Edge and Odds

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)

Edge and Odds

Invest with smart knowledge and objective odds

COMMODITIES

THE DAILY EDGE: 16 FEBRUARY 2021: Liquidity!!

U.S. Home Builders Urge Biden to Help Slow Housing Inflation

The biggest U.S. homebuilders group urged the Biden administration to help increase lumber supply, saying record-high costs threaten to price potential home buyers out of the market and curb construction.

The administration needs to remove import tariffs on Canadian lumber and urge producers to boost output, the National Association of Home Builders said Friday on its website. In November, the U.S. Department of Commerce reduced its duties on Canadian softwood lumber by more than half to 9%. (…)

Alicia Huey, a high-end custom home builder in Alabama and second vice-chair of NAHB, said the price of her lumber framing package on identically-sized homes has more than doubled over the past year to $71,000 from $35,000. (…)

U.S. homebuilders, buyers contending with record lumber prices

This cost-push on housing leads us to

THE BIG DEBATE

Last week, I showed this chart comparing YoY changes in house prices with the CPI “housing inflation” component that together account for 32% of CPI, highlighting the non-impact of rising house prices on the CPI:

Another way to see this is to index each series to January 2000 = 100: house prices have multiplied by 2.3x while Owner’s Equivalent Rent is up 1.7x.

fredgraph - 2021-02-15T073657.477

Nordea:

There are as always many opposing forces in inflation numbers but if we take a balcony view it is the “shelter” component, i.e. rents, that is holding back core inflation.

Shelter has a 42% weight in core CPI and is thereby extremely important. Currently it is running at 1.6% y/y, which is historically quite low, and core CPI would be at 2% y/y if shelter increased at a normal rate. COVID-19 has clearly affected the numbers, both due to how rents are measured but also in terms of the political viability in raising rents during a deep humanitarian disaster.

What is clear, however, is that the underlying pressure to hike rents when COVID-19 cools down is massive, which probably also is true for other service prices. Apartment vacancy rates are the lowest since 1986, house prices are soaring, inflation expectations are increasing and landlords are signalling the largest increase in the asking price for rent ever. There could be a huge, latent jump in shelter in the second half of 2021.

Underlying upside US rent pressures are massive

Any major upward trend in core inflation probably won’t happen until the COVID-19 lockdown behaviour has passed, but here we remain positive on developments. New cases continue to decrease with both the vaccine rollout and seasonal factors indicating that we have passed the peak. Restrictions will accordingly gradually be lifted over the coming 6-8 weeks, opening up for a surge in spending. In our view, an effect of this will be broad price increases.

Financial conditions are extremely loose, money supply has increased rampantly, fiscal stimulus is still with us, inflation base effects will come into play, global food prices are up 20% the past 6 months, there are bottlenecks for semiconductors, freight costs are surging, inflation expectations are rising, companies/households have plenty of money on the side-line and the economic starting point was very different from after the financial crisis – a supply shock that soon should be over, bringing the economy back to normal much faster than from the 2009 abyss. The inflation story is alive.

Bloomberg Businessweek summarized the Summers-Krugman, two Democrats, debate:

Summers, who got to go first, made four points: 1) The $1.9 trillion package is “extremely large” and the amount of spending is far bigger than the estimated “output gap,” that is, the amount by which the economy’s output is falling short of potential; 2) it goes “way beyond what is necessary” to help victims of the Covid-19 crisis; 3) “We risk an inflationary collision of some kind”—if the package does kick up inflation, the Federal Reserve could inadvertently cause a recession by trying to squelch the inflation with higher interest rates; 4) that sum of money, or even more, would be better spent on long-term public investment, what Biden calls “building back better.”

Krugman did not wholly disagree. He compared his differences with Summers to physicist Wolfgang Pauli’s disagreement with Albert Einstein. After one of Einstein’s lectures, Pauli said, “You know, what Mr. Einstein said is not so stupid.” But Krugman said Biden’s plan should be regarded as a rescue, not a stimulus. “Think of it as disaster relief or like fighting a war. When Pearl Harbor gets attacked, you don’t say, ‘How big is the output gap?’” (…)

Krugman argued that the package wouldn’t overstimulate the economy, causing inflation, because a lot of the $1,400 given out in checks will be saved, rather than spent. And if the coronavirus crisis should ease, much of the aid to state and local governments will also be saved in rainy day funds. (…)

[Summers] disagreed with Krugman’s contention that most of the relief money would be spent slowly. He said that once the pandemic ends, there could be a burst of consumption. (…)

Left hug Right hug Toward the end, the two heavyweights veered into partial agreement. Krugman said, “Larry and I are actually, in many ways, on similar wavelengths.”

Addressing Summers’s views about inflation, he said, “I think you’re wrong. I think you’re excessively worried. But I’m not sure about that.” Sarcastic smile What they think doesn’t matter anyhow, he said, because the package is likely to pass intact—or nearly intact. “Then we’ll find out.”

So, it comes down to Krugman saying: “I don’t agree with you, but maybe I should. Anyhow, let’s spend another $1.9 billion, not even 10% of GDP, and see what happens.”

Nobody knows: will people save or spend? So every month, Morning Consult asks Americans: “After you paid your recurring expenses last month, did you have any money left over that you could save or add to your savings?”

unnamed - 2021-02-13T074944.252

Despite the second round of stimulus checks in January, the number of adults who experienced financial hardship in January remained relatively unchanged from December.

Another way to look at the above numbers is that more households spent their stimmies in January.

Consumers’ view of the economy slipped in early February as Americans were more downbeat about future business conditions, according to a University of Michigan survey released Friday.

The preliminary estimate of the index of consumer sentiment came in at 76.2 in February, down from 79.0 in January. The decline in sentiment was concentrated in the measure of future expectations and among households with incomes below $75,000, said Richard Curtin, the survey’s chief economist.

“Households with incomes in the bottom third reported significant setbacks in their current finances, with fewer of these households mentioning recent income gains than anytime since 2014,” Mr. Curtin said. (…)

The sentiment measure was the lowest since August, and down from the 101.0 in February 2020, just before the coronavirus pandemic took hold in the U.S. (…)

Consumers’ assessment of the current economic conditions decreased slightly to 86.2 in February from 86.7 in January. The index of consumer expectations—which reflects the balance of respondents anticipating improved business conditions in the next six months—fell to 69.8 from 74.0 the prior month. (…)

unnamed - 2021-02-16T080528.329

Data: University Of Michigan; Chart: Axios Visuals

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Goldman Sachs sees inflation smooth landing:

We estimate that the impact of fiscal measures on the level of GDP will average 5-6% of GDP in 2021, roughly the size of the current output gap. We see less risk of persistent overheating from fiscal stimulus (…). First, any excessive boost from fiscal stimulus would likely be short-lived because spending on most items such as stimulus payments is one-off and spending on some items such as UI benefits will shrink automatically if the economy booms. Second, most consumers tend to deviate only so much from their normal spending habits, so they are likely to spend less of their pent-up savings while they are receiving generous fiscal support, for example. As a result, the total impact of fiscal stimulus, pent-up savings, and post-vaccination reopening will likely prove smaller than the sum of the parts estimated individually.

(…) The difference between stimulus and support should shape the policy response. Last March, central banks purchased large quantities of assets to prevent dislocation in normally liquid markets for government instruments. But those purchases were not reversed when the temporary dislocation ended. The result is that, unlike after the quantitative easing undertaken in response to the financial crisis, monetary aggregates are now growing very rapidly. In the U.S. M2 rose by 26% between January 2020 and January 2021; in the U.K. the broader measure M4 rose by over 13% in the year to December 2020.

The belief that the sharp fall in output over the past year is a reason for a large monetary injection reflects a fallacious view that any kind of negative shock justifies stimulus. The economic models that lie behind that view fail to pay adequate attention to the nature of today’s shock. Further generalized monetary and fiscal stimulus would add to the existing risk of much higher inflation down the road.

On the fiscal front, what’s required is temporary support for those affected by the immediate consequences of Covid-19, not a longer-lasting stimulus. This is the crucial distinction, far more important than whether the package is big or small.

Much has been made of the difference between the size of the Biden administration’s proposed package and the degree of stimulus recommended by its critics. In fact, both Treasury Secretary Janet Yellen and former Treasury Secretary Larry Summers are right. It makes sense to go big with temporary support that will unwind as the Covid restrictions are relaxed — just as Yellen advocates, when she stresses the need to help people “make it to the other side.” But Summers is also correct in pointing to the dangers of a longer-lasting fiscal stimulus on top of the Federal Reserve’s large monetary injection.

The debate should be about the timing and composition of added fiscal support, not about whether it adds up to $1.9 trillion, $600 billion, or something in between. Support, not stimulus, is what’s critical in limiting the damage from the Covid restrictions while avoiding future inflation. And once that’s settled, we can start talking about the next big challenge — guiding the long-term shift in economic activity that will be needed after the pandemic is controlled.

While the world debates, markets reflate:

unnamed - 2021-02-16T080801.554

Data: U.S. Department of the Treasury; Chart: Michelle McGhee/Axios

Mortgage rates increased in four of the first six weeks of 2021, data from the Mortgage Bankers Association showed last week.

Nordea notes:

Regarding real interest rates, it might be difficult to understand why we talk about a possible trend reversal when the yield on US 5-year real TIPS reached an all-time low this week. So did Italian government bond yields, by the way. And US junk bond yields traded below 4% for the first time ever. Well, to us forward rates can sometimes be an important precursor of things to come. And 5y5y real swap rates have started to move higher. The divergence compared to spot real rates is similar to the late 2012/early 2013 experience when it marked the bottom for 5-year real rates. (…)

Real rate divergence could spell coming trend reversal

Will inflation expectations lead real rates higher?

The Nordea team is really looking everywhere to find support for its inflation call:

US small businesses are hiking prices

How about this relationship?

Higher gasoline prices could spill over in “unexpected” ways to core inflation

Meanwhile, liquidity keeps coming at us:

Yellen Shift on Vast Treasury Cash Pile Poses Problem for Powell

Already low short-term interest rates are set to sink further, potentially below zero, after the Treasury announced plans earlier this month to reduce the stockpile of cash it amassed at the Fed over the last year to fight the pandemic and the deep recession it caused.

The move, which aims to return its cash position at the central bank to more normal levels, will flood the financial system with liquidity and complicate Powell’s effort to keep a tight grip over money market rates.

“All this cash from the Treasury’s general account will have to go back from the Fed and into the market,” said Manmohan Singh, senior economist at the International Monetary Fund. “It will drive short term rates lower, as far as they can go.”

While the Fed has pushed its benchmark overnight policy rate down to nearly zero to aid the pandemic-inflicted economy, a drop in short-term market rates into negative territory could prove disruptive, especially for money market funds that invest in short-dated Treasury securities. Banks may also find themselves hamstrung by effectively being forced to hold large unwanted cash balances at the central bank. (…)

Market pros are trying to parse out the implications of what could be an unprecedented surge of liquidity. Some forecast downward pressure on the dollar. Others predict buoyant stock and bond prices. Still others see it mostly as a non-event — except when it comes to the money markets. (…)

In an effort to provide a floor for the money markets, the central bank could lift the rate it pays on excess reserves parked at the Fed by banks and on its reverse repurchase agreements, from 10 basis points and zero, respectively. Tweaking these administered rates is something the Fed has done before. (…) While any rate rise would be portrayed as a technical adjustment, there’s a risk investors wouldn’t see it that way. (…)

Nordea’s take:

(…) We estimate a funding need of >$1400bn for the coming two quarters, which means that the cash account will be taken more than >$1000 bn lower and the commercial banking system will be on the receiving end of the liquidity. If Biden-nomics is implemented, the Treasury will likely increase issuance 1 to 1, but so far they make no assumptions on coming additional stimulus.

This will lead to a drawdown (read underfunding) on the TGA [Treasury General Account] by >$250bn in February, >$400 bn in March and >$400bn again in May, in turn leading the TGA towards sub $500bn territory by the end of June. This is marked game changer for the USD liquidity outlook as commercial banks will be on the receiving end of the liquidity addition.

Excess liquidity in the banking system will accordingly increase, and if we include/assume a continued 120Bs a month in QE purchases by the Fed, the total liquidity increase in the first half of 2021 could end up around 1.6-1.8trn – (almost) without historical precedence.

Excess liquidity to increase by a whopping 1.6-1.8trn $

(…) the new refunding strategy should be viewed as positive USD liquidity news and could prove to be a marked change of scenery from the Mnuchin era. Maybe the US Treasury decided to spend the idle cash as the Fed seemed unwilling to monetize debt to the same extent as in 2021 (Fed Review: An unchanged QE pace is a sort of tapering scenario…)? Or else they are simply clearing the way for a huge fiscal package from the Biden/Yellen administration.

The decision also reduces the risk of an unsurmountable pile of debt issuance in Q1/Q2, and even with Biden-nomics included, the issuance to QE ratios now look less scary than prior to the decision to scale down issuance markedly. It is still clear that Fed will not end up “overmonetizing” debt over the next few quarters, if just parts of Bidens fiscal plan comes into fruition over the course of the spring. Higher long-term USD real rates are still on the cards.

A tsunami of USD in the market, along with the Biden checks…

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Japan powers out of coronavirus dip with 3% fourth-quarter growth Rise in GDP boosts hopes of mounting a ‘V-shaped’ recovery
SENTIMENT WATCH

The BofA’s sentiment index keeps rising but is still just neutral…

More than $58 billion went into mutual and exchange-traded funds tracking global stocks during the week ended Wednesday, the largest such inflow on record, according to a Bank of America analysis of data from EPFR Global.image

  • A gauge of market positioning from JPMorgan shows global investors now are the least fearful of taking risk in markets since the dot-com bubble burst. (Bloomberg)

The mob in action:

A Week Inside the WallStreetBets Forum That Launched the GameStop Frenzy Five days of chaos on Reddit: ‘This is the most fun I’ve ever had losing money’

(…) There was jubilation across WallStreetBets. Shares of GameStop—known by its ticker, $GME—were rising in premarket trading after a mind-boggling rally to $483 the previous week. Members were amped for more. They wondered: What was preventing the stock—which started the year around $18—from topping $1,000?

The weekend had already seen celebrations. WallStreetBets members had purchased billboard ads touting GameStop. In states ranging from Colorado to Minnesota to Georgia to Tennessee, they were seemingly everywhere.

“Bought 4 billboards on I-15 between Provo and Salt Lake City,” u/TheWardOrganist posted over the weekend. “$160 for four days—not even half a share of GME to fuel this rocket to Mars!” (…)

By Monday’s end, one thing was becoming clear: With roughly eight million members at that point—versus fewer than two million a month earlier—WallStreetBets wasn’t the same absurd internet corner it once was. Members were looking out for “imposters.” Fingers were pointed. Posts demanded: Hold the line. (…)

“I’m going to get a lot of hate for this, but I think we need a reality check,” u/Taking_The_Odds commented. “The stock is going to be worthless soon.”

u/TastyCodex93 wasn’t pleased: Don’t post discouraging things, the user said. “[You’re] helping the enemy.”

By midweek, r/WSB users were frustrated. How, some wondered, could $GME be falling? Members had posted screenshots showing they were still buying shares.

There had to be another reason behind the tumble, some thought. A theory emerged: it must be a “short ladder attack.”

According to posts on WallStreetBets, such an attack works like this: To make it appear as if a company’s share price is dropping, bearish short sellers sell nonexistent shares to each other at lower and lower prices. (…)

In reality, there was one big problem with that theory: Short sellers, academics and regulatory experts had never heard of a “short ladder attack.” (…)

“How do you know this is in fact a short ladder attack?” u/GoldilocksRedditor questioned.

“Honestly, it’s getting to the point where every drop is called a short ladder in this sub, when 80% of these people didn’t even know what it was 2 weeks ago,” u/dedriuslol said.

“Well no one did because you literally can’t find a single post on the internet about it before then,” u/Psturtz replied.

“Yeah has anyone here played chutes and ladders before?” u/OCOWAx quipped about the childhood board game. (…)

In just four days, GameStop shares had fallen 84%. (…)

“This is the most fun I’ve ever had losing money,” u/AvalieV posted Friday night. “See you next week.”

What about fundamentals?

Positive earnings revisions at record high. Remember that it needs to continue as everyone agrees that higher equities from here needs to come from earnings and not multiple expansion:

But who cares about earnings now?

  • Currently, retail net bullish call options are piling up on the most shorted stocks…

Speculative Mania Smoke 02-12-21, Speculative Mania Continues As It “Goes Up In Smoke” 02-12-21

  • …even though those are the stocks with the worst fundamental factors.

Speculative Mania Smoke 02-12-21, Speculative Mania Continues As It “Goes Up In Smoke” 02-12-21

In the debt market:

Debt Binge Reaches Riskiest Companies Investors’ near-insatiable demand for even the riskiest corporate debt is fueling a Wall Street lending boom, offering lifelines for struggling companies even as the coronavirus pandemic still drags on the economy.

Companies such as hospital operator Community Health Systems Inc. and newspaper publisher Gannett Co. Inc. have issued a record $139 billion of bonds and loans with below investment-grade ratings from the start of the year through Feb. 10, according to LCD, a unit of S&P Global Market Intelligence. More than $13 billion of that debt had ratings triple-C or lower—the riskiest tier save for outright default—about twice the previous record pace.

Despite the onslaught of new bonds, riskier companies can now borrow at interest rates once reserved for the safest type of debt.

As of Friday, the average yield for bonds in the ICE BofA US High Yield Index—a group that includes embattled retailers and fracking companies—was just 3.97%. By comparison, the yield on the 10-year U.S. Treasury note, which carries essentially no default risk, was as high as 3.23% less than three years ago. The 10-year Treasury yielded around 1.2% Friday. (…)

In recent weeks, three businesses have financed dividends to private shareholders by issuing so-called PIK toggle notes—bonds that give the issuer flexibility to pay interest in additional bonds rather than cash. Such deals are hallmarks of hot credit markets, rising to prominence in the years leading up to the 2008-2009 financial crisis. (…)

  • More than 15% of debt raised in the U.S. high-yield bond market has carried a rating of CCC or below, the lowest ratings given, since the start of 2021. That’s the highest share since 2007. (FT) And BTW, covenants are just as light as ever.

Some people simply don’t care of all the above:

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TECHNICALS WATCH

Of all the technical analysis I survey, Lowry’s Research remains the most intelligent and comprehensive. Lowry’s recognizes the peculiarities of this bull, namely the sharp increase in participation of retail investors and the impact it can have on several technical indicators. Its recent analysis seeks to find if conventional technical readings are twisted and biased by these newcomers. So far, it remains confident that readings of breadth, intensity and participation along with its own proprietary indicators all point to a “dynamic bull market with a long way to go.”

Green Copper

Green copper demand to rise very fast. You can sum up a whole investment theme in one chart and the one below certainly fits that bill. It doesn’t even include cars as EVs require much more copper than traditional gas guzzlers. The reality is that for the green energy transition to be a reality it will require a lot more copper. As copper globally is getting harder to extract as ore body quality declines, this will require much higher prices to incentivise expanded production. If you wonder what that looks like in pratical terms, the chart at the bottom shows the increasingly large production gap. (The Market Ear)

Sanford Bernstein

  • BTW: The share of U.S. adults who say they are likely to purchase an EV in the next decade (39 percent) is up 6 percentage points since March 2019. Meanwhile, the share of those who say they are unlikely to do so is down to 49 percent from 56 percent. Interest in hybrids has remained steady during the same period. Read more.

Apple approached Nissan to work on autonomous car project Talks ended after disagreement over branding of iPhone maker’s secretive effort

Ninja China targets rare earth export curbs to hobble US defence industry

The U.S. relies on imports of the elements, which are used in everything from smartphones to fighter jets. Rare earths have previously been a focus in the deteriorating trade relationship between China and the U.S.

China’s stock market cap

China has become one of the largest single-country exposures for U.S. investors, according to Seafarer’s data.

“China is now both the second largest economy and the second largest capital market,” Linda Zhang, CEO of Purview Investments, tells Axios.

“Most U.S. investors are exposed to Chinese firms … either directly or indirectly through their brokerage accounts or 401ks.”

Banning Chinese companies from U.S. stock exchanges could push Chinese companies to the Shanghai and Hong Kong stock exchanges.

  • In the long run, this would increase the relative power of these exchanges over those in the U.S., Bob Bartel, global head of corporate finance at New York-based financial consultancy Duff & Phelps, points out.

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THE DAILY EDGE: 11 FEBRUARY 2021

INFLATION WATCH
U.S. Consumer Price Inflation Picks Up in January; Core Prices Stabilize

The Consumer Price Index rose 0.3% (1.4% y/y) during January following a 0.2% December increase, revised from 0.4%. The gain matched expectations in the Action Economics Forecast Survey. The CPI excluding food & energy held steady last month (1.4% y/y) as it did in December, revised down from 0.1%. A 0.2% January gain had been expected.

A 3.5% increase (-3.6% y/y) in energy product prices provided the lift to last month’s CPI gain, following December’s 2.6% rise, revised from 4.0%. Gasoline prices surged 7.4% (-8.6% y/y) after strengthening 5.2%. Fuel oil prices strengthened 5.4% (-16.5% y/y) following a 10.2% jump. The cost of electricity eased 0.2% (+1.5% y/y) while natural gas prices fell 0.4% (+4.3% y/y) for the second consecutive month.

Food prices edged 0.1% higher (3.8% y/y) last month, after rising 0.3% in December, revised from 0.4%. Food-at-home prices slipped 0.1% (+3.7% y/y). (…)

Goods prices excluding food & energy edged up 0.1% in January (1.7% y/y) for a second consecutive month. Apparel prices surged 2.2% (-2.5% y/y) after gaining 0.9% in December, revised from 1.4%. Sporting goods prices rose 0.7% (2.8% y/y), about the same as during each of the prior three months. Recreation product prices improved 0.1% (-0.2% y/y). Declining were prices for education & communication goods which fell 0.6% (-1.9% y/y) following two moderate increases.

New vehicle prices declined 0.5% (1.4% y/y). Used car & truck prices fell 0.9% (+10.0% y/y), the third consecutive monthly decline. Medical care product costs slipped 0.1% (-2.3% y/y), the fifth decline in the last six months. Household furnishings prices weakened 0.5% last month (+2.4% y/y) after holding steady in December. Household appliance prices weakened 1.1% (+5.7% y/y) after holding steady in December.

Services prices held steady for a second straight month (1.3% y/y). December was revised from a 0.1% rise. Shelter costs rose 0.1% for the sixth straight month and by a greatly lessened 1.6% y/y. The owners’ equivalent rent of primary residences also rose 0.1% and gained 2.0% y/y. Education & communication services prices held steady (2.0% y/y). Falling by 1.0% (+0.3% y/y) were recreation services prices which followed a 0.5% drop. The cost of public transportation fell 1.7% (-13.9% y/y). Medical care services prices improved 0.5% (2.9% y/y) following three straight months of decline.

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The Atlanta Fed’s sticky-price consumer price index (CPI)—a weighted basket of items that change price relatively slowly—increased 1.1 percent (on an annualized basis) in January, following a 1.0 percent increase in December. On a year-over-year basis, the series is up 1.7 percent.

On a core basis (excluding food and energy), the sticky-price index increased 0.9 percent (annualized) in January, and its 12-month percent change was 1.5 percent.

The flexible cut of the CPI—a weighted basket of items that change price relatively frequently—increased 11.4 percent (annualized) in January, and is up 1.8 percent on a year-over-year basis.

atlanta-fed_sticky-price-cpi (1)

  • Underlying Inflation Gauge (UIG)
  • The UIG “full data set” measure for January is currently estimated at 1.5%, unchanged from the previous month.
  • The “prices-only” measure for January is currently estimated at 2.1%, unchanged from the previous month.
  • The twelve-month change in the January CPI was +1.4%, unchanged from the previous month.

For January 2021, trend CPI inflation is estimated to be in the 1.5% to 2.1% range, which is unchanged from the December 2020 range.

At the risk of completely boring you, here’s the Cleveland Fed’s Median Price CPI table:

image

Unsurpisingly

Yields, which fall when bond prices rise, dropped after the Labor Department said core consumer prices, excluding the often volatile food and energy categories, remained unchanged in January compared with the previous month. Core prices were also flat in December after a downward revision to the earlier estimate. (…)

The post-report rally was notable because it came hours before a $41 billion Treasury auction of 10-year notes. The looming influx of new bonds into the market would typically put upward pressure on yields, which were climbing before the inflation report. The auction later met solid demand from investors, leaving yields still lower on the session. (…)

(…) The Fed is unlikely to “even think about withdrawing policy support” by raising rates or reducing its bond purchases for the foreseeable future, Mr. Powell said at a virtual appearance before the Economic Club of New York.

The Fed chief also repeated his call for more fiscal assistance for the economy, saying that monetary policy alone won’t be enough to restore the labor market to full strength. “It will require a society-wide commitment, with contributions from across government and the private sector,” Mr. Powell said. (…)

But it is fiscal policy that “is the essential tool for this situation,” Mr. Powell said Wednesday. (…)

Mr. Powell—also a Republican—said Wednesday that now isn’t the time to address the path of the federal debt and that he worries less about inflation than about the economic pain inflicted by the pandemic. (…)

“Inflation dynamics will evolve, but it’s hard to make the case why they would evolve very suddenly.”

Mr. Powell also said that providing too much support to an economy buffeted by risks and uncertainties is preferable to doing too little. (…)

The unemployment rate understates the impact of the pandemic on workers, particularly the most vulnerable, Mr. Powell said. Counting people who have left the labor force and those whose employment status is misclassified would increase the jobless rate to near 10% in January, he said.

“Published unemployment rates during Covid have dramatically understated the deterioration in the labor market,” Mr. Powell said. (…)

While the number of workers earning at least $85,000 a year rose 1% between February and December, the number of workers earning less than $30,000 was down 14%, economists at the New York Fed said in a report published Tuesday.

LSE_2021_heterogeneityVI-some-workers-hit-harder_abel_ch1_v2-01LSE_2021_heterogeneityVI-some-workers-hit-harder_abel_ch3-01-01

Another way to look at the same data:

Recession has Nearly Ended for High-Wage Workers,

but Job Losses Persist for Low-Wage Workers

The Atlanta Fed Wage Growth Tracker reveals that workers in the bottom wage quartile are seeing accelerating wage growth. If and when lower wage employment resumes, the aggregate wage bill will swell.

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(…) Ms. Daly [a voting member of the FOMC] said the things now debated by Congress “are not things that are going to overheat our economy. These are things going to distressed people, distressed sectors, distressed businesses.”

The pandemic “is not over. And for us to say [more aid] is too much, I don’t know what metric and yardstick people are using; it’s certainly not looking out in their communities” and taking stock of the pain many Americans are feeling, Ms. Daly said. (…)

Like many of her colleagues, Ms. Daly said she wouldn’t be surprised to see inflation pressures accelerate as the economy recovers, but she doesn’t expect that to endure. And that will pose a test for policy makers.

“The head fake I want to avoid is thinking that a few quarters of very rapid growth can be extrapolated to future quarters of very rapid growth. If that happens, fantastic,” Ms. Daly said.

“The greatest risk is that we get nervous, and we pull back accommodation too quickly on the fears of rapidly rising inflation or on the overconfidence that inflation’s hit our target, and then we have more work to do to get it back up,” Ms. Daly said.

(…) markets show no sign of concern, either in the average expectation of inflation implied by the bond market or the likelihood of very high inflation in the options market, both of which are merely back to where they stood in 2018. (…)

The Summers/Blanchard case is based on the theory that a hot economy feeds through into price rises. There is a link between the two, as prices tend to rise faster as the output gap—however measured—narrows. But the link is very far from perfect, and depends on another unknown: how far unemployment can fall before wage pressures build. Policy makers across the developed world repeatedly reduced their guesses for the sustainable level of unemployment over the past decade, and there’s no particular reason to think that the pre-pandemic figure—3.5%—is the minimum, or even that it is the right way to measure joblessness.

According to the CBO, the economy had been running hot for two years before the pandemic, yet the Federal Reserve’s preferred inflation gauge was still below its 2% target. (…)

In a more diverse job market, inflation expectations play a bigger role, both for workers asking for a raise and CEOs deciding on prices. With inflation having been so low for so long, the evidence from Japan is that it is hard to shift expectations up again, and a one-off jump might not do it. (…)

fredgraph - 2021-02-11T062900.331

Bloomberg’s Ben Holland summarizes the big debate:

With No Inflation in Sight, Why the Inflation Debate?

Case for Inflation: Money Supply

    • Case Against: Money Velocity

      Case for Inflation: Households are Flush

        • Case Against: Households are Cautious

          Case for Inflation: Loose Central Banks

            • Case Against: Loose Labor Markets

              Case for Inflation: Supply Shocks

                • Case Against: Spare Capacity

                For one, ING is clear:

                US inflation: The only way is up!

                (…) With Covid containment measures having eased somewhat and demand returning, prices have recovered over the subsequent eight months. If price levels stay unchanged for the next four months the comparison with the depressed price levels of that heavily stressed March-May period means headline inflation is going to rise to 2.8% YoY. This is the bear minimum annual inflation will get to.

                Given rising commodity and energy prices and rising freight costs that are still to work through to consumer prices this takes us closer to 3%. Then with the vaccine roll out process gaining traction, potentially paving the way for a fuller economic re-opening at some point in 2Q21, many businesses may take the opportunity to raise their prices.

                This is most likely to happen in sectors that have experienced supply constraints such as the leisure and hospitality industry. Faced with less competition (bars and restaurants having gone out of business, hotels having closed and aircraft mothballed) at a time when customers are desperate to experience things they haven’t been able to do for 12 months, pricing power is going to be strong.

                Throw in rising housing rents – which on their own account for 7.9% of the inflation basket – and we could see inflation push above 3.5% and possibly head close to 4% by May.

                unnamed (24)

                Source: Macrobond, ING

                December’s $900bn fiscal support package followed by the proposed $1.9tn package, followed by a potential $3tn Build Back Better infrastructure and Green energy plan is a lot of money going into an economy at a time when the Federal Reserve continues to buy $120bn of financial assets each month. (…)

                Remember, household cash and savings deposits have risen $2.4tn since 3Q 2019 and credit card balances are at 4 year lows so it isn’t just government that has cash ammunition to spend.

                How sustained inflation will be is likely going to be determined by the response of the labour market. The US is largely a service sector economy meaning that the main inflation driver over the medium to longer term is the price of the workforce. If the economy sees rapid jobs growth and wages start to rise, this is when inflation can become a much bigger, ingrained issue.

                We suspect the robust growth environment and a higher and more sustained set of inflation readings will lead to a change of thinking with Quantitative Easing likely to be tapered before year-end and the first Fed rate hike coming in 2023. Given this backdrop we expect the 10Y Treasury yield to push up to 1.5% by mid-year with a 1.75% handle our base case for 2H21.

                Let me throw in this interesting chart from tracktherecovery.com showing that the high income segment is not currently spending much, unable to buy a lot of the services it normally craves on. But this is the segment with most of the excess savings. Meanwhile, low income people are splurging.

                Consumers are spending the latest stimulus cheque – daily credit & debit card transactions

                chart (12)

                Money velocity may be rising, judging by money moving from savings to checking accounts:

                fredgraph - 2021-02-11T082441.724

                Certainly related:

                More U.S. Buyers Than Ever Seeking $1 Million-Plus Homes More than 1 in 10 home searches on Redfin were for set for seven-digit properties

                (…) Last January, about 8.5% of all saved searches were for homes at or above that price threshold.

                (…) fierce competition over a shortage of homes for sale has caused prices to soar across the U.S., and has pushed the median home price past $500,000 for the first time in numerous cities. In December, the U.S. median sale price was up 13% from a year prior, by Redfin’s measure.

                In January, 36% of home searches were filtered for properties asking $500,000 or less, down from 39% a year ago. It’s a sign that lower-income buyers are not as active in the market. (…)

                “In the past, anything over $1.5 million would stay on the market for several weeks, but that’s not the case anymore,” said Seattle-based Redfin agent Bliss Ong. “Even in the $2 million range, homes are selling within the first week.”

                Meanwhile:

                Oil Demand Recovery Expected to Outstrip Production The global supply and demand of crude oil are on course to continue rebalancing this year after the turmoil brought by the pandemic in 2020, the International Energy Agency said.

                (…) The agency significantly increased its forecast for producing nations outside of the pact between the Organization of the Petroleum Exporting Countries and allies such as Russia, raising its projections for non-OPEC supply growth by 290,000 barrels a day to an increase of 830,000 barrels a day this year.

                At the same time, the IEA trimmed its forecast for global oil demand by 200,000 barrels a day to 96.4 million barrels—around 3% less than in 2019—but said part of that was because of a change to historic data. (…)

                At the beginning of February, Saudi Arabia—one of the world’s largest producers—unilaterally cut an additional one million barrels of crude a day, a move that surprised the world when it was announced a month earlier.

                Along with resilient demand in developing-world powerhouses, such as China and India, as well as hopes of a large U.S. stimulus bill and volatile trading in broader financial markets, Riyadh’s move has fueled a recovery in oil prices.

                The so-far successful efforts of OPEC-plus to hold back supply, the rollout of coronavirus vaccination programs, and the prospect of weaker travel restrictions remain the basis for cautious forecasts of an oil-market recovery, the IEA said. (…)

                If balances continue to tighten and non-OPEC producers increase production, that could fray the cohesion of OPEC-plus cuts, the IEA said. That might have consequences for the oil-price rally.

                TECHNICALS WATCH
                Speculative volume skyrockets as smart money sells

                Last month, there was a remarkable jump in the most speculative corners of the market, including leveraged vehicles like options and margin trading, and lottery ticket shares in the form of penny stocks.

                The roaming horde of speculators found that niche in December, with more than 1 trillion shares traded. It picked up even more in January. (…)

                At the same time, the smart money is selling. At least, if we can consider activity during the last hour of trading to be the work of more informed investors, the theory behind the Smart Money Index. As calculated by Bloomberg, this measure is hanging near its lows despite indexes being at new highs.

                (…) never before have we seen so many days when the S&P 500 was in the upper 90% of its 1-year range while the Smart Money Index is in the bottom 10% of its own 1-year range. (…)

                There has been no shortage of signs of extreme, even record, speculation in recent weeks. The biggest counter-point to that has been widespread and impressive buying interest. That started to show some cracks in the past few weeks, but recent days have started to make up for it. It’s a challenging dichotomy but risks in the short- to medium-term appear high, and the persistent last-hour selling adds to those concerns.

                Speculative demand is increasingly being met by speculative supply:

                unnamed - 2021-02-11T073313.024These lesser-scrutinized blank-check IPOs, often backed (or just pumped) by a celebrity, are hitting the market at a furious pace. According to Dealogic, SPAC IPOs have raised $38.3 billion so far this year. We are well on our way to surpassing $300 billion in new SPAC listings this year—a four-fold increase on 2020, the so-called “year of the SPAC.” (Bloomberg)

                image

                The shorts (dumb or smart?) are essentially gone, like in 2000:

                unnamed - 2021-02-11T073245.574

                That said, the dependable 13/34–Week EMA Trend, while extended, is not flashing anything close to red:

                And NDR’s demand/supply volume chart shows rising demand and declining supply…

                JPMorgan Says Commodities May Have Just Begun a New Supercycle

                (…) Everyone from Goldman Sachs Group Inc. to Bank of America Corp. to Ospraie Management LLC are calling for a commodities bull market as government stimulus kicks in and vaccines are deployed around the world to fight the coronavirus. (…)

                “We believe that the new commodity upswing, and in particular oil up cycle, has started,” the JPMorgan analysts said in their note. “The tide on yields and inflation is turning.” (…)

                Hedge funds similarly haven’t been this bullish on commodities since the mid-2000s, when China was stockpiling everything from copper to cotton while crop failures and export bans around the world boosted food prices, eventually toppling governments during the Arab Spring. The backdrop is now starting to look similar, with a broad gauge of commodity prices hitting its highest in six years. (…)

                Previous commodity supercycles peaked in the late 1970's and 2008

                Warnings:

                Biden, China’s Xi Hold Talks Over Rights, Trade, Climate The U.S. president raised issues that divide the two countries but also held open the possibility of working together on common concerns.

                (…) The call, Wednesday night in Washington, came after Mr. Biden in recent days spoke with a host of allies in Europe and Asia, signaling that he seeks to deal with China as the leader of the world’s democracies rather than solely an American president. The U.S. needs to “join together with others to hold China accountable for its abuses and to shape China’s choices going forward,” said a senior administration official.

                A White House statement said Mr. Biden raised his “fundamental concerns about Beijing’s coercive and unfair economic practices,” as well as human rights issues and “preserving a free and open Indo-Pacific” region. But it said the leaders discussed cooperation on fighting Covid-19, climate change and other issues. (…)

                The Chinese leader reiterated Beijing’s view that “cooperation is the only correct choice for both sides,” according to a readout from Chinese state media. He said that the U.S. and China should work together on issues such as efforts to combat the Covid-19 pandemic, spur a global economic recovery and maintain regional stability.

                “China and the U.S. will have different views on certain issues and the key is to respect each other, treat each other equally, and to manage and deal with the issues in a constructive manner,” Mr. Xi was quoted as saying. (…)

                Heavy tariffs will remain in place for now while the Biden team conducts a review of trade policy internally and with allies, the senior administration official said. At that point, the administration would decide which ones to roll back.

                Currently the U.S. has levies on $370 billon of Chinese imports—three quarters of everything China sells to the U.S. (…)

                The official also said the U.S. plans to work with allies on a joint plan to deny critical technologies to Beijing. Biden officials have argued that the technology competition between the two nations is one of the administration’s main focuses. (…)

                ZeroHedge has its own color:

                (…) According to an account of the conversation reported by Chinese state television, Xi said that “cooperation was the only choice and that the two countries need to properly manage disputes in a constructive manner.” Xi also told Biden that “confrontation between China and the United States would be a disaster and the two sides should re-establish the means to avoid misjudgments.”

                Xi also said Beijing and Washington should re-establish various mechanisms for dialogue in order to understand each others’ intentions and avoid misunderstandings, the report said.

                Finally, and most bizarrely, Xi told Biden that he hopes the United States will cautiously handle matters related to Taiwan, Hong Kong and Xinjiang that deal with matters of China’s sovereignty and territorial integrity. Quite the opposite of what Biden reportedly told Xi… (…)

                On Sunday, Biden told CBS News that China would face “extreme competition” from the US. While he praised his Chinese counterpart — whom he knows from his time as Barack Obama’s vice-president — as “very bright”, he said he “doesn’t have a democratic . . . bone in his body”.

                Just a few days prior, Blinken told Yang the US would stand up for democracy and human rights, signalling a hawkish stance towards China. “I made clear the US will . . . hold Beijing accountable for its abuses of the international system,” Blinken wrote on Twitter following the call. In response, Yang warned the US not to interfere in Hong Kong and Xinjiang, saying “no one can stop the great rejuvenation of the Chinese nation”. (…)

                Iran Makes Uranium Metal in Breach of Nuclear Deal Iran has started producing uranium metal, a material that can be used to form the core of nuclear weapons, the United Nations atomic agency told members in a confidential report.

                Contact: edgeandodds [at] gmail.com