by Louis Navellier
August 30, 2022
Fed Chairman Jerome Powell surprised both me and the stock market at the Kansas City Fed’s annual Jackson Hole, Wyoming conference by being much more hawkish than I could have ever anticipated. First, Powell said that the Fed is not yet convinced that inflation has peaked, even though the core inflation rate has been falling since March, and the Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index, has declined to 6.3% in July, from 6.8% in June. Even more vital (to the Fed), the core PCE, excluding food and energy, declined to 4.6% in July, down from 4.8% in June.
Second, Chairman Powell said that “with inflation running far above 2 percent and the labor market extremely tight, estimates of ‘longer-run neutral’ are not a place to stop or pause,” implying that there might be additional key interest rate hikes after September 21st. I don’t agree. Trust me, the Fed never fights market rates, which are around 3% now, so after a 0.75% interest rate hike on September 21st, the Fed funds rate will be at 3% and the Fed will then likely be “neutral” (in synch with Treasury yields).
Any further fine-tuning on interest rates would likely happen at the December FOMC meeting, since the November meeting is just six days before the elections, when the Fed won’t want to disrupt the market.
Finally, Chairman Powell said, “We must keep at it until the job is done,” implying that the Fed may continue to raise key interest rates well beyond September 21st. Powell also hedged that remark by saying, “Our aim is to avoid that outcome by acting with resolve now,” which I interpreted as he wants the last rate hike to happen on September 21st, but the Chairman’s other hawkish comments drowned out that fact.
Historically, Fed Chairman Powell has tried to be reassuring, not shocking like this, and in recent months Powell has backed up President Biden and Treasury Secretary Yellen by saying that the U.S. is not in a recession, despite two straight negative quarters of GDP growth, which makes this talk out of character.
In a dramatic confirmation of this change of definitions for recessions, Wikipedia has just redefined what a recession is, citing the National Bureau of Economic Research (NBER), which says that a recession is “a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” In other words, new definitions mean the U.S. did not have a recession in the first half of 2022.
The Kansas City Fed conferences began in 1979 and have been at Jackson Hole since 1982. Our friends at Bespoke reported that the S&P 500, since 1979, tends to rally when the Kansas City Fed conference meets. This could be due to the wonderful weather and dramatic scenery there, but the stock market also tends to rally heading into the Labor Day weekend, so perhaps the usual Jackson Hole conference market surge is just the early part of the Labor Day weekend rally, but one thing is certain, and that is there is now more uncertainty after Fed Chairman Powell’s speech. The stock market does not like uncertainty and unfortunately, Chairman Powell did not paint a clear picture of where the Fed and inflation is heading.
Most Economic Indicators Say, “No Recession in America” (Except in Housing)
Regarding GDP growth and the chances of a recession, the Commerce Department revised its estimate for last quarter’s GDP growth to a negative annual pace of just -0.6%, up from a negative rate of -0.9% previously. The final revision to second quarter GDP growth will come at the end of September, so if they can find some real growth, we may be able to avoid that dreaded second straight quarter of falling GDP.
However, the housing market is clearly in a recession. The Commerce Department on Tuesday announced that new home sales declined 12.6% in July to an annual pace of 511,000, which represents a 6½-year low. This was much lower than economists had expected. They forecasted the new home sales rate would slow to a 575,000 annual pace, down from a revised 585,000 annual pace in June. Also, the inventory of 464,000 new homes for sale represents an abnormally high 10.9-month supply. Due to high inventories, many builders may now increasingly have to discount new home prices to reduce inventory.
In other news, the Commerce Department announced on Wednesday that durable goods orders in July dipped by less than $0.1 billion but were essentially unchanged. This was a big disappointment, since economists were expecting durable goods orders to rise 0.8%. However, the details are encouraging: If you exclude defense aircraft orders, which plunged nearly 50% in July, durable goods rose by a more robust 1.2%. Also, core durable goods from businesses orders rose 0.3% in July, and commercial aircraft orders rose 14.5% in July, as Boeing reported 130 new plane orders compared to just 50 in June. Overall, the flat July durable goods change was almost entirely attributable to a big drop in defense aircraft orders.
On Thursday, the Labor Department announced that weekly unemployment claims declined slightly to 243,000 in the latest week, down from a revised 245,000 in the previous week. Continuing unemployment claims declined to 1.415 million in the latest week, down from a revised 1.434 million in the previous week, so unemployment is not a problem yet, even though the four-week moving averages rose slightly.
Speaking of the labor situation, last Wednesday, I was talking to a friend in Dearborn, Michigan who is a major auto supplier. I asked him how the morale was at Ford, since they recently announced 3,000 more layoffs in addition to the 8,000 announced when the CATL battery deal was signed. He admitted that the morale was horrible at Ford and that the EV transformation is being subcontracted out to other firms, like CATL, LG Chem and SK Innovations, which are Ford’s primary battery suppliers.
Although teaming up with CATL will allow Ford to offer less efficient iron-phosphate batteries, like Tesla does in China and Europe, its current lithium-ion battery suppliers, namely LG Chem and SK Innovations, remain constrained by acute shortage of cobalt as well the high prices of lithium and nickel, so Ford is gearing up to comply with the new California mandate to switch to 100% EVs by 2035.
One downside of the EV transformation is that many Ford executives are losing their jobs. Furthermore, since EVs have fewer parts than vehicles with engines, fewer manufacturing jobs will be needed, so there will also likely be mass UAW layoffs in the upcoming years as the EV transformation unfolds.
I should add that my family’s Audi e-tron EV has been at the dealer for over five weeks now waiting for the approximately 740-pound battery pack to be removed for further diagnosis. The reason it is taking so long is that my Audi dealer only has one lift to remove the battery pack and there were several other e-tron’s ahead of me. For our e-tron EV to fail after only 22,000 miles is scary, plus all the other e-tron battery failures sitting at our Audi dealer. The problem with our e-tron EV is that it will not charge.
As tough as things are here, they are worse in Europe. Electricity is so expensive in Britain that it makes more sense for many British citizens to pay $10 per gallon for gasoline, rather than to charge an EV at home. Furthermore, electricity rates are due to go up on October 1st, unless the new British Prime Minister (who will be announced on September 5th) intervenes to stop the impending electricity rate hike.
As the cost of EVs continues to rise due to high lithium, nickel and cobalt prices, the EV revolution is not unfolding as many had hoped. I find it very interestingly that Tesla still does not pay U.S. taxes, since it only makes money on its Shanghai plant as well as selling EV tax credits. Right now, EVs are toys for the rich. Mass adoption of EVs will be slow, due to high prices for batteries as well as high electricity prices.
Navellier & Associates owns Ford Motor Co. (F), a few accounts own Boeing Co. (BA), and Tesla (TSLA), per client request in managed accounts. Louis Navellier and his family own Ford Motor Co. (F), via a Navellier managed account. He does not own Tesla (TSLA) or Boeing Co. (BA) personally.
What Will Vladimir Putin Do Next?
Vladimir Putin is still fuming over the car bomb attack that killed ultra-nationalist, Darya Dugina, the daughter of his close advisor, Alexander Dugin. Specifically, Putin called the assassination “a vile crime” and pledged retaliation. Andrey Gurulyov, the former deputy commander of Russia’s southern military district warned the West of impending war and said: “We’re at war with the United States and the UK … If the British soldiers end up on the territory of Ukraine, this war won’t be taking place in Ukraine.”
This rhetoric sent natural gas prices to a 14-year high, and crude oil prices surged, too. Not surprisingly, Russia blames Ukraine for the car bombing, especially in the wake of Ukraine’s special forces conducting successful strikes within Crimea. However, it is also possible that the car bomb came from dissidents in Russia. Whoever conducted the attack, it was likely a highly trained military team, since the explosives were massive and clearly meant to send a signal to Putin’s circle that they are no longer safe in Moscow.
The Kremlin is facing increasing domestic pressure now that Crimea and Moscow are no longer secure, but the good news is that if and when the Ukrainian war ends, the stock market could surge 40% to the upside in a massive relief rally. For now, due to the bomb, all bets are off for a cease fire, so the best we can hope for is to accumulate food and energy stocks that are prospering from Russia’s bad behavior.
One other important trend is that a severe drought is impacting central Europe and China, which is hindering economic growth, since transportation of raw materials on rivers has become increasingly difficult. Normally, the weather does not impede economic growth for long, but until heavy rainfall fills up the major rivers in both Europe and China, more raw material and goods must be transported on trucks and rail cars. Naturally, these disruptions are impeding GDP growth, so the U.S., with its more open lines of transportation, suddenly has a big advantage over both Europe and China.
There is one thing that Wall Street seems more afraid of than China and Russian aggression, and that is rising Treasury bond yields. During Monday’s big selloff, the 10-year Treasury bond yield rose back above 3%. The higher Treasury yields soar, the more the Fed must raise key interest rates to get to “neutral.” The initial decline in Treasury yields since mid-June was caused by bond investors believing that inflation had peaked as well as a strong U.S. dollar attracting foreign capital that was pushing down Treasury yields. Well, the good news is the U.S. dollar remains stronger than ever, since the euro fell below parity, so I would expect that foreign capital will return and push Treasury bond yields lower.
I should also add that a strong U.S. dollar also puts downward pressure on commodity prices, since commodities are priced in U.S. dollars, so inflation should moderate further in the upcoming months.
The major downside of a strong U.S. dollar is that approximately half of the S&P 500’s revenues are from outside the U.S., so multi-national companies will be fighting a currency headwind, which may lead to more analyst earnings estimate cuts. This is a good time to remember that the commodity stocks that are profiting from higher commodity prices, like food and energy, are likely to remain an oasis for investors.