it means prices just won't rise at the same rate as we've seen (lower rate of change).  So, yes, he admits there is massive inflation.  But he says, the peak rate-of-change just won’t be persistent.  

It seems clear that the non-political line has been well crossed by the Fed, and they have since become an instrument of the Biden administration, to facilitate the funding of the massive economic and social change agenda.