by Louis Navellier
March 8, 2022
In a state of emergency, on several fronts, President Biden’s first State of the Union speech sounded like political business as usual, with scant attention to the several new crises that have emerged on his watch.
We were given a copy of the text of the talk before he delivered it, and I was shocked to see that there was no change in Biden’s national energy policy in the light of $115 oil and soaring inflation, with prospects of much higher prices due to the cutoff of Russian supply. With the latest U.S. GDP estimate now at zero, and headed into negative (recessionary) territory, the U.S. economy faces the prospect of stagflation, which is inflation combined with lackluster economic growth, for the first time since the Carter era.
In that light, the Biden Administration’s stubborn political allegiance to the the green energy push is a head scratcher, since Russia is also a major supplier of nickel (for lithium-ion batteries), which continues to hit record high prices. A shortage of lithium-ion batteries persists and will continue to hinder the switch to electric vehicles, especially since battery companies, like LG Chem, continue to raise prices.
One lingering problem LG Chem has is their batteries’ tendency to burst into flame. That is one reason VW Group recently lost 3,965 new Audis, Bentleys, Lamborghinis, Porsches, and VWs on a transport ship as many of the EVs onboard caught fire and exasperated firefighting efforts, since lithium battery fires are next to impossible to put out, especially when they are in a ship in the middle of the ocean. The Felicity Ace sank last Tuesday about 250 miles offshore of the Azores Islands, near Portugal. Interestingly, LG Chem recently paid GM $1.9 billion for the Bolt EV battery fires, so it will be interesting if VW Group tries to hold LG Chem responsible for the loss of 3,965 new vehicles valued at about $400 million.
As Europe and the U.S. strive to diversify away from fossil fuels, it will make Western nations more dependent on China (for the processing of lithium and cobalt) and Russia (for nickel in lithium-ion batteries), during a time of acute battery shortage. For example, Lucid Group last week scaled back its 2022 production goal to only 12,000 to 14,000 vehicles, down from its previous goal of 20,000 that CEO Peter Rawlinson cited last November. Lucid has 25,000 reservations for its innovative EV, so its customers must now wait up to two years to get their vehicles, due to ongoing “supply problems.”
The fact that Tesla was not making money on its U.S. operations in the fourth quarter – due partially to the high cost of the lithium-ion batteries – is a bad omen for the Green Revolution. Virtually all of Tesla’s profits were attributable to its Shanghai factory, which uses cheaper, less efficient iron phosphate batteries from CATL. Although LG Chem, SK Innovation, Samsung, and other battery suppliers are ramping up their battery production, the higher prices for lithium, nickel, and cobalt are hindering the EV revolution.
During his State of the Union talk, President Biden addressed the supply chain bottlenecks as one of the reasons why inflation has surged, but he missed the point. He was very critical of the lack of competition among ocean shipping companies, essentially blaming the industry for the higher cost of goods. He threatened to crack down on shippers, but nearly all shipping companies are foreign chartered due to U.S. liability laws, so there is little he can do to attack foreign shipping companies or improve competition.
Crude oil futures rose above $120 per barrel recently on news that 70% of Russian crude oil was “struggling to find buyers,” according to Energy Aspects, as major buyers shunned Russian-sourced crude oil. President Biden said the U.S. and 30 other countries are releasing 60 million barrels of crude oil from strategic reserves, adding that “we stand ready to do more, if necessary, united with our allies.”
That is only a stopgap measure. I was disappointed that President Biden did not call for boosting domestic energy production and making the U.S. energy independent again. Fortunately, higher energy prices help boost domestic production, so North Dakota and other shale fields can come online to boost domestic production. I expect domestic energy production will be a major mid-term election issue and there could be a major leadership shift in Congress, since high prices at the pump have infuriated many Americans.
Inflation Rates Rise While Interest Rates Retreat
The Fed’s favorite inflation indicator, namely the Personal Consumption Expenditure (PCE) index, is now running at an annual rate of 6.1%. The core PCE, excluding food and energy, is now running at a 5.2% annual pace. The increase in the PCE has triggered many economists to call for even more key interest rate increases by the Fed. However, I am expecting that the Fed will become more cautious and increase key interest rates more slowly, due partially to the fact that the European Central Bank (ECB) will not be increasing its interest rates due to rising recession risks from the Ukrainian/Russian conflict.
According to the Atlanta Fed, U.S. GDP is now expected to remain flat (0.0%) in the first quarter, down from its previous estimate of a 0.6% increase. Although the U.S. is much less dependent on Russian crude, the West Coast has been buying more Russian oil as Alaska’s production has declined. California now has $6 per gallon gasoline, so if all Russian crude oil were cut off, $8 per gallon gasoline is possible.
The European Union’s statistics agency on Wednesday announced that inflation in the eurozone is now running at a 5.8% annual pace through February. Further inflation increases are expected due to higher energy prices and supply chain glitches, since some European companies, like VW Group, rely on Ukraine for wiring harnesses and other key vehicle parts. Regardless of surging inflationary pressures there, I do not expect that the ECB will raise key interest rates, due to their imminent recession risk.
Market rates around the world continue to plunge due to a flight to quality. As I have repeatedly said, the Fed never fights market rates. Fed Chairman Jerome Powell testified before the House Financial Services Committee last week, saying that the Fed still plans to raise key interest rates but he also clarified that the Fed would “proceed carefully.” (This last comment by the Fed Chair triggered a big stock market rally!)
The Fed’s Beige Book survey was released last Wednesday, citing widespread labor shortages as well as rising frustration with inflation. The Beige Book survey cited modest to moderate economic growth in all 12 Fed districts, but implied that economic growth was being held back by severe winter weather, as well as workers calling in sick from more Covid testing. The survey also implied that economic growth should pick up in the Spring with most Covid restrictions being dropped and the weather improving.
In other statistical releases, the Institute for Supply Management (ISM) announced on Tuesday that its manufacturing index rose to 58.6 in February, up from 57.6 in January. The new orders component was especially impressive, increasing to 61.7 in February, up from 57.9 in January, while the production component rose to 58.5 in February, up from 57.8 in January. Especially impressive was the backlog of orders component, soaring to 65 in February from 56.4 in January, and the new orders component, which increased to 57.1 in February, up from 53.7 in January. All but one of the 17 industries that ISM surveyed reported growth, so the manufacturing sector remains healthy, and it still has a good order backlog.
On Thursday, ISM reported that its non-manufacturing (service) index declined to 56.5 in February, from 59.9 in January. Economists were expecting a rise to 61, so this was a big disappointment. This is the lowest reading for the ISM service index in 12 months. I should add that any reading above 50 signals an expansion, so the service sector is still growing, but at a slower pace. The deliveries component rose to 66.2 in February, up from 65.7 in January, so that was a positive detail. Furthermore, the order backlog component rose to 64.2 in February, up from 57.4 in January, which bodes well for future service growth.
In the first week each month, the payroll reports come out. On Wednesday, ADP reported that 475,000 private payroll jobs were created in February. This time, large businesses (500 or more employees) created more than the total – 552,000 new payroll jobs – while medium business (50 to 499 employees) created only 18,000 payroll jobs, and small businesses (under 50 employees) lost 96,000 jobs, perhaps reflecting the closure of small retail businesses due to vaccine mandates for customers and employees. (ADP pointed out that the smallest business, with 1 to 19 employees, lost 95,000 of those 96,000 jobs.)
On Friday, the Labor Department reported that total payrolls rose 678,000 in February, substantially above the economists’ consensus estimate of 432,000. Also, December and January payrolls were revised up to 588,000 (from 510,000) and 481,000 (from 467,000), respectively. The unemployment rate declined to 3.8% in February, down from 4% in January. The average hourly wage rose by only 1 cent to $31.58, but average hourly wages are up 5.1% in the past 12 months. Overall, the job market remains healthy.
In between those two widely watched payroll reports, the Labor Department reported on Thursday that weekly unemployment claims declined to 215,000 in the latest week, compared to a revised 233,000 in the previous week. Continuing unemployment claims were 1.476 million, up slightly from the previous week’s revised 1.474 million. Lower unemployment claims reflected the ongoing economic recovery.
Navellier & Associates owns Volkswagen Ag. (VWAGY), a few clients own Tesla (TSLA), per client request in managed accounts, but we do not own General Motors (GM), Lucid Group (LCID), CATL, LG Chem, SK Innovation, or Samsung. Louie Navellier and his family personally own Volkswagen Ag. (VWAGY), via a Navellier managed account, They do not own General Motors (GM), Lucid Group (LCID), CATL, LG Chem, SK Innovation, Samsung, or Tesla (TSLA) personally.