2-7-23: The Global Fallout of the Fed’s Decision

by Louis Navellier

February 7, 2023

A day after the Fed’s announcement, the European Central Bank (ECB) raised its key interest rate 0.5% to 2.5% on Thursday. This was the fifth straight increase in the ECB’s key interest rate, which is now at its highest level since 2008. The ECB said that it would “stay the course in raising interest rates significantly,” so another 0.5% rate increase is anticipated in March. Interestingly, the ECB said that after its March meeting that it “will then evaluate the subsequent path of its monetary policy.”  Translated from central bank double-talk, the ECB is expected to pause its key interest rate increases after March.

The best news is that the recent Treasury auctions have been going amazingly well due to the fact the bid-to-cover ratio has averaged only 0.12%. In fact, January experienced the strongest bidding for Treasury securities since October 2021. Frankly, this means that bond investors are fully expecting inflation to cool off, and that the Fed’s key interest rate hikes will soon end. After the FOMC meeting, the 10-year Treasury bond yield declined to below 3.6%, which is the lowest yield since September 2022.

One of the reasons why there is likely a lot of buying pressure at recent Treasury auctions is that investors suddenly have some good money market investments available, plus certificates of deposit (CDs) have become popular again. Obviously, investors are not worried about inflation, since they have been pushing Treasury yields lower. The Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index, cooled to a 5% annual pace in December. The core PCE, excluding food and energy, also slowed to a 4.4% annual pace. In December, the PCE index for goods declined 0.7%, while the price of services rose 0.5%. The Fed has been trying to squelch service inflation and seems to be succeeding.

The most certain economic event in the upcoming months, to me, is that crude oil prices will be rising due to growing global demand and the fact that the Biden Administration will no longer be releasing up to one million barrels per day from the Strategic Petroleum Reserve (SPR) to manipulate crude oil prices.

Ongoing Challenges Facing EVs, Autonomous Driving Systems, and ESG Investing

Although U.S. crude oil inventories remain high near-term, as seasonal demand picks up, crude oil prices are expected to rise to $100 per barrel in the spring and peak at $120 in the summer. It will be interesting to see what happens to EV sales now that Tesla and other EV manufacturers have an inventory glut.

Ford Motor announced on Monday that it is lowering the price if its Mach-e by $600, depending on the model. Although the Mach-e has not been profitable for Ford due to its higher battery component costs, Mach-e production is expected to increase from 78,000 annual units to 130,000 this year. Marin Gjaja, the head of Ford’s EV business said, “We are responding to changes in the marketplace” and added, “As we want to stay competitive in the marketplace, we’re having to respond.”  Ford Motor is currently #2 in U.S. EV sales, so clearly it intends to continue to capture a significant share of EV sales.

The other significant news in the automotive industry is that Mercedes has become the first car company approved for Level 3 autonomy. This is also a big win for Nvidia, which is making the AI chips that Mercedes is using in its autonomous driving systems. Only the Mercedes S-Class and its EQS EV has its Level 3 Drive Pilot Automated Driver Assist System (ADAS) that allows autonomous driving “on suitable freeway sections and where there is a high traffic density.”

I for one think Tesla made a big mistake when it eliminated expensive LiDAR sensors, which the U.S. military uses to guide its missiles through smoke, fog, snow, and other difficult to see environments. Currently, Tesla’s “Full Self Driving” system relies on just cameras and GPS data. Tesla’s Full Self Driving, Ford’s Blue Cruise, and GM’s Super Cruise are all Level 2 autonomous systems. Level 5 is the ultimate goal for the auto industry, which is a vehicle that will drive us around with no steering wheel.

One of the big developments helping the fossil fuel industry is that big states like Florida and Texas have seen a big ESG backlash. Interestingly, on February 1^st, the Biden Administration’s Department of Labor (DOL) officially removed any fiduciary liability from ESG risk factors by removing “pecuniary factors” from the DOL rule amending “Investment Duties” under the Employee Retirement Income Security Act (ERISA) of 1974. In other words, if you lose all your money in ESG investments – like British battery startup, Britishvolt did, recently filing for bankruptcy – then you are effectively without legal recourse.

Effectively, our elected leaders are still pushing ESG investing, but also are trying to remove any culpability for ESG investments that are destined for bankruptcy. Although the U.S. is in the midst of building many new battery plants to qualify for the tax incentives under the Inflation Protection Act, the transition to electric vehicles is complicated, since there may not be enough lithium to make the EV transition many politicians desire. Last week, I mentioned The Guardian’s many scathing articles about lithium mining. According to The Guardian, the global demand for lithium may rise 40-fold by 2040.

There is currently only one lithium mine in the U.S. It is operated by Albemarle at its Nevada Silver Peak facility, which is a sprawling 21-square mile facility that has 22 enormous evaporating ponds that hold a briny liquid from underground wells that bakes the salty fluid in those evaporating ponds. It takes about two years to bake the salt under the Nevada sun before the pond brine is heavy enough for processing, where lime and soda ash are added to extract lithium carbonate. The Silver Peak facility makes 5,000 tons of lithium carbonate annually, which is enough to make batteries for 80,000 EVs. The worldwide demand for lithium is currently about 350,000 tons and forecasted to rise to 2.1 million tons by 2030.

There is another, potentially bigger, lithium mine in Nevada seeking aid from the Biden Administration after a conditional $700 million loan was granted to begin mining. The Energy Department said the Rhyolite Ridge site could produce enough lithium to support the production of 370,000 EVs, but there is an endangered Nevada wildflower, called Tiehm’s buckwheat, that is delaying the Rhyolite Ridge mine. The environmental impact report on Rhyolite Ridge will obviously try to save this endangered Nevada wildflower, plus recharge the water table from the tremendous extraction of underground water.

Obviously, mining is a very big, complicated business, whether for oil, lithium, or gold. Complicating matters further are migrating birds that sometimes land in evaporating ponds. There is a lot of gold mining in Nevada that is required to cover the evaporating ponds that contain cyanide that is used to extract gold. When you fly over Nevada, you may not be aware of many marshes that support ducks, geese, and other migrating birds. As someone who has a home in Nevada, I am keenly aware of these beautiful marshes, but since only 743 people live in Esmerelda County, Nevada, I suspect that the Biden Administration will succeed in pushing through expanded lithium mining, despite the potential environmental devastation to the water table, marshes, and migrating birds.

As I have been saying, Tesla got kicked out of S&P’s Global ESG index back in May due to concerns about the lithium battery production at its Reno plant, which is actually operated by Panasonic. When Tesla was kicked out of S&P’s Global ESG index, it was replaced by Exxon Mobil. U.S. refiners are now making “green diesel” from animal and organic waste, which is also why the U.S. has had acute diesel shortages, since the green diesel production lowered the U.S. diesel production by approximately 400,000 barrels per day.

Are you confused enough about what ESG means now?  We all are. The environmental blowback against mining lithium and cobalt is just one of the complications associated with incentives passed by the Biden Administration’s Inflation Protection Act. In the meantime, the fossil fuel industry is increasingly making green diesel and other alternative fuels that are appeasing the ESG analysts. The bottom line is that the fossil fuel industry is now rising in ESG indices to stop the ESG blowback being pushed by Florida, Texas, and other states. The other irony is the DOL removed fiduciary liability from ESG risk factors, so clearly the federal government is no longer striving to protect investors from bogus ESG investments.

Navellier & Associates owns Panasonic Corp (PACRFY), Ford Motor Co. (F), Nvidia Corp.(NVDA, and Exxon Mobil Corp. (XOM) in managed accounts and a few accounts own Tesla (TSLA), per client request in managed accounts. Louis Navellier and his family own Panasonic Corp (PACRFY), Ford Motor Co. (F), Exxon Mobil Corp. (XOM) and Nvidia Corp (NVDA), via a Navellier managed account. He does not own Tesla (TSLA), personally.

The Two Major Jobs Reports Are Miles Apart – Ignore Them Both (for Now)

The big news was in the employment arena, but the data were conflicting. On Wednesday, February 1, ADP announced that only 106,000 new private payroll jobs were created in January, substantially below the economists’ consensus estimate of 190,000. The hospitality sector added 95,000 jobs, so the service sector dominated new job creation. Trade, transportation, and utilities shed 41,000 jobs, so the Amazon layoffs showed up there. The construction sector lost 24,000 jobs, but many of these jobs were weather-related. The manufacturing sector added 24,000 jobs. Interestingly, small businesses with less than 50 employees, shed 75,000 jobs, while large companies with more than 500 employees added 128,000 jobs.

By contrast, on Friday, the Labor Department announced that 514,000 new payroll jobs were created in January, substantially higher than the economists’ consensus expectation of 187,000. Past months were also revised higher. December and November payroll jobs were pushed up to a combined 550,000 (from 479,000 first reported). The unemployment rate declined to 3.4% (from 3.5%), the lowest rate in 53 years.

Average hourly earnings rose 0.3% (10 cents) to $33.03. In the past 12 months, average hourly earnings rose by 4.4%. Labor force participation remained unchanged at 62.4%. Overall, this was a stunning payroll report that I am 100% certain will be mentioned in President Biden’s State of the Union speech.

The ADP payroll report does not include government jobs, but there is no reconciling these two reports. I would ignore them for now. There is no way anyone can count all new jobs two days after a month’s end!

The Department of Labor on Thursday announced that weekly unemployment claims declined to 183,000 from 186,000 in the previous week. Continuing unemployment claims declined to 1.655 million, down from a revised 1,666 million in the previous week. The four-week average of weekly unemployment claims continues to decline, so the labor market remains healthy and is not expected to influence Fed policy.

In other news, the Conference Board announced that its Consumer Confidence Index slipped to 107.1 in January, down from a revised 109 in December. The silver lining was the present situation component, which rose to 150.9 in January, up from 147.4 in December. However, the expectations component plunged to 77.8, down from 83.4 in December. Consumers may feel better but are scared of the future!

The Institute of Supply Management (ISM) announced on Wednesday that its manufacturing index dipped to 47.4 in January, down from 48.4 in December. Since any reading below 50 signals a contraction, manufacturing has declined for the past three months. The new orders component plunged to 42.5, down from 45.1 in December, while the backlog of orders component declined to 43.4, down from 45.4 in December. This is truly horrible, but the primary reason that the ISM manufacturing index did not fall further was that its new export orders component rose to 49.4, up sharply from 46.2 in December. So other than rising export orders, there were no “green shoots” in the January ISM manufacturing report.

The only “green shoot” came on Friday, when ISM announced that its non-manufacturing (service) index rose to 55.2 in January, up substantially from 49.2 in December. The business activity component surged 6.9 points to 60.4 in January (from 53.5 in December), but the big shocker was that new orders soared 15.2 points to 60.4 in January (up from 45.2 in December). Barely half (10 of 18) of the industries surveyed by ISM reported growth in January, so although the index expanded, some industries are still struggling.

Although there is talk of recession, it’s hard to see a recession when there is a 3.4% unemployment rate!