There's an encouraging sign that Americans view painfully high inflation as a temporary phenomenon, according to Courtenay Brown and Neil Irwin.
It comes in the form of another sharp drop last month in how steep consumers expect inflation to be in the upcoming years, as shown in the New York Fed's latest Survey of Consumer Expectations.
Expectations for the level of inflation over the next year fell by about half a percentage point in August – a historic monthly decline in the survey's nine-year history and second only to July's record-breaking drop.
Consumers' expectations for year-ahead price increases for gasoline also saw another sharp drop. Now, consumers expect gas prices to be roughly the same a year from now.
The Fed's huge fear is that consumer expectations for steep inflation will become a mainstay of the economy, which could force them to act in ways that would help inflation spiral upward.
For what it's worth, that worst-case scenario doesn't appear to be materializing.
Respondents also aren't nudging up expectations for higher wages in the future. For the eighth straight month, earnings growth expectations held at 3%.
Even as inflation expectations move in the right direction, the survey shows consumers expect inflation to be much higher than the Fed's 2% target in the years to come.
Economists expect that the CPI – out tomorrow – will show that prices fell by -0.1% in August.
Core inflation – which strips out more volatile food and energy prices – is expected to have risen by 0.3%, matching July’s pace.
“Big Short” big shot Michael Burry is repeating his warning that the U.S. stock market is in the midst of a major crash.
Burry, who’s famous mainly for his bet against subprime mortgages during the Great Recession, is equating current market conditions to the crashes in 2008 and 2000.
Burry tweeted yesterday, “Crypto crash. Check. Meme crash. Check. SPAC crash. Check. Inflation. Check. 2000. Check. 2008. Check. 2022. Check.”
The Scion Capital Management chief’s latest pronouncement comes during a period of prolonged pain for especially paper market investors.
The S&P 500 is down about 18% since January 1st (it hit -24% in mid-June), while the Dow Jones Industrial Average has plummeted about 15% (its 2022 low is -19.8%).
And the techy Nasdaq has fallen about 9% (it’s been as low as -35%) over the same period – all at or into bear territory.
Popular “meme stocks” have struggled during this virtually all-encompassing downturn.
Bed Bath & Beyond shares are down more than 51%, AMC shares have plunged nearly 70% and GameStop shares have fallen about 37% this year.
Burry has also called out weakness in SPACS – special purpose acquisition companies – which boomed during the stock market’s surge after its plunge in March 2020 but have cooled considerably over the last year.
Meanwhile, bitcoin is down more than 60% this year and has dived below $19,000.
One of the economy’s many enigmas in 2022 has been “blockbuster jobs growth during a time of very low unemployment vs. complaints of a labor shortage,” according to Courtenay Brown and Neil Irwin.
They add that since earlier in the year, it’s seemed like something has had to give. Now, new evidence suggests that "something" may have arrived.
ADP, the nation's largest payroll processor, rolled out its new measure of private-sector payrolls on Wednesday.
In partnership with Stanford University’s Digital Economy Lab, the ADP Research Institute indicator infers data based on workers added or cut and paychecks sent by its own massive client base.
The other day, it showed private employers added 132,000 jobs in August — less than half from the 270,000 in July, and the lowest reading since January last year.
The newly designed ADP report aims to capture underlying employment trends compared to its older version that essentially represented little more than a prediction of what the BLS would report two days later.
Well…today’s job report shows that 318,000 jobs were added to private payrolls last month, the lowest gain since April 2021 and well below July's 526,000, but just slightly below economists' estimate of 318,000.
The duo’s historic cross-country expedition began in 1804, when President Thomas Jefferson directed Meriwether Lewis to explore lands west of the Mississippi included in the Louisiana Purchase.
Lewis chose William Clark as his co-leader for the mission. Their treacherous adventure lasted over two years.
Along the way, they faced hostile weather, unforgiving terrain, perilous waters, bodily injury, persistent hunger, disease and both friendly and unwelcoming Native Americans.
Nevertheless, their roughly 8,000-mile trek was deemed a big success and provided new geographic, ecological and cultural information about previously unmapped areas of North America.
It was all about slow and steady.
Fast Forward 400 Years.......
And oh what a week it’s been. Let’s go back to last week for a minute. Last Tuesday the market capped off a blistering to week run, by having the S&P run “smack dab” into its 200 day moving average. Now a lot of people will tell you that the 50 and 200 day moving averages don’t carry as much weight as they used to, but they still carry some clout.
When the S&P hit that 200 day, that whole two week climb came to a screeching halt and we started heading down a bit, but nothing major. Until Friday. Friday the wheels fell off and we plunged. That carried into Monday of this week as the market puked for another big drop. Tuesday and Wednesday the market sort of “ran in place” trying to figure out if they had over reacted on the big sell down.
Meanwhile over in Wyoming at the Jackson Hole economic meeting, all the movers and shakers were talking about the economy, inflation, and interest rates. Despite several fed heads telling folks that they think rates must go higher, most of the talking heads began to tell folks that it seemed the Fed might only do a 50 basis point hike at its next meeting. (Hogwash, you’ll see why)
The American housing system is broken.
It’s bad for homebuyers and homebuilders; it’s even worse for renters.
To put it bluntly, the U.S. desperately needs more high-quality rental housing. A lot of it.
These are far different times than those of our grandparents who came home from WWII to go to college on the GI Bill and find affordable single-family homes to raise their new families in.
Today, homeownership still works for many – but doesn't work for many others, especially those who aren’t ready to settle down in one place or who don’t have an ample nest egg to tie up all their savings in.
Builders See a Housing Recession
And builder sentiment – for single-family homes anyway – has fallen into negative territory this month, as builders and buyers alike struggle with higher costs.
The National Association of Home Builders Housing Market Index dropped 6 points to 49 this month, its 8th straight monthly decline. Anything above 50 is considered positive; 49 is not.
Notably, NAHB chief economist Robert Dietz says, “Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession.”
The builders index hasn’t seen negative numbers since the start of the pandemic. Before that, it hadn’t seen negative territory since June 2014.
Of the index’s three components, current sales conditions dropped 7 points to 57, sales expectations in the next six months fell 2 points to 47 and buyer traffic fell 5 points to 32.
The biggest hurdle for buyers – like many renters – right now is affordability.
Home prices have been climbing since the start of the pandemic, and the average rate on the 30-year fixed mortgage, which had hit historic lows in early 2020, is almost double what it was at the start of this year.
Yes, home price growth has cooled somewhat in recent weeks, while mortgage rates have come down from their 6%ish highs.
But Deitz believes, “The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011.
The eternal optimist adds, however, that peaking or falling inflation and stabilizing long-term interest rates “will provide some stability for the demand-side of the market in the coming months.”
Another day, another drama, another slew of confusing data flowing out of government agencies.
The U.S. economy has created over 3 million jobs so far this year.
The number of people working as of July exceeded the total seen in February 2020, just before the economy dipped into recession, at least according to the National Bureau of Economic Research.
But it looks like the hiring binge could be winding down. In fact, many companies are now planning to cut back, largely because of the Fed’s rate hiking campaign and Quantitative Tightening to rein-in high inflation.
A new PwC survey shows that 50% of companies are planning to reduce their overall headcount.
Additionally, 46% of companies said they’re ending or reducing signing bonuses, while 44% are rescinding offers (my daughter was a recent victim).
Myles Udland believes that reducing overall headcount doesn't mean all of the respondents to PwC's survey are planning layoffs but indicates plans similar to what’s been going in tech.
As the report says: "Respondents are also taking proactive steps to streamline the workforce and establish the appropriate mix of worker skills for the future.”
That should come as no surprise. After a fury of hiring and a tight labor market over the past two years, executives see the distinction between having people and having people with the right skills."
Or, as Steven Covey once put it, having the right people in the right seats on the bus.
Since the labor market bottomed in April 2020, more than 22 million jobs have been added – or in many cases, added back – to the economy.
Fed Chair Jerome Powell told reporters last month, the U.S. labor market is "very hot." And those comments came before the government’s July jobs report showed 528,000 jobs were created last month.
This robust rebound, however, has been far from evenly spread across industries.
The nonpartisan Committee for a Responsible Federal Budget reports that overall leisure & hospitality employment is still down over 1 million jobs from February 2020.
At the same time, industries like "professional & business services" – which covers a host of white collar, Zoom-based, remote jobs – are up almost a million jobs (986,000) from pre-pandemic levels.
Udland says this uneven industry-level recovery “is why it sometimes feels like ‘everyone’ has gotten a new job in the last year while no restaurant…is fully staffed these days.”
In late June, I wrote in how crack spreads would “see more pressure as the Biden administration does everything in its power to push gas prices lower before November’s mid-term elections.”
Crack spreads measure the difference between the cost of crude oil and the prices of refined products like gasoline — and are a key contributor to both profits at oil refineries and also prices at the pump.
The spreads – aka oil refiners’ profits — have soared this year as gasoline demand outstrips supply.
While surging profit margins for the makers of gasoline have opened the industry up to charges of price gouging, industry officials claim they’re producing as much gas as they can these days.
Industry capacity utilization was running at 94% as the summer began – the highest since 2018 when it hit 97%.
At the same time, a Department of Energy report also showed that overall refining capacity has fallen in the last two years. In fact, it’s now back down to where it was in 2014, meaning that supply would be stifled even if refineries were to run at 100%.
So, I wrote, with little chance of bringing new sources of gasoline online anytime soon, “the administration's best chance to lower prices at the pump in the near term will have to come from leaning on OPEC+ to drill more oil or on refiners to accept smaller profit margins.”
That, I predicted, “will become a growing source of agita for investors in oil companies – and other industries.” Seems I was a tad overconfident.
The Commercial/Selling a Put
I got an email the other day from a gent who was watching TV, and a commercial came on. In that "financial" based commercial, there was a conversation between a client and what appears to be either his broker, or advisor. In the flow of conversation, the advisor says to the client, "well we might consider selling a put..." to which the client says something like "that's an interesting idea."
So I got this email, and Joe R. asks, "Bob, what's up with selling a put and why is that an interesting idea?" I thought maybe others might be interested in the answer, so I told him I'd address it to the subscription base.
If you don't know how options work, then this is going to sound like goblety -gook. But even if you do know about buying calls and puts, "selling" a put is in a different category. You'll need to pay attention because the differences are many.
The following is from an options tutorial I wrote years ago, and sometimes parts of it come in pretty handy. This is one of those times, because later in the tutorial you're going to see why in that commercial the client thought that selling a put was an "interesting" idea.
Americans expect inflation to drop precipitously over the next three years, according to the New York Fed.
And Neil Irwin says “that's great news for anyone who doesn't want current prices to become the new normal.”
The NY Fed’s July Survey of Consumer Expectations, released today, shows marked drops in how households expect inflation to be across a variety of time horizons.
History shows that the higher we expect inflation to be, the more likely it becomes a self-fulfilling prophecy as businesses feel more comfortable raising prices and workers demand steeper wages.
In that sense, Irwin says falling inflation expectations “are a welcome sign that the high inflation of the last year is not causing a long-lasting shift in Americans' psychology around money.”
But inflation expectations in the July survey remain far above the levels that we saw in the years before the pandemic and are above the 2% inflation rate the Fed target.
In fact, consumers expect inflation to be 6.2% over the next year. That’s down from 6.8% in June and is the steepest one-month drop since the survey began nine years ago (CPI rose an annual 9.1% in June).
The potential good news lies in expectations over the next three years having fallen to 3.2% from 3.6%, and 5-year expectations to 2.3% from 2.8%
Irwin reports that the drop was most evident among survey respondents making less than $50,000.
He surmises that’s a possible reflection of those consumers, who were most affected by soaring oil and gasoline prices, seeing relief at gas pumps last month.
Fed chair Jerome Powell mentioned the NY Fed's results as a reason to continue aggressive rate increases at the Federal Open Market Committee’s June policy meeting.
Thus, Irwin believes the falling expectations “will likely give comfort to the central bank.”
Courtenay Brown and Neil Irwin have been spot-on with their analysis of the economy recently.
Yesterday, they wrote that the “strong labor market continues to be the economy's bright spot.”
They say it could stay robust even as the Fed sends the economy into a slowdown if, that is, “businesses hoard workers to avoid repeating past mistakes.”
Employers, particularly in industries that have struggled with labor shortages, may be more reluctant to lay people off, even as rising interest rates and other factors slow consumer and business demand.
Brown and Irwin believe if employers maintain their payrolls, it would make the coming “economic slowdown milder and less painful for workers than recent recessions.”
They point to recent company earnings calls, where some employers have reported hesitancy to reduce their headcounts, even as growth deteriorates.
Government quarterly reports show that GDP has shrunk a cumulative 2.5% in the first half of 2022.
Chris Gorman, CEO of bank holding firm KeyCorp, said, "It's been challenging, frankly, to be out in the hiring market in this ride-up in the last couple of years."
That's why he says his company will staff up more in some areas "in sort of a flat or down" environment than they have in the past.
In June, only 1.3 million workers were laid off, fired or otherwise released from their jobs, according to the Labor Department.
That’s down 28% from the average of 1.8 million in 2019 (i.e., before the pandemic) – suggesting that companies are indeed more reluctant now than they were then.
Debate is flourishing on Wall Street and at Main Street kitchen tables over the Federal Reserve's fight to lower inflation and how high unemployment will jump as a result.
On the one hand, Fed policymakers believe its rate hikes will eventually drive down strong demand in the economy without causing too much pain in the job market – in other words, a soft landing.
On the other hand, influential economists like Larry Summers say the Fed's ideal outcome hasn't materialized before, and there's no reason to think it will now.
The fight is being debated in various academic papers, but the real stakes for workers and their families are high.
Courtenay Brown and Neil Irwin write today that the issue “is not whether unemployment rises, but by how much as the Fed tightens.”
They believe the crux of the debate is the inverse relationship between unfilled job openings and the unemployment rate.
Other things being equal, as job vacancies rise, unemployment falls and vice versa.
As of May, job openings trended lower but remained near their highest levels ever at 11.3 million.
Plus, the headline unemployment rate is holding near a half-century low (remember, the headline rate is significantly underreported).
The result is an unprecedented 1.9 job openings for each unemployed worker.
I want to take a break in the self/home defense series and chat a bit about recent economic developments, including gold.
So the Feds tossed another 75 basis point hike on us this week. That was totally expected. They have to look like they’re doing something to combat the worst inflation in 40 years.
But in this world, in the year 2022, nothing is as it seems. Nothing is as it should be. See, on one hand they’re hiking rates into a slow economy, which is a recipe for disaster. But on the other hand, the one they hide behind their back, they’re buying up about 320 million dollars worth of assets per day.
Why is that? Remember a couple weeks back, where the ECB put out a news blurb that literally caught me so off guard, I had to rethink a lot of things? That blurb said that the ECB would use “unlimited” resources to keep the debt market intact.
The European Central Bank will unveil an unlimited bond-buying tool next week to help markets better adjust to steeper and faster interest-rate increases than previously thought, economists surveyed by Bloomberg say.
I’ve always been fascinated by trucks – big trucks; the ones with 18 wheels – and the men and women who drive them.
My first full-time job offer out of college way back in the day was from the American Trucking Association. That I declined that position to take one with another DC nonprofit didn’t negate my lifelong fascination.
One of my fondest memories of that era is my casual friendship with a guy who worked for National Geographic during the week and drove 500-1,000 miles roundtrip on weekends as an independent truck driver.
When he retired from National Geo, he drove a lot more miles every week in his big truck to support his true love (well, actually, true loves – if you count his lovely wife!).
When I read over a year ago about the nation’s big shortage of truck drivers, I worried about people like my old friend, not to mention its impact on our economy, with already messed-up supply chains.
More Truckers Than Ever
But today, more than 18 months later, Axios’ Emily Peck asks, what trucker shortage?
She writes that employers have managed to find and hire over 115,000 new truckers since the depths of the pandemic in 2020.
At the height of the supply chain crisis, which is still ongoing, transportation companies pointed to a shortage of truckers as a contributing factor.
Truckers and their advocates were quick to point out that low pay, poor working conditions and high turnover were driving the growing problem.
Now, Peck says the shortage is getting better, even possibly over – pointing to a report from transportation market research group ACT, which notes, "The driver supply flipped from shortage to surplus in early 2022."
The surge in hiring, according to Peck, comes as big wage increases and demand for trucks to deliver all the goods we've been buying are bringing loads of new drivers to the profession.
Plus, she adds, some of the health constraints of the pandemic have begun to fade away.
Now that federal stimulus checks are a thing of the past and prices are surging, driving a truck – in an industry with wage growth that’s outpacing inflation – looks unusually appealing.
Andrzej Tomczyk of too big to fail Goldman Sachs said employers "have been trying to hire like crazy ever since the pandemic-induced demand surge led to relative capacity constraints in the industry. So, it’s likely a reflection of some catch-up coming online."
Over 20,000 more long-haul truckers got jobs in May, the largest monthly addition of new truckers since 1997 – when the Bureau of Labor Statistics started tracking.
In fact, long-haul trucking employment is now 2% above pre-pandemic levels. And average weekly earnings were about 11% higher in May, compared to a year ago, for drivers in freight trucking.
According to BLS, the average weekly earnings of truck drivers have increased about 33% from January 2018 to May 2022, to $1,215 – which equates to $63,000 a year.
Many veteran and independent long-haul drivers earn a lot more. Recently, more drivers have bought their own truck and, according to Peck, are taking advantage of surging "spot prices" (live market rates) for hauling.
"A lot of people who wouldn't normally be a truck driver" became truck drivers, observed Kenny Vieth, president of ACT.
As the chart above shows, there are now a new millennium high of 1.1 million general freight truck drivers – up 28% from about 860,000 at the depths of the Great Recession.
In one of his lesser-known songs, “Easy Money,” legendary singer-songwriter Billy Joel writes:
I want the easy, easy money
I could get lucky, things could go right
I want the easy, easy money
Maybe just this time, maybe tonight.
Things aren’t so easy these days for the too big to fail banks whose financial shenanigans are coming home to roost.
Profits at mega Wall Street banks took a nosedive in the 2nd quarter, as "easy money" policies that made the pandemic era a boom time in lower Manhattan come to a close.
The latest earnings reports show that Goldman Sachs and Bank of America earned smaller profits than a year earlier. Ditto for Wells Fargo, Citigroup, JPMorgan Chase and Morgan Stanley.
Free money on Wall Street — a side effect of the “emergency” monetary policies the Fed implemented to keep the pandemic from imploding the economy — has been winding down over the last few months.
The Fed started cutting interest rates in March 2020 – slashing them to virtually 0% and began printing trillions of dollars and pumping them into financial markets, if not the economy as a whole.
And as Matt Phillips points out, that turbocharged Wall Street – driving public stock offerings and corporate bond sales, advising and financing big mergers and acquisitions, and operating hyperactive trading desks.
Bank stocks themselves surged, too. A year after the stock market hit bottom in March 2020, Morgan Stanley was up 200%, Goldman Sachs was up 150%, while Bank of America and Citigroup had doubled.
The S&P 500 grew by a measly 75% over that same time.
Fast forward to 2022: interest rates have begun to take off, rapidly changing the conditions in financial markets and slowing down business in the New Normal.
High rates have been crushing stock prices as of late and pushing the S&P 500 into bear territory, and now, companies are getting antsy about what new business to write in a down economy.
The business of managing new corporate bond sales is also sagging as interest rates rise – with companies not wanting to borrow at the new, outrageously high rates (2-3%!).
And, as Phillips notes, higher borrowing costs – which the Fed is using to try to ease inflation – also increase the risk of recession and the losses on loans that normally occur during downturns.
So, banks are socking away billions in reserves just in case things get ugly, which hurts their earnings.
But it's not all bad on Wall Street. In fact, volatility can be good for bank trading desks that make the right calls. Trading was a bright spot for Goldman and Citi this last quarter.
Higher interest rates can also boost the money that banks make by charging interest – Bank of America, for one, did just that.
But overall, higher interest rates in the months ahead mean tighter margins for big banks – with stagnant dividend payments, less share buybacks and more circumspect credit for the rest of us.
Could It Get Worse?