There were some concerns about persistent supply-chain bottlenecks boosting prices.
A number of participants remarked that supply chain bottlenecks and input shortages may not be resolved quickly and, if so, these factors could put upward pressure on prices beyond this year. They noted that in some industries, supply chain disruptions appeared to be more persistent than originally anticipated and reportedly had led to higher input costs.
But the overall sentiment on inflation at the central bank remains dovish.
Despite the expected short-run fluctuations in measured inflation, many participants commented that various measures of longer-term inflation expectations remained well anchored at levels broadly consistent with achieving the Committee’s longer-run goals.
A few members want to have a discussion on QE tapering.
A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.
Some FOMC members are becoming uneasy with “financial stability” trends (asset bubbles).
Regarding asset valuations, several participants noted that risk appetite in capital markets was elevated, as equity valuations had risen further, IPO activity remained high, and risk spreads on corporate bonds were at the bottom of their historical distribution. A couple of participants remarked that, should investor risk appetite fall, an associated drop in asset prices coupled with high business and financial leverage could have adverse implications for the real economy. A number of participants commented on valuation pressures being somewhat elevated in the housing market. Some participants mentioned the potential risks to the financial system stemming from the activities of hedge funds and other leveraged investors [a reference to Archegos Capital], commenting on the limited visibility into the activities of these entities or on the prudential risk-management practices of dealers’ prime-brokerage businesses. Some participants highlighted potential vulnerabilities in other parts of the financial system, including run-prone investment funds in short-term funding and credit markets. Various participants commented on the prolonged period of low interest rates and highly accommodative financial market conditions and the possibility for these conditions to lead to reach-for-yield behavior that could raise financial stability risks.
The market’s reaction was:
- Both nominal and real yields jumped and inflation expectations declined.
- The dollar strengthened.
- The futures-based probability of a rate hike next year increased.
- Gold and Silver declined
President Biden releases his first major piece of legislation, the American Rescue Plan (ARP).
And what ended up making the cut?
More PPP funding of $7.5 Billion
Employee retention credit will now be allowed in Q3 and Q4
An expansion of the child tax credit to give families up to $3,600 per child
Additional non-profit will now be allowed to take PPP
Additional Targeted EIDL Advance of $15B for small businesses
Additional eligible entities are now allowed to take PPP
$25 billion in new funding available for restaurants
Additional $1.25 in SBA Shuttered Venue Operators Grant Program
Extended credit dates for the FFCRA
Payments of $1,400 to most individuals, along with the same amount for each dependent. Checks start to phase out at $75,000 in income and go to zero for individuals making $100,000
A $300 per week unemployment supplement through September 6, 2021.
And there you have it.
Tesla, Part 3
Tesla (NASDAQ:TSLA) shares were the weakest among the Big Six megacaps in last Monday’s trading, declining more than 2% and falling back below their 200-day simple moving average. Other highly-valued stocks have seen weakness lately. But Tesla shares are feeling the pressure coming from a few directions, related to and unrelated to its core business of selling cars.
Stock numbers: In Monday’s session, Tesla fell back below the 200-day SMA, which sits at about $584. Last week Tesla fell below that level for the first time since March 2020, at the depth of the COVID-related selling and momentum has been a concern for a month. Shares are now down 35% from their closing high in late January and 24% lower from the recent high on April 13. Just two trading sessions earlier, on April 9, the 50-day SMA crossed below the 100-day in a bearish sign. The price has been consistently below the 100-day since April 27 and the 50-day since May 6.
Burry short: Tesla shares got hit with additional pressure yesterday afternoon when Michael Burry of The Big Short fame, disclosed a large short position in the stock. Burry’s Scion Asset Management (made famous in the movie “The Big Short”) holds 8,001 put contracts, bearish options on 800,100 Tesla shares, although there were no details on strike price or expiry in the regulatory filing. Burry had disclosed a Tesla short in December in a since-deleted tweet and has expressed his concern about the valuation. Burry was one of the catalysts for the retail investor interest in GameStop, although he closed out his long position before the big squeeze. The disclosure adds some more credence to the theory that Tesla shares have come too far too fast after a year of cash from fiscal and monetary stimulus chasing returns in Big Tech and momentum names.
“Tesla is currently trading at an enterprise value multiple of about 11x based on its expected 2021 revenues, hardly a bargain, but Tesla is expected to continue to report impressive growth figures for the next 3-4 years and possibly beyond,” Seeking Alpha contributor The Outsider wrote yesterday, warning about buying on the current pullback. “This justifies to some extent its premium valuation, but even when compared to technology companies this valuation seems to already incorporate much of the future growth.”
Self-driving headlines: A fatal crash in California involved a Tesla Model 3 driver who had, in the past, recorded TikTok videos lauding the “full self-driving” feature and driving with his hands off the wheel, according to Reuters. Yesterday, the California Department of Motor Vehicles confirmed that Tesla is under review to see if the company misleads customers by advertising its full self-driving capability option.
Crypto controversy: Tesla shares have also seen volatility as CEO Elon Musk battles with supporters arguably as passionate as his own devoted customers and investors: the crypto crowd. Musk, who had been praised for accepting bitcoin (BTC-USD) for transactions and seen Tesla stock rally on the announcement, found himself in the crosshairs after reversing that decision and suspending bitcoin purchases on concerns about the amount of energy used in mining. After then saying he believes in crypto, he ended up in a weekend Twitter war with cryptocurrency fans that led to speculation Tesla may shed its bitcoin holdings. He then had to clarify that Tesla wouldn’t sell.
The Potential Upside Explosion for Gold
One reason the US dominates the world economy is our “exorbitant privilege” of issuing the world’s reserve currency. Most international transactions are settled in US dollars through the US banking system. This gives Washington leverage, or at least influence, over pretty much everything.
The currency privilege is also a vulnerability. US companies import from China and pay for them with dollars. China uses those dollars to buy US Treasury securities, helping to keep our rates low. OPEC countries did the same before China’s rise.
Beijing would rather not finance Washington’s debt, but presently has no choice. Xi’s central bankers would like to give the world another currency system—a digital one that may work as well as dollars. Their digital yuan would be issued and backed by their central bank, the People’s Bank of China, giving it instant legitimacy.
If China wants to displace the dollar as the global reserve currency, it needs to offer more than an alternative. It needs something way better than USD.
PBOC may let the digital yuan grow slowly from the bottom up, encouraging merchant and customer usage. But they can move fast if they want.
isn’t just big; its government has the ability to dictate standards, leaving businesses and consumers little choice. And not just domestically, but also with some of its trading partners. The digital yuan could easily have a billion users a few months after launch.
Then of course, they have the potential to launch that same platform into many Belt and Road countries. A potentially frictionless currency transaction that is acceptable and transferable to your local currency, and that is easier, especially to those who lack bank accounts.
What would that do to the value of the US Dollar? It would plummet. A falling US Dollar has ALWAYS caused Gold and Silver to rise……A LOT!
Another factor on the US Dollar is DEBT.
If we look at Federal spending as a % of GDP, the CBO is saying if the 10-year Treasury goes to 4.9%, which is their normalized projection, the interest expense alone will be close to 30% of GDP every year, that’s basically what we just spent on the COVID emergency in the last year. There is no way we can afford to have 30% of all government outlays be toward interest expense, so what will happen is that the Fed will have to monetize that. When they monetize it, I believe it will have horrible implications for the US dollar.
There are only two ways out of this for the US––
- to let the US Dollar weaken meaningfully, or
- to put the US economy into a recession to re-attract global capital flows into the UST market.
The problem is that with US debt/GDP at 130%, the US cannot put its economy into a recession to re-attract capital flows into the US Treasury market without crashing the US Treasury market.
The deflationary forces of debt and demographics are facing an MMT (Modern Monetary Theory) experiment, one we haven’t seen for more than 100 years. The theory is that if you are a government that issues money in your own currency, there is no end to what you can print.
- MMT has been tried many times in the past. What always kills MMT booms is inflation.
- Few are talking about the entitlements that are coming our way. There is no we can finance them.
- There is no way the government can get out of this without inflation. At some point, the inflationary boom will become a bust.
If inflation is transitory largely due to debt, excess capacity, and demographics, then interest rates are headed lower. And with monetary and fiscal spending at our backs, the bull market in bonds and equities continues.
The UNsustainable Fed Policy
With Covid uncertainty receding fast, and several quarters deep into the strongest recovery from any postwar recession, the Federal Reserve’s guidance continues to be the most accommodative on record, by a mile. Keeping emergency settings after the emergency has passed carries bigger risks for the Fed than missing its inflation target by a few decimal points. It’s time for a change.
The American economy is back to prerecession levels of gross domestic product and the unemployment rate has recovered 70% of the initial pandemic hit in only six months, four times as fast as in a typical recession. Normally at this stage of a recovery, the Fed would be planning its first-rate hike. This time the Fed is telling markets that the first hike will happen in 32 months, 2½ years later than normal. In addition, the Fed continues to buy $40 billion a month in mortgages even as housing is clearly running out of supply. And the central bank still isn’t even thinking about ending $120 billion a month of bond purchases.
Not only is the recovery happening at record speed, excesses of fiscal policy are already visible. Consumers are spending like never before, construction is booming, and labor shortages are ubiquitous, thanks to direct government transfers. Two-thirds of all relief checks were sent after the vaccines were proved effective and the recovery was accelerating. Opportunistic politicians didn’t let the pandemic go to waste. Especially after the Trump years, Congress has decided to satisfy its long list of unmet desires.
The emergency conditions are behind us. Inflation is already at historical averages. Serious economists soundly rejected price controls 40 years ago. Yet the Fed regularly distorts the most important price of all—long-term interest rates. This behavior is risky, for both the economy at large and the Fed itself.
Future fiscal burdens will put the kind of political pressure on the central bank that hasn’t been seen in decades. The federal government has added 30% of GDP in extra fiscal deficits in only two years, right as the baby-boomer retirement wave is beginning to accelerate. The Congressional Budget Office projects that in 20 years almost 30% of all yearly fiscal revenues will have to be used solely to pay back interests on government debt, up from a current level of 8%. More taxes simply won’t be enough to bridge the gap, so pressures to monetize the deficit will inevitably rise over the years. The Fed should be adapting policy today to minimize these risks.
The risks are no longer hypothetical. For decades Treasurys have been the preferred asset for foreigners looking to hedge global portfolios. It was therefore shocking and unprecedented that in the midst of last year’s stock-market meltdown and while the Cares Act was being debated, foreigners aggressively sold Treasurys. This was dismissed by the Fed as a problem in the plumbing of financial markets. Even after trillions spent to prop up the bond market, foreigners have continued to be net sellers. The Fed chooses to interpret this troubling sign as the result of technicalities rather than doubts about the soundness of current and past policies.
America’s deep divisions also make the central bank’s independence crucial. Fighting inequality and climate change are very far from the Fed’s central mission. There’s a reason central bankers are supposed to be unpopular. Inflation is often the result of a fragmented society that feels unrepresented by weak political leadership. Eventually, the choice between fiscal discipline—lower taxes or higher spending—and forcing the central bank’s hand becomes an easy one for politicians to make.
With these risks in mind, and with unambiguous evidence of a strong recovery, the Fed should be doing more than just reanchoring inflation expectations to a slightly higher level. Fed policy has enabled financial-market excesses. Today’s high stock-market valuations, the crypto craze, and the frenzy over special-purpose acquisition companies, or SPACs, are just a few examples of the response to the Fed’s aggressive policies. The central bank should balance rather than fuel asset prices. The pernicious deflationary episodes of the past century started not because inflation was too close to zero but because of the popping of asset bubbles.
With its narrow focus on inflation expectations, the Fed seems to be fighting the last battle. Just because the Fed hasn’t faced big trade-offs in recent decades doesn’t mean trade-offs aren’t coming or that they no longer exist. Chairman Jerome Powell needs to recognize the likelihood of future political pressures on the Fed and stop enabling fiscal and market excesses. The long-term risks from asset bubbles and fiscal dominance dwarf the short-term risk of putting the brakes on a booming economy in 2022.
“So my issue here is, in the future, as we go forward, if we look at Federal spending as a % of GDP, the CBO is saying if the 10-year Treasury goes to 4.9%, which is their normalized projection, the interest expense alone will be close to 30% of GDP every year, that’s basically what we just spent on the COVID emergency in the last year.
There is no way we can afford to have 30% of all government outlays be toward interest expense, so what will happen is that the Fed will have to monetize that. When they monetize it, I believe it will have horrible implications for the US dollar.”
– Stan Druckenmiller,
Former Chairman & President, Duquesne Capital
Everyone believes that the Fed has our backs. That they won’t let the stock market crash. That they won’t let the bond market crash. Hold interest rates at zero and buy $120 billion worth of mortgage, Treasury bonds, and a junk bond or two each month and—for now—everyone may be right. But for how long? Don’t know. When it comes to the future, in my view, Druckenmiller is right.
- After massive stimulus-driven gains in March, last month’s retail sales surprised to the downside. Some analysts have suggested that US consumers are starting to balk at rising prices.
- Online shopping remains strong, but its share of the overall retail sales has eased.
- Consumers pulled back on mall shopping.
- Retailers’ inventories-to-sales ratio has cratered.
- The U. Michigan consumer sentiment index slumped in May, coming in well below market consensus. Once again, inflation concerns might be to blame.
- Manufacturing output expanded a bit faster than expected but is holding below 2018 and 2019 levels for this time of the year.
- Chip shortages remain a drag
- Factory capacity utilization is not back at pre-COVID levels yet.
- Inflation concerns have spread across the economy.
- Import prices increased more than expected last month.
- Americans are increasingly comfortable with many activities they have avoided since the start of the pandemic.
- The unprecedented rally in US lumber futures appears to be fading.
- Post-COVID declines in apartment rents:
- Empire State, the first regional manufacturing report of the month, shows robust factory activity in the NY region.
- Manufacturers are increasing employee hours.
- The backlog of orders remains elevated.
- And price pressures are intensifying.
- Morgan Stanley expects a rapid increase in CapEx over the coming years.
- We should see further gains in productivity as a result of this recovery in business investment.
- Homebuilders remain upbeat despite sharp increases in lumber prices.
- This chart shows home price gains by price tier.
- The U. Michigan survey shows that consumers are increasingly negative on home buying conditions (due to high prices).
- A national survey of consumers by the NY Fed is even more bullish on housing.
- Continuing unemployment claims remain elevated.
- The Fed remains focused on the labor market, targeting “broad-based and inclusive” full employment.
- Residential construction paused in April amid headwinds from supply/labor bottlenecks and soaring lumber costs.
- Construction costs have surged.
- The backlog of units authorized but not yet started keeps climbing.
- The Citi Economic Surprise Index declined further after the disappointing housing starts report.
- The first-quarter increase in the Employment Cost Index was too high relative to the prime-age employment-to-population ratio.
- For now, the Atlanta Fed’s wage tracker isn’t showing any acceleration in wage growth.
- There is still a long way to go to recoup jobs lost during the pandemic.
- Labor force participation for older age groups has failed to recover even as the economy reopens.
- The gap between unemployment and job openings has closed substantially across sectors over the past few months, according to Deutsche Bank
- Job gains in April were driven by low-wage sectors.
- Long-term unemployment continues to climb.
- State tax revenue took a milder hit last year relative to the financial crisis
- Mortgage applications to purchase a house have lost momentum.
- The U. Michigan consumer sentiment on buying conditions for vehicles and large durables remains depressed.
- Retail sales have exceeded retail inventories for the first time in decades.
- Many states are ending emergency unemployment benefits next month.
- The Philly Fed’s manufacturing index weakened more than expected this month.
- To be sure, the PA/NJ/DE-area factory activity remains strong, but this report shows a loss of momentum. Much of this pullback was due to supply bottlenecks but not all. Demand eased slightly as well. Are higher output prices to blame?
- Hiring slowed, but many manufacturers are boosting workers’ hours.
- The CapEx expectations index remains elevated.
- Supply challenges are hitting extreme levels as delivery times extend further.
- By the way, chip lead times have risen sharply around the world.
- Factories haven’t been this backed up on orders in decades.
- Manufacturers have been increasing inventories.
- Price pressures continue to surge. While businesses are increasingly passing on a portion of these costs to clients, at some point, buyers are going to balk.
- The downside surprise in the Philly Fed’s report sent the Citi Economic Surprise Index below zero.
- We also saw a pullback in the Oxford Economics Recovery Tracker.
- Initial jobless claims continue to ease. We should see a substantial drop in continuing claims next month as several states terminate emergency benefits.
- The Conference Board’s index of leading indicators rose sharply last month, driven by the decline in initial jobless claims.
- Inflation options markets are assigning a 40% probability of inflation running above 3% over the next five years
- More US companies are mentioning “inflationary pressures” during earnings calls.
- Most fund managers see above-trend growth and above-trend inflation ahead.
- Here are the components of CPI.
- Inflation is not extreme at this point. The two-year changes in inflation are in line with the levels we saw in 2018 and 2019.
Thought of the Week
“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.” —John Kenneth Galbraith (1908-2006)
Picture of the Week