by Louis Navellier
November 30, 2021
Each new strain of Covid is given the next letter from the Greek alphabet. We all remember the Delta strain from last summer. That is only the fourth letter of the Greek alphabet. Recently, the newest strain was called NU, the 13th letter of the Greek alphabet, but for some strange reason they skipped over “XI,” the next letter and went straight to Omicron. Could it be that they didn’t want to offend China’s leader, Xi Jinping, the man who is ultimately responsible for exporting the original virus to the world last year?
Whatever the reason, the new Covid-19 variant from South Africa caused an emergency meeting of the World Health Organization (WHO) that spooked the financial markets on “Black Friday,” putting a damper on the biggest retail sales day of the calendar year. Britain, France, and Israel quickly imposed travel bans to South Africa, which caused airline and other travel stocks to plummet. Crude oil also sharply declined on Friday in anticipation of another global economic slowdown. The 10-year Treasury bond also declined significantly. Friday’s abrupt market reaction is setting the stock market up for a potential surge in subsequent days if WHO does not freak the world out after its emergency meeting.
The biggest fear is that this South African Covid-19 variant has up to 30 “spike proteins,” so it can more easily infect people and be more vaccine resistant. Existing vaccines have been effective at blocking these spike proteins. Dr. Anthony Fauci said that the U.S. is rushing to get new data on the new variant from South Africa, but he also stressed that existing vaccines must be tested against this new Covid-19 variant.
Overall, markets always tend to react first and research second, so they panic from time to time. Anytime there is an abrupt market sell-off like this, I go to Morningstar.com and check the ETF spreads to see if they have widened relative to their Intraday Indicative Value. Sure enough, there was an abnormally wide ETF spread after the opening on Friday for iShares Select Dividend ETF (DVY), the bellwether ETF that I usually check first, since it is the ETF that abruptly fell almost 35% intraday back in August 2015 during a “flash crash.” The good news is that even though the ETF spread widened for DVY on Friday, trading in the ETF appeared orderly, so I do not think there is any imminent risk of another flash crash.
Another overreaction has been in energy. With new travel restrictions, oil use will be down, but the Biden Administration, as well as Britain, Japan, India, and South Korea, have all followed China by releasing crude oil from their strategic reserves in a coordinated attempt to push down crude oil prices. The White House said, “The president stands ready to take additional action, if needed, and is prepared to use his full authorities working in coordination with the rest of the world to maintain adequate supply as we exit the pandemic.” But much of Europe is locking down again, so demand should moderate soon.
A better solution would be to work with our domestic energy producers to boost U.S. oil production as needed. Production has fallen to slightly over 11 million barrels a day, down from a peak of over 12.9 million barrels a day in late 2019. In fact, as recently as March 2020, the U.S. produced 12.8 million barrels of crude oil per day when the pandemic commenced. The solution is very simple, namely for the Energy Department to reopen the drilling on federal lands and stop demonizing energy companies. (In case you want to see the trend in graphic form, here is a link to monthly U.S. crude oil production.)
Port bottlenecks have improved immensely in Europe, so the costs of renting containers have fallen significantly. Nonetheless, inflation is expected to persist, but possibly at lower rates. The most optimistic inflation forecast comes from Treasury Secretary Janet Yellen, who told the Providence Chamber of Commerce that she expects the monthly inflation rate to decline to 0.2% to 0.3% in the second half of 2022. Frankly, I think Secretary Yellen is overly optimistic and that 4% to 5% inflation is more likely.
Modern Monetary Theory in Action
I mentioned in last Monday’s podcast that The Wall Street Journal published a fascinating article on Modern Monetary Theory (MMT) and how huge deficit financing by sovereign governments, including the U.S., has gone beyond the point of no return without any fear of debt. The scheme began in Europe with zero interest rates and almost unlimited quantitative easing (money creation). The fact that all this massive money pumping has not driven interest rates much higher has lured politicians into complacency and painted many central bankers into a corner, where they now cannot raise key interest rates very much.
Speaking of central bankers, President Biden renewed Fed Chairman Jerome Powell for a second term as Fed Chairman, so the MMT he has practiced since March 2020 will continue, with low interest rates and quantitative easing as needed. For example, the infrastructure bill that passed the House and is expected to be extensively modified by the Senate in early 2022, will be largely financed by more “fiat money” creation (MMT in action), since hiking taxes in an election year would be political suicide. This essentially means that the Biden Administration will be putting more pressure on the Fed to continue its quantitative easing and money printing so that it can boost the federal government’s spending each year.
Frankly, I feel sorry for Fed Chairman Powell and the other members of the Federal Open Market Committee (FOMC), since they are being placed into an impossible predicament. The Journal article said that “the Fed is (rightly) worried about inflation and is tweaking its tools to try to influence the economy with monetary policy, something MMTers think doesn’t work.” The truth of the matter is that politicians love the freedom to spend, using MMT, and the FOMC is trying to adapt. The real risk from MMT, as Europe has demonstrated, is that the eventual outcome of negative interest rates will likely be stagnation.
In the meantime, Americans are spending up a storm with all the money that the Fed has pumped into the system. Black Friday deals are everywhere, and retailers are expected to remain super-aggressive with promotions through Cyber Monday. As a result, I am expecting a very strong holiday shopping season.
Speaking of spending, the National Association of Realtors announced that the median home price has risen 13.1% from a year ago and that the median home price is now $353,900. Despite home sales slowing a bit, 2021 is on track for six million existing home sales, which would be the strongest year since 2006. Overall, real estate and the stock market remain great beneficiaries of the current wave of inflation!
Economic Indicators Released Last Wednesday Reflect Money (MMT) in the System
Last Wednesday, the Commerce Department announced that durable goods orders rose 0.5% in October, higher than economists’ consensus forecast for a 0.3% increase. Durable goods have risen for 15 of the 18 months since the April 2020 pandemic low. Core capital goods rose 0.6% in October as businesses have been rebuilding inventories and consumer spending remained strong. Year to date, durable goods orders have risen 22.1%, but shipments have risen only 13.1%, so businesses continue to have robust order backlogs that have been complicated by component and parts shortages. I should add that September’s durable goods number was revised down to a 0.4% decline, compared to a 0.3% decline initially reported.
In addition, the Commerce Department announced on Wednesday that personal income rose 0.5% in October, while consumer spending rose 1.3%. As a result, the personal savings rate declined to 7.3% in October, down from 8.2% in September. Anytime consumers are willing to incur debt bodes well for both consumer confidence and holiday spending. I should add that the Atlanta Fed is now estimating 8.6% annual GDP growth for the fourth quarter, which will largely be driven by robust consumer spending!
And finally, the Labor Department announced last Wednesday that new weekly unemployment claims in the latest week declined to 199,000, down from a revised 270,000 in the previous week. Continuing unemployment claims in the latest week declined to 2.049 million, down from a revised 2.109 million in the previous week. The good news is that weekly unemployment claims are now at a post-pandemic low.