by Louis Navellier

June 29, 2021

Last weekend saw record heat in the Pacific Northwest, but a bigger danger is the long-term drought in the Southwest. The problem has become so bad that farmers in Arizona and California’s Central Valley are now at risk of being “cut off” from water, so crop prices for fresh vegetables, fruits, and nuts are expected to rise. The “mega-drought” out West is also expected to cause electricity prices to rise due to hydroelectric power plant output falling, being rationed, or possibly shut down.

The “heat dome” out West is already straining electrical grid output, and more outages will be likely when hydroelectric output begins to disappear. For example, the hydroelectric plant at Lake Oroville in Northern California is expected to close for the first time ever as the lake drops to record low levels.

I can make an argument that higher food and electric prices may be “transitory,” as the Fed has asserted, but this “transition” may not be dissipated until the weather cools in the fall. California is in the biggest pickle, since they are now increasingly dependent on natural gas power plants, even though the state has banned natural gas for new homes, and it has closed three massive natural gas plants on the ocean.

During the last California governor’s recall – the one for Gray Davis back in 2003 – the state did not have enough natural gas “peaker” power plants, so brownouts were common. This time around, it will be interesting to see if the recall of California Governor Gavin Newsom will also coincide with more electric outages. I am sure Governor Newsom will blame “climate change” for any brownouts, but California’s war against natural gas is not helping the state make a transition to greener electricity options.

Interestingly, The Wall Street Journal featured an article last Tuesday titled, “Rising Inflation Looks Less Severe Using Pre-Pandemic Comparisons.” Clearly, this article defends the Fed’s claim that inflation is “transitory.”  Although the Journal (and the Fed) may be right, we still may have to wait until the fall for crude oil and other commodities to ebb as seasonal demand weakens. Any way you slice it, the Fed is entering into a Brave New World and has stuck its neck out with its “transitory” inflation prediction.

Speaking of the Fed, Chairman Jerome Powell testified before Congress last week. He claimed that the shortage of used cars, computer chips, and workers will fade over time and bring inflation closer to the Fed’s 2% long-term target. Specifically, Chairman Powell said, “If you look behind the headline and look at the categories where these prices are really going up, you’ll see that it tends to be areas that are directly affected by the reopening,” adding, “That’s something that we’ll go through over a period. It will then be over. And it should not leave much of a mark on the ongoing inflation process.” Chairman Powell also said that although he has “a level of confidence” in the prediction that inflation will start to subside, “It’s very hard to say what the timing will be.” Translated from Fedspeak, Powell is beginning to waffle!

The Commerce Department on Friday announced that the Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index, rose 0.5% in May, slightly below the economists’ consensus expectation of a 0.6% increase. In the past 12 months through May, the PCE is now running at 3.4%, the fastest annual pace in 29 years (since April 1992). Coincidently, the Fed’s new “transitory” inflation target is 3.4%, up from 2.4%. The core PCE, excluding food and energy, rose 0.4% in May and 3.9% in the past 12 months. It will be interesting to see if the Fed will raise its target to match 3.9% “core” rate.

The bottom line is that the Fed will remain accommodative, and the “Goldilocks” environment of low interest rates and strong earnings growth will likely persist for the foreseeable future.

Inflation is Evident in the Housing Market, Too

Speaking of inflation, the National Association of Realtors on Tuesday announced that in the past 12 months, median home prices have risen 23.6% to $350,300. Existing home sales rose 44.6% in the past 12 months and are now running at an annual sales pace of 5.8 million. Only 1.23 million existing homes were for sale in May, up 7% from April, but down 20.6% compared to a year ago. At the current annual sales pace, there is only a 2.5-month supply, so median home prices are expected to continue to rise.

Meanwhile, the Commerce Department reported on Wednesday that the median new home price in the past 12 months surged 18.1% to $374,400, so affordability maybe hindering new home sales.Sales volume declined in May to an annual pace of 769,000, and April’s new home sales were revised down to an annual pace of 817,000, down sharply from an annual pace of 863,000 previously reported.

New home sales are now running at the slowest annual pace in the past 12 months. Economists were expecting May new home sales to come in at an annual sales pace of 870,000, so this is a big surprise. However, due to high new home prices, many home builders are still expected to report record earnings.

The biggest economic news on Thursday was that the Commerce Department announced that durable goods orders rose 2.3% in May. Even though that was below economists’ expectation of a 2.7% increase, it was welcome news after the 0.8% decline in April. Orders for civilian aircraft surged 27.4% in May after soaring 31.5% in April, so airlines are ordering lots of new planes. Excluding transportation, durable goods orders rose 0.3% in May, so some of the supply chain glitches are still impeding the manufacturing sector, but this weakness will also allow the Fed to remain accommodative for the foreseeable future.

One reason that the Fed is remaining accommodative is that it has not yet fulfilled its unemployment mandate. The Labor Department on Thursday reported that new weekly unemployment claims came in at 411,000, down slightly from a revised 418,000 the previous week. Economists were expecting new weekly unemployment claims of 380,000, so this was a disappointment. Continuing unemployment claims were a bit better, coming in a 3.39 million, down from a revised 3.534 million in the previous week and are now at the lowest level since March 21, 2020. Economists were expecting continuing weekly unemployment claims to come in at 3.46 million, so this was a pleasant surprise.

And finally, the Atlanta Fed on Thursday revised its second-quarter GDP estimate to a 9.7% annual pace, down from its previous estimate of a 10.3% annual pace. (The next GDP estimate is due on Friday.) With first-quarter annual GDP now finalized at a 6.4% annual pace, there is no doubt that growth accelerated in the second quarter, which is why Corporate America should be announcing record second-quarter results.

Cryptocurrencies are Certainly Not Suffering from Inflation Lately!

One asset class that is suffering deflation are cryptocurrencies, since China has been enforcing its ban on cryptocurrencies. Specifically, China’s four biggest banks refuse to help customers trade bitcoin and other cryptocurrencies. This has accelerated the cryptocurrency crash, causing an estimated $1.3 trillion loss.

One of the dirty secrets of one of the largest U.S. financial networks is that it tends to base its program content on Google Analytics (i.e., “what’s trending”), so their coverage of bitcoin, Redditt, Robinhood, and other “hot” topics” is based on what is trending in Goggle searches. The danger of this type of media programing is that it facilitates financial bubbles with the bubble bursting during peak “mania” season. Please remember that crowds are not too “smart.” Other assets may now benefit as the crypto crowd runs for the exit. (Here is a link to what I said about bitcoin on CNBC last Wednesday.)

I continue to be amazed at Treasury bond yields – despite the inflation that has swept the world due to the supply chain glitches, plus the heat wave in our West that could cause crop prices to rise and deplete water to farmers. Nonetheless, the Treasury auctions last week were characterized by strong demand and higher bid-to-cover ratios, so there was briefly some downward pressure on intermediate Treasury yields.

Interestingly, the Treasury will need the deficit ceiling raised before Congress goes on its summer recess in August. This time, they cannot do their normal accounting tricks to work around the ceiling due to the way that the Covid-19 relief spending was written. As a result, our elected leaders will have to lift the deficit ceiling. As they procrastinate and bicker among themselves, Treasury Secretary Janet Yellen is expected to get more vocal about the debt ceiling and how she does not want to suspend Covid-19 relief.

The other interesting news last week was that Panasonic on Friday announced that it sold its entire stake in Tesla for about $3.6 billion. Panasonic said the sale of Tesla’s stock will not impact its relationship as Tesla’s primary battery supplier in the U.S. The Gigafactory outside Reno was a $1.6 billion investment for Panasonic and the company endured years of operating losses until turning a profit last year.

Outside the U.S., Tesla is using other battery suppliers, like CATL and LG Chem. Panasonic is also diversifying its customer base and is working with Toyota to build solid state batteries. In my opinion, whoever wins the solid-state battery race will be the ultimate winner in the electric vehicle (EV) race.

Navellier & Associates does own Tesla (TSLA), for one client, per client request.  We do not own CATL, LG Chem, Panasonic, or Toyota. Louis Navellier does not own Tesla (TSLA), CATL, LG Chem, Panasonic, or Toyota personally.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Please see important disclosures below.

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Sector Spotlight by Jason Bodner
Are the New “Roaring 20s” About to Begin?

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Louis Navellier
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