by Louis Navellier
November 16, 2021
The economy seems like it is standing at a crossroads. After the third quarter suddenly sagged, we are seeing optimistic forecasts for the fourth quarter, like the Atlanta Fed’s latest 8.2% annual GDP growth forecast. The key question is – will we sag, like the third quarter, or soar again, like the first two quarters?
First, here are the key catalysts supporting the economy’s strength this quarter. First, in the most recent FOMC statement, Fed Chairman Jerome Powell avoided any mention of the Fed raising key interest rates. As a result, Treasury yields meandered lower, which causes more money to pour into the stock market.
Second, the U.S. dollar is up strongly, since China is becoming more isolated and mighty Germany’s export machine is sputtering, so more global capital is expected to flow into U.S. Treasury securities.
Third, retail sales are expected to soar this holiday shopping season due to high consumer confidence as well as rising personal income. The shortage of some key goods should not derail holiday spending, since when consumers have money in their pockets, they will spend it on whatever is available.
But what about rising inflation? Fed Vice Chairman Richard Clarida last week said that recent imbalances should dissipate “without putting persistent upward pressure on price inflation and wage gains adjusted for productivity.” Clarida added that the rise in inflation this year is a “moderate overshoot,” The Vice Chairman added that most of his Fed colleagues who participate in rate-setting meetings believe the risks now are tilted to higher-than-anticipated inflation outcomes. Clarida is a key architect of the Fed’s policy statements, so his comments signal that the Fed has become frustrated with surging inflation and intends to squelch it in 2022, even though the Fed has failed to forecast more than one key interest rate increase.
Speaking of inflation, the Labor Department announced on Tuesday that its Producer Price Index (PPI) surged 0.6% in October and is now running at an 8.6% annual pace. Wholesale gasoline prices surged 6.7% in October. Excluding food, energy, and trade margins, the core PPI rose 0.4% in October and is now running at a 6.2% annual pace in the past 12 months. Service costs accounted for approximately 60% of the PPI increase in October. This means much of the rise in wholesale prices will be hard to reverse.
Then, on Wednesday, the Labor Department announced that October’s Consumer Price Index (CPI) surged 0.9% (a double-digit annual rate), the largest monthly increase since June. In the past 12 months, the CPI is running at a 6.2% annual pace, the highest rate in over 30 years. The core CPI, excluding food and energy, rose 0.6% in October and 4.6% in the past 12 months. Food prices surged 0.9% in October, while energy soared 4.8%, led by a 12.3% increase in heating oil and a 6.1% increase in gasoline. Natural gas prices also increased by 6.6%, so if we see a cold winter, utility bills will become abnormally high.
In the past 12 months, consumer price inflation has been led by a 59.1% increase in energy services (i.e., electricity and natural gas), a 49.5% increase in gasoline, and a 26.4% increase in used car prices.
Inflation is Far Worse in China and Europe Than in the U.S.
Wholesale inflation is even worse in China, as the National Bureau of Statistics announced on Wednesday that China’s Producer Price Index (PPI) surged by a record 13.5% in October compared to a year earlier. This was a 26-year high and up substantially from the 10.7% annual pace reported in September.
Although wholesale inflation is running out of control in China, the official consumer inflation rate is running at a lowly 1.5% annual pace in October, due to price controls at the consumer level. The National Bureau of Statistics cited extreme weather and shortages of some goods, but the Chinese authorities have ordered coal miners to operate at full capacity and rolled back restrictions on coal imports, while fixing electricity prices, so many Chinese power plants were having rolling blackouts, since they did not want to lose money due to high coal prices. Fixed electricity prices are one big reason why consumer inflation has not risen as much as wholesale inflation in China has risen. Regardless, President Xi has his hands full. He has not travelled internationally for over 21 months, as China’s domestic problems keep escalating.
In Europe, some energy prices are up four-to-five-fold as supplies dwindled and some countries went “all in” on solar and wind power, so China and Europe have demonstrated that inflation is a massive global problem. What amazes me, though, is that interest rates have stayed so low for so long, as major central banks are in no hurry to raise interest rates to squelch inflation, as they did during the inflationary 1970s.
On Tuesday, Treasury Secretary Janet Yellen said on National Public Radio that, as the pandemic fades, “I’d expect price increases to level off, and we’ll go back to inflation that’s closer to the 2% level that we consider normal.” After the October surge, however, inflation may not be dissipating as fast as they had hoped, so I would not be surprised if central bankers use this “transitory” language in 2022 and beyond!
In other economic news, the National Association of Realtors announced on Wednesday that median home prices rose 16% to $363,700 in the third quarter vs. the same quarter a year ago. Austin, Texas was the fastest rising home market, as prices surged 33.5% in the past 12 months. Naples, Florida was #2 with 32% annualized appreciation, and Boise, Idaho was #3, with 31.5% annual appreciation. Due to a tight inventory of existing homes for sale, median home prices are expected to continue meandering higher.
The Labor Department also announced on Wednesday that weekly unemployment claims declined to 267,000 in the latest week compared to a revised 271,000 the previous week. Continuing unemployment claims rose slightly to 2.16 million compared to a revised 2.101 million in the previous week. Although weekly unemployment claims are now at a post-pandemic low, both weekly and continuing claims were a bit higher than expectations. However, weekly claims can be volatile, especially as the holidays approach.
Who Will Save Us? Government or Private Initiatives?
An Overview of COP26 in Scotland
by Jane Hunt and Louis Navellier
Note: Jane Hunt, Navellier & Associates’ Director of Marketing and Design, lives in Britain and attended the World Climate Summit and Climate & Freedom Symposium, which was going on at the same time as COP26, which was only open to “accredited observers,” or selected super-rich celebrities like President Barack Obama. Let’s hope these accredited observers all bought carbon offsets for the massive carbon footprint they left from hundreds of private and government jets! According to Forbes:
“In the run-up to the event, 118 different business jets flew in… according to data compiled by WingX, an aviation consultancy. Overall, inbound private jets to Glasgow and Edinburgh airports were up 525% on the opening day of the summit compared with the previous seven days. Those taking private jets to and from COP26 include Jeff Bezos, Prince Charles, and Boris Johnson, who was criticized for flying back to London to attend a dinner on Wednesday evening.…Private jets are, by far, the most inefficient way to travel, and many have pointed out the hypocrisy of turning up to a summit on climate change on something that is contributing to its very cause.” (Forbes, Nov. 5, 2021)
The Scots are noted for their parsimonious nature, so it’s no surprise that the local Scottish press (“The Scotsman,” November 11, 2021) noted that the COP26 Conference in Glasgow cost more than twice any other previous climate event in terms of its “carbon footprint.” Even though they didn’t set such a great personal example, the conference did end on an optimistic note, reflected in a joint declaration between China and the U.S. that they would work together on a number of climate-related actions. In brief, the declaration states that the U.S. has a goal of providing 100% carbon-free electricity by the year 2035!
Frankly, this is not going to happen without carbon offsets, like planting millions of trees or sequestering carbon dioxide by storing it in rocks. Please excuse our skepticism, but the primary reason that China signed this declaration is that they are poised to profit from dominating worldwide solar panel production, and rare earth materials for lithium batteries, and by helping the world switch to nuclear energy.
The good news is that at the nearby World Climate Summit, private industry was very busy striving to get business active in meeting the world’s climate goals. The idea of Environmental, Social and Governance (ESG) investing is constantly evolving and continuously being redefined. Specifically, there were intense discussions on what “net zero” means, since definitions vary. For example, a vegetarian has a smaller carbon footprint than someone who eats meat, but it will be very hard to offset bovine emissions, since cows will continue to be cows, although it is possible to change their diets to reduce their gas emissions.
Another highlight of the World Climate Summit was an even harder goal, decarbonizing the travel sector. VW’s Global Head of Sustainability called for building more solar facilities, expanding car sharing schemes, and promoting walking and bicycling. Clearly, urban folks can reduce their carbon footprint more than those in suburbs and rural communities, since they do not have as much access to mass transit and car sharing. Furthermore, the pandemic caused many to flee city centers and head to suburbs and rural communities. As long as the trend toward “remote work” or “working at home” persists, it reduces commute time and pollution, but as office work resumes post-COVID, it will make commutes longer.
The Confusing Debate Over How to Increase Electricity 50% by 2035
By far, the most fascinating discussion at the World Climate Summit was electricity generation, which is expected to soar 40% to 60% by 2035 due to emerging markets as well as electric vehicles (EVs). Not surprisingly, offshore wind projects are very popular in Britain, since wind farms are everywhere and growing. Since making concrete is a big source of worldwide carbon emissions, building smarter cities was repeatedly discussed. Although buildings and infrastructure can be made more efficient, in old cities like Glasgow as well as throughout Europe, it is naturally overwhelming to attempt to reduce carbon emissions from buildings. The discussions about the virtues and drawbacks of low carbon concrete, glass, steel, and other building materials were endless, since they are so complex, and no real solution is in sight.
Bottom line, one of the most interesting outcomes of the COP26 conference is that four of the world’s largest auto manufacturers have not agreed to eliminate their carbon emissions by 2040, while countries with abundant hydroelectric power, like Canada and Chile, agreed to these goals. Big industrial nations like China, Germany, and the U.S. did not agree to eliminate emissions by 2040, since some countries are clearly blessed with abundant hydroelectric resources, while others still remain dependent on fossil fuels.
In particular, the U.S. was called out for its policy inertia regarding Green Energy. In addition to wind, solar, hydroelectric, and other green energy solutions, hydrogen was cited as the “technology of the future” and nuclear energy was also mentioned as a key solution. New technologies are still needed for both hydrogen and nuclear, but a small modular nuclear reactor was mentioned often. Battery storage facilities for excess solar and wind energy were also discussed, but the fact that there is a current shortage of iron-phosphate and lithium-ion batteries, due to growing EV production, was not thoroughly discussed.
In the end, we were pleased to note that the Climate & Freedom Symposium concluded that “markets will solve the climate crisis.” This is very true and a profound statement. Governments can provide carbon incentives, but the private sector and free markets usually provide the best, most cost-effective solutions.
Companies we recommend, like Enphase Energy (ENGH) and Generac (GNRC) are already helping to provide backup electricity solutions and decentralize the electric grids. We believe that entrepreneurs and innovative companies like Enphase Energy and Generac hold the key to fulfilling climate change goals.
Navellier & Associates owns Enphase Energy, Inc. (ENPH), and Generac Holdings (GNRC), in managed accounts. Louis Navellier and his family personally own Enphase Energy, Inc. (ENPH) and Generac Holdings (GNRC), via a Navellier managed account.