Help, I'm Stepping Into the Twilight Zone
I doubt either Rod Sterling or Gene Roddenberry had 2021 in mind when they envisioned their respective hits - "The Twilight Zone" and "Star Trek." Maybe they did, since most of their episodes were based in the future. However, I feel like I'm living in one of those old TV episodes. Whether it's the Twilight Zone classic episode "Nightmare at 20,000 Feet," where a young William Shatner sees a mysterious creature on the wing of the airplane that no one else sees, OR the famous Star Trek episode "Mirror, Mirror," where there is an alternate version of the Enterprise with alter egos of the crew. (By the way, I probably just dated myself). From the nonsensical recommendations of policy makers to investors hinging on each syllable uttered from a 68 year-old economist's mouth, the world definitely seems topsy-turvy. A bit of trivia about the title of today's musings - the words were taken from the lyrics of the Golden Earrings' hit song "Twilight Zone," written by lead guitarist George Kooymans. The song is not written about the TV show of the same title, but inspired by the Robert Ludlum character Jason Bourne from the novel "The Bourne Identity." As you read today's musings, you might want to keep in mind the opening monologue of the TV show that Rod Sterling would read each week...
"You are about to enter another dimension, a dimension
not only of sight and sound, but of mind.
A journey into a wonderous land of imagination.
Next stop, the Twilight Zone."
Latest Fed Speak. The Fed concluded their July meeting by keeping bond purchases in place and holding rates steady. This was pretty much the foregone conclusion. However, the market is now trying to parse each word or phrase regarding the two policies to see if they can predict when they will commence. In the official statement released Wednesday, the Fed stated "the economy has made progress toward these (low unemployment and stable inflation) goals, and the Committee will continue to assess progress in the coming meetings." So, no interest rate hikes or tapering for now. We think the Fed will delay both, if possible, until after year-end. The Fed is currently reducing the amount of funds available to banks to issue loans by increasing reverse repos in the overnight lending markets. By doing this, the Fed can draw down on the amount of reserves available to banks and thereby reduce the number of loans being issued. By reducing the amount of lending, the Fed can somewhat control inflationary pressures. Yet, the Kansas City Fed report showed last week that businesses are passing other costs onto consumers (materials and transportation) that the Fed cannot control. In addition, we've written multiple times about the higher wages and bonuses being offered by companies to entice the unemployed back to work. This too is out of the Fed's control. Since the recession ended in May of last year, Consumer Prices, Producer Prices, and wages have steadily risen. When wages increase to the same degree as prices, we could be in for an inflationary spike. (By the way, I'm at the car dealership for an oil change as I write this - 3 hour wait due to labor shortage! Do you think the extended pandemic benefits are having an effect on a lack of willingness to work?) Investors can wish all they want to, but sooner or later the Fed will taper bond purchases and raise interest rates - that is, unless you warp into an alternate Star Trek dimension.
Earnings and Economic Releases. Stellar earnings, disappointed revenue, 2nd half cautions, and mixed economic results have been the order this week. New Home Sales disappointed as the costs of building materials remains elevated and building delays due to supply chain issues kept new construction dampened. Durable Goods orders, the value of new long-lasting manufactured orders, declined in June compared to May (+0.8% vs +3.2%). However, Consumer Confidence improved in July (129.1 vs 128.9 in June). Home Prices increased and Wholesale Inventories dropped, meaning consumers are still purchasing goods. The Richmond Services Index, compiled by the Richmond Fed, declined month-over-month, but the Dallas Services Index, compiled by the Dallas Fed, increased month-over-month. Demand for oil continues to show a pick up in economic growth as weekly API Crude Oil Stocks declined by 4.7 million barrels - the 9th weekly decline in 10 weeks. Bloomberg reported on Monday that American Airlines and Southwest Airlines were both experiencing shortages of jet fuel, in what looks like further evidence of demand rebounding ahead of supply.
Yesterday, Jobless Claims disappointed by coming in at 400,000 versus 380,000 expected. However, last week's number was revised higher to 424,000, so this week's number marks the 12th decline in claims over the last 16 weeks. Also released this morning was the 1st print of 2nd quarter GDP, which came in at +6.5%. This is typically a very solid number, but it was well below market expectations. So far, the market seems to be shrugging off these numbers. This will probably further investors view that the Fed should stay pat on rates & tapering. This morning, however, Consumer Spending, Personal Income, and Consumer Sentiment all beat expectations, and with Spending and Income increasing month-over-month. According to this data, the U.S. consumer, which comprises two-thirds of GDP, is alive and well. Big tech companies smashed earnings expectations once again for the 2nd quarter. Facebook, Google, Amazon, and Apple all crushed expected earnings by 35% higher, on average. However, most of those companies signaled warnings about 2nd half growth related primarily to chip shortages and supply chain issues. Of the 536 companies that have reported earnings through Wednesday, 86% have met or exceeded expectations. The market is overly focused on COVID and issues overseas - namely China. I feel like William Shatner in the Twilight Zone episode as the only one who sees the man outside plane damaging the engine. Unless policy makers drive us back into lockdowns, the economic numbers are strong and do not justify a recession/bear market at this point.
"Are You Out of Your Vulcan Mind?" If you're like me, it's hard to figure out just exactly where policy makers are deriving their justification for another mask mandate. I swear, I don't think I've ever seen nor heard of a situation where the messaging from government officials has been worse. That's not a political statement, because the messaging has been bad across the board throughout the pandemic. Americans were first told masks weren't needed, then mandating masks, then recommending wearing two masks, then saying it was safe for vaccinated not to wear masks, now ultimately we're back to recommended wearing masks - even for the vaccinated. Is it any wonder so many have chosen not to get vaccinated? We make life and death decisions every day - whether to ride a roller coaster that could derail; whether to get in our car and drive knowing there's a chance we could die in a car wreck; whether to swim in the ocean when the caution flags are flying. The bottom line is, we have lost our ability to manage risk. We are relying on really bad policy makers to decide how we should manage our lives instead of just managing our own lives.
It feels like ages ago, but it wasn't. Just three weeks ago on July 9th the CDC stated that vaccinated teachers, students, & staff don't need masks in school. On Wednesday, now the CDC recommends vaccinated persons need to wear masks indoors. How did they reach this conclusion - one laboratory test of the Delta variant using non-human subjects and another study in India using a vaccine against the variant that has not been approved in the U.S. - oh, and the latter study was rejected in peer review as invalid! Now, it doesn't take a virologist to understand that those tests/studies may not be relevant to the situation here in the U.S. What is relevant is that the CDC Director Walensky stated on Wednesday that they "don't have any evidence that" the Delta variant is any more harmful to children than the original strain of COVID. What evidence backs up this statement? In the U.K., where the variant has been highly prevalent, 99.99% of the 470,000 children infected have survived. You see, the decisions we make need to be based on hard evidence, not opinion. Looking at the numbers, in the Fall of last year, the original strain of COVID saw cases & deaths rise almost in tandem, yet over the same amount of time (59 days) this year, cases have risen but deaths are lower. A study in England, shown below, proves that a vaccinated 80-year old has the same risk of COVID Mortality (less than 0.1%) as a healthy unvaccinated 50-year old. And, we can probably get a glimpse into how our numbers will look in the next few weeks as Cases have rolled over in the U.K. Since peaking a little over a week ago, cases are now down 36%. Herd immunity has been reached, yet the media won't illuminate any of these facts, it's just scare as many people as possible. Congratulations, we've just crossed over into the Twilight Zone.