by Louis Navellier
March 2, 2021
Despite the stock market’s gyrations last week, the 10-year Treasury yield spiked above the 1.6% level on Thursday. The 10-year Treasury bond yield is now at the highest level in a year. The catalyst for the surge in yields was a horrific 7-year Treasury bond auction with a very weak bid-to-cover ratio of 2.04. This essentially means the U.S. budget deficit is getting too big, the Fed needs more money for its quantitative easing and investors are scared to buy Treasury bonds as yields rise, since that means their price is falling.
The Fed is purposely trying to stimulate inflation, and it is starting to work on the producer price level as commodities are priced in terms of a weak U.S. dollar. Combined with strong demand for copper, lumber and other key commodities, most commodity prices are soaring. All this money pumping and quantitative easing is going to continue to undermine the U.S. dollar, so inflation will likely continue to increase.
Ironically, in light of these soaring commodity prices, Fed Chairman Jerome Powell told the Senate Banking Committee on Tuesday that inflation was “soft,” but he added the pandemic “left a significant imprint on inflation.” Powell also stressed that the recent pressures from higher housing and energy prices are not a threat now. Additionally, Fed Chairman Powell said, “The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.” Translated from Fedspeak, Powell implied that the Fed would continue its quantitative easing for the foreseeable future, which is shaping up to be an “eternity,” as far as I can tell from his actions.
Then, on Wednesday, in front of the House Financial Services Committee, Chairman Powell reiterated that the Fed would maintain ultra-low key short-term interest rates and hefty asset purchases until “substantial further progress has been made” toward employment and inflation goals. Powell also said that the Fed’s employment and inflation goals will “likely to take some time” to achieve. Since Treasury Secretary Janet Yellen is primarily a labor economist, I suspect that Powell may defer to her guidance as well as to the Fed’s many economists and district Presidents. Interestingly, Powell said, “We won’t tighten monetary policy just because of a strong labor market.” This is just further confirmation that the Fed is now entering the world of Modern Monetary Theory (MMT) – or unlimited money printing.
I should add that Tucker Carlson discussed the potential pitfalls of MMT on Fox News last week and pointed out how that getting rich through speculation does not always end well. Carlson is not an economist and he did not interview any experts on his segment discussing MMT, but he did point out how cash became worthless in post-World War I Germany when hyperinflation destroyed the German economy in 1923. The good news this time around is that Europe is playing more with MMT than the U.S., so if inflation destroys the European economy, then perhaps the U.S. will learn from their mistakes.
Another brewing concern is that the so-called stimulus bill is turning into a pork-filled grab bag for various Congressional representatives, rather than a focused stimulus bill to help displaced workers who lost their jobs due to Covid-19 restrictions. Furthermore, there is over $1 trillion in Covid-19 relief left over from the Trump Administration that has yet to be spent, so as our elected leaders use the Covid-19 crisis as essentially a “front” to pay for pet projects, this only serves to undermine investor confidence.
The Economic News Continues to Surprise Most Economists
The Wall Street Journal had an excellent article last week that discussed how manufacturers were caught off guard with the sharp rebound in consumer demand after the initial Covid-19 restrictions were lifted. With travel and restaurants restrictions in place in many states, consumers continue to spend money while “nesting” by upgrading their homes. There remains a shortage of selected appliances, mattresses and some consumer electronic items, especially webcams for Zoom meetings. The global semi-conductor chip shortage that is curtailing vehicle production is the best example of how manufacturers were caught flat footed by strong consumer demand for durable goods. Overall, there is no doubt that when you put money in consumers’ pockets they will spend it, which bodes well for economic growth this year.
Here are some examples. The Conference Board announced last week that its Leading Economic Index (LEI) rose 0.5% in January, which was much higher than the economists’ consensus expectation of a 0.3% increase. Also, the Atlanta Fed revised its first quarter GDP estimate on Thursday to an annual pace of 9.6%, while the Conference Board is expecting the U.S. economy to expand by only 4.4% in 2021.
In addition, the Conference Board announced on Tuesday that its consumer confidence index rose to 91.3 in February, up from 88.9 in January, marking the first improvement in consumer confidence after three straight monthly declines. As spring approaches, consumers naturally cheer up, plus Covid-19 restrictions are expected to ease in the upcoming months, so I expect that consumer confidence will keep improving.
The Commerce Department reported on Wednesday that new home sales rose 4.3% to an annual rate of 923,000 in January, up from a revised 885,000 annual pace in December. Economists were expecting new home sales to decline, to an annual rate of 850,000. The inventory of new homes for sale declined to a record low 4-month supply, so median home prices are expected to rise. However, mortgage rates are now rising, as the 10-year and 30-year Treasury bonds yields are now at their highest level in over a year. Overall, the housing market remains healthy, but due to higher median prices and higher mortgage rates, new home sales may slow in the upcoming months as affordability issues begin to impede sales.
The Labor Department announced on Thursday that weekly unemployment claims declined to 730,000, down from a revised 841,000 in the previous week. Continuing unemployment claims declined to 4.419 million, down from a revised 4.52 million in the previous week. These were big surprises, since economists were expecting weekly unemployment claims of 825,000 and continuing claims of 4.46 million. This is the first time in the past seven weeks that weekly unemployment claims fell below 800,000, so this is truly great news – that folks are finding new jobs as Covid-19 restrictions are being lifted. Since the U.S. is a consumer-driven economy, as we add more jobs, it naturally boosts retail sales.
The Commerce Department reported on Thursday that durable goods orders surged 3.4% in January, due to a whopping 390% surge in aircraft orders. Excluding transportation orders, durable goods still rose by a healthy 1.4% in January. Durable goods have now risen for nine straight months and January was the biggest monthly gain in six months. Economists were only expecting durable goods orders to rise 1% and 0.7%, excluding transportation, so the January durable goods report was another massive positive surprise.
Speaking of manufacturing, Tesla is curtailing Model 3 production at its Fremont factory for two weeks. The global chip shortage is cited as the cause of this slowdown. A severe drought in Taiwan and water restrictions are curtailing semi-conductor chip production. This chip shortage is expected to persist for several months, but manufacturing activity should rise sharply as more chips become available.
One Navellier & Associates Inc. account owns Tesla (TSLA), per client request in managed accounts. Louis Navellier does not own Tesla (TSLA) personality.