by Louis Navellier
April 26, 2022
While the U.S. press was more exercised over the words of Fed Chair Jerome Powell, perhaps the market was more shaken by the bizarre words and behavior of European Central Bank (ECB) President Christine Lagarde, who was on the same IMF panel with Powell and was a bit more colorful, since she refused to endorse a potential July interest rate hike by saying, “For goodness’ sake, let’s wait until we have the data and then move on to decide.” Lagarde also said the U.S. labor market is much stronger than Europe’s, and implied that the Fed could move more aggressively to fight inflation than the EU could. In the past, she has said she wanted to wait until the Ukrainian disruption was over, since it created a lot of uncertainty.
Overall, the euro will remain weak due to Lagarde’s reluctance to raise key interest rates, while the U.S. dollar remains strong, due to the Fed’s anticipated 50 basis point rate hikes at upcoming FOMC meetings. With long-term U.S. rates near 3% and short-term rates soon to rise to near 1%, the U.S. dollar will stay stronger than the euro, whose official rate remains near zero, so the world will keep buying U.S. dollars.
In addition, the U.S. economy is stronger than Europe’s, which is sinking into recession. This week, we get the official first estimate of first-quarter GDP. Last Tuesday, the Atlanta Fed revised its first-quarter GDP estimate up to a 1.3% annual rate, up from its previous estimate of a 1.1% annual pace. Thanks to a persistently strong consumer, the U.S. should be able to skirt a recession, as order backlogs will keep our manufacturing sector strong, with an even stronger service sector due to our amazingly upbeat consumer.
Specifically, the University of Michigan’s preliminary consumer sentiment index recently surged to 65.7 in April, bouncing off an 11-year low of 59.4 in March. The “expectations” component surged to 64.1 in April (up from 54.3 in March), while the “current conditions” component rose to 68.1 (from 67.2). Note: This could be a “spring surge,” since consumers are often “seasonally optimistic” when Spring arrives.
America is not only beating Europe in the currency and economic arenas, but we’re probably beating China, too, despite their rosy official statistics, just released. Specifically, China just announced that its GDP rose at a 4.8% annual pace in the first quarter, but many economists were either skeptical of this number, or doubted that this GDP growth could be sustained this quarter due to the Shanghai lockdown.
First, how can China’s GDP grow near 5% with factories closed down and home sales down 25.6% in the first quarter due to the Evergrande debt crisis? Also, how can Chinese officials expect 5.5% annual GDP growth in 2022 with their premier port and largest city, Shanghai, almost totally shut down? Unless there is a sudden miracle and double-digit growth in the second half, China could fall short of this lofty goal.
Currently, the nearly 30 million people trapped in Shanghai are not happy campers due to the oppressive Covid lockdown there, enforced by Chinese authorities. Shanghai is three times larger than New York City and its citizens have been forced to stay in their apartments and undergo virus testing. If citizens test positive, they are then forced into mass quarantine centers with 24/7 lighting and no showers. If a Shanghai citizen cannot have someone take care of their pets, those pets are killed by Covid authorities.
Shanghai accounts for a tremendous amount of China’s GDP and operates its biggest port. Massive U.S. companies doing business there, like Apple and Tesla, have been negotiating to restart their production, which stalled due to these oppressive Covid lockdowns. If Apple or Tesla are allowed to restart production, their workers must essentially sleep at the manufacturing plants as long as the lockdowns persist in Shanghai.
Due to the fact that China’s economic growth has stalled and much of Europe is in a recession, many economists now believe that inflation may have “peaked” in March. Obviously, any inflation relief will be welcome, but the peak in energy-based inflation may have to wait until September, when worldwide demand begins to fall as the weather cools and driving miles are reduced in the Northern Hemisphere.
Can the Fed end inflation while avoiding a “hard” (recessionary) landing? The jury is still out. The Wall Street Journal last week had a great article pointing out that in the past 80 years the Fed has never been able to lower inflation “as much as it is setting to do now … by 4% … without causing a recession.”
The difference this time is that the unemployment rate is very low, and consumers are still increasing their credit card debt, which is a sign of consumer confidence. According to Citigroup, first-quarter credit card spending rose 23%. JPMorgan reported a 29% rise, and Wells Fargo reported a 33% increase. JPMorgan also pointed out that charge-offs (bad credit card debt) have remained below 1.5% for three straight quarters, which caused Jamie Dimon, JPMorgan CEO, to say, “Charge-offs are extraordinarily good,” and added, “As a matter of fact, way better than they should be.” So if credit remains available to consumers, it is very possible that the Fed could engineer a soft landing and avoid a recession as key interest rates rise.
The U.S. Economic Indicators (Particularly in Housing) Remain Positive
The economic news last week was largely positive. For example, the Commerce Department announced that housing starts rose 0.3% in March to an annual pace of 1.793 million. Also notable was that building permits rose 0.4% in March to an annual pace of 1.873 million. February’s housing starts were also revised up to an annual pace of 1.788 million, up from 1.769 million first reported. The strength in housing starts was a surprise, since economists were expecting them to decelerate 2.4% to 1.745 million. So, despite the fact that mortgage rates are now up to 5%, the housing market remains surprisingly strong.
On Wednesday, the National Association of Realtors announced that existing home sales declined 2.7% in March to an annual pace of 5.77 million, but in the past 12 months, median home prices rose 15% to $375,300. The best news was that the inventory of existing homes for sale rose 11.8% to 950,000, so there is now a two-month supply of homes for sale at the current annual sales pace.
The Fed’s Beige Book survey was released on Wednesday and revealed some interesting details. First, the Fed remains worried about inflation since demand continues to outstrip the supply of everything from labor to goods. Second, the recent lockdowns in China, as well as the spike in energy and food costs due to Russia’s invasion of Ukraine, are exasperating inflationary pressures. Specifically, the Beige Book said, “Supply chain backlogs, labor market tightness, and elevated input costs continued to pose challenges on firms’ abilities to meet demand.” The Beige Book concluded by saying, “Outlooks for future growth were clouded by the uncertainty created by recent geopolitical developments and rising prices.”
Translated from Fedspeak, the Fed seems to be saying they are helpless in fighting inflation, but will continue to raise interest rates to try to prick the inflation bubble and engineer a soft economic landing.
And finally, the Labor Department on Thursday announced that weekly jobless claims declined to 184,000 in the latest week compared to a revised 186,000 the previous week, and continuing unemployment claims declined to 1.417 million in the latest week vs. 1.475 million in the previous week. This marks the ninth week in a row that weekly jobless claims have been below 200,000, so unemployment claims remain very positive for continued low unemployment in the upcoming months.
A Sound Energy Policy is a Major Key to Avoiding Hyper-inflation or Recession
If the Democrats don’t want to face a historic Congressional defeat in the November election, they better “get real” about their energy policies real fast. The lithium-ion battery shortage is now becoming increasingly obvious as companies struggle to cope with high lithium, nickel, and cobalt prices, which threaten to postpone the much-touted (but way too ambitious) electric vehicle (EV) revolution.
As a result of these added costs, Tesla has been raising prices for all its EVs, but the most interesting development is that its Model Y from the new Austin factory – with the latest and greatest 4680 batteries with 90% nickel – only has a 276-mile range. This is because Tesla has purposely shrunk the Austin-built Model Y’s battery pack, apparently so that it can sell more cars. Obviously, with Tesla now operating another new manufacturing plant in Berlin, Germany, the demand for the latest and greatest lithium-ion batteries (those with high nickel content) may continue to outstrip supply, which is why Bloomberg has said that the EV battery shortage is becoming even more acute than the semiconductor shortage.
Last Tuesday, The Wall Street Journal cited Rivian CEO R.J. Scaringe’s warning that the shortage of battery supplies for EVs could surpass the semiconductor shortage. Specifically, Scaringe said, “All the world’s (battery) cell production combined represents well under 10% of what we will need in 10 years,” adding that, “90-95% of the supply chain does not exist.” His alarm was echoed by Tesla’s Elon Musk.
According to Benchmark, raw materials now account for 80% of the cost of a lithium-ion battery, up from 40% in 2015. Specifically, Benchmark said that materials for the battery cathode, such as lithium, cobalt, and nickel, have collectively risen about 150% in the past year, including 25% to 30% in the past month! This is why Rivian recently had to raise the price on its pickup by $17,000, and $20,000 more on its SUV.
One reason why Tesla posted record first-quarter profits last Wednesday is that the company’s regulatory tax credits more than doubled to $679 million (vs. the previous quarter). On the Tesla conference call last Wednesday, CEO Elon Musk said that higher lithium prices are “a limiting factor” to EV growth. In the first quarter, the average Tesla cost $52,200, which was 2.9% higher than the fourth quarter.
In their earnings statement, Tesla said, “Our own factories have been running below capacity for several quarters as supply chain became the main limiting factor, which is likely to continue through the rest of 2022.” CEO Musk also added on the Tesla conference call that although severe supply chain pressures are curtailing Tesla’s output, Tesla’s new manufacturing plants in Austin (Texas) and Berlin (Germany) should enable the company to overcome some bottlenecks and make “over 1.5 million cars this year.”
The fact that Russia is a major nickel supplier is just one of the many catalysts behind soaring prices for lithium-ion battery components. Another factor was rising demand for EVs, especially in China and Europe. Between Russia’s commodity ban by Western nations, and more supply chain disruptions from the Shanghai Covid shutdown, now we have Russia escalating the conflict with the U.S. via a diplomatic pouch sent to Washington DC apparently demanding that the U.S. stop supplying Ukraine with weapons!
Although the Ukraine war is now concentrated in the East and along the Caspian Sea, Russia continues to launch cruise missiles at Lviv and Kyiv to terrorize Ukrainian citizens. Also, Russia flew two TU-160 nuclear bombers over Ukraine, escorted by fighter jets, to further terrorize citizens. Clearly, the Russian invasion of Ukraine is not over, and it now threatens to draw in NATO countries, so uncertainty persists.
I should add that the probability of a Russian debt default is rising, which could trigger the U.S. seizing more Russian assets, including possibly the assets of the Russian central bank, where $642 billion in foreign currencies are currently frozen. The U.S. did seize $3.5 billion in assets from Afghanistan’s central bank, so central banks have been used as a major weapon, in addition to economic sanctions.
However, if the U.S. and its allies try to seize the assets of the Russian central bank, it will be interesting to see if Russia starts flying its TU-160 nuclear bombers over Europe. The Russian state media is already saying that World War III has begun, but many in Russia remain skeptical of these Doomsday warnings.
Navellier & Associates owns Apple Computer (AAPL), and a few accounts own Tesla (TSLA), per client request in managed accounts. We do not own China Evergrande Group (EGRNF), Citigroup (C), JPMorgan (JPM), Rivian Automotive (RIVN), and Wells Fargo (WFC). Louis Navellier and his family own Apple Computer (AAPL), via a Navellier managed account and Apple Computer (AAPL), in a personal account. He does not China Evergrande Group (EGRNF), Citigroup (C), JPMorgan (JPM), Rivian Automotive (RIVN), or Wells Fargo (WFC) personally.