Nicholas Glinsman | January 10th, 2022
· Making sense of Friday’s employment report
· Last week’s epic action in the bond markets reviewed
· Supply-chain issues continue
· New year brings new all-time high for shipping’s epic traffic jam,
· Inflation watch – used car prices are still moving higher
· Crude oil – Discretionary speculative money has little or no exposure
· The House is gone for the Democrats at the midterms, but now the chances of retaining the Senate majority is likely also gone
· Joe Biden’s Potemkin presidency
Making sense of Friday’s employment report
Making sense of the latest reports from the Bureau of Labor Statistics is not easy. The BLS says that employers report they created 199,000 jobs in December, while households report that 483,000 unemployed persons found work. The disappointing employer report suggests a weak labour market, while the fall in the unemployment rate from 4.2 per cent in November to 3.9 per cent in December, and the recent rise in average hourly earnings at something like a 6 per cent annual rate, suggests a strong one. A labour market this tight relieves the Federal Reserve Board of fears of triggering a recession if it raises interest rates and unwinds its bond and mortgage-buying programmes.
The American economy ploughs forward, surmounting obstacles created by the new Covid variant laying a million Americans low every day. Well, not very low, at least not for the vaccinated and boosted, but with short-lived symptoms akin to a bad cold. Consumers are buying stuff at a rate that has the world’s trade routes cluttered, with about 1,000 vessels struggling to land their cargoes and send that stuff on its way to warehouses and shops. Builders are delaying accepting orders for new homes (see below article) until they can get their hands on materials and workers to meet demand. Consumers continue to spend.
There is an acute shortage of workers. Employers are so eager to hold on to staff that they tolerate about five million absences while they await the expected peak in infections, due to arrive in a few weeks, followed by a predicted rapid fall-off. Workers are so certain of the availability of jobs — between 10 and 12 million openings remain unfilled, that we are witnessing what is being called “The Great Resignation”.
Between April and September of last year, 24 million workers advised their employers to take their jobs and shove them — a record quit rate of 3 per cent. They are confident they can find a better combination of pay and working conditions elsewhere, or have joined the 1.4 million who started businesses in the first three-quarters of last year.
Workers are insisting on conditions they dared not demand before China included Covid among its many exports. Employers who, like Barbra Streisand, have “misty watercolour memories of the way we were”, are largely confined to executive suites on Wall Street. It is acknowledged by many others that working from home is part of the new normal, and that Friday is no longer considered part of the working week. JP Morgan Chase chief executive Jamie Dimon once said: “People don’t like commuting, but so what?” But The Wall Street Journal reports that Dimon now “accepts that some staff won’t work five days in the office going forward”.
Nor is it likely that workers will treat the threat of inflation with the indifference they did before the pandemic. With the rate as people experience it at 6.8 per cent (forecast to rise to 7.0% for the December release this Wednesday) , workers no longer regard the difference between nominal and real wages as something best left to academics.
Inflation likely to persist at a rate high enough to wipe out wage gains has already brought the revival of Cola — no, not the drink, but cost-of-living adjustment clauses — not seen here for decades. Both agricultural equipment-maker Deere and cereal giant Kellogg have reluctantly, after strikes, agreed to provisions that will see pay following rising prices. More such deals will follow.
Another emerging change that will make the labour market very different from the one we once knew is the revival of trade union power. That clout has been in decline, to the point were only 6.3 per cent of private sector employees are members of trade unions. However, workplace changes induced by Covid lockdowns, reports of soaring corporate profits and share prices, and union support by the Biden administration are resulting in increased worker militancy.
Graduate students at Columbia and Harvard universities struck for higher pay for teaching and research chores, undeterred by the fact that they will soon emerge into a world where they are virtually assured of monetising their degrees. Some Starbucks baristas find life behind the counter too hectic as they struggle to distinguish between a pistachio latte and a salted caramel cream cold brew. They voted for union representation in the hope of reducing work demands and adding benefits to those already received. Add to them a group of workers at Google. Backed by the powerful Communications Workers of America, they have formed a union to cope with “massive power at the executive level”; force Googleowned YouTube to remove a video address by Donald Trump; and reshape the company’s culture.
And one last piece of behavioural economics, consider, too, how workplace language has changed. Workers talk of interviewing employers — a change from the older notion that it is employers who do the interviewing. That tells us more about where bargaining power lies than any amount of confusing survey data.
Meanwhile, after the December FOMC Minutes were released, the contents of which were well known from the December meeting anyway, we are now seeing how the Fed has managed to to do something that’s rarely seen in the U.S. these days: Get members of the Democratic and Republican parties to agree.
At this year’s annual meeting of the American Economic Association, prominent economists from both sides of the political spectrum argued that the Fed is behind the curve in the battle to contain an outburst of inflation in an economy still beset by a pandemic. And while they generally welcomed the Fed’s pivot toward a tighter monetary stance and expect price pressures to ease this year, they sounded doubtful that inflation will decelerate as much as central bankers are forecasting. They saw it remaining well above monetary policy makers’ 2% target.
Among those chiming in at the three-day virtual conference that wound up yesterday: Former Treasury Secretary Lawrence Summers and ex-White House chief economist Jason Furman, both Democrats. and renowned monetary economist John Taylor and former Council of Economic Advisers Chairman Glenn Hubbard, who served in Republican administrations.
Here are some of the points on inflation and the Fed made by a number of well-known economists in panels at the AEA conference:
· Furman, a Harvard University professor, said he expects inflation to remain elevated this year, with a mean forecast of 3.2% for the core personal consumption expenditures price index. That’s above the median 2.7% forecast of Fed policy makers at their Dec. 14-15 meeting. Meanwhile, Furman saw a 15% chance that inflation will come in higher this year than last. He also averred that the three nominees that Biden is reportedly considering for the central bank’s board “are considerably more dovish than anyone who’s been on the Fed” for a long time.
· Taylor, whose monetary-policy rule has been a guidepost for central banks worldwide for years, said the Fed is “way behind” the curve. Depending on the assumptions made, he suggested the federal funds rate should be anywhere from 3% to 6%, not the near-zero percent level now targeted by the central bank. Noting that yields on Treasury securities jumped last week, the Stanford University professor predicted seeing “more of that down the road.”
· Summers, a Harvard University professor, also foresees Treasury yields rising further. “As the reality of the need for balancing supply and demand becomes clear, interest rates will rise substantially over the next year and a half,” he said. Summers got into a spirited back-and-forth with Stiglitz at the conference, arguing that the Columbia University professor was placing too much emphasis on supply-chain kinks for the run-up in prices.
· Gregory Mankiw, who was chief White House economist for Republican President George W. Bush, said “a lot” of the increase in inflation could be blamed on temporary dislocations in supply. “We also have a very tight labour market and you’re starting to see it in wage growth,” he said. The Harvard professor, who is now a self-described political independent because of opposition to former President Donald Trump, said that although inflation isn’t going to stay at 7%, he’d be “surprised” if it falls back to 2% very quickly.
· Former Fed Vice Chairman Alan Blinder said he still counts himself as a member of “Team Transitory” in the debate over inflation. But Blinder, who served in the White House under Clinton and now teaches at Princeton University, has said it could take some time for “bottleneck inflation” to ease. Fed policy makers have been slow to recognize the bubbling price pressures in their forecasts, he’s added.
· The soft landing that Powell and his central bank colleagues are trying to engineer for the economy “will require the Fed to be both lucky and smart,” Hubbard told the conference. Pointing to inflationary pressures from rising rents and home prices and increasing wages, the Columbia University professor doubted whether the three quarter-percentage-point rate increases Fed policy makers have penciled in for this year will be enough.
· Nobel Prize laureate Joseph Stiglitz, who was chief White House economist for Democratic President Bill Clinton, called for caution by the central bank. He argued that higher interest rates wouldn’t solve the supply snafus and global shortages that have helped push up inflation. In addition, labor-force participation remains well short of what it could be.
And lest we forget Bill Dudley, whose piece today for Bloomberg is entitled “The Federal Reserve Needs to Get a Lot More Hawkish”. Key excerpts from this op-ed include:
“Yet Fed officials remain incongruously dovish over the longer term. Consider their latest set of projections, released following the December meeting: In an economy with above-trend growth pushing unemployment below the level consistent with stable prices, the median forecast has inflation melting away, falling to 2.6% in 2022, 2.3% in 2023 and 2.1% in 2024. This could be justified if they expected to tighten monetary policy sharply, but they don’t. Their median projection for the federal funds rate at the end of 2024 is just 2.1%, well below the level they deem to be neutral.
This is a remarkable, even surreal forecast: Inflation won’t be a problem, even if the Fed does little to rein it in…
…More likely, the Fed will have to leave the enchanted forest. This means becoming a lot more hawkish, both in the near term and over the next few years. As the economic recovery pushes unemployment unsustainably low — something that may already have happened — wage growth will spill into consumer price inflation. The Fed will have to respond by taking interest rates above neutral well before the end of 2024.
How high might rates go? If inflation is running above the Fed’s 2% target, they must adjust both to compensate for higher inflation and to achieve tight monetary policy. So if inflation subsides to 2.5% to 3% as supply chain issues dissipate, then a federal funds rate peak in the 3%-to-4% range seems reasonable.
This is a much steeper path and higher peak than financial markets currently anticipate — roughly double what Eurodollar futures imply. Markets are starting to catch on, but only very slowly. At some point, the reckoning is likely to become disruptive, triggering a sharp rise in interest rates and a large drop in bond prices. The “taper tantrum” may have been merely delayed, not avoided.”
Last week’s epic action in the bond markets reviewed
Last week’s bond market price action was historically significant, and indeed, at this moment, it continues today. When discussing bond market moves, I believe the best metric is total return. It encompasses both price change and the level of yields (accrued interest). The following charts show calendar week total returns. That is, the week ending Friday (Thursday if a holiday).
The 30-year data goes back to 1973 and last week was the worst calendar week total return in at least 49-year history! The long-bond lost 9.35%!! If this was a year, a 9.35% total return loss would be the 5-year worst year ever. Impressive for five days of trading.
The 10-year note finished it worst week in 42 years, with a total return loss of 4.24%. Only Feb 1980 saw a bigger loss for a calendar week loss (Volcker inflation panic, funds rate headed to 21%) -4.24% would also be the fifth worst YEAR ever.
Finally, Tte calendar week total return for the Bloomberg 10+ TIPS Index was -6.09%. This marks the third worst week ever.
If you cannot read them clearly, the note above each one of the other marked weeks were significant:
· 3/13/20, -14.39% = peak COVID Panic Fed buying $100B/day of bonds
· 9/13/19, -5.19% = The week the repo mkt blew up
· 6/21/13, -5.12% = The height of the taper tantrum
· 10/10/08, -7.13% = Lehman failed.
Why was last week so epic?
Well, it seems that the whole bond market finally realized that easy money is over and now expects QT is coming. For weeks, many bond players argued the following table was wrong, and that the Fed would go less than 4 hikes, along with no QT. Well, not after last week’s FOMC minutes, even though all this information was clearly stated by Powell in his press conference after the last meeting.
What about the TIPS market and narrowing break evens? Well, as the second chart below shows, the Fed took over this market. They now own 25% of this market, up from less than 10% pre-pandemic. The left chart shows the Fed has bought more TIPS than the Treasury issued the last two years!!
TIPS are no longer a market signal about inflation expectations, as the Fed ruined this with its big footprint. TIPS are flow driven and flows are dominated by expectations of the speed of the Fed printer.
So, 3 or 4 hikes coming? QT coming? The most vulnerable market to the Fed printer gets killed. TIPS yields soar and breakevens fall. Again, not a signal about inflation. A signal about a loss of Fed liquidity coming.
Simply put, the bond market saw one of its worst weeks in history because bond market players finally “got it” that the Fed is going to end liquidity. This kicked off a big the scramble to get out and not be the “bond bag holder” when the Fed printer is turned off.
This naturally begs the question, what about the stock market? The S&P was down -1.9%, hardly an epic week. What is going on here? Hate to say it, but the stock market is NOT a leading indicator among financial markets. Or the stock market turns last:
· 2002 it bottomed AFTER the recession ended (Nov 2001) for the first time in 100 years
· 2007 it peaked after housing/bond market peaked in 2006
· 2009 stocks bottomed after the bond market in credit bottomed in late 2008.
So, if the bond market is having epic convulsions in the wake of the Fed’s printer being turned off, do not take solace that the stock market “doesn’t get it.” This is how financial markets turn, the stock market often stays too long and turns last.
Supply-chain issues continue
Just consider this article from the weekend Wall Street Journal, Supply-China Issues Leave New Homes Without Garage Doors and Gutters. Here are some pertinent excerpts:
“Supply-chain backlogs are roiling the new home market, upending efforts to accelerate construction, limiting home-buyer choices, and causing some new owners to move into unfinished homes. Home builders have increased activity in the past year in response to robust home-buying demand and a shortage of homes in the existing-home market. In many cases, the surge in demand in late 2020 and early 2021 overwhelmed builders, forcing many to halt sales in some markets while they caught up.
Now the industry is struggling with global supply-chain woes. Pandemic-related factory closures, transportation delays and port-capacity limits have stymied the flow of many goods and materials critical for home building, including windows, garage doors, appliances and paint. Freezing weather and power outages in Texas in February led to a shortage of resin, which is used in many home-building products.
While supply-chain delays for some products showed signs of easing at the end of last year, builders say it is still taking weeks longer than normal to finish homes. About 90% of home builders surveyed by housing-market research firm Zonda in November said they were experiencing supply disruptions, up from 75% in January 2021. Delivery delays can cause a domino effect of rescheduling work crews, which is worsened by a shortage of skilled tradespeople in many markets.
Many builders so far have been able to pass increased material costs along to home buyers. But with home prices higher than ever—the median price of a newly built home in November rose 18.8% from a year earlier to a record $416,900—some builders are concerned about pricing out potential buyers…”
New year brings new all-time high for shipping’s epic traffic jam,
Let’s start off with the current map of the US coastal system:
The holiday rush may be over, but the offshore traffic jam of container ships is still getting worse, and the volume of inventory on the water (thus unavailable for sale) is still increasing. As 2022 begins, import volumes remain very strong ahead of China’s Lunar New Year holiday, concerns are mounting about omicron-induced dockworker shortages at U.S. terminals, and the number of container ships waiting for berths in Southern California has — yet again — hit a new high.
A record 105 container ships were waiting for berths in Los Angeles and Long Beach on Thursday, according to data from the Marine Exchange of Southern California. Of those, only 16 were in port waters (within 40 miles of Los Angeles and Long Beach) and 89 were loitering or slow steaming outside the newly designated Safety and Air Quality Zone, which extends 150 miles to the west of the ports and 50 miles to the north and south. Ship-positioning data from MarineTraffic confirms that most of these vessels are off the Baja peninsula.
There are now more than three times as many container ships waiting for LA/LB berths as there were at this time last year, 11.6 times more than on June 24 (the low point for last year), and 31% more than on Oct. 24, when online searches for the term “supply chain” peaked and the ports of Los Angeles and Long Beach announced a new Biden administration-backed congestion fee plan.
Because ships vary widely in size, a more telling indicator than the number of ships is total capacity of vessels in the queue. The vessels waiting for LA/LB berths on Thursday (including container ships and general cargo ships with containers aboard) had an aggregate capacity of 815,958 twenty-foot equivalent units, according to Marine Exchange data. To put that in perspective, that is 6% higher than the combined imports of Los Angeles and Long Beach in the entire month of November. It is 9% higher that the capacity of ships waiting offshore at the end of November (745,305 TEUs) and 28% higher than capacity off LA/LB at the beginning of November (637,329 TEUs).
In Northern California, the port of Oakland experienced heavy congestion in Q2 2021, after which queues disappeared when carriers slashed services. But services are being added back and anchorages are refilling. As of midday Friday, MarineTraffic data showed eight container ships anchored in San Francisco Bay and one more loitering in the Pacific. An additional four container ships were waiting for berths in Seattle/Tacoma in the Pacific Northwest. And over on the Gulf Coast, five container ships were anchored or loitering off the shores of Houston.
On the East Coast, the queue off Savannah, Georgia — which at one point last year reached 30 ships, second only to LA/LB’s — was down to just two container vessels. However, queues have grown to the north. There were six ships waiting off Charleston, South Carolina, and an additional four waiting off Virginia.
The ports of New York and New Jersey are now home to the largest queue on the East Coast. As of Friday, MarineTraffic data showed 11 container ships offshore, bringing the grand total waiting for berths along all three U.S. coastlines to 146.
Inflation watch – used car prices are still moving higher
In July, Main Street Media and Tweeter big brains were saying that the peak was in for used vehicles…
well, have a look!
Crude oil – Discretionary speculative money has little or no exposure
To explain the following chart, the speculative length in the market is 600mb below the Dec19 futures, and 20mb below the Dec 20 futures equivalents (highlighted by the 2 red arrorws). If you remove index money (by its very nature, sticky money) and recent CTA length addition, the discretionary speculative money has little to no exposure on the upside.
The House is gone for the Democrats at the midterms, but now the chances of retaining the Senate majority is likely also gone
Here is Albert’s thinking:
· Warnock, depending on who is the GOP candidate is likely gone.
· Masto and Kelly are the next most vulnerable Democrat Senators.
· Hassan would follow.
· There is a good chance GOP sweep all 4.
· Demings has little chance of beating Rubio, and
· Now Johnson running again in Wisconsin takes away that opportunity for Democrats
Why such a prognosis…blame it on the big guy first and foremost.
Joe Biden’s Potemkin presidency
The one-year anniversary of the January 6 riots unfolded in a manner as dramatic as it was predictable. The Pearl Harbor and 9/11 comparisons were uttered before noon — not by some media hack on MSNBC, but by the vice president. Democrats, led by Speaker Pelosi, stood on the steps of the Capitol adorned with face masks and holding fake candles to hold a prayer vigil. At one particularly bizarre point during the day’s ceremonies, Pelosi introduced playwright Lin-Manuel Miranda, who in turn introduced cast members from his hit musical Hamilton to sing a virtual rendition of “Dear Theodosia.” If that last sentence confuses you, don’t worry: I’m also not sure exactly what I just wrote. Not to be forgotten in all of this theater was President Joe Biden, a man far more interested in panic pageantry than governing.
It’s not hard to work out why the normally hard-to-reach Joe and Kamala were bright-eyed and bushy-tailed to take to the podium on Thursday morning. After all, they were eager to be their old selves again. Remember pre-election Joe and Kamala? They were so popular and fearless. Times have changed. The Biden-Harris administration is saddled with inflation issues, border crises and at-home testing failures. However, on January 6, 2022, Biden was able to put aside his shortcomings and remind the world of his greatest asset: that he isn’t Donald Trump. That’s why the Potemkin president spent his entire speech incessantly talking about the “former guy.” If Congresswoman Alexandria Ocasio-Cortez’s theory on political criticism is true, it would appear as though Biden is sweet on 45.
Beyond fixating on the former president, Biden also made a point of insulting all of Trump’s supporters. The unifier-in-chief had no qualms about depicting the 74 million Americans who voted for Trump in 2020 as akin to the deranged rioters who breached the Capitol.
“Instead of looking at election results from 2020 and saying they need new ideas or better ideas to win more votes, the former president and his supporters have decided the only way for them to win is to suppress your vote and subvert our elections.”
This may come as a shock to Joe Biden, but Trump’s 74 million supporters weren’t all present at the Capitol on what the media dweebs are calling “J6.” Biden is implying that all of the law-abiding Americans who supported Trump in 2020 are trying to “subvert elections.” Why not just call all Republicans “armed insurrectionists” from here on out? The man who ran on empathy and healing has proven to be an expert on scapegoating, dividing and vilifying scores of millions of Americans.
Even if everything was hunky-dory in Joe Biden’s America, his speech would have still been over the top. Considering things are going about as well for the country as they are for Biden, I think it is safe to say the president overplayed his hand. Perhaps the most damning aspect of Amtrak most famous commuter’s address had nothing to do with the words he spoke: Biden’s Thursday sermon highlighted the fact that when the president wants to, he can show up. When Biden knows that his teleprompter tough talk will be met with cheers from the media, he is happy to oblige. When he can play president for the day and old-man-yell about democracy and the subversion of elections, Biden is game. Unfortunately, most other times Biden is unavailable. If there is a botched withdrawal from Afghanistan, he might show up a few days later, but don’t expect much. Who can forget the picture of the president with his head in the hands at the podium? And if you have questions on inflation, Covid-19 or gas prices, don’t be shocked when you are met with the back of Biden’s head and the sound of loud elevator music
His minions aren’t any better. On the rare occasions that Vice President Kamala Harris answers questions, they come from pre-selected journalists in sit-down interviews. Even then, she manages to bungle it. But when the VP thinks there is an issue she can easily politicize, she leaps at the chance. When news broke that border patrol agents had allegedly whipped Haitian migrants in Del Rio, Texas, Kamala ran to the closest cameraman to conduct an interview. This kind of “chumin-the-water” fodder she could tackle as Candidate Kamala, back before the world knew the depth of her incompetence. She leaned in to words like “horrible” and “thorough investigation” while gesticulating profusely for the camera man. The whole story was bogus, but that didn’t matter. The fake stories are the ones these empty suits care about. They can wax poetic and abstractly discuss injustice and hate with furrowed brows and concerned voices. They can say nothing, which is their favorite thing to say.
Biden and Kamala are like early-stage contestants on The Bachelorette: they are not in this White House for the right reasons. Sure, they enjoy throwing red meat to their dwindling fan base on CNN when an anti-Trump mood strikes. But what about the other 364 days of the year that aren’t January 6? When it comes to the real issues, the man and his right-hand are nowhere to be found. He is usually on vacation, fully masked, walking a beach with his dog. She is still trying to get her YouTube Originals career off the ground with her NASA series featuring paid child actors.
The 2021 elections proved that voters aren’t fooled by these kind of absentee ideologues. Instead voters wanted candidates who talked about grassroots issues that mattered to Americans. Republicans focused on education, the economy and crime. And despite having the entire mainstream media against them, many of these Republicans managed to resonate with voters and win. Maybe Biden and his party are convinced that their voters sit around the kitchen table at night and talk about QAnon Shaman and the symbolism of Representative Andy Kim’s J-Crew blue suit. Based off Biden’s track record one year in, the Democrats had better hope that their voters are as unhealthily obsessed with this insurrection theater as they are, because the current opinion polls show a different tale.