by Louis Navellier
August 31, 2021
The big economic news of late August is usually the annual Kansas City Fed Conference in Jackson Hole, Wyoming, but the on-site meeting was canceled for the second year in a row, due to Covid-19 cases in Teton County. I feel sorry for CNBC’s senior economist, Steve Leisman, who likes to go fishing there. The Jackson Hole conference is a major international event. Although the event is now “virtual” in nature, I suspect that this only means the participants won’t have as many private moments in the cool, clean air.
In his speech on Friday, Fed Chairman Jerome Powell stressed that inflationary pressures are cooling and getting closer to the Fed’s 2% target rate. In his best Fedspeak, Chairman Powell also acknowledged that some inflation is a “cause for concern” and implied that higher prices could be more permanent than he expected. He also cited the impressive payroll growth despite the rise of the Covid-19 Delta variant risk.
Furthermore, Powell implied that a major monetary move now could be “ill-timed,” avoiding any specific reference to timing, leaving any further clarification for the Fed’s upcoming Open Market Committee (FOMC) meeting in late September. Overall, Powell kicked any tapering announcement down the road.
The truth of the matter is that central bankers in the European Union and Japan pioneered negative (or zero) interest rates long ago and are now pulling both Britain and the U.S. into the negative interest rate abyss. Since we cannot tax our way out of today’s rising deficits, Modern Monetary Theory (MMT) tells governments that keeping interest rates near zero can help avoid paying high interest on the national debt.
The European Central Bank (ECB) and the Fed have apparently diverged on their respective monetary policies. While the ECB recently increased its quantitative easing, the latest FOMC minutes reveal that the Fed wants to announce that it will begin tapering in 2022. As a result, the euro has declined 4% against the U.S. dollar so far this year due to positive rates in the dollar vs. zero or negative euro rates.
I remain in the camp that no matter what the Fed announces at its upcoming September FOMC meeting, the Fed will not commence any tapering until 2022 and, even then, will continue its quantitative easing, but at a reduced pace. Inflation effectively allows all central banks to print more money. The major eventual risk is stagnation – after businesses and consumers have spent up a storm with the new money.
In Japan and Europe, their populations are older and they often live in smaller homes, so they tend to save more of their pay toward retirement. In the U.S. our elderly are a smaller percentage, but we tend to live in bigger homes and have bigger families, so consumer spending in the U.S. is not expected to stagnate.
It will be interesting to see how long the U.S. can sustain its 6% GDP growth rate, which is forecasted to persist through the third quarter. In addition to robust consumer spending, there remains a massive order backlog due to supply chain glitches. Furthermore, robust job growth continues to add new consumers, who are expected to continue to boost retail sales. With robust business and consumer spending, this represents a powerful one-two punch that should continue to boost GDP growth the rest of the year.
The inflation bubble that easy monetary policy created is expected to ease somewhat in the fall, especially as demand for crude oil and natural gas ebbs. This seasonal drop in worldwide energy demand is caused by the fact that there are billions more people in the Northern Hemisphere than in the South, so demand ebbs as the weather cools. Unfortunately, much of the wholesale inflation that rippled through the U.S. economy were service costs that are not expected to diminish, so some recent inflation is here to stay.
Government Intervention is not Helping the EV Market – or Much Else
While all eyes are on our blundering exit from Afghanistan, that is only one example of how government planning can be clueless. I am bothered by the Biden Administration’s executive order mandating 50% electric vehicles (EVs) in our fleet by 2030. Our domestic “Big Three,” Ford, GM and Stellantis (formerly Chrysler) are all currently planning to use nickel cobalt batteries, so they are impeded by the acute battery shortage due largely to a lack of battery factories as well as high prices for nickel and cobalt.
In other words, unless new battery technologies are used – as Apple and Tesla (in China) are doing – Biden’s 50% goal by 2030 is just a pipe dream. I want to commend Apple for its foresight in utilizing iron-phosphate batteries that are safer (less fire prone) and can better accommodate fast charging.
Although government can encourage consumer behavior with incentives, they cannot change the law of economics. A good example is when the Biden Administration declared back in late January that the federal government fleet of approximately 600,000 vehicles would make a transition to EVs. The problem is that the UAW – via Ford, GM and Stellantis – are not making anywhere near enough EVs to meet this quota, plus their Mexican plants are not in compliance with Biden’s “Buy American” executive order.
Since Tesla’s workers are not members of the UAW, they have been ignored by the Biden Administration and apparently are not going to be selling any of its popular EVs to the federal government.
Furthermore, an acute shortage of lithium-ion batteries, plus the ongoing semiconductor chip shortage, are curtailing EV production, which is why deliveries of the Mexican-made Ford Mach-e has been postponed. GM is also replacing all the batteries in its Bolt EV in a massive and expensive recall. As a result, I have no faith that the government can effect change. Fortunately, as government struggles, the private sector is expected to boom, which is great news for our growth stocks that have been implementing such changes.
The one thing that our federal government has done that impacted the stock market is that they have caused the money supply to soar 40% in the past year, which is why residential real estate, the stock market, commodities and some collectibles have prospered. The velocity of money, which is how fast money is changing hands, remains high as consumers get out and about, despite the Covid-19 Delta variant, so 6% annual GDP growth persists. Another boost was that the bulk of the Covid-19 relief went directly to businesses and consumers, who can spend money more efficiently than the government.
I am also keenly aware that 61% of Americans pay no federal income taxes and that two-thirds receive more in benefits from the federal government than they contribute. However, those who pay high taxes are becoming more energized and will be asserting themselves via economic activity as well as voting.
In California, one of the reasons that some experts expect Governor Gavin Newson to be recalled in September is that the state unemployment office has had repeated delays processing claims due to fraud. Another example is that many prisoners in California that fight the wildfires in exchange for a lower sentence, have been freed due to Covid concerns, so there is an acute shortage of firefighters. Finally, when your power is shut off every fire season, like the folks in Marin County know all too well, you may not be too happy with your governor, so the California recall could set off a political earthquake.
In summary, government is now under siege due to chronic mismanagement. When even CNN turns on their favored President and strives to humiliate U.S. leadership through its vast international influence, America has a problem. Fortunately, our government’s attempt to influence the U.S. economy, outside of their generous money printing, has largely failed. In other worlds, it is time for capitalism to reassert itself and that is exactly what I expect to see happen in the next few years, so I want to remind all investors that our best defense is a strong offense of accumulating our fundamentally superior growth stocks!
The Economic News Continues “Mixed,” Giving the Fed Reason to Delay Tapering
The economic news last week continued to be mixed. The National Association of Realtors announced that existing home sales rose 2% in July to an annual pace of 5.99 million. Median home prices soared 17.8% in the past 12 months to $359,000. Interestingly, median home prices slipped slightly, down from $362,000 in June. There are currently 1.32 million homes for sale, a fairly small (2.6-month) supply. I expect median home prices to remain high until existing home sales slow a bit and inventories rise.
The Commerce Department on Tuesday announced that new home sales rose 1% in July to an annual pace of 708,000. Also, June’s new home sales were revised up to an annual pace of 701,000 from 676,000 previously estimated. New home sales were strongest in the West, where they have risen 14.4%, but of the 367,000 new homes for sale in July, 29% have not been started yet, since many builders are striving to pre-sell new homes due to erratic building material costs. The 226,000 new homes under construction represent the highest level since 2008. At the current annual sales pace, there is a 6.2-month supply.
The Commerce Department also announced that durable goods orders decreased 0.1% in July to $257.2 billion, due largely to a 2.2% decline in transportation orders, but excluding transportation, durable goods orders rise 0.7%. The global semiconductor chip shortage continues to impede vehicle production and Toyota is the most recent auto manufacturer to announce that it had to curtail production. I should add that economists expected a 0.5% decline in July, so the durable goods report was better than expected.
The Labor Department on Thursday announced that new jobless claims rose to 353,000 in the latest week, up slightly from a revised 349,000 in the previous week. Continuing unemployment claims rose to 2.862 million in the latest week, up from 2.82 million in the previous week. It is possible that this is due to lower hospitality hiring due to states like Hawaii discouraging visitors and states like Wyoming discouraging large indoor gatherings (which is why the Fed’s Jackson Hole conference is now virtual).
The Commerce Department on Thursday estimated that second quarter GDP growth rose 6.6%, up from its 6.5% initial estimate. The trade deficit remains a major threat to GDP growth, but fortunately, the trade deficit declined 6.2% in July, perhaps aided by a stronger U.S. dollar, which helps put downward pressure on commodity prices. In July, imports declined 1.4% to $233.9 billion, while exports rose 1.5% to $147.6 billion. Just how the port bottlenecks and part shortages impacted imports remains uncertain, but overall, the July trade deficit bodes well for continued strong GDP growth in the current quarter.
Navellier & Associates does own Tesla (TSLA), for one client, per client request in managed accounts and Apple Computer (AAPL). We do not own Stellantis (STLA), Ford (F), Toyota (TM), or General Motors (GM). Louis Navellier and his family do not own Tesla (TSLA), General Motors (GM), Stellantis (STLA), Toyota (TM), or Ford (F), personally. They do however own Apple Computer (AAPL) via a Navellier managed account and in a personal account.