The inflationary reporting is flawed; And “V” vs “U”

The equities markets last breathed last week (ended January 15th^th), with the S&P 500 falling just 1.5%; that is down from its high level a week earlier. The really bad economic data may have played a part, but then again, equity markets are as bad data as it means more stimulus (Biden’s $ 1.9 trillion plan), and markets know that many of the incentive always gets into the financial system. Nevertheless, for the economy, if the December and January data continue, it would be easy for us to have a negative GDP quarter.

The 10-year Financial Note reached a high of 1.15% on 11 January^th, 12^th and 14^th. It was 0.93% on January 4th^th, so the move up. It closed the week down 6 basis points from that 1.15% peak at just below 1.09%. While the economics of nuts and bolts indicate that disinfection is still an ongoing issue, fear of inflation seems to be the driving force in this recent upward movement, with fears such as that has been fueled by the recent price spikes in commodities.

The Economic Data

It appears that, after nearly a year of industrial unrest, the labor market has been severely damaged. The longer a body is out of work, the less likely it is to get back into work. According to the Bureau of Labor Statistics (BLS), as of December, a person is likely to be out of work for more than 52 weeks and still looking low at 7.3%. And it’s only 15.4% for an unemployed person between 15 and 52 weeks.

The number of unemployed people remains a major issue. The week ended January 9th^th saw Initial Applications (ICs) (i.e., a substitute for new layoffs) spike. The state and PUA (Pandemic Unemployment Assistance) programs rose to 1.44 million from 1.08 million the previous week, the highest level since the week of September 19. For the state-only programs, the spike the ICs at their highest since the week of August 22nd! By permission, some of this could be due to the holidays (i.e., the lull followed by the spike), but the pain in the labor market is intense. The accompanying album tells the story. The four weeks on the far left are pre-pandemic (pre-closure). The spike occurs and then the slow grinds down. Looking to the right of the chart, note flattening (lack of further upside) starting in October with a much higher move starting in December, and now seemingly spinning.

The ongoing rate of new layoffs is due to industrial shutdown / restriction re-emergence in some states while the virus is reacting and moving into an even more infectious stream. And, although we now have effective vaccines, the initial distribution seems to have been fairly smooth. (This should be given to the private sector!) Dr. Fauci says herd protection occurs at 80%. Studies show that 35% -40% either do not get vaccinated or want to wait to see if they are safe. This looks like it is moving (delaying) a return to a level of “normal.”

Given the initial stimulus of the CARES Act back in April / May ($ 1,200 / adult; $ 500 / child), much of its impact had passed by late summer / early fall. As a result, for the past few months there have been negative readings on the consumer side (70% of GDP!). Sales fell -0.7% M / M in December (a disappointing holiday season). It was the third month in a series of such declining sales. Outstanding credit card debt is falling and outstanding bank loans are flat in negative. Student debt is still the only consumer debt that grows (perhaps because the public thinks there will be some kind of “forgiveness” available in the Biden Administration).

Pent-Up Demand and Inflation

At the same time, equity markets have taken notice of the fundamental downturn as the economy is now dependent on financial subsidies from Uncle Sam, borrowed from future generations. The financial market statement has two themes:

1. Once vaccines are released, there will be a major “V-shaped” recovery due to the high demand for pent-up;
2. The large number of debts caused by the stimulus loans (and more yet to come) coupled with rising commodity prices will cause inflation in the short term (hence the increase in the Treasury yield curve).

Pent-Up Request: We all know that the economic pain is in the services sector; that is where consumption has been lost. Ask yourself: Do you “make up” for all the restaurant food you missed? Will you go to the sports park more often than usual because you didn’t go this year? Are you going to fly twice as much as you used to because you haven’t been flying since March?

The lost spending in services is gone forever; it will not be made up. While consumers may go back to something close to what they did before, they are not going to make up for the services they missed. And it can be argued that, since consumers have invested heavily in the topic of “cooking at home” (remodeling the kitchen, buying new pots / pans, appliances, Tupperware, and cookbooks), they are not likely to eat out as much as they used to. As with many other services, ie, the “new routine” will be different with greater savings and self-reliance.

In addition, as explained in a previous blog, consumers, backed by more than 100% revenue from Uncle Sam, changed their spending towards products and away from the closed or restricted services department. The cost of items such as furniture, appliances, home improvement, autos… has been well above average. ”Therefore, in a situation where there is a slight return to“ normal, ”consumption of such goods, at least in part if not completely, corrects the return of spending on services. Therefore, I can strongly argue that the “V” -shaped revival expected sometime in 2021 will turn out to be more of a “u”. “That is against the norm now dominating the minds of equity investors.

Inflation: From an economic theory point of view, the fear of inflation today is strange.

• Commodity prices are rising and, as a result, the report says, inflation is coming. Commodity rounds occur every four or five years and do not really cause inflation unless the price spikes are bad (1970s oil crisis lie). Supply constraints usually occur causing prices to rise and then new supply pushing prices back. In addition, product weight in the CPI is very low, especially compared to service weight;
• Rents, for example, weigh 30% in the CPI. They are clearly spoiling. Medical care costs, almost always rising, fell -0.1% M / M in December and have now fallen for three consecutive months. That three-month fall is the first in the series’ history, dating back to the 1950s. Truck (transport) costs fell -0.1% M / M in December, are down in four of the last five months, and have fallen -3.5% Y / Y;
• Core CPI in the US rose + 0.1% in December. Cleveland Fed’s five-year inflation expectation model was at + 1.24% in December. For context, that inflation measure was + 1.64% last January (2020) and + 1.87% in January 2019.

Where does the fear of inflation come from? I am asked to look at the current federal deficit, the proposed new Biden package ($ 1.9 trillion) and the inevitable “infrastructure” package (at least another $ 1 trillion ). With all this debt, rates must rise as supply exceeds demand at today’s levels.

For an answer: Look at the chart of 10-year landlord results. At 1.12% (1/14/21), the rate on the 10-year US Treasury, the world’s gold standard, is almost twice as high as Greece at the waste level, and close to Italy and Spain at waste level. Take a look at the negative rates on the stronger European countries: Germany, the Netherlands, and France. Tell me that money owners, all over the world, are not going to the US Treasury paper! Levels cannot rise much in this environment. No wonder the Treasury auction last week (week 10 January)^th) so successful.

Conclusions

The federal government can and will print money and loans from the future. For equalities, in today ‘s world, it does not matter how bad the labor / labor market is because the unemployed have an income through a similar incentive. without stopping. But that will end when more and more incentives become less and more effective. The greatest danger is growing as a third world country. Today’s markets still don’t care about that – that’s for another day / another politician. All highly satisfied equity investors think they are smart enough to ‘get out’ beforehand. Trust me – they are not!

The inflation statement, at least for the short and medium term, is, therefore, a statement, as is the “V” recovery. With the “value” in the output of the US Treasury compared to the rest of the developed world, and, as inflation is likely to be “reported” as time passes and inflation disappears still comatose, it is difficult to see the Treasury yield curve rising much from normal levels, based on the “normal” economic fundamentals.

Then again, we don’t live in a “normal” world!