Cheap Money, Inflation & The Fed

By Jeff Kelly on September 3, 2021

“We can easily forgive a child who is afraid of the dark. The real tragedy of life is when men are afraid of the light.”

– Plato

The Labor Day weekend brings us to the traditional end of Summer. I love the fall and leaving Summer behind is something I’m happy to do after the last three months. The markets have been strong while the news flow has been difficult to say the least. As we move into the last third of the year three things stand out in my observations.

The first is the overwhelming evidence of inflation in the system. Some is due to the easy money posture of the Fed. Some is due to supply chain disruptions and some is due to coming out of a pandemic. Today one of the big three car manufacturers announced they will be shutting down production for two weeks. It’s not because they lack demand, they can’t get the parts (specifically semiconductors) to make the cars. The current inventory of unsold new cars in the U.S. is 190,000. It would historically be around 1,000,000. Fewer cars and more demand leads to higher prices. Businesses need employees and to get them you need to pay more. We saw this in the jobs report today. Wages were up at a 4.3% annual clip. Recent speeches by the Fed and world events have also led to a lower U.S. Dollar. A lower dollar leads directly to higher commodity prices. These higher prices have some staying power.

The second thing that stands out is the ability for companies to borrow money at rates that lower the cost to do projects and deploy capital. A Real Estate Investment Trust last night borrowed 700,000,000 Euro, about 800 Million dollars U.S. via a bond maturing in 2030. They are paying a .50% interest rate on this debt. It doesn’t take a crazy rate of return to make projects profitable when money is this cheap.

The third factor in the markets is the amount of buying demand that could be unleashed between now and the 1st of the year. We are coming into a period where spending typically increases. The fall season and the holidays may see demand at levels we haven’t experienced before. While many arears such as real estate have seen significant recoveries this year other recoveries are still in process. Travel and leisure have pulled back over the past couple months as the Delta variant reduced demand. We could be seeing a peak in these cases. If that occurs we will see the areas that have languished will begin to emerge. This will drive more jobs and spending. This will also push inflation even harder.

It’s likely the Federal Reserve will use today’s weak jobs report as a reason to wait on tapering their bond purchases. This will allow the party to heat up even more. We plan to be ready for the effects as we move through the balance of 2021.

Charts From The Week Past

Pending Home Sales

• Softish report in July U.S. Pending Home Sales Index coming in at 110.7, which declined about -1.8% M/M and -8.5% Y/Y (generally leads Existing Home Sales by a couple of months)
  • This is at a level that is still above 2019 levels
• Very sharp deceleration in August Dallas Fed Manufacturing General Activity Index, which came in at 9.0 versus 27.3 in July
  • Within the survey, it wasn’t all bad news with many indicators still above average / normalized levels and price indicators, of course, remaining near all-time highs

Source: Bloomberg, National Association of Realtors, Hedgeye

U.S. Citigroup Economic Surprise Index trade to new lows.

Yield move higher. One of these will be wrong in the coming months. I’m betting the surprise Index starts to move higher.

Source: Bloomberg, Strategas

The confidence that business will be better in 6 months is back to 2020 lows reports the Conference Board.

Source: Bloomberg

S&P 500 Index Seasonal Chart.

September is tough.

Source: @EquityClock.com

Shanghai to Los Angeles freight Container rate per 40 Foot Box.

Parabolic move.

Source: Bloomberg

It seems counter intuitive but debt to equity at lower end of historical range.

Source: Federal Reserve

Eurozone Consumer Confidence remains high.

Source: Bloomberg

Evergrande Bonds, one of the largest property developers in China continue to trade lower.

Now about 40 cents on the dollar.

Source: Bloomberg, Strategas

No problems in High Yield credit.

Spreads at the lows for the past couple years.

Source: Bloomberg, Strategas

Vaccine hesitancy slowly declines. 

Source: Axios/Ipsos Coronavirus Index, Aaron Blake/Washington Post

Average taxi speeds were up in Manhattan in 2020.

Maybe the only positive I’ve seen from 2020.

Source: New York State department of transportation

Default rates on Corporate Bonds well below historical rates.

Currently 2.00% vs 3.51% historically.

Source: JP Morgan

The largest stocks have been going strong while much of the market has struggled.

Source: Bloomberg, Strategas

Source: Bloomberg, Strategas

U.S. now 25th on the World Democracy Index.

It’s not hard to see why. State Legislators and Governor’s work daily to overturn public votes.

Source: The Economist Intelligence Unit

If the Federal Reserve does taper will it affect big tech?

The chart below indicates it will.

Source: BofA Global Research, Bloomberg

Options expiration is September 17th.

We will likely see some volatility around that time.

Source: Bloomberg

The consistent “spacing” of short-term volatility pockets also argues for some rough waters around the expiation on September 17th.

Source: Nautilus, FactSet

Unstoppable Big Tech?

Barron’s Magazine covers have often marked tops and bottoms in various markets. Will it work again? We’ll see.

Source: Barron’s

The decline in oil price volatility argues for higher oil prices.

Source: Hedgeye, StockCharts.com

Goldman Sachs sentiment indicator is at a one-year low.

Historically we don’t see major tops with sentiment this low.

Source: Goldman Sachs

German CPI Hits 27-Year High, While Eurozone Sentiment Decelerates Marginally.

• Another inflationary move in August Germany CPI, which came in at +0.1% M/M and +3.9% Y/Y versus +3.8% in July → This is good for a 27-year high

Source: Hedgeye

At +8 to 1 advancing stocks vs. declining stocks, breadth was solid across the board last Friday… but the real star of the show was down the capitalization scale, with Russell 2000 advancers vs. decliners coming in at a very good +18 to 1.

That marks the strongest internal day for small-caps since April of 2020, and after an 8- month consolidation, should serve as a spark to kick the group back into gear. Seasonality makes the timing of any call a little tricky here, but as we’ve noted over recent weeks for groups like Financials and Industrials, ETF flows have also reset for small-caps… IWM inflows were extreme earlier in the year, before getting washed out this summer (positive from a contrarian perspective). Last week’s sharp contraction in HY spreads (largest w/w decline since February) is also a positive for small-caps.

Source: Bloomberg, Strategas

Just 25 mega-cities produce 52% of the world’s urban greenhouse gas emissions

It’s not hard to see a common denominator here.

Source: Frontiers Science News

Weekend Homework

Fascinating Article on Wildfires in the West

Seems like democracy is worth fighting for.

Texas sees a 550% spike in Poison Calls as Folks take a Horse and Cow De-wormer.

Iron Cowboy is an endurance memoir in the tradition of Dean Karnazes’s Ultramarathon Man—a lifetime’s worth of intensely lived experience packed into twenty riveting chapters. Readers will discover the secret to redefining their own goals and achieving great success. When James Lawrence (aka the Iron Cowboy) announced his plan to complete 50 Full Distance Triathlons in 50 consecutive days in all 50 states, the only person who believed that he could pull it off was James himself (and his wife, Sunny). An Ironman consists of a 2.4-mile swim, a 112-mile bike ride, and a 26.2-mile run. In Lawrence’s case, he would have to complete those distances and then make it to the next state in time to do it all over again the next day. Even Lawrence’s coach didn’t think he could do it; he penciled in another event the day Lawrence was supposed to complete the challenge.

• Writing and earning on Substack
• Going from ‘Platform owning people’, to ‘People owning platforms’
• The end state of publishing
• Tips for new writers
• Getting good at cold outreach
• And a LOT more!

Linda Lebrun – The Substack Economy (EP. 59)

Have a happy, healthy and safe holiday weekend.

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