It seems the inflation story just won’t die down for the Fed. It doesn’t help that Fed governors and presidents are out in force trying to get ahead of the story. We have now gone from “its just transitory” to “there’s a 50/50 chance this inflation is persistent”.
After reviewing Brainard’s and Bowman’s recent speeches, I can confirm that Bowman is seeing the same thing Bostic and Bullard had alluded to. While Brainard’s speech was more geared towards her audience (Oklahoma Tribal leaders), Bowman’s was full of interesting topics. In Governor Michelle Bowman’s address in South Dakota, she covered the employment picture, shortages and bottlenecks, inflation risk, and the beginning of the taper.
Like other speeches from Fed members, Governor Bowman’s views on the employment picture are well based in the data we are seeing come out of the US BLS. She affirmed that the 3.5% prepandemic unemployment rate was a 50-year low and doesn’t expect to return to that level “any time soon”. She stated that progress has been made, even in light of the poor September report. She also recognized that there is uncertainty in the outlook for small businesses.
“I continue to hear concern about the future from small business owners, which is also reflected in the latest readings from broader surveys of small business sentiment. While many factors lead to this perspective, I have heard specific reference to continued rising costs, supply chain issues, labor shortages, and uncertainty about other factors, like tax increases and vaccine mandates.”
She then pivoted to monetary policy.
“Earlier this year, as the economy was reopening, we saw a pronounced pickup in inflation, as prices for motor vehicles, electronics, and other goods rose especially rapidly. Most of these increases could be traced to bottlenecks in global supply chains. The bottlenecks were often the direct result of shortages of labor and key materials used in production and distribution.”
In Arthur Burns fashion, she deflected the blame for high prices onto semiconductor shortages, supply chain bottlenecks, and the low labor force participation rate. There was no mention of the flood of liquidity that the Fed provided in 2020 and continues to provide in 2021 being part of the problem. I’m sure that would have been too much honesty from a Fed member.
She is of the mind that the asset purchases by the central bank need to be tapered.
“Provided the economy continues to improve as I expect, I am very comfortable at this point with a decision to start to taper our asset purchases before the end of the year and, preferably, as early as at our next meeting in November.”
This signals to me that the Fed has seen the data. They know that this inflation is no longer going to be transitory and that action on their part is required. I’m sure they all know that if the money spigot gets shut-off, we’ll walk straight into a recession. Also, if bond yields rise too fast, we’ll walk straight into a recession. In fact, the odds that we’ll see a recession within the next 6 months looks strong. That’s why I’m excited to see the margin debt posted by FINRA.
While the number dipped from $911 billion to $903 billion, it looks like investors are continuing to utilize a large amount of margin debt. This can be very bullish for the stock market. However, once this begins to reverse course, watch out below. You can see how the market reacted at the end of 2018 as investors began dialing back on their margin use. The 4th quarter of 2018 will look tame compared to what a reversion to the mean will look like now.
The “Free Credit Balance” is the true measure of “cash on the sidelines”. This figure is the amount of money in stock trading accounts that is sitting in money market funds waiting to be put to use in the stock market. The free credit balance isn’t a key to the market, but I like to use it as a guide to know how investors are feeling about their current investing options. From the looks of it, investors are having a hard time finding things to invest in. There was a tremendous increase in the balance starting in August of last year. It waned slightly going in to May and dipped in July, but has resumed it’s upward trend.
Finally, the University of Michigan’s consumer sentiment and inflation expectations report was released today. On the inflation side, it edged up to 4.8% from 4.6% for the year ahead, while the 5-year outlook eased to 2.8% from 3%. On the consumer sentiment side, it dropped from 72.8 to 71.4. This was a big shock as estimates were an increase to 73.1. Richard Curtin, the Surveys of Consumers chief economist shed light on the situation.
“Consumer sentiment has remained for the past three months at the lows first recorded in response to last year's shutdown of the economy. The Delta variant, supply chain shortages, and reduced labor force participation rates will continue to dim the pace of consumer spending into 2022. There is another, less tangible factor that has contributed to the slump in optimism: confidence in government economic policies has significantly declined during the past six months. To be sure, the DC logjam, including the debates on the debt ceiling and the $3.5 trillion social infrastructure program did not help, but the staged drama was largely ignored by most consumers. Consumers in the past were more attentive to the debates about extending the debt ceiling, passing major spending programs, or the face-off at the "fiscal cliff" (which may again happen in December). Unlike past debates, just 3% of consumers mentioned these policy debates when asked about recent news they had heard. Consumers presumably thought that these policies were important, but they largely ignored the dire partisan claims of an ensuing calamity. Consumers have much more basic concerns over policy. The adage "never let a crisis go to waste" mirrors the range and scale of Biden's progressive proposals, but consumers see it as too risky a strategy. When asked about their confidence in economic policies, favorable evaluations fell to 19% in early October from Biden's honeymoon high of 31% in April, while unfavorable policy evaluations rose to 48% in early October from 32% in April (see the chart). The decline in confidence in economic policies was recorded across all age, income, and education subgroups as well as among Democrats, Independents, and Republicans.”
The people are growing calloused to the ways of the politicians. This could have serious repercussions for them down the road. Currently this attitude is rearing it’s head in the current administration’s declining approval ratings and confidence in economic policies, as well as that new “Let’s Go Brandon” chant everyone is talking about. However, if it goes on long enough, it could eventually lead to mass civil disobedience, record low voter-turnout, and succession movements. At this point, I think the democrats are going to need to pull an amazing stunt to stay in power past 2022 and the clock is ticking. Now get outta here and enjoy your weekend.