Price at the pump has cooled off from it's worst prices back in the early summer, but if you know where to look there are some signals that energy may still be challenging. Then there's the JOLTS (Job Opening and Labor Turnover Survey) number that we've been talking about the Fed wanting to see come down, but DIDN'T in August!! As such, inflation and the Fed waging war against it with rate hikes remains the challenge facing the markets presently.
Listen in as Jesse & Chris chat through these topics, learn a little German and Polish, and work to provide some clarity on what's happening now in markets.
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Charts and write-up below...
We began by discussing if Jesse had considered an electric vehicle, and Jesse shared that based on understanding of resale value, no - but they are cool. Chris shared a repair estimate from Twitter of a new EV battery for a Chevy Volt ($34 for coolant, and $26,850 for a new battery!):
From the LA Times: On August 25th, California banned sales of new gas powered cars by 2035, followed shortly thereafter by Massachusetts, and now Virginia is discussing as well:
But, as it stands, only 2% of all automobiles right now in the United States are electric vehicles. While they may be more green, we keep seeing reports that the infrastructure is challenged.
And then, from the California Independent System Operator (who according to Wikipedia is a non-profit ISO that oversees California bulk electric power system, transmission lines, and electricity market generated and transmitted by its member utilities) a note came on August 30th that with an “excessive heat warning”, it will stress the energy grid, and they warned of blackouts. Among the solutions recommended to Californians: conserve energy by putting thermostats at 78 degrees or higher, avoid using large appliances, and don’t charge your electric vehicle!
We thought it was odd that the state is planning to restrict you from buying a gas vehicle, but the power grid is so overloaded that you can't charge your vehicle to get anywhere. These announcements were five days apart. So, perhaps the infrastructure is just not there yet!
Speaking of energy challenges, we learned a new word: Brennholz. Turns out that in German, Brennholz means “firewood”. And looking at Google Trends, and narrowing for just Germany, the Germans are searching for this word more than any time in the past 5 years:
As we mentioned you can go on Google Trends and you choose just about any country to see specifically for what's being searched.
It would seem that some Germans are pretty concerned about having energy to keep them warm this winter because of the Ukraine-Russia war, and the lack of gas.
The next picture is a utility bill for a coffee shop in Westmeath, Ireland for 73 days (a little random to see a bill for 2 ½ months, but maybe that’s how they send bills in Ireland).
The $US dollar and Euro are trading basically at parity right now ($1 = €1), so this power bill is $3,934 per month for the coffee shop. Seems like the potential for a challenging winter ahead.
The same Google Trends phenomenon is coming out of Poland. The next picture is a search for wegiel, or coal.
Obviously, the concern about fuel for the winter in both Eastern AND Western Europe is high, and the prices have been going up exponentially.
The Fed funds Rate (short term interest rates): looking at the market’s guess on where the Fed Funds Rate ought to be by the end of the year, the market thinks there is over 60% chance the rate will be 3.75%. A month ago (end of July), that expectation was 3.25%. For context, the Fed Funds rate is currently 2.25%, so 3.75% by the end of the year is quite a jump (70% higher) – all while in most aspects, the economy has been slowing. While that may appear ominous, it also begs the question, is there a potential for less bad information going into the end of the year?
We talked about going to Jackson last week and in Jay Powell’s, he said, you know, listen, this is going to have some effect on labor conditions which may have some effects and pain on families.
Jesse made the point that in an eight minute speech, Powell said the word “pain” three times. There was no ambiguity in what he was forecasting in regards to what they needed to do to stem off inflation.
While none of this is positive, another question is what the Fed’s verbiage does to slow the economy as well. In market terms, less bad often equals good.
This next image is from a research report from our friend, Nick Colas, at DataTrek that today's Fed lives in the shadow of the 1970’s Fed. And, you know, the Fed missed a chance to kill inflation in ‘75 and ‘76, an error only corrected by manufacturing a deep recession.
So let's look back at that error referenced in the 70’s (chart on next page). The purple is the Fed Funds Rate, meaning raising interest rates to slow down the economy and kill inflation. And the orange is the inflation rate itself. You can see a couple of times where the Fed ratcheted up rates and you saw inflation kind of rolling over. And then the Fed let off the gas. And then you can see going into 1980 where the Volcker Fed kept the Fed Funds rate higher for longer, and they squashed inflation. Volcker just said no more of this.
Colas’ point is a good one: they don't want to let off too soon so as to allow it to rear its’ head again. They're also fighting some of the criticism coming out of last year that they should have started the process of raising interest rates sooner.
The obvious question is, what trouble does that cause in other aspects of the economy and markets?
The next chart is from the Bureau of Labor Statistics, but courtesy of our friend Jim Bianco. And he pointed out that every inflation forecast ends at 2% because, oh, we're going to get it down and this is how it's going to work out. And yet every single month this year, except for July, you've seen inflation numbers increase while those inflation forecasts just get pushed further out.
So the big question is, does the Fed have to adjust? Is 2% the correct target for Fed Funds rate, or is it going to be 3% in the future? I mean, it used to be we talked about inflation on average was 3% annually. And then post-financial crisis, we talked about inflation being 2%. Will 3% be acceptable again?
In the next chart, from one of our friends at All Star Charts, Steve Strazza is pointing out that when stocks get really beaten up like they were back in June, that's historically been a pretty good time to buy stocks. I thought we might maybe look under the surface a little bit at that.
Looking at the time periods in yellow in the past, we tend to get a “W” in the bottoming process, and this time we have one side of the “W”….the question is will we get the other side? Historically, this has been a pretty useful tool, because you've seen a lot of bottoms when conditions reach this oversold level. But when there have been problematic times like, oh, wait, maybe ‘11, ‘15 and ‘16 when this bottoming indicator has rolled over for a time or even stayed beneath for an extended period like 2008. The question is whether we roll back over now or not in in the coming months.
Finally, we've got another chart from a friend that All Star Charts about Utilities when compared to the S&P 500. We see utilities versus the S&P at a 22-month high. This type of outperformance by Utilities is not a circumstance we normally see in a bull market. I’m sure that’s not our primary indicator, but another piece of information.
Jesse shared an A. S Scott Fitzgerald, quote that that came to my mind just as it dawned on me. Fitzgerald says the test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function. The way I think about that right now is, you know, short-term, we recognize the challenges ahead of us, and yet must also manage through the opportunities all while considering a more defensive stance as well. And mid-to long-term, we aren't forecasting that we're negative forever.
The opportunity to see ourselves move forward over the longer-term, which is where our investment dollars should be focused, is, is still very positive.
Thanks as always for reading and listening! Happy Labor Day and put something on the grill for the last weekend of summer!
Friends, as always, we are here for you and your family. This is a challenging time, and we are here to provide advice, plan for the future, and execute your plan.
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