- Scott Poore, AIF, AWMA, APMA
There's A Hole In The Bucket, Dear Liza - Then Fix It!
This children's song is appropriate given where the Fed and Congress are on getting inflation, the supply chain, and labor back on track. The song can be attributed back to the Pennsylvania Dutch (German) song about about a hole in a jug.
Burl Ives first made the song famous in the U.S. with his recording in 1959. The song describes a "deadlock" situation where two people can't seem to agree on how to fix a problem. The Fed can't seem to agree on tapering and raising rates. Congress can't seem to agree on Infrastructure and Reconciliation bills. And the Biden administration can't seem to agree on how to correct the shipping crisis. As the song suggests, We need to fix it. Here's what we're seeing so far this week...
Shipping Crisis Not Going To Fix Itself. While the ports and railways are part of the problem, the biggest issue is truck drivers. The problems run deep and even Fed Chairman Powell admitted in his presser today that the Fed's tools would have "little effect" on the shipping crisis. In fact, Powell further stated that he sees shipping bottlenecks lasting into the 2nd half of next year. Meanwhile, there are a lack of truck drivers in the U.S. There are several reasons: high average age of current drivers (i.e., retirement), high levels of substance abuse in the industry, infrastructure, vaccine mandates, and low entry into training schools.
So far in 2021, 44,000 truck drivers have been sidelined due to drug or alcohol-related violations. The number 1 substance that caused drivers to fail evaluations was Marijuana. The likely issue being that drivers are travelling between states where the drug is legal and into states where it is not legal. On top of this, current truck drivers in good status are having difficulty finding parts to repair their trucks, especially if they are independent drivers. As far as recruiting new drivers, the industry has struggled to bring in new drivers. Due to new rules adopted by the Federal Motor Carrier Safety Administration, applications are being turned away for a new truck driving position if the background check does not go through.
There is some good news on the shipping front. First, the recent fines levied against containers sitting at port waiting to be transported has caused some movement. Shippers are fined $100 per day for each container that does not move after the initial 9 days. The fines increase each day in $100 increments. Since last week, the Long Beach port saw 10% of its 27,000 lingering containers get moved to avoid the fines.
On top of that, partially due to fewer shipments out of China and India, the Global Baltic Dry Index has declined 43% since peaking on October 7th. This is the largest decline in the index (shipping rates) this year. By placing a priority on hiring new truck drivers, getting existing drivers with a drug violation clean and fit for duty, and providing incentives for shippers to get containers out of the ports, perhaps shipping costs would continue to decline.
Powell Avoids Use Of The Word "Transitory." On Wednesday, Chairman Powell's press conference after the FOMC meeting avoided the use of "transitory" when describing current U.S. inflation. The language in the Fed's official statement termed "factors" contributing to inflation as "transitory." However, Powell did not utter the word in his press conference. Rather, he stated that he sees inflation remaining elevated into the 2nd half of next year. Between you and me, I'm still not sure how that could be termed as "transitory" when inflation has been rising now for 17 months, and, if Powell is correct, 6 months into next year would make nearly 2 years of rising inflation. If I lost my job for 2 years, I'd hardly call that "transitory." If I had to remain in the hospital for 2 years, I wouldn't consider that temporary. You get the point.
The Fed did announce that Tapering would begin soon. Unlike previous reports that Tapering would likely begin in December, the Fed stated that Tapering would begin in November. Many regional Fed governors had wanted Tapering to begin even sooner than this month. The Fed Chairman did not directly answer a question on raising rates in 2022, leaving that door open. Powell stated his belief that more jobs will come back as COVID/bottlenecks recede.
He was also eager to stress that Tapering was a decision independent from any decision to hike interest rates. The market doesn't show much faith in that assessment as market futures on future rate hikes have increased the odds for the June, September, or December rate hike(s) in 2022.
Good News On The Economic Front. So far this week, most of the economic releases have been favorable. The ADP report on private jobs provided a 2nd consecutive month of job gains that exceeded expectations.
More than 570,000 private jobs were added in the month of October, while the market was looking for only 400,000. Most importantly, 78,000 new jobs were added in the Transportation sector, which will likely help with some of the shipping crisis. This morning, the government's Jobs Report showed 531,000 new jobs added and at least 54,000 new jobs added in Transportation & Warehousing. Moving on to the consumer, for the first time in 6 months, gains were made in the number of automobiles purchased in October. In September, due to the semiconductor shortage, only 12 million vehicles were sold versus 13 million in October. Both the ISM manufacturing and services indices were higher month-over-month. Both Weekly Jobless Claims and Continued Claims dropped for the week. Continued Claims have now declined for 6 consecutive weeks and have dropped by more than 800,000 since the middle of August. This is good news toward solving the labor shortage issue.
Fiscal Spending At A Standstill. The Biden administration is clinging to hopes to get some kind of agreement made on the Infrastructure and Reconciliation bills sitting before Congress. Senators Manchin and Sinema have proven to be a blockade against either bill passing through the Senate. After Tuesday night's election results in Virginia and New Jersey, there seems to be a shift in sentiment for the current path the country is facing. And, 53% of Virginians expressed concern that the country is worse off in exit polls yesterday. Also, efforts to defund police in Minneapolis, MN were rejected by voters at the ballot box. Why does this matter? Virginia, a solid blue state, was mainly turned red. This could have an effect on the spending bills. Those Senators and House members who reside in "purple" or swing districts could think twice about their support for either the Infrastructure or Reconciliation bills. Former Obama strategist David Axelrod made a shocking statement Tuesday night when he said, “[O]ne of the questions I have is, if you’re Democrat sitting on Capitol Hill, and you’re from one of these swing districts in suburban areas, are you re-thinking tonight your vote on this reconciliation package? Are you thinking, maybe it’s best we shouldn’t do it? If I were sitting in the White House, if I were sitting in the leadership of the — in the Democratic councils in the Congress, I’d be worried about that. I’d be trying to firm these people up. Because there’s going to be — I just know how this goes. I have experienced it. I know when things go badly, people begin to think of themselves.” If Mr. Axelrod is correct, it might be that the President's spending package is stalled indefinitely. Typically, the market likes it when the branches of government are deadlocked. We will have to wait and see how this plays out.