The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Invest with smart knowledge and objective odds

THE DAILY EDGE: 29 MARCH 2021

PENT-UP OR SPENT-UP?

Friday’s consumer spending release did little to tilt the debate one way of the other as bad weather in much of the U.S. likely kept many consumers indoors.

Interestingly, however, after 12 months, Wages and Salaries are back to their pre-pandemic level, even with 9.5 million fewer people working. By comparison, it took 40 months to revisit the October 2008 peak during the GFC which cost 8.7 million jobs at its worst point. Considering that 8.4 of the 9.5 million fewer working people are in Service-Providing sectors, the economic re-opening should bring Wages and Salaries closer to the trend line by the end of 2021. If so, labor income could be up as much as 8.0% YoY by the end of the year.  

fredgraph - 2021-03-27T110141.342

Consumer spending, which tends to closely track labor income, was down 1.0% MoM in February and is 0.6% below pre-pandemic levels. Spending on Goods declined 3.0% MoM in February following its 8.4% jump in January. It has declined in 4 of the past 5 months but is still up 5.5% annualized (nominal) for the period.

image

Taking into account Federal rescue money, disposable income is up 5.0% YoY during one of the worst recession. KKR estimates that the average American household’s disposable income rose 4.6% in 2020 and will rise another 4.8% in 2021 despite the surge in unemployment. Add $2.5 trillion in extra savings by the end of 2021 (17% of pre-pandemic annual consumption spending) and one can only conclude that the consumer sector will remain a driving force for the economy for several years.

imageNot all of those dollars will get spent at once, but we do think they will support a multi-year expansion. Much of the extra savings have built up at the high end, as lockdowns have curtailed upper-income spending on travel and leisure. Excess savings should help catalyze big-ticket discretionary spending amid reopening.

At the lower end, high and sustained consumer demand could encourage employers to accept paying higher wages to attract hard-to-find labor as the economy re-opens. This is not only true in specialty manufacturing or in transportation. Many restaurant and retail groups have announced higher wage rates to retain and attract qualified workers. Last week:

Darden [Restaurants] said Thursday that starting next week, hourly restaurant employees will earn at least $10 an hour, including tips, instead of the federal minimum wage [$7.25] or state minimum wage. The company is planning to raise that floor to $11 per hour in January 2022, and $12 an hour in January 2023. The change will impact about 20% of hourly workers, according to the company. The move comes at a time when Darden is trying to attract workers. Our greatest challenge right now is staffing,” Darden CEO Eugene Lee said on a call with analysts. (…) Staffing up is “our number one priority right now,” Lee said.

In reality, Americans will emerge from the pandemic in great financial shape:

  • total disposable income is up well above inflation;
  • swollen bank accounts and credit card balances down 12%;
  • much lower interest rates on most other debt.

fredgraph - 2021-03-28T071042.511

fredgraph - 2021-03-28T071330.545

Thanks to “stimmy” checks and unprecedented money printing, real disposable income is set to have its biggest increase ever in any given six-quarter period, says Credit Suisse. The firm expects U.S. consumption to surge an “extreme” 10% this year, triggering a significant jump in new orders and new hiring—all of which is highly inflationary. This month, in fact, U.S. manufacturers reported the sharpest rise in new orders since 2014, according to IHS Markit.  (Via US Funds)

real disposabble income having perhaps its best six-quarter stretch ever

The other debate is about inflation. Larry Summers on Bloomberg last week:

“If you were looking to un-anchor inflation expectations, having the Fed chair say the Fed’s going to have a new regime and is no longer sure that overheating the economy leads to inflation, and having the administration say we’re in an entirely new progressive era where policy is going to differ radically from what it has been for the last 40 years — those would seem like the best things you could do if you were trying to un-anchor expectations,” he said.

KKR’s Henry McVey:

If there was ever a time to talk about inflation, now is that time. We have record money supply growth, a dovish Fed, and a new Secretary of Treasury who may be even more dovish than the current Fed chair. (…) inflation risk is clearly the issue most heavily weighing on investors’ psyches.

But Friday’s data release did nothing to boost inflation expectations:

A key measure of inflation was mostly muted in February. The price index for personal-consumption expenditures, the Federal Reserve’s preferred inflation gauge, rose 1.6% last month from a year before, the Commerce report showed. That was slightly faster than the 1.4% annual rise in January, and the largest year-over-year increase since February 2020.

After excluding volatile food and energy components, however, the so-called core index was up just 1.4% in the year ended in February, which was slower than the 1.5% year-over-year increase in January.

fredgraph - 2021-03-28T071946.664

The Atlanta Fed’s Underlying Inflation Dashboard:

unnamed - 2021-03-28T094601.717

PCE Durable Goods prices, still up 1.0% YoY (+3.3% per the CPI), declined 0.1% in February and have declined in 4 of the last 6 months. Market-based core PCE prices are not accelerating and are up only 1.4% YoY in February, essentially unchanged during the last eight months.

image
fredgraph - 2021-03-28T080229.552

Curiously, CPI-Durables did not drop in March and April 2020 unlike PCE-Durables, largely explaining the current gap in YoY measures. In the last 5 months, prices of PCE-Durables are off 0.25% while prices of CPI-Durables are flat.

fredgraph - 2021-03-28T080541.471

Investor angst is really focused on goods inflation given rising commodity prices, supply and supply chain issues and very low inventories. But the evidence so far does not support runaway goods inflation, perhaps because merchants have been able to offset these cost increases with higher volume and increased productivity.

S&P 500 companies reported revenues up 2.7% in Q4’20, materially above expectations, particularly for consumer-sensitive sectors. Q1’21 revenues are seen up 8.6% (+10.1% ex-Energy). Profits, up 3.8% in Q4’20, are forecast up 23.9% in Q1’21, again materially above previous expectations.

image

Now, Goldman informs us that since “it takes several quarters for upstream costs to be reflected in consumer prices, overall core PCE inflation probably does not yet fully reflect higher commodity costs and industrial goods prices. (…) upstream input prices tend to lead core goods prices by 2-6 quarters.”

If so, the hit to inflation, or to profit margins, should begin in Q2 or Q3. So far, corporate pre-announcements for Q1 are better than they were for Q4’20. It will be interesting to hear forward guidance in the next few weeks.

Meanwhile, the economy is gradually re-opening (charts from GS and US Global Investors):

image

TSA Checkpoint Crossing Hit a new post-pandemic high

Fridges, microwaves fall prey to global chip shortage A global shortage of chips that has rattled production lines at car companies and squeezed stockpiles at gadget makers, is now leaving home appliance makers unable to meet demand, according to the president of Whirlpool Corp in China.

Economists bullish on Biden’s $3T infrastructure plan (Axios)

Economists are becoming positively giddy about the potential for economic growth this year as President Biden and Congressional Democrats look set to push forward a $3 trillion infrastructure bill.

“Stimulus helps build the bridge for the recovery to reach the other side, but an investment in infrastructure is the fuel to jump start the economic engine,” Beth Ann Bovino, U.S. chief economist at S&P Global, says in an email.

  • S&P predicts Biden’s infrastructure plan will create 2.3 million jobs by 2024, inject $5.7 trillion into the economy — which would be 10 times what was lost during the recession — and raise per-capita income by $2,400.

Economists at Goldman Sachs again revised up their outlook for growth this year in a Sunday note to clients, predicting real consumption will grow by 9.5% in Q1 and 12.5% in Q2, citing retailer reopenings, the reversal of winter storm effects and a decline in new COVID-19 infections.

  • Further, they note that OpenTable restaurant reservations are nearing 70% of normal nationwide and are back above their pre-crisis level in Texas.
  • They also anticipate the pace of fiscal support to U.S. consumers will accelerate by $1 trillion on an annualized basis (or 5% of GDP) for March and the second quarter, relative to the previous six months.
Faster Inflation Is Coming. How Bad Will It Be? (Mohamed A. El Erian)

(…) While economists and the Fed would view a spike in inflation through a longer lens, markets might well end up living more in what Bloomberg’s Jonathan Ferro labels “the moment” — that is, reacting in the short term by rapidly taking bond yields higher and risking to destabilize stocks and other risk assets that have benefited enormously from the widespread market confidence in continuing ample and predictable liquidity injections. Coming at a time of excessive and, in some cases, irresponsible risk-taking, this could have adverse economic spillovers.

Such effects would be felt well beyond the U.S. Already, European Central Bank officials have complained about the “undue tightening” of euro-zone financial conditions because of higher U.S. bond yields. This has also contributed to a slowly widening cycle of interest rate increases by central banks in emerging economies. (…)

With that comes the risk of higher market volatility and, on the political front, the prospects of more heated congressional deliberations on economic and social well-being that could make subsequent fiscal packages harder to pass quickly notwithstanding their importance for a lasting U.S. recovery.

House Prices Are Inflating Around the World Pandemic-related stimulus, ultralow rates and changes in buyer behavior are turbocharging markets from Europe to Asia

In the 37 wealthy countries that make up the Organization for Economic Cooperation and Development, home prices hit a record in the third quarter of 2020, according to OECD data. Prices rose almost 5% on the year, the fastest in nearly 20 years.

(…) “It is clear that rising [house] prices of between 5% and 10% annually, depending on the market we are talking about, are not sustainable in the long run,” said Karsten Biltoft, assistant governor at the [Danish] central bank. (…)

Property prices are up 16% over the past year in the city of Shenzhen, for example. In New Zealand, authorities recently tightened mortgage lending standards, with median home prices climbing 23% in February from a year earlier to a record.

In Sydney, where property prices also recently hit records, new mortgage demand is so high that some banks are struggling to keep up, said Christian Stevens, senior credit adviser at mortgage brokerage Shore Financial. (…)

As in the U.S., much of the buying globally is being driven by real demand rather than speculation, with families looking to upgrade to larger properties in suburban areas as they work more from home. (…)

Canada’s central bank governor, Tiff Macklem, said in February there were early signs of “excess exuberance” in the Canadian housing market, with prices up 17% on an adjusted basis over a one-year period, according to the Canadian Real Estate Association. Mr. Macklem said officials would be monitoring the situation closely, but dismissed taking measures to rein in sales, saying the economy needed all the support it could get. (…)

In early March, the chairman of China’s main banking regulator said he was worried about a possible correction in home prices, which could threaten banks’ stability.

Europe’s housing prices have kept climbing despite a much bleaker economic outlook than in the U.S. or China. In part that is because governments have kept supporting families with salary subsidies and moratoriums on loan repayments. It is also because interest rates remain extraordinarily low, with mortgage rates averaging 1.35% across the eurozone. (…)

(…) Farmland values rose during 2020 as soaring grain prices last fall revived farmers’ fortunes, according to February reports from three regional Federal Reserve Banks. Land prices in the Chicago Fed region, which covers parts of Illinois, Indiana, Iowa, Michigan and Wisconsin, climbed 6% last year, the largest such increase since 2012, the bank said.

Many agricultural lenders surveyed by the banks expected farmland values to rise this year as well. A March survey of Iowa farmland specialists showed a statewide average of farmland values was up nearly 8% since September, according to Iowa’s chapter of the Realtors Land Institute. (…)

Competition among U.S. farmers for land is fierce partly because there is less to go around. (…) Fewer, bigger farmers now dominate the country’s remaining 900 million acres, with 75% of farmed cropland controlled by about 13% of farms, the data show. (…)

China Helped Rev Up, Then Slow Down, the Commodities Boom Nearly a yearlong bull run among industrial metals is faltering as the unwinding of a stimulus in China slows demand, underscoring the increasingly pivotal role its state-led economy plays in global commodity booms.

(…) China, which accounts for as much as 60% of the world’s resource consumption, has in recent weeks pulled back from its investment-led playbook, as policy makers refocus on containing bad loans and retooling the economy onto a consumer-led footing. Amid fresh concern that some battery-making metals could be globally oversupplied, benchmark metals fell in March from records a month earlier—nickel by 18%, cobalt 13% and copper 9%. (…)

Among the most tightly supplied of such metals globally is copper. But even so, copper imports to China had eased by December off midyear highs, down 9% that month compared with November. Imports of lithium-cobalt oxide, the bluish-gray crystal used in rechargeable battery electrodes, were down 14% for the year compared with 2019. Nickel ore imports in 2020 fell 30% year over year. (…)

In early March, nickel prices, which had soared for months on China’s projected battery demand, plummeted 9% in a single day, hours after Chinese metal producer Tsingshan Holding Group announced plans to cheaply supply large volumes of nickel matte, a battery ingredient, to Chinese battery makers—damping industrywide expectations of battery-grade nickel shortages.

Also weighing on prices: U.S. miners are racing to develop new supplies of lithium, in part to lessen dependence on China, which analysts estimate controls around half the world’s lithium output and makes three-quarters of its lithium-ion batteries. (…)

“Can China continue to demand the same amount of commodities? To me, the answer is no, because its structural growth is coming down,” Ms. Garcia-Herrero said. “This doesn’t bode well for supercycle.”

Is the so-called commodity super cycle running on fumes already?

(Nordea)

Lower commodity prices would help the “inflation transitory” team:

relates to Bull Market Interrupted Is a Bearish Script for Stocks
imagefredgraph - 2021-03-29T083537.253
Pandemic Accelerates Retirements, Threatening Economic Growth The proportion of older workers participating in the labor force is hovering at its worst level since the onset of the coronavirus pandemic, potentially impairing economic growth.

The labor force participation rate—the proportion of the population working or seeking work—for Americans age 55 and older has fallen from 40.3% in February of 2020 to 38.3% this February—representing a loss of 1.45 million people from the labor force.

The participation rate initially fell much more for prime-age workers, those between ages 25 and 54, from 82.9% in February last year to 79.8% in April, but has since jumped 1.3 points, to 81.1% in February of this year. By contrast, participation for older workers has shown no rebound from last spring. (…)

fredgraph - 2021-03-29T072912.527

Many of these workers appear to have retired and thus may not return even when the public-health crisis is over. The proportion of the working-age population not in the workforce due to retirement rose to 19.3% in the fourth quarter of 2020 from 18.5% a year earlier, just before the pandemic, according to government data compiled by the Federal Reserve Bank of Philadelphia.

That is roughly 2.4 million workers who left the labor force due to retirement since the pandemic’s onset, more than double the number who did so in 2019, according to Ms. Boussour’s analysis. (…)

That decline is especially worrisome because it comes as an aging population has already been holding down growth in the U.S. labor force. Economic output depends on the number of workers and how productive each worker is. Thus, the decline in participation, if not reversed, could weigh on growth. (…)

There will be impacts on growth but also on productivity and wages.

Suez Container Ship Is Partially Freed Engineers partially freed a wedged ship blocking the Suez Canal and tug boats were working to straighten its course, an effort that could soon reopen the vital trade route and end days of global supply disruptions.

Ninja MARGIN CALL

Stock Futures Drop as Banks Warn of Losses S&P 500 futures edged lower after Archegos Capital unwound billions of dollars in holdings, triggering concerns that banks who dealt with the firm could face sharp losses.

(…) Global investment banks Credit Suisse Group and Nomura Holdings on Monday said they could incur substantial losses from dealings with a U.S. client. Neither bank named its respective client. Shares in some global banks fell as investors grew worried that more financial intermediaries may struggle to recoup money loaned to this client. (…)

Morgan Stanley, Goldman Sachs Group and Deutsche Bank unloaded large blocks of shares for Archegos last week. According to people familiar with the fund, the highly leveraged Archegos took big, concentrated positions in companies and held some positions via swaps. Those are contracts brokered by banks. (…)

(…) Much of the leverage used by Hwang’s Archegos Capital Management was provided by banks including Nomura Holdings Inc. and Credit Suisse Group AG through swaps or so-called contracts-for-difference, according to people with direct knowledge of the deals. It means Archegos may never actually have owned most of the underlying securities — if any at all.

While investors who build a stake of more than 5% in an U.S.-listed company usually have to disclose their position and future transactions, that’s not the case with stakes built through the type of derivatives apparently used by Archegos. The products, which are made off exchanges, allow managers like Hwang to amass stakes in publicly traded companies without having to declare their holdings. (…)

While the margin calls on Friday triggered losses of as much as 40% in some shares, there was no sign of contagion in markets broadly on Monday. (…)

As well as their secrecy, equity swaps and CFDs grew in popularity among hedge funds because they are exempt from stamp duty in high-tax jurisdictions such as the U.K. Banks like them because they can make a large profit without needing to set aside as much capital versus trading actual securities, partly a consequence of regulation imposed in the aftermath of the global financial crisis.

Regulators in Europe have begun clamping down on CFDs in recent years because they’re concerned the derivatives are too complex and too risky for retail investors. In the U.S., CFDs are largely banned for amateur traders. (…)

TECHNICALS WATCH

My favorite technical analysis firm remains positive while acknowledging that continuing short-term gyrations could be unnerving to many. Selling pressure has increased since Mid-February even with rising equity prices. Not problematic so far but an indication that more investors are finding reasons to trim exposure.

But the “broadening market” theme seems at risk:

The latest data points on retail trading from Charles Schwab show that retail trading activity has declined for the 3rd consecutive week, down 7% last week, following 13% and 5% declines in the prior two weeks. Trading activity is now 30% below late January peak levels on Charles Schwab’s platform. MS QDS team report that their retail proxy metrics indicate that option volume is down and premium spent on calls via small orders (odd lots) is also down recently. Perhaps, we may have seen the peak of the retail hand in markets, as businesses are slowly beginning to re-open and people go back to work they will have less time / fewer resources to sit at home and undoubtedly trade. (The Market Ear)

  • Gone with the wind – SPAC first day pops.

(…) “I don’t know what the f— I’m doing,” a young man said in a TikTok video in January. “I just know I’m making money.” He added that he’d been trading stocks for only three days, but “just like that, made $300 for the day.” In the next few weeks that young man, Danny Tran, racked up roughly 500,000 followers on TikTok.

At the WallStreetBets forum on Reddit, the online chat community, comments like “I can’t read” and “I have no idea what I’m doing” are common. Users insult each other’s—and their own—intelligence as terms of endearment and badges of honor. In February, commenters on WallStreetBets called themselves “stupid,” “idiot” or related terms 3,550 times, according to TopStonks.com, which tracks stocks mentioned on Reddit and other sites. (…)

As of March 23, 95.9% of the slightly more than 3,000 stocks in the Wilshire 5000 Total Market Index had a positive total return over the prior 12 months, according to Wilshire. No other one-year period has come close to that since the end of February 2004, when 93% of stocks had positive 12-month returns. (…)

The expected value of a lottery ticket is generally less than 65 cents on the dollar. Casinos, sports-betting websites and online gaming outfits take less “vigorish” as their cut, but on average the house always wins. Most bettors know that, but no one minds—because the hope of winning is so exciting, no matter the odds.

Now that just about anybody can trade commission-free, gambling on stocks offers a much better chance of making money than other kinds of wagers.

(…) A stock is much more fun than a lottery ticket, which is static and which assures that you will almost always lose.” (…)

“The majority of the time I’m winning, with barely any knowledge, so it’s been a fun process,” he says. “Knowing what you’re doing would always be good, but in this market anything is possible.” (…)

Note Summertime,

And the livin’ is easy

Fish are jumpin’

And the cotton is high Note

TESTING, TESTING!

ARKK

TESTING?

U.S. fears China attack on Taiwan (Axios)

“The US is concerned that China is flirting with the idea of seizing control of Taiwan as President Xi Jinping becomes more willing to take risks to boost his legacy,” the Financial Times reports (subscription).

  • A senior U.S. official told the FT the Biden administration had reached the conclusion after assessing Chinese behavior during the past two months.

An invasion of Taiwan, the self-governed island claimed by Beijing, would force the U.S. to decide whether to go to war with China to defend an implicit ally.

  • After a show of force by Chinese bombers off Taiwan just after President Biden took office, the State Department said: “We urge Beijing to cease its military, diplomatic, and economic pressure against Taiwan.”

Adm. John Aquilino, nominee to head U.S. forces in the Pacific, warned the Senate Armed Services Committee this week that the threat to Taiwan “is much closer to us than most think,” CNN reported.

Adm. Philip Davidson, current head of the U.S. Indo-Pacific Command, testified earlier this month that the Chinese military is building up offensive capability, making the threat to Taiwan “manifest during this decade — in fact, in the next six years.”

THE DAILY EDGE: 17 MARCH 2021

U.S. Retail Sales Are Held Back by Severe Winter Weather in February

Total retail sales including food service and drinking establishments declined 3.0% (+6.3% y/y) during February after rising 7.6% in January, which was strengthened by a second round of government stimulus checks. The January gain was revised from 5.3%. The Action Economics Forecast Survey expected a 0.3% slip. Retail sales excluding motor vehicles and parts declined 2.7% last month (+5.5% y/y) after surging 8.3% in January, revised from 5.9%. Sales have fallen in four of the last five months. A 0.3% February rise had been expected.

Sales in the retail control group, which excludes autos, gas stations, building materials and food services, fell 3.5% last month (+10.2% y/y) after surging 8.7% in January, revised from 6.0%.

Motor vehicle purchases declined 4.2% in February (+9.2% y/y) following a 5.0% January rise. The decline compares to a 5.6% weakening (-6.7% y/y) in unit sales of light vehicles. (…) Furniture & home furnishings sales weakened 3.8% (+8.9% y/y) following a 12.9% jump while sales of electronics & appliances eased 1.9% (-3.1% y/y) after surging 16.7% in January. Sporting goods, hobby and book store sales declined 7.5% (+15.4% y/y) after rising 10.3%.

Building materials sales fell 3.0% (+14.2% y/y) with the severe weather after increasing 4.9% in January. (…)

In the nondiscretionary sales categories, food & beverage store sales held steady in February (11.7% y/y) after gaining 2.4% in the prior month. Health personal care store sales eased 1.3% (+5.4% y/y) following a 2.3% rise.

Sales at restaurants and drinking establishments posted a 2.5% decline (-17.0% y/y) in February after rising 9.1% in January.

The consumer-spent-out theory finds support from the declining sales in 4 of the past 5 months. Note however that Control Sales (blue bars) are still up at a 3.6% annual rate since October amid the second wave and poor February weather:

fredgraph - 2021-03-16T175508.044

The pent-up-demand view says that consumers continue to buy goods at double digit YoY rates over pre-pandemic February 2020. Per ING: “January’s stimulus-payment-induced surge was revised even higher and with another stimulus cheque hitting bank accounts and the weather situation having improved, the numbers for March and April will surge.”

fredgraph - 2021-03-16T092205.821

The next set of government payments have not reached consumers yet but Chase’s spending tracker has surged through March 12:

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China’s experience per Bloomberg which coined the expression “revenge spending”: “The reopening of the nation’s domestic travel corridors sparked a tourism revival, with locals visiting destinations like Macau and Hainan. They’ve been spending so much there that brands like Ralph Lauren Corp., Estee Lauder Cos. and Coach are all scrambling to open more stores. There’s universal hope that there’ll be a similar fervor in the U.S. too.

The other, related, debate:

Goldman Sachs: The Inflation Boost From Supply Chain Disruptions: Here Today, Gone in 2022

US manufacturers’ supply chains are increasingly strained, as a rapid recovery in goods demand combined with lingering pandemic-related constraints on international transport services has pushed delays in supplier deliveries to their highest level in over 40 years. As a result, a significant majority of manufacturing firms currently indicate that supply chain disruptions and delivery delays are negatively affecting production.

Unfortunately, supply chain disruptions are unlikely to abate in the near term and will continue to put upward pressure on consumer prices for the rest of this year: fiscal stimulus will keep goods demand elevated and the virus will continue to disrupt the supply of international goods transport services. However, by early next year, we think that shipping bottlenecks are likely to resolve themselves and prices will moderate, turning the boost to core inflation into an outright drag.

The good news is that because supply challenges are largely driven by transportation and not production constraints—unlike last spring when supplier delays spiked due to factory shutdowns that halted the supply of intermediate goods—we expect that supply constraints will put upward pressure on prices but have less of an impact on real economic activity. As examples of how some importers and manufacturers have alleviated bottlenecks at higher costs, some companies have started importing bike parts and hot tubs by air rather than sea freight, and other producers have started rerouting imports through alternate ports.

Hmmm…read on and judge by yourself if “supply challenges are largely driven by transportation and not production constraints”.

Commodities Boom Hits Home Prices are surging for the raw materials used to build American homes and builders and manufacturers are passing along higher prices for wood, copper and bricks.

(…) “Whoever the home buyers are, they have been able to pay for it,” said Todd Tomalak, who tracks building products for John Burns Real Estate Consulting.

American Homes 4 Rent, which built more than 1,600 rentals last year and plans to construct another 2,000 houses this year, said its lumber bill is between $20,000 and $25,000 per house, up from about $10,000.

“Fortunately, we’ve been in a rental-rate growing environment, and that has kept us yield neutral,” said Jack Corrigan, the company’s chief investment officer.

Investors are watching all corners of the economy for signs of stimulus driving a pickup in inflation. They are finding it in housing, where rising input prices are translating into higher costs for consumer goods. (…)

“We’re sold out. We can’t take on any more business this year,” [CanWel Building Materials Group Ltd.] Chief Executive Amar Doman told investors last week. “Everything that we’re producing is sold, and it’s out the door.” (…)

The National Association of Home Builders says that rising lumber prices have added $24,000 to the cost of building the average single-family home and about $9,000 per apartment. (…)

Builders boosted prices for nearly three quarters of all floor plans offered during January, according to RBC Capital Markets, compared with 54% of models that became more expensive in December. (…)

At Burke Brothers Hardware nearby, owner Jeff Hastings is balancing rising costs with keeping customers. He is stocking up on copper wire before prices go any higher and sacrificing his own profit on lumber sales to attract customers who will add higher-margin items, like fasteners and tools, to their tickets. (…)

From the latest ISM survey:

  • “The coronavirus [COVID-19] pandemic is affecting us in terms of getting material to build from local and our overseas third- and fourth tier suppliers. (Computer & Electronic Products)
  • “Supply chains are depleted; inventories up and down the supply chain are empty. Lead times increasing, prices increasing, [and] demand increasing. Deep freeze in the Gulf Coast expected to extend duration of shortages.” (Chemical Products)
  • “Steel prices have increased significantly in recent months, driving costs up from our suppliers and on proposals for new work that we are bidding. In addition, the tariffs and anti-dumping fees/penalties incurred by international mills/suppliers are being passed on to us.” (Transportation Equipment)
  • “We anticipate a fast and large order surge in the food-service sector as restaurants open back up.” (Food, Beverage & Tobacco Products)
  • “Overall capacities are full across our industry. Logistics times are at record times. Continuing to fight through shipping and increased lead imes on both raw materials and finished goods due to the pandemic.” (Fabricated Metal Products)
  • “Prices are going up, and lead times are growing longer by the day. While business and backlog remain strong, the supply chain is going to be stretched very [thin] to keep up.” (Machinery)
  • “Things are now out of control. Everything is a mess, and we are seeing wide-scale shortages.” (Electrical Equipment, Appliances & Components)
  • “We have seen our new-order log increase by 40 percent over the last two months. We are overloaded with orders and do not have the personnel to get product out the door on schedule.” (Primary Metals)
  • “Prices are rising so rapidly that many are wondering if [the situation] is sustainable. Shortages have the industry concerned for supply going forward, at least deep into the second quarter.” (Wood Products)

Samsung Warns of Severe Chip Crunch While Delaying Key Phone The tech giant voices concern about chip shortages spreading beyond the automaking industry.

(…) Samsung, one of the world’s largest makers of chips and consumer electronics, expects the crunch to pose a problem to its business next quarter, (…).

Industry giants from Continental AG to Renesas Electronics Corp. and Innolux Corp. have in recent weeks warned of longer-than-anticipated deficits thanks to unprecedented Covid-era demand for everything from cars to game consoles and mobile devices. Volkswagen AG said this week it’s lost production of about 100,000 cars worldwide. In North America, the silicon shortage and extreme weather have combined to snarl more production at Toyota Motor Corp. and Honda Motor Co. The fear is the crunch, which first hit automakers hard, may now disrupt the much larger electronics industry.

“There’s a serious imbalance in supply and demand of chips in the IT sector globally,” said Koh, who oversees the company’s IT and mobile divisions. “Despite the difficult environment, our business leaders are meeting partners overseas to solve these problems. It’s hard to say the shortage issue has been solved 100%.” (…)

“The tightened supply of Qualcomm AP chips produced by TSMC is affecting everybody except Apple,” said MS Hwang, analyst at Samsung Securities. “PCs will soon be hit due to the short supply of display driver ICs, and the profitability of TV will be affected by soaring LCD panel prices.”

Compounding matters, Samsung’s own production got sideswiped last month. Its fab in Austin, Texas — which makes chips both for internal and external consumption — was sidelined in February by statewide power outages and hasn’t resumed full production. The resulting shortfall in production of Qualcomm 5G radio frequency chips could reduce global smartphone output by 5% in the second quarter, research firm Trendforce estimates. (…)

Some analysts say shortages could get mostly ironed out in coming months. But the concern is that tight supply in certain segments — such as in more mature semiconductors where it takes time to build capacity — could eventually throttle the broader consumer electronics industry and jack up prices if it persists. (…)

At the same time, China’s insatiable appetite for chips — fueled in part by its rapid recovery from the pandemic — and inventory stockpiling by local companies is fueling demand. Sales for the country’s chip industry climbed 18% to 891.1 billion yuan ($137 billion) in 2020, China Semiconductor Industry Association Chairman Zhou Zixue told a conference in Shanghai Wednesday. (…)

U.S. Import and Export Prices Rise Further in February

Import prices increased a slightly larger-than-expected 1.3% m/m (3.0% y/y) in February on top of an unrevised 1.4% m/m gain in January. The Action Economics Forecast Survey anticipated a 1.2% m/m gain in February. The 3.0% y/y increase was the largest since October 2018. A 11.1% m/m (6.5% y/y) jump in fuel prices following a 9.0% m/m increase in January was the major factor behind the rise in import prices in February. (…)

Nonfuel import prices rose a modest 0.4% m/m (2.8% y/y) in February after a 0.9% m/m increase in January. The 2.8% y/y rise in nonfuel prices was the largest since January 2012. Prices in all of the major end-use categories rose in February, though apart from fuel and foods, feeds, beverages (1.6% m/m), the increases were very small. These figures are not seasonally adjusted and do not include import duties.

After posting a 2.5% m/m jump in January, the largest monthly gain in the series history, export prices increased a larger-than-expected 1.6% m/m (5.2% y/y) in February. The Action Economics Forecast Survey had expected a 1.1% m/m gain. The 5.2% y/y rise was the largest since June 2018. The price index for agricultural exports rose 2.9% m/m (16.1% y/y) following a 6.0% jump in the previous month. The February gain was primarily due to higher soybean and corn prices. The 16.1% y/y increase was the largest annual gain since September 2011.

Prices of nonagricultural exports increased 1.5% m/m (4.1% y/y) in February after a 2.2% m/m gain in January. Prices rose in all major end-use categories in February with the largest being a 3.6% m/m increase in prices of industrial supplies and materials, led by an 8.8% m/m increase in exported fuel prices.

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Note that non-fuels import prices are up 7.0% a.r. in the last 3 months.

“It’s Gone Parabolic”: Canadian Housing In One Shocking Chart The months’ supply of homes for sale across the country hit a record low of 1.8 in the month (the norm is about 5)

U.S. Industrial Production Drops 2.2% in February After 4 Strong Months

Industrial production fell 2.2% in February (-4.2% y/y). It had advanced 1.1% in January, 1.0% in December, 0.9% in November and 1.0% in October. The Action Economics Forecast Survey looked for a 0.3% m/m gain for February. Nearly all industry groups experienced the February declines. Manufacturing output fell 3.1% (-4.1% y/y) after a 1.2% increase in January. Mining output declined 5.4% (-15.3% y/y) following a 2.1% increase in January. Utilities were the exception in February, as their output advanced 7.4% (10.1% y/y) after falling 0.6% in January.

Durable manufacturing output fell 2.6% in February (-4.0% y/y) after a 1.5% gain in January. Among those individual industries, only primary metals and aerospace and miscellaneous transportation equipment had increases, with declines marked in the other nine industries in that sector. Specifically, motor vehicle industry output fell 8.3% in February (-8.6% y/y).

Nondurable goods output fell 3.7% in the month (-3.6% y/y) after increasing 1.1% in January and 1.2% in December. The only industry with an increase was textiles and product mills, which saw their production increase 0.6% (-3.3% y/y). Otherwise, the biggest declines in February output were in chemicals, which plunged 7.1% m/m (-5.1% y/y) and in petroleum and coal products, 4.4% (12.3% y/y). (…)

Output of selected high technology equipment decreased 0.3% m/m (7.9% y/y) in February. Excluding these products, overall production fell 2.3% m/m (-4.0% y/y). Excluding both high tech products & motor vehicles, factory production fell 1.9% m/m (-3.7% y/y).

Capacity utilization for the industrial sector increased dropped to 73.8% last month from 75.5% in January. Factory sector utilization was 72.3%, down from 74.6%.

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PMIs are supposed to be leading indicators. But diffusion indices sometimes fail showing the actual magnitudes of trends.

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Here’s what Markit was saying on March 1:

Despite easing, rates of expansion in output and new orders remained sharp overall in February. The rate of production growth was among the fastest in six years while new order growth was among the fastest seen over the past three years. New export orders also rose solidly, registering the second-steepest gain since September 2014.

Particularly encouraging is a marked improvement in demand for machinery and equipment, hinting strongly at strengthening business investment spending. However, new orders for consumer goods showed the strongest back-to back monthly gains since the pandemic began, suggesting higher household spending is also feeding through to higher production. (…)

The accumulation of backlogs of work was the quickest for three months. (…) The degree of optimism was the highest for three months (…)

Toyota, Honda to Halt Some U.S. Production Over Supply Shortages Toyota and Honda are halting production at some North American plants as the pandemic’s continuing effects on the global supply chain create shortages of essential components.

(…) Toyota cited an unspecified “shortage of petrochemicals” at some North American plants. The shortage would affect production at vehicle factories in Kentucky and Mexico, as well as an engine plant in Alabama. (…) It said that for now it didn’t expect to have to furlough any workers.

Honda said it would halt production at most of its U.S. and Canadian car factories next week because of supply-chain issues including port backlogs that have delayed the delivery of parts.

Honda said a combination of the port issues, a shortage of semiconductors, pandemic-related problems and fallout from severe winter weather across the central U.S. led to the decision. The cold caused pipes to burst in some of its factories. (…)

The shutdown is set to start at most of Honda’s five auto plants in the U.S. and Canada on March 22 and last a week, the company said, without specifying which plants would halt production.

Honda said the duration of the shutdown could change depending on parts supply. Workers will continue to be paid to perform other tasks at the plants, it said. (…)

That was all about goods. What about services?

NY Fed’s Service Business Leaders Survey

No surprise, service business activity remains very weak:

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The surprise may be that wages and prices are rising in this environment:

The employment index rose seven points to -7.1, pointing to a modest decline in employment levels. The wages index continued to march upward, rising eight points to 34.9. As in recent months, price increases picked up in the March survey. The prices paid index rose eleven points to 53.2, its highest level in two years, and the prices received index rose five points to 14.5.

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Uber to Reclassify U.K. Drivers in Win for Labor Activists The change, after a court loss, reclassifies drivers as “workers” rather than independent contractors, making the U.K. the first place where Uber is paying directly for drivers’ vacations and pensions amid a global battle over gig-economy employment.

(…) The changes may presage legal wrangling, however, because the ride-hailing company says it will guarantee its drivers the U.K.’s minimum wage only after they have accepted a trip—not from the moment they sign into the app and are ready to work, as labor activists have demanded. (…)

But the U.K.’s Supreme Court found in its February ruling that the group of former drivers should have been considered working whenever they were connected to the Uber app and available for trips. (…)

In November, Uber won a major ballot battle in California—its home state—that exempted it from having to reclassify its drivers as employees eligible for broad employment benefits. As part of that win, Uber offered some new benefits including health insurance for some drivers. The company passed on some of its costs to riders in the form of higher prices.

Uber and others are lobbying to make such a model the national standard in the U.S., and the company has made similar proposals in Europe. (…)

Elsewhere in Europe, meantime, Swiss courts have forced Uber Eats, the company’s food-delivery arm, to stop using independent contractors in the Geneva area. Last spring, a French court reclassified a former Uber driver as an employee. (…)

Uber, for instance, says the change in employment status doesn’t cover delivery workers at its Uber Eats business, saying the food-delivery sector operates using a different economic model—a view labor activists may challenge. (…)

THE YEARN TO EARN

Putting the Risk Into Risk-Free Treasurys Inflation worries make buyers wary of locking up money in government bonds for a long time

(…) The value of a 30-year Treasury fell 15.6% in just three months. That is the equivalent of almost a decade of the income it offered three months ago, and it is the flip side of the sudden rise in yields. Shorter-maturity Treasurys have fallen less, but even for the 10-year note it will take six years of income to recover the loss of the past three months.

The danger is that this is just the beginning. (…)

But this recent chart from David Rosenberg should interest the contrarian in you:

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David titillates us even more writing that “bond yields have always peaked out and rolled over at these levels.”

Like Ronald Reagan, I trust but verify: the red dots are approximately where sentiment bottomed above. Rosie is right!

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Coincidentally, BofA just published its latest Fund Manager Survey: getting long bonds here is a truly contrarian move.

TLT may be extended but the trend is not your friend just yet, particularly with the booming budget deficit:

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Steve Blumenthal’s On My Radar warns:

What the next chart shows is how much is at risk for every 1% rise in bond yields (red arrow pointing right). Shown are the 10-year Treasury note and the 30-year Treasury bond. Zero in on the -9.24% and -21.67% numbers. That’s the current loss in rise in interest rates since late August. Note the losses should rates move up another percentage point from here too. This is why I say the bond market is broken. A 1.54% yield with inflation above that number does nothing to help your portfolio. Further, should rates continue to rise, you lose money. The reward-to-risk is just not there.

More yearn to earn:

Greensill-Owned Bank Declared Insolvent, Causing Losses for Small German Towns Local governments deposited money at the lender to escape negative interest rates at their usual banks.
COVID-19
Alibaba Browser Pulled From China’s App Stores As Xi Warns Tech Giants Pose “Risks” To CCP Control

(…) According to minutes from a meeting of senior CCP leaders, President Xi warned that tech giants are growing “in an inappropriate manner” that creates risks for the Chinese system.

“Some platform companies are growing in an inappropriate manner and therefore bear risks. It is a considerable problem that the current regulatory regime has failed to adjust” to the rise of these groups,” the minutes of the meeting said. Regulators will “step up” efforts to improve the regulation of China’s big internet companies, the minutes added.

Xi added that the development of China’s platform economy is currently at a crucial stage, and it’s necessary to focus on the long term, strengthen weaknesses and create an innovative environment to promote the healthy and sustainable development of the platform economy. In the past, Xi has spoken about the importance of limiting monopolies, but this is the first time he has specifically addressed the problems posed by “platform” companies like Tencent, Alibaba, JD.co and others. (…)