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Monday Market Mayhem – 13 Fed Speeches and Lots of Data this Week

Evans, Williams and Williams.

That's who's up today – all doves.  Tomorrow it's Evans, Bullard, Bostic, Bullard – so we're turning hawkish after 9am.  Williams (dove) again on Wednesday at 5pm and again Thursday morning, followed by Harker, Evans and Bullard – so now we're mixing things up and the last word goes to Harker (hawk) on Friday morning.

Since there are far more hawks than doves on the Fed at the moment but the doves are getting the majority of the speaking time – it's pretty clear which face the Fed is trying to present but it's interesting that they're "experimenting" with Bullard having the very last word on Tuesday without anyone to negate him all day Wednesday.

That means there's a good chance we have a sell-off Tuesday into Wednesday and the Nasdaq is already plunging this morning and everything has been going downhill since China's open as now power cuts due to electricity shortages are getting bad enough to affect both demand and the factories ability to produce goods (China's PMI will be out Thursday morning – hence the doves coming back to save us).  China International Capital Corp. estimated the electricity shortages will lower the country’s growth rate by 0.1 to 0.15 percentage point in the third and fourth quarters. Nomura Holdings Ltd. cut its full-year forecast for gross domestic product, while Morgan Stanley warned of lower fourth-quarter output.

The stringent measures to cut electricity use in economic powerhouses like Jiangsu, Zhejiang and Guangdong provinces will probably cause the purchasing managers index, scheduled for release later this week, to drop below 50, Nomura said in a report Monday.  Nomura’s Chief China Economist Lu Ting said there’s now a chance that its growth projection for 2021 — which was cut on Friday to 7.7% from 8.2% — could be lowered further. 

CICC economists said the power supply shock will have a large impact on short-term production, especially in September, with industrial output growth in the month likely dropping to 4%-4.5%.  CICC also sees an impact on inflation, with producer prices likely to rise at least 9% in 2021 from a year earlier, weighing on the profitability of downstream firms. Monetary policy will likely stay neutral with an easing bias, CICC economists said.

Emerging-market investor sentiment is the worst since June 2020Power shortages are one of those growth limiters that don't go away quickly.  They require the cooperation of Government and business over several years to improve.  That's why it's ridiculous to extrapolate endless growth in the stock market – there's a physical limit to how fast the economy can grow in the real world.  

China’s economy will now grow at a slower-than-expected pace in the years through 2023, according to Bank of America Corp. It lowered its forecast for 2022 to 5.3% from a previous estimate of 6.2%.  “Beyond the immediate concerns associated with Evergrande, China’s recent struggles with the delta variant, tech-centered crackdowns, and now the property sector will likely shave a bit off of global growth at the margin,” said John Lau, head of Asian equities at SEI.  Apparently, he didn't even know about the power shortages!

Europe is about to have an electricity crisis too and that's due to short supplies of Natural Gas this fall.  There simply isn’t enough gas to fuel the post-pandemic recovery and refill depleted stocks before the cold months.  In European countries and Britain combined, storage sites are currently around 72% full, compared with 94% full at the same time last year, and 85% full on average over the past 10 years by the end of September.     

Reuters Graphics

As I have been warning for over a year, these are the kinds of consequences we face when we artificially stimulate an economy.  In this case, the government has spent money to maintain demand during an economic slowdown but that hasn't prevented the raw materials and infrastructure services from slowing down due to lockdowns and sick workers and some workers who aren't as productive since having Covid (15% of the US population has had it so far).  

This has caused supply chain shortages and we still haven't really addressed those issues as a lot of the supply chains begin overseas, where the Governments can't print money the way the US can to paper over all their problems and where they don't send their workers back to work and their children back to school like lab rats in a massive herd immunity experiment.  

Low water levels in the Parana River are forcing Brazil’s hydroelectric plants to rely on other fuels for generation.PHOTOGRAPHER: JUAN MABROMATA/AFP/GETTY IMAGESThe spike has forced some fertilizer producers in Europe to reduce output, with more expected to follow, threatening to increase costs for farmers and potentially adding to global food inflation. In the U.K., high energy prices and price caps have forced several suppliers out of business – worsening the problem.  In China, industrial users including makers of ceramics, glass, and cement may respond by raising prices; households in Brazil will face expensive power bills. Economies that can’t afford the fuel, such as Pakistan or Bangladesh, could simply grind to a halt.

The image here is Brazil's Parana River which non-existant Global Warming had reduced to a trickle, making their hydroelectric dams useless for power generation.  Again – infrastructure projects that can't quickly be replaced.  The prospect of accelerating energy costs, in conjunction with squeezed supply chains and food prices at decade highs, could make more central bankers question whether the jump in inflation is as transitory as they’d hoped.  

But hey – record high markets so who cares, right?  

Right???

 


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  1. hi phil, what do you think about all this oil shortage talk and goldman saying 90 dollars by january .


  2. Good Morning.


  3. I blame goldman sacks for high oil and natural gas prices. Pitch, Manipulate, Win $$$


  4. Comment content omitted because it is too long.


  5. Good morning!

    Oil/Tommy – Well that's Brent so $85 on WTIC and maybe more of a gap as it's mostly a Europe problem.  Brent is at $80 now, we're at $75.50.  GS is pointing to a fast recovery and hurricane damage – both of which may or may not hold up but not much you can do when GS wants to manipulate the price on you.  Essentially the hurricane has taken as much off-line as OPEC has added.  Of course, the lack of /NG supplies is a real issue and some industrial customers will use oil for power instead of gas and that's a big demand swing – so can't really bet against it for now.  

        

    BLK/1020 – I love those guys, very smart operators.


  6. Indexes improving (mostly):

       

    Those cotton commercials are doing their job:

     




  7. Cosmo/Phil   BX are pretty smart operators as well… ;)



  8. 1020    BX bought it for 1.7B + 500M . then sold the operations for $1.6B , so $600M left for which they get $200M year in rent plus they still own the RE they can sell later. 

    not too shabby 





  9. Peloton Just Made a Killer Deal With UnitedHealth




  10. Samsung wants to copy and paste a brain


  11. BX/1020 – I always mix them up. 

    Not too shabby/Stock – It's like one of those deals they try to teach you to do in infomercials…

    China’s Power Crisis Moves From the Factory Floor to Homes.

    From Nairobi to Ningbo: See the Supply Shocks Spanning Globe

    Chinese Regulators Are Serious About Crypto Ban This Time

    Pelosi Sets Thursday Vote on Infrastructure Bill in Crucial Week

    Beaten-Down Airline Stocks Celebrate Easing of Travel Rules

    The Key Market Flows Behind "Yet Another Quick Selloff"

    Gasflation

    Hedge Fund Net Leverage At All Time Highs As No Dips Are Sold

    Just How Many Containers Of Cargo Are Stuck Off California's Coast?

    70,000 people a day hospitalized – a whole football stadium!  What crisis?  

    Luckily we have 6,090 hospitals in the US and they probably have about 100 beds each so – what could possibly go wrong?  

    As long as we cycle these guys through in 10 days and no one else needs a bed for any other reason at all – we'll be fine!  


  12. The Russell had a hell of a rally but not much else going on:

       
    • Like many of her colleagues, Federal Reserve Governor Lael Brainard expects inflationary pressures to subside, but the coronavirus Delta variant throws a wrench into the timing of economists' forecasts.
    • "With Delta disrupting the rotation from goods to services and prolonging supply bottlenecks, it is uncertain just how fast and how much inflation will decelerate over the remainder of the year and into next year," she said in a speech at the annual meeting of the National Association for Business Economics.
    • As a result, Brainard is watching upside risks closely. Those include housing services inflation, the risk that goods prices may not decelerate as expected, that wage gains are feeding higher inflation, ands signs that longer-term inflation expectations move above the Fed's 2% inflation objective.
    • One clear lesson is that "we need to be humble about our ability to correctly anticipate future economic conditions given the unpredictability of the virus," she said.
    • She also warns that "the September labor report may be weaker and less informative of underlying economic momentum than I had hoped," pointing to the lack of employment gains in the leisure and hospitality sector in August.
    • "Employment is still a bit short of the mark on what I consider to be substantial further progress. But if progress continues as I hope, it may soon meet the mark," she said. That indicates that she would then be in favor of reducing the Fed's asset purchases, as "substantial further progress" toward the central bank's goals must be met before the taper starts.
    • "I would emphasize that no signal about the timing of liftoff should be taken from any decision to announce a slowing of asset purchases," Brainard said. She reminds the economists that the Fed must pay close attention to the incoming data and that people not place too much weight on "an outlook that remains highly uncertain."

     

    • The spike in inflation caused by the rapid reopening of the company and resulting disconnect between unexpectedly strong demand and supply chain disruptions may take "another year or so" to resolve, said New York Fed President John Williams in an online speech for the Economic Club of New York.
    • "As the economy gets through these highly unusual dynamics, I expect inflation to come back down to around 2% next year," Williams said.
    • Specifically, longer-term inflation expectations have remained "relatively stable" and are still well-anchored, he said.
    • Echoing remarks made by Fed Chair Jerome Powell and Chicago Fed President Charles Evans, Williams said that "a moderation in the pace of asset purchases may soon be warranted," assuming the economy continues to improve as he anticipates. But the Fed reducing purchases of Treasury securities and mortgage-backed securities won't be applying the brakes to the economy, he said.
    • "It is important to remember that even after the asset purchases end, the stance of monetary policy will continue to support a strong and full economic recovery and sustained attainment of 2% average inflation," he said.
    • While the central bank is looking for "substantial progress" toward its targets of 2% inflation and maximum employment, its test for hiking rates is stricter. It's looking for the economy to reach conditions consistent with maximum employment and for inflation to moderately exceed 2% for some time.
    • "There is still a long way to go before reaching maximum employment, and over time it should become clearer whether we have reached 2% inflation on a sustained basis," he said.
    • See also: How well-anchored are long-run inflation expectations? NY Fed analyzes the data
    • Even with the price spikes caused by the pandemic and supply chain disruptions, Chicago Fed President Charles Evans argues that "the inflation we've seen to date does not yet satisfy the FOMC's overshooting criterion."
    • Over a year ago, the Federal Reserve reworked its framework to let inflation overrun its 2% target so that the country's inflation rate averages 2%. Previously, the Fed would act pre-emptively so that inflation didn't exceed 2%. Now the risk for inflation is that it will run too low instead of too high.
    • "Instead, we  should be focused on producing sustainable inflation that aligns longer-run inflation expectations with our 2% goal," he said in prepared remarks for a speech at the National Association of Business Economics Annual Meeting.
    • That's because the effective lower bound risk, in which the Fed's benchmark rate has been running at near zero, imposes a "substantial inflation-undershoot bias," he said.
    • He expects the inflation caused by pandemic-related supply chain disruptions to eventually resolve.
    • "Though the modest overshooting projected from 2022 through 2024 is an improvement, I don’t think it is a strong signal of sustainable inflation above 2%. I feel we need to go beyond trying to thread the needle by a couple of tenths in order to be assured of a sustainable moderate overshoot," Evans said.
    • As for monetary policy, he sees tapering of the Fed's asset purchases starting soon, if employment improvements continue. He doesn't expect the federal funds rate target to be increased until late 2023.
    • Also see: How 'well-anchored' are long-run inflation expectations? NY Fed analyzes the data
    • ExeBritish warehouse companies say that they are having to increase pay up to 30% to fill entry-level positions in order to meet demand for the upcoming holiday season.
    • Clare Bottle, the CEO of the UK Warehouse Association is paying new workers 20-30% more and Jordan Francis, commercial director of the Prodrive recruitment agency is offering 25% more for a standard warehouse role.
    • Francis says that many of his previous temporary workers left for France or Germany, where they don't need visas to work. Last year, workers furloughed due to COVID provided much of the temporary labor needed at the warehouses.
    • Analysts note that major companies should be able to weather the storm with more capital available and greater automation, while smaller retailers will have more trouble. An executive said that normal delivery times could rise to seven to ten days from five days currently.
    • British consumers can expect to pay more for goods and deliveries. "There's very little give in those margins, most warehouse companies and particularly the smaller ones keep their overheads very low, they have very flat management structures, really a big proportion of the cost that they pass on are labour costs," said Bottle. "If the labour costs go up, there's really nowhere to go."
    • Turning to the United States, Morgan Stanley recently lowered its price target on Amazon due to rising labor costs  and Whole Foods said it would add a delivery fee to orders.

    • The Enbridge-led (ENB +1.3%) PennEast Pipeline cancels development of the proposed Pennsylvania-to-New Jersey natural gas project, citing the continued lack of support from New Jersey regulators in acquiring environmental permits.
    • The move comes just three months after the U.S. Supreme Court ruled in favor of PennEast in overruling New Jersey's attempt to block the company from seizing state-controlled land for construction of the $1.2B project.
    • As recently as last month, PennEast said it planned to finish the first phase of the pipeline in Pennsylvania by next year, but the company says it still lacks certain permits, including a water quality certification for the New Jersey portion of the project.
    • Enbridge's partners in the PennEast project are New Jersey Resources (NJR +1.7%), South Jersey Industries (SJI +0.9%), Southern Co. (SO -0.2%) and UGI Corp. (UGI +1.1%)
    • Other U.S. east coast gas pipelines held up by regulators and legal battles include Williams' Northeast Supply Enhancement project.
    • Oil bulls are in charge today, lifting the energy sector (XLE +3.6%) to the top of the S&P sector standings, supported by crude oil prices that are on track to post their highest settlements in nearly three years.
    • November WTI crude (CL1:COM) is up for the fifth consecutive day, +2% to $75.50/bbl and edging closer to its July high near $77, while Brent (CO1:COM) +1.9% to $79.58/bbl; both front-month contracts are poised to settle at their highest levels since October 2018.
    • All five of today's top gainers on the S&P 500 are oil and gas names: OXY +7.4%FANG +6.8%XEC +6.7%COG +6.7%MRO +6.3%.
    • Other big winners include FTI +5.9%HAL +5.5%APA +5.1%VLO +4.7%PSX +4.4%.
    • Expecting oil's rally to continue, Goldman Sachs raises its Brent price forecast for December to $90/bbl from $80 previously, citing the strong rebound in global oil demand to pre-COVID levels combined with Hurricane Ida's hit to production, which the firm says has more than offset OPEC+'s production ramp-up since July with non-OPEC+ and non-shale output continuing to disappoint.
    • "While we have long held a bullish oil view, the current global oil supply-demand deficit is larger than we expected," Goldman analysts say. "Winter demand risks are further now squarely skewed to the upside as the global gas shortage will increase oil-fired power generation."
    • But the Lundberg Survey says "ongoing U.S. Gulf recovery from Ida and OPEC+ continuing output hikes" loom as potentially bearish factors that could at least cause crude prices to plateau if not fall.
    • Energy stocks led all other groups last week, as WTI and Brent crudes both climbed more than 3% last week.
    • Oil and gas prices come out of the gates strong in Monday's trading session, pushing up the prices on crude names.
    • Crude has jumped above the $75/bbl mark on the back of a global energy crunch.
    • West Texas Intermediate and Brent crude are now sitting on near three-month highs, posting their best numbers since early July.
    • WTI was trading at $75.48 at last check.
    • The rally comes as fuel stations across Britain have dried up due to a shortage in trucks delivering fuel, forcing gas stations to ration gasoline and related supplies.
    • Goldman Sachs has now adjusted their Brent crude price forecast to $90/bbl from an earlier $80/bbl.
    • Per Reuters, the investment bank stated in a note that "while we have long held a bullish oil view, the current global supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts."
    • With energy pressures growing stronger, oil and gas stocks and ETFs have seen a push to the topside. Below is the price action on some of the top-moving names:
    • Occidental Petroleum Corporation (NYSE:OXY) +7.81%, Diamondback Energy (NASDAQ:FANG) +7.17%, and Marathon Oil Corporation (NYSE:MRO) +6.89%.
    • ETFs seeing the biggest moves include the SPDR S&P Oil & Gas Exploration & Production (NYSEARCA:XOP) +7.09%, Vaneck Oil Services ETF (NYSEARCA:OIH) +5.76%, Energy Select Sector SPDR ETF(NYSEARCA:XLE) +3.85%, and the United States Oil ETF (NYSEARCA:USO) +2.16%.

    • See below a year-to-date performance chart on how the above ETFs have fared against each other.


  13. Phil, any thoughts on KRBN?


  14. KRBN/BDC – We just added them to the Future is Now portfolio:

    PSW Investments is working on a project to sell $50M worth of Carbon Credit Futures so, if you know anyone who might like that – let me know.  Meanwhile, we can all play carbon credit Futures with KRBN, which has done nothing but go up and well it should:

    Global Carbon Allowance Market Highlights

    • According to IHS Markit, as of December 31, 2020 the global price of carbon was $24.05 per ton of CO2. It is estimated that carbon allowance prices need to reach $147 per ton of CO2 to meet a 1.5°C global warming limit.2
    • As of December 31, 2020, the three largest global carbon futures markets, tracked by IHS Markit’s Global Carbon Index, had a market size of $260.79 billion.1
    • In April 2019, The Financial Times reported that European carbon allowances within the European Union Emissions Trading System were the world’s top-performing commodity over the past two years.3,4
    • China’s emissions trading market is expected to launch by end of 2020. Once fully implemented, it will be the largest carbon allowance market in the world, which may provide an additional catalyst for the performance of the global carbon allowance market.4

    Through our New Age/One World partnership, we expect to control $500M worth of Carbon Credits (from hemp farms and hemp to plastic manufacturing) over the next 4 years but it's just a drop in the bucket of the still very small global market.  Demand is being mandated by governments and there simply aren't enough credits to satisfy demand.  

    KRBN has only short-term futures and they are thinly traded but I want to keep an eye on them so, in our Future is Now Portfolio, let's sell 10 of the Jan $37 puts for $2 ($2,000) as that's a line that should hold up well (the lower end of the rising channel) and we'll seek to establish a long-term position.