Nicholas Glinsman | January 12th, 2022
· Stimulus/BBB Hybrid for 2022 Commentary (by Albert)
· The Fed will finally tighten monetary policy, but is the world now sitting on a time bomb?
· Inflation watch – CPI
· US Trucking Trade Group Warns of Continued Shortages, Bottlenecks
Stimulus/BBB Hybrid for 2022 Commentary (by Albert)
As Joe Biden’s economic agenda slips away and the midterm election season is about to ramp up, there is a last ditch effort by Schumer and Pelosi to pass at least some parts of BBB. The economic realities are now starting to merge with the political realities. However, the fiscal cliff in March (February 18 is the date of record when the CR expires) affords the opportunity for Congress to pass BBB in a hybrid bill, combining it with a stimulus package for businesses, in particular small and medium businesses. The GOP, being self-declared champions of SMEs, cannot really stand in its way, although we may need to see a stock market correction (something in excess of what we have just experienced) in order for them to justify voting in favour thereof, especially given the narrative surrounding fiscal and inflation – imagine more fiscal after today’s 7.0% CPI figure.
The media are focused on the Democrats’ Voting rights proposal and the related demand to end the filibuster, but we believe that this is simply a decoy to distract from BBB negotiations going on in the background without the media circus revolving around key Senators’ chambers. Our Manchin-Sinema wall from January 2020 remains intact, along with the continued reticence of those Democrats, who are vulnerable in this year’s midterm elections, However, there will be a moment where votes will need to on the record or Biden’s economic agenda dies in the halls of the Senate, and that is where we could see the shift.
In the event that Congress passes a hybrid BBB/stimulus bill, look for an important threshold figure of $2 trillion. That line in the sand could allow the Fed to raise rates in May by 25 bps, rather than March, which could well clash with rising fiscal cliff tensions. This has been the messaging for quite some time.
The Fed will finally tighten monetary policy, but is the world now sitting on a time bomb?
Hell hath no fury like a central bank fighting to regain lost credibility. If 2021 was the year of ultra-loose money and rampant inflation, 2022 is the year of retribution when chickens come home to roost. The US Federal Reserve has switched almost overnight from friend to foe. The latest Fed minutes compound the policy shock, with tremors spreading through the global bond markets and the interlinked nexus of credit contracts and exchange rates. Everything is tightening.
Today markets are pricing the first rise within a couple of months, the start of four staccato hits in rapid succession this year. Worse yet for tech stocks levitated by quantitative easing, the Fed is not only itching to end fresh bond purchases vivacissimo, but also intends to start selling down its $8.8 trillion portfolio within months. Quantitative tightening (QT) is coming much sooner than expected. Evercore ISI expects the Fed to start QT in June and quickly to reach cruise speed of $750bn a year. If inflation persists, there could be a rate rise every meeting. This is what happens when a central bank falls badly behind the curve.
Omicron is almost a market irrelevance at this juncture, although there could still be a surprise from zero-Covid China as an unstoppable variant meets a defective vaccine in a ‘virus-naive’ population. That aside, the critical economic and market variable as we head into 2022 is what central bankers do about a wage-price spiral of their own making.
Last months jump in US CPI to 6.8% was the straw that broke the camel’s back, and today we got a 7.0% print. This has been complimented by the 23pc rise in house prices over the last year, more extreme than the subprime bubble before 2008.
It is as if the FOMC looked into the mirror and collectively asked itself how it could justify injecting further emergency stimulus into a red-hot economy growing near 7pc (on the Atlanta Fed’s instant GDP tracker). Or asked how it can justify the most steeply negative real rates in modern history when the economy has hit capacity constraints and unemployment is at 3.9pc.
Stock markets normally cope fine when the Fed starts to raise rates, interpreting it as a sign of economic health. Deutsche Bank’s Jim Reid has shown the S&P 500 has risen 7pc on average over the first nine months during post-war episodes. Markets climbed steadily higher for three years after the Greenspan Fed first raised rates in June 2004 and kept raising them 13 times.
However, debt ratios are higher today and QE has changed market chemistry. Chairman Jay Powell’s attempt to unwind asset purchases by $50bn a month in late 2018 set off violent moves on Wall Street and led to global contagion. He capitulated. The optimistic view is that this time is different. Goldman Sachs says there is a safety cushion of $1.5 trillion of commercial bank liquidity parked in short-term ‘reverse repos’. This could be used to soak up US Treasury bills and cover some of the US government’s vast funding needs.
Matt King of Citi begs to differ. What drives asset prices in our brave new world of QE is the ebb and flow of fresh purchases. Markets are more sensitive to changes than to levels. As the flow of new money creation has dwindled, the rally has become dangerously narrow. It’s best not to linger too long in crowded spaces. Michael Hartnett from Bank of America says we’re seeing the end of the “liquidity supernova”. Central banks have been buying $26bn in assets for every trading day since Covid began. They added $10.5 trillion from 2020-2021. They will subtract $0.6 trillion this year.
Stock market breadth has been deteriorating. Two thirds of global equity indexes are currently trading below their 50-day and 200-day moving averages, a sign that the late bull market is gradually breaking down. Michael Hartnett said a hint of serious tightening has already burst multiple bubbles, in cryptocurrencies, leveraged private equity, and a swath of less plausible tech companies, with the deflationista Cathy Wood’s Ark Innovation down 47pc, the Hang Seng tech index down 51pc, the SPDR biotech index down 42pc. The QE winners are turning into preemptive QT losers.
The FAAMG quintet of Facebook, Apple, Amazon, Alphabet, and Microsoft have yet to buckle but they too are vulnerable to a profits squeeze. They have ballooned to $10 trillion of market capitalisation during Covid. Apple alone is up $2 trillion since lockdowns began. The five together almost equal the combined GDP of Japan, Germany, and the UK. They have not paid much tax and therefore enjoy scant political goodwill. They will face a triple headwind: tight money, a regulatory sledgehammer, and tax collectors. When these giant redwoods wobble, we will find out whether this is a correction or a secular bear market.
At some point there will be a soul-searching interrogation of its staff model and the New Keynesian Weltanschauung of its academic economists. The 1970s-esque wage-price spiral so adamantly denied all through last year is now in plain view.
Cynics think Jay Powell was politically captured last year by the White House, acting as a fiscal agent for Joe Biden’s $6 trillion spending plans. The Fed set a threshold for monetary tightening, regaining all the jobs lost during Covid, that could not plausibly be reached before inflation was already out of control. Some commentators believe that Powell was misled and is now determined to prove that he is not a political stooge. From my perspective, I will believe that when I see it.
The root problem in Fed culture runs deeper. Lord Mervyn King, ex-Governor of the Bank of England, says “the intellectual foundation of central bank policy” has been found wanting. The economic fraternity has fallen in love with its ideas, like the ‘scholastic’ monks of the Middle Ages, impervious to the radical uncertainty of the real world. The masters of money have ignored money itself. The Fed has disregarded the implications of a 30pc rise in the broad M3 aggregates since the onset of the pandemic. “Money has disappeared from modern models of inflation. Common sense suggests that when too much money is chasing too few goods the result is inflation,” he said.
The Fed itself published a paper in September that marks the moment when the New Keynesian ideological order began to crumble from the inside. The paper began with a quote from Dashiel Hammett: “
It said mainstream economics is “replete with ideas that ‘everyone knows’ to be true, but that are actually arrant nonsense”. Among the false beliefs is the Fed assumption that inflation expectations give prior warning of actual inflation. The paper said they do not. This error is why US inflation is today running at a 40-year high.
Deutsche Bank says the Fed has led the world up the garden path and is now “sitting on a time bomb”, with potentially “devastating effects” for the most vulnerable in society. That is a little harsh. You could argue that the Fed has cleverly inflated away the explosive debt costs of the pandemic. Steeply negative real rates under financial repression amount to wealth confiscation from bondholders, who have broad shoulders. If inflation subsides again this year, the central banks may just get away with it. Right now it looks as if their Faustian bargain has closed in on them.
Inflation watch – CPI
So, CPI for December came in at 7.0% yoy, the highest since 1982. Core CPI was 5.5% yoy.
Again, the BLS is badly miscalculating rent component by saying that OER was up 3.8% yoy (still the highest since 2007) and that Rent of Primary Residence was higher by 3.3% yoy.
Apartment List said this week that 2021 rents were up by 17.8%. If the latter was punched into today’s calculation, CPI would be above 10%.
However, below might be the most important inflation chart right now. 40% of the public has less than $1,000 of savings and rents. They did not have home prices and/or stocks to “bail them out” from higher prices. Their position worsened in December (bottom panel).
They might not know who the Fed or Jay Powell is, but they do know who the President is. And they have been killing him, especially his disapproval rate (orange). In turn, the administration is putting enormous pressure on the Fed to “do something” about inflation.
US Trucking Trade Group Warns of Continued Shortages, Bottlenecks
US trucking will remain plagued with equipment and driver shortages this year, according to an industry trade group. Though freight growth is slowing from last year’s pace, it is leveling off at a very high level, and in some sectors it can continue to grow,” according to Bob Costello, chief economist for the American Trucking Associations. The industry is short about 80,000 drivers even as pay has jumped, and truckmakers can’t keep up with demand. “Supply remains challenged this year in the trucking industry, even if we do add some more drivers.”
For customers, that all adds up to ports remaining congested as manufacturing rebounds, companies seek to rebuild inventories and consumers continue to spend at high levels. Spot freight rates — which rose 29% last year, according to KeyBanc Capital Markets — will likely remain elevated.
But new entrants who paid “outrageously high” prices for used equipment could face a shock at some point, Costello said. “I am worried about what happens to those folks when we get out of this environment of really tight capacity and booming freight,” he went on. “You could see a lot of capacity exit this industry in the next downturn.”
As for the global port congestion, it is getting worse. Sea-Intelligence has analysed data from the November 2021 issue of the Global Liner Performance report to calculate how much vessel capacity was being effectively removed from the market due to vessels being tied up on seemingly interminable queues around the world. Overall, 11.5% of the global capacity has been taken out of the market due to vessel delays in November 2021, a slight improvement from 12.3% in October 2021, according to Danish maritime data analysts. “However, it seems that there is no sign of imminent improvement, while the normal state of affairs in the market is that 2% of global capacity is ‘trapped’ in delays somewhere in the world,” noted Sea-Intelligence.
2021 was a year where demand grew 7% year-on-year, partly due to the downfall in early 2020, and at the same time capacity effectively was reduced by 11%. Furthermore, Sea-Intelligence used the bi-weekly customer advisories from the major South Korean container carrier, HMM, to calculate a terminal congestion index.
For Europe, the Danish analysts see a situation that has been steadily getting worse since the start of October, with no signs of any improvement, or even levelling out. This also implies that we might well expect to see a continued upwards push on freight rates on this trade, as the congestion is likely to have a negative impact on reliability, and hence in turn on available capacity, that all the available data show that congestion and bottleneck problems are worsening getting into 2022, and there is no indication of improvements.
The above figures show the results of Sea-Intelligence’s terminal congestion index for North America and Europe. For North America, the slight improvement after Golden Week was fully reversed by the end of 2021 and a new record was set on 30 December, albeit with a slight improvement again on 6 January, driven by improvements in Savannah and Charleston.
Here are some more graphics highlighting the increasing pressures in the US ports:
And for more evidence, let’s take a dive at some of the freight rates gauges, here is the Drewry Hong Long-Los Angeles Container Rate per 40-foot Box:
The Drewry Hong Kong-Los Angeles container-rate benchmark soared 162% on average in 2021 and ended the year on a high at $8,510 per 0-foot container. Supply-chain constraints have driven rates to levels generally seen as unsustainable and thus created heightened volatility. A surge in the omicron variant is adding to the challenges of an already stressed supply chain and will likely lead to more lockdowns and delays for the liner industry, ports and shippers this year. Supply-demand dynamics should support historically strong rates and earnings for the industry, even as rates moderate from these lofty levels.
Spot-rate volatility influences profitability for liner operators including Mitsui OSK, Maersk, Zim and Orient Overseas, and also for railroads. Truckers, freight forwarders and intermodal marketers are also impacted.
And here is the WCI Spot Container Rate (USD/FEU):
Spot rates for 40-foot containers increased 1.1% sequentially in the week ended January 6th, based on the World Container Index (WCI) data. Rates will likely move higher in the coming weeks as shippers look to move freight ahead of the Lunar New Year, which begins February 1st. These rates should moderate thereafter, but they will likely remain well above historical levels throughout 2022. Omicron outbreaks across China could put further upward pressure on rates from the volatility created by its zero-tolerance policy toward the virus and lower efficacy rates of it vaccines.
And finally, below, you can see ContainerLiner Volume declined by 2.3% in November for the first drop in 14 months, according to CTS data:
Weakness has been concentrated on secondary lanes since the three largest routes, Asia-North America (up 6.%), Asia-Europe (up 4.2%) and Intra-Asia (1.3%) experienced growth. They accounted for about 49% of the volume in 2021 through November. Total volume increased 7.2% year-to-date, which is expected to moderate to 4.2% this year, according to Clarksons. Global liner rates rose about 99% in November and should remain strong heading in to the Lunar New Year (February 1st), at which time you should see them moderate from these unsustainable levels.
Commodity Returns for 2012 to 2021