A quick hitter before you hit the weekend

Quits and expectations

Expectations and consensus views are continually getting hammered. The latest is from the Michigan Consumer report. Sentiment missed (estimated 72.4, actual 66.8), current conditions missed (est 80, actual 73.2), and expectations missed (est 70, actual 62.8). This was a slaughter.

According to the survey’s chief economist, Richard Curtin, these low readings are

“due to an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation. One-in-four consumers cited inflationary reductions in their living standards in November, with lower income and older consumers voicing the greatest impact. Nominal income gains were widely reported but when asked about inflation-adjusted gains, half of all families anticipated reduced real incomes next year. Rising prices for homes, vehicles, and durables were reported more frequently than any other time in more than half a century. The reactions of consumers to surging inflation should be no surprise, as it has been reported during the past several months. The description that inflation would be "transient" has the undertone that consumers could "grin and bear it" as economic policies counted on a quick and automatic self-correction to supply and labor shortages. Instead, the pandemic caused economic dislocation unlike any prior recession, and has been intertwined with partisan interpretations of economic developments.”

The bold is mine. Consumers growing beliefs are that the Fed isn’t in control. As more and more adopt this view, the herd is going to panic. Half these families already realize that the increase in pay that they are getting will evaporate as inflation steals their earnings right from under them.

The Michigan reported inflation expectations have hit 4.9%. The Fed will no longer be able to say that “inflation expectations are well anchored”. They have officially become “un-achored”.

Consumers are coming to grips that this inflation isn’t “transitory”. We could be witnessing the breaking point where the herd changes direction.

The Job Openings and Labor Turnover Survey (JOLTs) posted this morning. When reviewing it, I have more questions than answers. The first big question, who is going to fill all these job openings? The number of job openings in the US fell by 191,000 from a month earlier to 10.4 million in September. Its the second straight month of declines but the number of openings exceeds those on unemployment.

How is there not going to be a wage-price spiral in this situation?

Another question that came to me when reviewing the report is, what are all these people doing quitting?

We now have the highest quit rate since the BLS started the data series. Now I understand some of this could be retirees. It could also be impacted by those leaving employers requiring vaccination for employment. It could also be people leaving their jobs and opening their own businesses. Either way, this is not good for employers who are looking to fill vacancies. It adds pressure to raise wages. It also puts a big squeeze on the economy. Businesses that have to raise inputs will eventually have to raise prices. If they don’t, their profit margins are going to get hit. This could lead to earnings downgrades on publicly traded companies. Which in turn would cause the market to tumble.

If this scenario were to play out, does the Fed goose the money pump to keep the train on the tracks? Or will they have second thoughts as inflation spirals out of control? Will the Fed stick to the taper schedule or will they increase its speed? What happens if the Fed continues it’s purchases of bonds but raises interest rates in an attempt to stop inflation? Dangerous questions for sure. Gives you all something to think about over the weekend. For me, I’m thinking I need more exposure to gold, silver, and the associated miners. Also, Happy Birthday!