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

DEMOGRAPHICS

THE DAILY EDGE: 5 MAY 2021

U.S. Light Vehicle Sales Continue to Strengthen in April

U.S. sales of light vehicles increased last month as COVID-19 vaccines became more readily available. The Autodata Corporation reported that light vehicle sales during April rose 2.5% to 18.54 million units (SAAR) [consensus was 17.6M] and more than doubled y/y. So far this year sales have risen 13.0%.

Auto sales increased 4.5% (107.4% y/y) last month to 4.21 million units, the highest level since February of last year. Purchases of domestically-produced cars rose 3.0% (87.1% y/y) to 2.75 million units. Sales of imported autos jumped 7.4% (160.7% y/y) to 1.46 million, the highest level since February 2018.

Sales of light trucks rose 1.9% ( 113.6% y/y) during April to a record 14.33 million units. Purchases of domestically-made light trucks held steady (106.2% y/y) at 10.97 million units. Sales of imported light trucks increased 8.7% (141.7% y/y) to a record 3.36 million units.

Trucks’ share of the light vehicle market eased to 77.3% but remained near the record.

Imports’ share of the U.S. vehicle market increased last month to 26.1% from 22.4% twelve months earlier. Imports’ share of the passenger car market rose to 34.7% in April. Imports’ share of the light truck market strengthened to 23.4%. (Haver Analytics)

According to CalculatedRisk, April’s was the highest sales rate since 2005 and up 8% from the pre-pandemic high. Sales-to-date are up 1.9% compared to the same period in 2019.

David Rosenberg warns that

We have only been at this level five other times in the past (September 1985, September 1986, February 2000, October 2001, and July 2005) and sales plummeted on four occasions over the course of the next twelve months (the average decline was 13%). On a six-month basis, they declined sharply each time (-45.5% at an annual rate after the September 1985 surge; -23.9% after the September 1986 blowout; -18.2% in the six months after the February 2000 bounce; and -27.2% following the July 2005 run-up).

What Rosie omits to consider is where the savings rate was in each of those respective peak dates: 1985: 7.3%, 1986: 7.2%, 2000: 4.8%, 2001: 3.4%, 2005: 2.2%.

March 2021: 27.6%.

According to Markit, “the average age of light vehicles in operation in the US has risen to 11.9 years this year, about one month older than in 2019. (…) While work from home policies may continue for some time, there also has been increased reluctance in the use of public transit and ride sharing, and many consumers are opting for road trips instead of air travel for summer vacations.”

Pointing up The remaining problem is inventory which was at a 10-year low in March and no doubt declined further in April with the strong sales and idled plans due to the chip shortage. Wards is estimating that sales in May and June could be as low as 14.5M units SAAR. Rosie will prove right for a while.

Also noteworthy for the Biden administration:

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The Chase consumer card spending tracker suggests goods demand remained solid through April 30 after a very strong March:

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(…) In March, the U.S. deficit in trade in goods with China, the largest U.S. trading partner, widened sharply to $36.9 billion from $30.2 billion in February. Imports from China surged 19% to $48.3 billion, while exports to the country rose 8.6% to $11.3 billion.

As strong consumer appetite for goods kept American factories humming, imports of semiconductors—critical components of products ranging from autos to washing machines—grew 26% from February to $6.3 billion.

“For all the talk of supply disruptions in the global semiconductor industry holding back U.S. production, particularly in the auto sector, this highlights that much of the problem is instead the huge and unanticipated rebound in demand,” Andrew Hunger, senior U.S. economist for Capital Economics, said in a research note.

U.S. exports of semiconductors to the rest of the world also rose in March to $5.24 billion, up 8.5% from February. (…)

Job Growth Rate in Small Businesses Increases Significantly in April

The Paychex | IHS Markit Small Business Employment Watch, compiled from aggregated payroll data of approximately 350,000 clients on the Paychex human capital management (HCM) suite, is out with the latest numbers.

The Small Business Jobs Index increased 4.33 percent from March to 98.34 in April, a positive indicator of job growth returning to pre-pandemic levels. The increase is in part driven by the comparison period of one year ago (detailed below). Each region, state, and metro area analyzed in April 2021 saw employment gains. The South leads all regions at 99.42.

“A return to full employment is not complete. However, the Small Business Jobs Index returned to its pre-pandemic peak, seen in February 2020,” said James Diffley, chief regional economist at IHS Markit. “We’re encouraged by the progress in job growth we see in the April numbers.”

“The country has been waiting for a significant increase in job growth since this time last year—and April delivered. Many businesses are finally able to resume regular operations with the onset of vaccine availability for all U.S. adults,” said Martin Mucci, Paychex president and CEO. “The significant growth seen in the leisure and hospitality industry, over the last two months, will only accelerate with the upcoming financial relief available by the Restaurant Revitalization Fund grants made available this week by the SBA.”

In further detail, the April report showed:

  • Job growth improved in all four U.S. regions in March, as well as in all 20 states, and all 20 metros analyzed.
  • The South continues to lead all regions in small business job growth.
  • Texas took the top ranking for job growth among states.
  • Leisure and hospitality saw the greatest improvement among industry sectors, but construction still has the highest index at 100.72.
  • Leisure and hospitality and construction both also saw a significant gain in hourly earnings growth, 6.78 percent and 4.00 percent, respectively.

Paychex business solutions reach 1 in 12 American private-sector employees, making the Small Business Jobs Index report an industry benchmark. The national jobs index uses a 12-month same-store methodology to gauge small business employment trends on a national, regional, state, metro, and industry basis.

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COMPOSITE PMIs

Eurozone private sector growth continues to strengthen in April

Growth of the eurozone private sector economy improved during April, with latest data indicating the fastest expansion since last July and the second best in over two-and-a-half years. This was highlighted by the IHS Markit Eurozone PMI® Composite Output Index recording 53.8, up from 53.2 in March.

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The index has now signalled growth for two consecutive months and latest data indicated concurrent activity gains in both manufacturing and service sectors. Goods producers continued to lead the way, with output rising at a rate little-changed on March’s survey record. Service sector output returned to growth following seven months of continuous contraction, although the gain was only marginal overall.

Germany again led the way in terms of overall growth, expanding at a marked pace with growth underpinned by a strongly performing manufacturing economy.

Spain meanwhile saw growth improve to its strongest for over two years as service providers experienced a bounce in activity ahead of planned business reopening and in line with expectations of a relaxation of Covid restrictions.

France and Italy meanwhile registered modest growth of overall private sector output during April, with the gain in France the best seen in the past eight months.

Supporting the increase in overall eurozone private sector activity was a second successive monthly rise in new orders, the strongest recorded for over two-and-a-half years. Higher sales were reported in both domestic and international markets with foreign business rising at a rate little-changed on March’s series record level.

With new work continuing to increase in April, firms registered a further rise in backlogs of work, especially those based in manufacturing where delays in the delivery of inputs constrained production. The rate of growth was also the sharpest for 39 months, and helped explained why companies took on additional workers. April’s survey indicated that staffing levels rose for a third month in succession and to the strongest degree for two years.

Growing confidence in the outlook also encouraged firms to bolster payroll numbers. April’s survey indicated that confidence about the outlook was at its highest since composite data were first available in mid-2012.

Meanwhile, cost inflation intensified during April with latest data showing that operating expenses rose to the greatest degree for ten years. In part reflective of growing market demand, firms were able to pass on some of their increased costs to clients in the form of higher charges. Latest data showed that output prices rose to the greatest degree since February 2018.

The IHS Markit Eurozone PMI® Services Business Activity Index edged back above the crucial 50.0 no-change mark in April to signal the first growth in service sector activity since August 2020. That said, at 50.5, up from 49.6 in the previous month, the rate of expansion signalled by the index was marginal.

There was some notable divergences in performance by country. Whereas Spain registered a marked rise in activity, Germany and Italy experienced contractions. Marginal growth was seen in France.

The weak increase in regional activity overall reflected ongoing softness in levels of incoming new business. Although only marginal, new orders overall declined for a ninth successive month. Foreign demand remained a source of weakness: new export business fell for a thirty-second successive month.

Nonetheless, increasing confidence about the future led to a strengthening of business expectations to their highest level since May 2017. Positive projections for a rise in activity over the coming months helped to support a solid increase in employment.

Finally, operating expenses rose again in April and to the greatest degree for 15 months. Several firms raised their charges in response, although competitive pressures generally thwarted these efforts. This meant that output charge inflation remained marginal.

The U.S. Services PMI is out later today. Here’s the Australian Services PMI as a proxy of how services behave upon reopening:

The seasonally adjusted Business Activity Index rose to 58.8 in April from 55.5 in March, signalling a further sharp increase in activity. The latest increase extended the current sequence of expansion to eight months and was the steepest seen in the survey history. Panellists noted that the easing of COVID-19 restrictions had provided a further boost to total activity.

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Notably, new business inflows received by Australian service providers also rose at the sharpest pace in the five-year series history. Anecdotal evidence indicated that the easing of lockdown restrictions contributed to an improvement in consumer confidence and demand. The Australia-New Zealand travel bubble, briefly in operation in the second half of April, in part supported a renewed rise in new export sales, despite most travel restrictions remaining in place.

Stronger demand conditions led firms to expand their workforce numbers for the sixth month running in the latest survey period. The pace of job creation was solid and matched February’s series record. Despite a further and faster increase in employment, business capacity remained strained as backlogs of work rose for the third straight month. Input delivery delays were also cited as a factor contributing to the increase in outstanding business.

Concurrently, price pressures further intensified in April as Australian service providers experienced an eleventh straight monthly increase in cost burdens. The rate at which input prices rose accelerated to the fastest since July 2017’s survey high. The increase in cost burdens was often linked to greater raw material prices and wage costs. A number of firms noted efforts to partially pass on higher costs to clients, with output charges rising at the fastest pace since December 2017.

GOOD BOOM, ZOOM DOOM!

JPMorgan CEO Sees Economic Boom Ahead

The leader of the nation’s biggest bank reiterated his recent optimism that the economy is poised to emerge from the pandemic on fire, with growth that could stretch into 2023. Mr. Dimon has in recent weeks said that the massive government stimulus, the widespread vaccine rollout and the actions of his corporate and consumer clients have him believing in a possible “Goldilocks” economy of fast growth coupled with mild inflation. (…)

The projected growth over the next 12 months is now double what the bank expected three months ago, expanding to 4.3% by the second quarter of 2022. (…)

“Our government, when they point out the issues that we should do better, they’re right,” Mr. Dimon said. “But if we just throw a lot of money at it and it’s all wasted again…we will be in big trouble.” (…)

More JPMorgan employees will return to the office starting this month, though Mr. Dimon acknowledged they aren’t all happy about it. But the remote office, he said, doesn’t work for generating ideas, preserving corporate culture, competing for clients or “for those who want to hustle.”

“We want people back at work and my view is some time in September, October, it will look just like it did before,” Mr. Dimon said. “Yes, people don’t like commuting, but so what?”

To Mr. Dimon, commuting is better than the alternative.

“I’m about to cancel all my Zoom meetings,” he added. “I’m done with it.”

Yellen Backs Off Comment on Interest Rates, Inflation Treasury Secretary Janet Yellen walked back her remarks earlier in the day that rates might need to rise to keep the economy from overheating, adding that she didn’t think there is going to be an inflation problem.

Treasury Secretary Janet Yellen said Tuesday she is neither predicting nor recommending that the Federal Reserve raise interest rates as a result of President Biden’s spending plans, walking back her comments earlier in the day that rates might need to rise to keep the economy from overheating.

“I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address it,” Ms. Yellen, a former Fed chairwoman, said Tuesday at The Wall Street Journal’s CEO Council Summit.

Ms. Yellen suggested earlier Tuesday that the central bank might have to raise rates to keep the economy from overheating, if the Biden administration’s roughly $4 trillion spending plans are enacted. (…)

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” she said in a prerecorded interview at the Atlantic’s Future Economy Summit. (…)

Ms. Yellen’s remarks were unusual because White House officials typically refrain from commenting on monetary policy. Such was the norm for decades, starting in the Clinton administration, until President Trump began weighing in on the Fed’s actions and urging Mr. Powell to cut rates before the pandemic.

“If anybody appreciates the independence of the Fed, I think that person is me,” she told the Journal, adding that it is entirely up to the central bank how it manages monetary policy. “It’s not something I’m going to give opinions about.”

But she kind of did, until the market told her she shouldn’t.

We could be at a generational turning point for finance. Politics, economics, international relations, demography and labor are all shifting to supporting inflation. After more than 40 years of policies that gave priority to the fight against rising prices, investor- and consumer-friendly solutions are becoming less fashionable, not only in the U.S. but in much of the world. (…)

1) Central banks, led by the Federal Reserve, are now less concerned about inflation

2) Politics has shifted to spend even more now, pay even less later

3) Globalization is out of fashion

4) Demographics worsen the situation. One of the advantages of globalization was that it added foreign workers as the domestic workforce expanded more slowly. (…) When workers have less competition, they can demand more for their labor as fear of factories moving elsewhere is reduced.

5) Empowered labor puts upward pressure on wages and prices. (…) unions are strongly supported by Mr. Biden, and organization is likely to become easier.

Douglas Porter, chief economist at BMO Capital Markets in Bloomberg:

“One always has to be careful not to overplay a few anecdotes, and project that onto the broader economy,” Douglas Porter, chief economist at BMO Capital Markets, said in a May 1 report. “But as the anecdotes accumulate, they eventually become data.”

Porter pointed to a sampling of 10 recent datasets, including U.S. employment costs, Canadian wages and still-soaring shipping costs.

“As rising inflation risks suggest,” he said, “when you run things hot, you risk getting burned.”

Sam Zell Buys Gold With Inflation ‘Reminiscent of the ‘70s’

(…) “Obviously one of the natural reactions is to buy gold,” he said in a Bloomberg Television interview. “It feels very funny because I’ve spent my career talking about why would you want to own gold? It has no income, it costs to store. And yet, when you see the debasement of the currency, you say, what am I going to hold on to?” (…)

“Oh boy, we’re seeing it all over the place,” Zell said of inflation. “You read about lumber prices, but we’re seeing it in all of our businesses. The obvious bottlenecks in the supply chain arena are pushing up prices. It’s very reminiscent of the ‘70s.” (…)

“Right now, oil and gas is not priced to reflect the risk of what’s going on, whether it be in the EV world, a climate changed world,” he said. “As recently as a couple of years ago I thought the risk-reward ratio was appropriate. It’s clearly become very inappropriate as our political situation has changed.” (…)

“Everybody’s worried about going back to work and office-space occupancy. I don’t think that’s really an issue,” he said. “The problem is that, before the pandemic, we were dealing with an oversupply of office space. Obviously the pandemic hasn’t reduced that oversupply and has probably encouraged it accordingly.”

Stores also present challenges, he said, given that the U.S. already had more retail space per person than the rest of the world before Covid-19, and shoppers increased their reliance on e-commerce while stuck at home during the pandemic.

“Street retail today is like a falling knife, and you don’t know how far it goes down,” he said. While that “doesn’t mean the best malls aren’t going to perform,” there’s a “huge amount of real estate that’s going to have to be reprogrammed in one form or another.”

The challenges faced by hotels are more of a temporary problem over the next three to four years, Zell said. “We will see a slow recovery in business travel,” he said. “In the interim period of time, it’s going to be a slow recovery, and hotels are big overhead things and running them at less-than-optimum occupancy is a very expensive scenario.”

Chip Crisis Deepens at Jeep Maker Stellantis The auto maker slashed planned production by 11% in the first three months of the year due to the global semiconductor shortage and warned of additional cuts in the weeks ahead as the crisis lingers.

SENTIMENT WATCH

RBC revises outlook for U.S. stocks – and it’s not alone

Royal Bank of Canada has become the second major bank in less than a week to raise its year-end target for the S&P 500, as the blockbuster first-quarter earnings season continues to roll out.

RBC follows Credit Suisse, which bumped up its target on April 30. Even Citigroup, one of the most bearish of the big Wall Street banks, is sounding a little more optimistic about where the benchmark U.S. index may be heading later this year.

Lori Calvasina, head of U.S. equity strategy for RBC Capital Markets, on Tuesday lifted her 2021 S&P 500 target to 4,325, up from the 4,100 prediction she issued in January. That came alongside her S&P 500 earnings per share forecasts rising to US$187 for 2021 and US$200 for 2022 (up from US$177 and US$193, respectively). (…)

Last week, Credit Suisse analyst Jonathan Golub raised his price target to 4,600 from 4,300 to reflect higher EPS estimates for 2021 and 2022. (…)

Citi’s top strategist, Tobias Levkovich, remains decidedly more cautious on where stock prices will head next, expecting stocks to end lower than current levels. Yet, in a note on April 30, he cited “a variety of upside risks,” which include significant fund flows into stocks, more impressive earnings and additional monetary stimulus. “Admittedly, first quarter 2021 results may force our year-end S&P 500 objective closer to the upper end of our 3,600-4,000 trading range,” he said. (…)

WATCH YOUR BACK!

Data Show Demand for Butt Implants Soared During the Pandemic

(…) Botox and soft-tissue fillers remained the most popular overall. But the biggest riser was butt implants, up 22%, from 970 to 1,179. (Implants are what provide volume; a butt lift merely turns a droopy pancake butt into a toned pancake butt.)

Dermatologist Ava Shamban points to homebound stagnation—“modern-day ‘secretary spread,’ or a general flattening of the buttocks.” And let’s not forget Instagram. “Presumably, seeing the higher, tighter rounder assets on social media or any number of reality distractions, had patients researching and ultimately scheduling procedures to give their bottom line a much-needed boost,” she says. (…)

Washington shies away from open declaration to defend Taiwan White House official says shift to ‘strategic clarity’ would carry ‘downsides’ in face of China’s belligerence

Births in U.S. Drop to Levels Not Seen Since 1979 The number of babies born in America last year was the lowest in more than four decades. Births fell 4% in 2020 as the pandemic and lower birth rates among millennials usher in an era of lower fertility.

U.S. women had about 3.61 million babies in 2020, down 4% from the prior year, provisional data from the Centers for Disease Control and Prevention’s National Center for Health Statistics shows. The total fertility rate—a snapshot of the average number of babies a woman would have over her lifetime—fell to 1.64. That was the lowest rate on record since the government began tracking it in the 1930s, and likely before that when families were larger, said report co-author Brady Hamilton. Total births were the lowest since 1979. (…)

Women typically have fewer babies when the economy weakens. Fears of getting sick, making medical appointments and delivering a baby as a deadly virus spread also dissuaded some women from pregnancy. (…)

Demographers say the data suggests that more fundamental social and economic shifts are driving down fertility. Births peaked in 2007 before plunging during the recession that began that year. Although fertility usually rebounds alongside an improving economy, U.S. births fell in all but one year as the economy grew from 2009 until early 2020.

“It’s not just Covid. It’s the fact that the birthrates never recovered from the Great Recession,” said Kenneth Johnson, senior demographer at the University of New Hampshire. “I’ve been waiting for years to see a big jump in fertility to women in their 30s and it hasn’t happened.”

(…) He said separately released provisional monthly data from the CDC showed births declined about 7.7% in December. That shows a drop that was already under way before the pandemic and accelerated once the pandemic took hold.

Millennials, born between 1981 and 1996, now account for the majority of women having children. In seeking to explain their lower fertility rates, researchers have pointed to the fact that they are marrying later in life, getting higher levels of education and are less financially secure than previous generations when they were the same age.

Provisional birthrates fell for all women ages 15 to 44 last year. That included women ages 40 to 44, whose birthrates declined 2%. The rate for that age group had risen almost continuously from 1985 to 2019, by an average of 3% a year.

The sharpest fertility declines in 2020 were among women in their late teens and early 20s. Since peaking in 1991, the teenage birthrate has fallen 75%. (…)

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GE, AT&T Investors Reject CEO Pay Plans The nonbinding votes against the proposals for GE’s Larry Culp and AT&T’s John Stankey highlight investor displeasure with what some blue-chip companies paid leaders during the pandemic.

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.  

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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.

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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.

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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.

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The Atlanta Fed’s Underlying Inflation Dashboard:

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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.

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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.

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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.

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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):

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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.”

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