Microeconomics Explains Why People Can Never Have Enough of What They Want and How that Influences Policies

 

Economics is broadly divided into macroeconomics and microeconomics. The big picture, macroeconomics, concentrates on the behavior of a national or a regional economy as a whole: the totals of goods and services, unemployment, and prices.

Then there’s a more detailed picture: the economic decisions that people and businesses make. Microeconomics analyzes behavior. It looks at how individuals and companies respond to incentives and allocate scarce resources efficiently.

People struggle to get as much as possible while spending as little as possible. The economist Thomas Sowell has said there is never enough of anything to fully satisfy all those who want it. This omnipresence of scarcity in our lives makes the study of human behavior compelling.

Microeconomics is divided into the theory of the consumer, which focuses on people’s behavior in market settings, and the theory of the firm, which concentrates on how businesses act, once again in market settings.

Consumers Pursue their Self-Interest

In the 19th century, economists referred to consumers as “economic men” or homo economicus. Today they might call consumers economic people. All of these terms refer to the idea that individuals make decisions based upon the rational pursuit of their self-interest.

The meaning of self-interest is pretty clear, but it’s important to comprehend what economists mean by pursuing it rationally.

To an economist, behavior is rational if it helps attain goals. Economists do not pass moral judgment on a person’s goals. Behavior that may seem irrational to a non-economist is not necessarily so to an economist.

To see this, say that a man named Raj wants to rob a bank. Given that goal, economists would say that if Raj conducts surveillance on the bank to look for security cameras, that’s rational behavior — for Raj.

Or if a woman named Asha hates credit cards, economists pass no judgment on her thinking and would say that for her, it is rational to burn credit cards.

 

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of Arthur J. Gosnell Professor of Economics, Rochester Institute of Technology

 

Consumers Want the Most they Can Afford

To buy anything, a consumer must interact with a producer — a seller — whether that seller is a mom-and-pop store or Amazon. Consumer theory says they examine prices because they are interested in getting those goods and services that will make their satisfaction as large as possible at the lowest possible price.

Microeconomists study that interaction mathematically in two ways. First, they try to gauge a consumer’s satisfaction level by assigning a number based on how much this consumer values the goods and services she chooses to buy in a market. They call this number utility.

Second, they interpret the act of seeking the most satisfaction as solving a maximization problem. In a maximization problem, a consumer seeks the biggest bang for their buck.

Therefore, the central problem in consumer theory is the study of how consumers go about maximizing their utility in market settings — buying as much of what they like with the money they have available.

What fascinates microeconomists studying utility maximization is that it nicely illustrates a central tension in economics: how best to satisfy unlimited wants with limited means. The “unlimited wants” are captured by the notion of utility, and “limited means” refers to a consumer’s finite income or budget. Economists call this a constrained maximization problem.

As an example, consider Sheila, who has a budget of $1,000 a month (her constraint) for apartment rent. The monthly rents for apartments A, B and C are $900, $1,000 and $1,500. Sheila rules out apartment C – it’s too expensive. Apartment A will save her money, but apartment B, within her budget, may be nicer.

Companies Also Pursue Self-Interest

An integral part of microeconomics is the theory of the firm, the term economists use for companies. Economists believe that businesses exist because team production is efficient and it minimizes the costs of contracting.

Economists study how businesses make as much profit as they possibly can. Companies, like individual people, try to solve a maximization problem: how to maximize their profit. Producer theory seeks to explain how businesses do that.

The study of profit maximization is fascinating to a microeconomicist like me because no company can produce whatever it wants and in unlimited quantities. Businesses are constrained by their technical capabilities and the cost of paying for inputs like capital and labor. Microeconomists describe these technical capabilities by means of the production function. This mathematical relationship describes how businesses use capital and labor to produce their goods or services.

Microeconomics looks at how consumers and companies behave so that they can understand why society needs economic policies to regulate and shape their behavior.

 

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Holiday Gift-Giving Season May Include More Gift Cards and IOUs

 

While last year’s holiday season was hampered with travel restrictions and concerns over visiting older relatives amidst a pandemic, the 2021 gift-giving season may be challenged with a shortage of gifts.  Constraints on importing and exporting grow throughout the entire network, including dock space, ships, trucks, warehouses, workers, and rail transit – they are all beyond capacity on top of the already backed-up ports. Demand for many items is much higher than normal. These problems are expected to continue into, and perhaps through next year. Americans should expect ongoing shortages of imported goods, higher prices that may be temporary, and closing of stores that can’t keep enough product on the shelves.

 

Help from Washington?

Earlier this month, the Biden administration announced it was working with supply chain operators in an effort to ease congestion at the ports.  The President is on record as saying, “Our experts believe … that these bottlenecks and price spikes will reduce as our economy continues to heal.” It’s not expected that any immediate relief will come from these longer-term efforts.

 

Image: Shipping traffic Map from Marine traffic.com (8/30/21)

 

Who Benefits

Where will the money flow? With the idea that with every problem, there is opportunity, let’s explore.

Shipping companies would seem to be an obvious choice. Although their costs have increased, they have as a group been rising all year after a challenging 2020 — they are now largely in the driver’s seat. Some shipping companies are trading at a multiple of their December 31^st close. Large retailers may also benefit, they have the financial firepower to outcompete and perhaps even drive small competitors out of business. These companies did well last year as many also have a large online presence. The deck seems to continue to be stacked in their favor. Made in America companies avoid at least one bottleneck, but their products will be in demand. They will have an easier time than their overseas competitors. There are a number of fintech companies involved in gift cards. Gift cards were popular last year since, as a gift, they are easy to mail. This year as scarcity provides an additional reason to exchange gift cards, the underlying companies providing the financial instrument could have another good year. Dredging companies may also benefit. Part of the problem is many of the ships are too large for some of the U.S. ports. As part of infrastructure improvements, money has been earmarked to update the ports to accommodate these larger ships.

 

Take-Away

Pent-up demand coupled with shortages of labor and high stimulus levels has created huge bottlenecks at the nation’s ports. This makes many products difficult to come by. The situation may only get worse as we approach the peak pre-holiday season.

The problem is likely to raise product prices as it has already raised shipping fees. Other industries and specific companies appear set to profit from the supply-chain issues.

 

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Sources:

https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/08/fact-sheet-biden-harris-administration-announces-supply-chain-disruptions-task-force-to-address-short-term-supply-chain-discontinuities/

https://www.transportation.gov/briefing-room/secretary-pete-buttigieg-hosts-roundtable-port-congestion-supply-chain-disruptions

https://www.fmc.gov/testimony-of-commissioner-dye-before-congress-impacts-of-shipping-container-shortages-delays-and-increased-demand-on-the-north-american-supply-chain/

https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/08/11/remarks-by-president-biden-on-the-build-back-better-agenda/

https://www.youtube.com/watch?v=F4_jK8YGigY

 

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Two Things Happened to Real Estate Last Week, Both Could be Good for Stocks

 

The Real Estate market is an alternative and even competing investment to the stock market. They can be complementary investments, as historically there is a low correlation between the two. If one asset class enters a bear market, or perhaps shows potential for outsized gains, some investors will shift from one to the other.

Real Estate “Swing Traders”

The low interest rate environment of the past few years had brought house flipping back as a profitable enterprise. A flip is defined as a home purchased and sold within a 12-month period. It’s been a good ride for those involved. During 2020, the average gross return on flipped homes reached record levels. According to ATTOM Data Solutions, the number of homes flipped in 2019 vs 2020 dropped 13%, even at that it was 5.9% of single-family home sales and 241,630 units. And, although it was the highest year for gross profit, the actual return on investment sunk to levels not seen since 2012. 

The nature of any transaction in real estate is there has to be a wide margin for error. This is because transaction costs and carrying costs, including taxes, utilities, upkeep, and perhaps financing, can add up quickly. These costs all pull from the investment’s final return (ROI).

In terms of price growth, single-family homes and condos have outperformed the stock market over time so for some, they are considered less risky, and easier to understand than buying shares of a big company. But real properties are certainly not as liquid as securities that trade on an exchange. So, if the housing market begins to decline, finding someone to take the other side of your real estate sale may take time. As mentioned earlier, time is costly.

 

The chart shows net returns on real estate flipping have not increased since 2016 and have even trended lower. With more reduction in return, more investors may decide to place their investible cash someplace with a better risk/return profile.

Real Estate “Income Investors”

But not everyone invests in residential real estate with the idea of trading out of the property within 12 months. Some become landlords and benefit from an income stream. The difference between the two types of real estate investors is not unlike the difference between a (stock market) swing trader and another with a portfolio of dividend stocks. Over the past year, these landlord/investors have, as a group, captured the dramatic rise in real estate prices. Most have at the same time collected steady rents.

 

The Graph shows the national median sales price of existing homes over the last 12 months

Last week it was reported that home prices dipped in July from June. This interrupts housing’s price climb for the first time in a year. And the climb has been rapid; back in May and June, the median price for existing homes had reached a historical record when it grew 23% from a year earlier. But in July, the median price dipped (to $359,000), reducing the year-over-year gains to a still worthwhile 18.8%.

For both landlords that have had pandemic-related challenges that we’ll address later and the house flippers that are already seeing a decrease in their ROI, this may signal that it’s time to take their chips off the table. For the flippers, reduced inventory is already forcing fewer transactions. This speculative money will find itself trying to earn a return in other markets, perhaps stocks with high growth potential.

Rental property owners have their own set of concerns. For one, they’re faced with the proposed long-term capital gains tax increases (39.6% to 43.4% for high-income individuals) that would cut into any profit from a sale. Perhaps more concerning are the other government impositions since March 2020. Last March, an agency of the U.S. government (Center for Disease Control) imposed a temporary ban on evictions; this ban was extended twice, with the most recent deadline set as October 3, 2021. The reality that a property owner can have this level of outside meddling in their business increases their investment risk. For those that may have wanted to sell their property since March 2020 because of the changing regulatory landscape, a non-paying, non-evictable tenant hampered the option.

Real
Estate Investors (All Styles)

The U.S. Supreme Court on Thursday (Aug 26) effectively banned the temporary ban on evictions, originally imposed by the CDC. The Court said that the ban exceeded the CDC’s authority to combat communicable diseases and that it forced landlords to bear the costs of the pandemic. The court made clear in an unsigned opinion that the CDC did not have any standing in the case since they did not have authority. The Court paper did indicate Congress could still enact non-eviction laws.

 

“…the CDC has imposed a nationwide moratorium on evictions in reliance on a decades-old statute that authorizes it to implement measures like fumigation and pest extermination. It strains credulity to believe that this statute grants the CDC the sweeping authority that it asserts.” – U.S. Supreme Court, August 26, 2021

 

The decision was not unexpected. The current administration recently made $47 billion in funds available to landlords to benefit their tenants that had accrued overdue rent obligations. This money is to be distributed by state governments with the goal of making landlords whole and tenants current. The states have been slow to distribute this taxpayer money. Rules have recently been eased to help expedite the process. For example, landlords of multiple rentals had to apply for each individually; now they can put them all on one application. The $47 billion entering the economy is being put into the hands of landlords that are now able to evict. This could cause an increased supply of existing homes on the real estate market.

 

 

The Stock Market May Benefit

Home flipping is experiencing reduced returns and a much more difficult and risky environment. The nature of flipping is that it usually burns itself out in a cyclical nature. Low ROI and few available properties signal the top of the cycle. Signs of reduced activity in this area suggest investible cash is being sidelined.

As we saw with stimulus checks and the market reaction, large sums of money placed in people’s hands is either spent, invested, or used to reduce liabilities. Many landlords will receive their portion of the $47 billion reimbursements for uncollected rent and use it to pay overdue bills. Others that have been keeping up with their costs will see it as found money, money they can put to work (invested) or to treat themselves. Putting it to work, in light of current conditions, is not as likely to mean purchasing additional real estate, or even improving current properties. These owners had a hard lesson last year, and the Supreme Court has as much as told Congress, if you want eviction moratoriums, pass a law. Meanwhile, home prices dropped last month; interest rate increases could push prices down further. This opens the door for landlords who have been made whole to decide if it’s time to cash out on their properties that are now sitting near record highs in an environment fraught with negative pressures.

Simply put, money not being invested in flipping, money from the landlord reimbursements, money from landlords cashing out, all has to go someplace. The stock market has been breaking records, it’s liquid, not subject to moratoriums on earned income, and has few carrying costs. It is perhaps the natural alternative. This is not to say the stock market doesn’t have its own concerns. The implication is that although real estate has historically outperformed, at this time in history, investors may find stocks the preferred alternative.

 

Take-Away

Nothing happens in a vacuum. The bond market impacts the stock and real estate markets, both impact gold and other commodities; new stimulus checks will impact cryptocurrency, weather impacts farm prices, new regulations, etc. Everything is connected. Looking ahead to how one may impact the other is a way for investors to keep ahead. Real estate had gotten to the point where people were once again speaking as though it can only go up forever – popular TV shows encouraged home flipping. This era may be ending. As for rental properties, they had become a burden on many over the past 17 months. For those landlords that will be handed a check worth 17 months of rent, in what is still a very strong but possibly declining real estate market, the opportunity to get out of the business will be compelling.

Paul Hoffman

Managing Editor, Channelchek

 

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Sources:

https://www.supremecourt.gov/opinions/20pdf/21a23_ap6c.pdf

https://www.cnbc.com/2020/12/17/home-flipping-profits-are-the-highest-in-20-years.html

https://www.attomdata.com/news/market-trends/flipping/attom-data-solutions-2020-year-end-u-s-home-flipping-report/

https://www.nar.realtor/newsroom/existing-home-sales-climb-2-0-in-july

 

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What Do Banks and Financial Executives Think of Blockchain and Digital Assets?

 

The accounting firm Deloitte Touche Tomatsu surveyed a global array of senior executives during the early Spring of 2021.  The intent was to gather information on their thoughts of blockchain and digital assets and make available perceptions and expectations that could shape the future.  A total of 1,280 senior business leaders worldwide were surveyed; all had at least a general understanding of blockchain. The 28-page report focuses on how organizations are harnessing blockchain’s capabilities with a further emphasis on financial applications such as crypto assets, industry value, and banking services. From this data, a trend and clearer picture of the future is painted.

The overall finding was that among the financial services industry (FSI) respondents, about 80% say digital assets will be “very/somewhat important” to their industry over the next 24 months. More than 75% of all respondents feel they’ll be at a disadvantage competitively if they fail to adopt blockchain and digital assets.

 

The 2021 Global Blockchain Survey was Conducted in 10 Locations (1,280 Respondents)

 

Source: Deloitte’s 2021 Global Blockchain Survey

 

How Do Financial Executives View Blockchain and Digital
Assets?

The respondent categories are broken out into three segments. The Overall includes everyone, FSI  Overall, and FSI Pioneers.  Deloitte defined the FSI Pioneers this way,  “…have deep convictions about the potential that blockchain and digital assets offer.” Across all three groupings, there was strong agreement of the importance of blockchain and digital assets.

 

Source: Deloitte’s 2021 Global Blockchain Survey

 

The Future of Digital Assets

It would make sense that the FSI Pioneer category would be near “all in” on their convictions. When it comes to importance to the industry or whether digital assets will be an alternative fiat, the Overall and FSI Overall demonstrated only 76% agreed.

 

 

Source: Deloitte’s 2021 Global Blockchain Survey

 

Barriers

Approximately 60% of the overall respondents and 70% of the FSI Pioneer category pointed to regulatory barriers as the largest obstacle of digital assets. Cybersecurity is also of great concern to the larger Overall group, with 71% responding that it is a big obstacle. Privacy was of least concern to the overall group, with 59% considering it a big concern, whereas almost 70% of the FSI Pioneers had privacy concerns.

 

 

Greatest Impact

The survey reflected optimism about future revenue opportunities from providing solutions for digital assets and blockchain. FSI Pioneers once again are strong believers, with 93% strongly/somewhat agreeing versus 80% of Overall respondents. In order to capture these revenues, financial services firms can’t sit idle; they must adapt and reinvent how they do business. If they don’t, the concern is they won’t capture the potential for revenue, and they will instead see a drain on old business lines.

The evolution of the financial services industry is picking up speed.  Blockchain is seen as a way among many business leaders, particularly those the survey categorized as pioneers, as a way to gain a competitive advantage. The winners will be those most flexible, they don’t have to invent any new path, but quick adaptation could be the difference between thriving and not.

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Cryptocurrency Gaining Acceptance by Banks

 

Source:

Deloitte’s 2021 Global Blockchain Survey

 

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The Beginning of the Road for Gold?

 

With the return of inflation and expected deceleration of economic growth, as measured by gross domestic product (GDP), a growing chorus of commentators are highlighting the risk of stagflation which was last prevalent in the 1970s. Stagflation is generally characterized as a period of declining economic growth, high unemployment, and inflationary pressure. While high unemployment is arguably not present in the current environment, most economists expect a deceleration in GDP growth rates, while inflation has been fueled by accommodative monetary policies and increased fiscal spending to combat the negative economic impacts of COVID-19. Longer-term Treasury yields appear to signal easing inflation, while inflation-adjusted yields are consistent with low economic growth expectations. The jury is still out on whether inflation will prove transitory or whether it will prove more sustainable than the U.S. Treasury Secretary and Federal Reserve Chairman predict.

Building a Stagflation Portfolio

Gold shined as a defensive asset during the stagflationary 1970s, a period characterized by inflation, high unemployment, and poor economic growth. While the current macroeconomic environment differs in many respects from the 1970s, there are similarities, including 1) transitory inflation is proving more persistent than many expected, 2) real economic growth is expected to decelerate, and 3) the labor participation continues to be negatively impacted by COVID concerns, federal unemployment benefits, and mortgage and rental forbearance programs that have been cited as reasons some choose not to enter or re-enter the workforce. The emergence of the delta variant of the coronavirus leads some to think that the economy could move into a stagflation-like period that could limit the Federal Reserve’s options for tightening monetary policy to combat the recent increase in inflation.

The information below was sourced from the U.S. Gold Bureau’s website, which summarizes historical asset class performance during stagflationary periods.

Sources: Bloomberg, Haver Analytics, Rosenberg Research, Incrementum AG

What is notable is gold’s average outperformance during these periods relative to the broader market. While metals underperformed, mining stocks linked to gold and silver could be expected to benefit from gold and silver outperformance. While oil outperformed gold and silver, the transition to alternative energy and lesser reliance by the United States on foreign sources of oil may impact oil’s sensitivity to stagflation.

Take-Away

While stagflation does not appear to be the base case for most economists, investors would be wise to consider how they might position their portfolio if its probability increases. In addition to gold, a stagflationary environment could benefit sectors with pricing power, including energy and materials or sectors that can pass on higher costs to consumers.

 

Suggested Reading:

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COLA Increases in 2022 Likely to Top $68 Billion

Digging Deeper Into Gold Investments

Recycling Li-Ion Batteries Through Bioleaching

 

Sources:

Analysis:
Stagflation? Recession? Bond Market Messages Puzzle Investors, Reuters, Yoruk Bahceli, August 6, 2021.

Stagflation
Portfolio Luring Managers Who Say Time to Act is Now, Reuters, Katherine Greifeld and Vildana Hajric, August 11,2021.

Stagflation
is ‘A Legitimate Risk’ that Would be Painful for U.S. Markets, MarketWatch, Christine Idzelis, July 26, 2021.

New
Coronavirus Wave is Giving Credence to the Risks of a U.S. Stagflation-Like
Scenario, Market Watch, Vivien Lou Chen, August 3, 2021.

Disco
Inferno: The U.S. Could Be Headed Back to ‘70s-Style Stagflation, Barron’s, Randall W. Forsyth, July 16, 2021.

Gold,
Stagflation and a Word About Basel III, United States Gold Bureau, Bill Stack, July 14, 2021.

 

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With Inflation Pushing Up the COLA on Social Security, Investing Where Seniors Spend Could Pay Off!

 

Retirees are likely to get a cost of living (COLA) increase greater than the last three years combined come January 2022. This will add up to an enormous amount of money. Many seniors have pent-up needs, after all, they’ve been tightening their belts as interest rates were pushed to near zero.  An inflation report last week (Aug. 11) released by the Bureau of Labor Statistics is the first of three which decides how much additional cash they’ll have to spend. It’s looking good for those over 62.

 

COLA Math

According to the Social Security (SSA) website, the basis for increasing Social Security payments is the change in inflation measured by CPI-W for the months of July, August, and September. These months are averaged for the current year and that average is the effective COLA beginning in January of the following year.

 

Source: Bureau of Labor Statistics CPI Report, Released August 11, 2021

On page 4 of the BLS report released last Wednesday, we can see that for the month of July, the first month that is weighted in the formula, the basket of goods measured has increased by 6%. If CPI-W drops to 0% for August and September, recipients will still get a 2% increase. This is already higher than last year (1.3%) and the year before (1.6%). Estimates are that August and September won’t see price increases slow, this has led to a range of forecasts for the Social Security COLA to be close to 6%. In June CPI-W increased by 6.1%. If the trend holds, a near 6% increase would add to more than the last three COLA adjustments combined.

The SSA website shows that for the last three years recipients received 2.8% in 2018, 1.6% in 2019, and 1.3% in 2020. The increases, even with compounding, only multiplies out to 5.80%.  

The average social security recipient receives $1,553.68 per month. A 6% increase for this group would be $93 additional monthly. On the high end, the maximum paid is $3,895 which would increase by $233.70. Neither of these is enough to lease a new Tesla, so what will Seniors be buying? The amount of money isn’t as small as it looks. The number of Americans collecting Social Security payments is 61.5 million. At an average increase of $93 per month, this will place an additional $68.6 billion into the economy next year, all primarily 62-years old and up.

 

Take-Away

The inflation that the economy has been experiencing, regardless of whether it is transitory or persistent, is likely to supply over 68 billion in additional cash to the hands of seniors next year. This is not an insignificant number. If there are specific demands among this group, for example, travel, new car, electronic updates, medical supplies, fitness, those sectors could do well. That is to suggest if there are commonalities among this demographic as to where money will be spent, investing in “gray” sectors may be worth exploring as we approach 2022.

To comment on this and other articles, find us on the popular social media sites below.

Paul Hoffman

Managing Editor, Channelchek

 

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Sources:

https://www.ssa.gov/oact/cola/latestCOLA.html#:~:text=How%20is%20a%20COLA%20calculated%3F&text=A%20COLA%20effective%20for%20December,which%20a%20COLA%20became%20effective.

https://www.ssa.gov/oact/STATS/cpiw.html

https://www.nasi.org/education/who-gets-social-security/#:~:text=About%2061%20million%20people%20collect,is%20receiving%20Social%20Security%20benefits.

https://www.bls.gov/news.release/pdf/cpi.pdf

 

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Debt Ceiling Season’s Impact on Stocks and U.S. Credit Ratings

 

The debt ceiling wrestling match and the U.S. Treasury’s inability to meet the responsibilities of the U.S. Government are likely to cause higher market volatility in the coming months. The suspension of debt limits has just expired, this kicks off the 2021 season, and a note from Janet Yellen is about to make a lot of people concerned.

The debt ceiling (statutory debt limit) is the maximum amount of debt the United States can have outstanding in Treasury debt.  The limit had been suspended in March of 2020 to keep the economy afloat by raising money through debt for businesses and individuals. The suspension was not indefinite and has recently expired.

 

The balance in the Treasury General Account (TGA), which is effectively the checking account for bill paying by the US government, has plunged from $1 trillion at the end of April, to $435 billion this week (August 12). This steep plunge in altitude was required to comply with the end of the statutes’ hiatus. In January, the Secretary of the Treasury Yellen said it would draw down the TGA from its then level of $1.6 trillion to $500 billion by this summer. On August 1, the existing debt ceiling became effective. According to the letter Yellen wrote to the House Speaker and Senate leaders there are immediate expenses that won’t be able to get paid. 

In this letter to Congress concerning the US meeting entitlement obligations, Yellen spelled out to Congress some “extraordinary measures,” the Treasury will take to keep the US from defaulting. The three large government-funded retirement systems topped her list:

-The Civil Service Retirement and Disability Fund

-The Postal Service Retiree Health Benefits Fund.

-The Government Securities Investment Fund (G Fund) of the Thrift Savings Fund that are part of the Federal Employees’ Retirement System.

All entitlements above are required by law to be (eventually) funded and are expected to be made whole as money becomes available by Congress hiking the amount of debt the Treasury can borrow by issuing US Treasury obligations.

If the debt ceiling is not raised by Congress, (or taxes hiked and budgets slashed), this list will grow. At some point, if money isn’t made available there will be concern that the US Treasury won’t be able to meet its debt payments. This will draw a reaction by rating agencies and investors.  For example, in August of 2011, the rating agency S&P cut the U.S. credit rating to AA+ and maintained a negative outlook. With the ratings change S&P analysts cited concerns of growing budget deficits. Rating downgrades typically cause investors (lenders) to seek higher interest rates for their new perceived risk.

Rating Agencies

Fitch, a Nationally Recognized Statistical Rating Organization (NRSRO), placed the US’s credit rating on negative outlook in July of 2020. Last month while reaffirming its AAA rating Fitch expressed heightened concern of financial activity they say will push the country further from a stabilized debt burden. The NRSRO said the US could be downgraded without a plan to balance debt and spending “in the post-pandemic phase.”

In June, Moody’s expressed its views about the US debt burden. “While the coronavirus pandemic has created unprecedented challenges for the US economy and exacerbated the pace of deterioration of the government’s fiscal position, Moody’s expects the US economy to recover over time and the sovereign’s credit profile to remain resilient to the shock,”

S&P, the third NRSRO covering US debt has a stable outlook on its AA+ rating. This maintained level is based on the dollar’s reserve status and institutional strengths, as well as the credibility of the Federal Reserve.

 

Looking Toward History for Guidance on Debt

The current year may not follow the pattern of other years as there have been many new and inventive financial strategies the US has taken to achieve goals over the past 18 months. However, this is what has generally happened each year over the decades (the statutory debt ceiling was enacted in 1917). 

Since 1960, each time the debt ceiling needed to be raised by Congress to pay bills required by Congress, those involved in working out the solution let the activity go down to the wire thereby creating an emergency situation. Defaulting on Treasury debt would topple world bond and equity markets while likely strengthening some commodities like gold and silver. Each time this has happened concessions were made, the debt ceiling was either raised or extended (or suspended), and we moved on until the following year when debt ceiling season.

Take-Away

Debt ceiling season this year has all the ingredients it needs to be even more tumultuous. The government debt is viewed as excessive relative to GDP. Washington’s spending “guarantees” have grown dramatically, there are still some concerned about how ready workers are to return to work, and money is flowing from the Treasury’s checkbook at a pace of $100 billion per week.

During past years the talk of if there “will be a deal,” “will they vote on a deal,” “they have a deal but Congress is on vacation,” sends the stock market into a volatility-tizzy. There’s no reason to expect this year’s to not be disruptive.

Stay in touch with our updates on the economy, exciting industries, and company research by registering at no cost at Channelchek.

Paul Hoffman

Managing Editor, Channelchek

 

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What Metals Can Tell Us About the Economy

The Correlation Between Stocks and Unemployment

Metals & Mining – Second Quarter 2021 Review and Outlook

Energy Industry – 2021 2Q Review and Outlook

 

Sources:

https://home.treasury.gov/system/files/136/Debt-Limit-Letter-Congress_20210802_Pelosi.pdf

https://home.treasury.gov/news/press-releases/jy0304

https://www.federalreserve.gov/releases/h41/

https://www.bbc.com/news/world-us-canada-14428930

https://www.moodys.com/research/Moodys-affirms-United-States-Aaa-rating-maintains-stable-outlook–PR_423587

 

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Debt Ceiling Season’s Impact on Stocks and U.S. Credit Ratings

 

The debt ceiling wrestling match and the U.S. Treasury’s inability to meet the responsibilities of the U.S. Government are likely to cause higher market volatility in the coming months. The suspension of debt limits has just expired, this kicks off the 2021 season, and a note from Janet Yellen is about to make a lot of people concerned.

The debt ceiling (statutory debt limit) is the maximum amount of debt the United States can have outstanding in Treasury debt.  The limit had been suspended in March of 2020 to keep the economy afloat by raising money through debt for businesses and individuals. The suspension was not indefinite and has recently expired.

 

The balance in the Treasury General Account (TGA), which is effectively the checking account for bill paying by the US government, has plunged from $1 trillion at the end of April, to $435 billion this week (August 12). This steep plunge in altitude was required to comply with the end of the statutes’ hiatus. In January, the Secretary of the Treasury Yellen said it would draw down the TGA from its then level of $1.6 trillion to $500 billion by this summer. On August 1, the existing debt ceiling became effective. According to the letter Yellen wrote to the House Speaker and Senate leaders there are immediate expenses that won’t be able to get paid. 

In this letter to Congress concerning the US meeting entitlement obligations, Yellen spelled out to Congress some “extraordinary measures,” the Treasury will take to keep the US from defaulting. The three large government-funded retirement systems topped her list:

-The Civil Service Retirement and Disability Fund

-The Postal Service Retiree Health Benefits Fund.

-The Government Securities Investment Fund (G Fund) of the Thrift Savings Fund that are part of the Federal Employees’ Retirement System.

All entitlements above are required by law to be (eventually) funded and are expected to be made whole as money becomes available by Congress hiking the amount of debt the Treasury can borrow by issuing US Treasury obligations.

If the debt ceiling is not raised by Congress, (or taxes hiked and budgets slashed), this list will grow. At some point, if money isn’t made available there will be concern that the US Treasury won’t be able to meet its debt payments. This will draw a reaction by rating agencies and investors.  For example, in August of 2011, the rating agency S&P cut the U.S. credit rating to AA+ and maintained a negative outlook. With the ratings change S&P analysts cited concerns of growing budget deficits. Rating downgrades typically cause investors (lenders) to seek higher interest rates for their new perceived risk.

Rating Agencies

Fitch, a Nationally Recognized Statistical Rating Organization (NRSRO), placed the US’s credit rating on negative outlook in July of 2020. Last month while reaffirming its AAA rating Fitch expressed heightened concern of financial activity they say will push the country further from a stabilized debt burden. The NRSRO said the US could be downgraded without a plan to balance debt and spending “in the post-pandemic phase.”

In June, Moody’s expressed its views about the US debt burden. “While the coronavirus pandemic has created unprecedented challenges for the US economy and exacerbated the pace of deterioration of the government’s fiscal position, Moody’s expects the US economy to recover over time and the sovereign’s credit profile to remain resilient to the shock,”

S&P, the third NRSRO covering US debt has a stable outlook on its AA+ rating. This maintained level is based on the dollar’s reserve status and institutional strengths, as well as the credibility of the Federal Reserve.

 

Looking Toward History for Guidance on Debt

The current year may not follow the pattern of other years as there have been many new and inventive financial strategies the US has taken to achieve goals over the past 18 months. However, this is what has generally happened each year over the decades (the statutory debt ceiling was enacted in 1917). 

Since 1960, each time the debt ceiling needed to be raised by Congress to pay bills required by Congress, those involved in working out the solution let the activity go down to the wire thereby creating an emergency situation. Defaulting on Treasury debt would topple world bond and equity markets while likely strengthening some commodities like gold and silver. Each time this has happened concessions were made, the debt ceiling was either raised or extended (or suspended), and we moved on until the following year when debt ceiling season.

Take-Away

Debt ceiling season this year has all the ingredients it needs to be even more tumultuous. The government debt is viewed as excessive relative to GDP. Washington’s spending “guarantees” have grown dramatically, there are still some concerned about how ready workers are to return to work, and money is flowing from the Treasury’s checkbook at a pace of $100 billion per week.

During past years the talk of if there “will be a deal,” “will they vote on a deal,” “they have a deal but Congress is on vacation,” sends the stock market into a volatility-tizzy. There’s no reason to expect this year’s to not be disruptive.

Stay in touch with our updates on the economy, exciting industries, and company research by registering at no cost at Channelchek.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

What Metals Can Tell Us About the Economy

The Correlation Between Stocks and Unemployment

Metals & Mining – Second Quarter 2021 Review and Outlook

Energy Industry – 2021 2Q Review and Outlook

 

Sources:

https://home.treasury.gov/system/files/136/Debt-Limit-Letter-Congress_20210802_Pelosi.pdf

https://home.treasury.gov/news/press-releases/jy0304

https://www.federalreserve.gov/releases/h41/

https://www.bbc.com/news/world-us-canada-14428930

https://www.moodys.com/research/Moodys-affirms-United-States-Aaa-rating-maintains-stable-outlook–PR_423587

 

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	Image Credit: The People Speak! (flickr)

Are Robots Coming After the Law Profession?

 

Imagine what a lawyer does on a given day: researching cases, drafting briefs, advising clients. While technology has been nibbling around the edges of the legal profession for some time, it’s hard to imagine those complex tasks being done by a robot.

And it is those complicated, personalized tasks that have led technologists to include lawyers in a broader category of jobs that are considered pretty safe from a future of advanced robotics and artificial intelligence.

But, as we discovered in a recent research collaboration to analyze legal briefs using a branch of artificial intelligence known as machine learning, lawyers’ jobs are a lot less safe than we thought. It turns out that you don’t need to completely automate a job to fundamentally change it. All you need to do is automate part of it.

 

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and opinions of Elizabeth C. Tippett, Associate Professor of Law, University of Oregon and Charlotte Alexander, Associate Professor of Law and Analytics, Georgia State University. The research cited in this article was produced in collaboration with MITRE, a federally funded non-profit devoted to research and development in the public interest.

 

While this may be bad news for tomorrow’s lawyers, it could be great for their future clients – particularly those who have trouble affording legal assistance.

 

Technology Can be Unpredictable

Our research project – in which we collaborated with computer scientists and linguists at MITRE, a federally funded nonprofit devoted to research and development – was not meant to be about automation. As law professors, we were trying to identify the text features of successful versus unsuccessful legal briefs.

We gathered a small cache of legal briefs and judges’ opinions and processed the text for analysis.

One of the first things we learned is that it can be hard to predict which tasks are easily automated. For example, citations in a brief – such as “Brown v. Board of Education 347 U.S. 483 (1954)” – are very easy for a human to pick out and separate from the rest of the text. Not so for machine learning software, which got tripped up in the blizzard of punctuation inside and outside the citation.

It was like those “Captcha” boxes you are asked to complete on websites to prove you’re not a robot – a human can easily spot a telephone pole, but a robot will get confused by all the background noise in the image.

A Tech Shortcut

Once we figured out how to identify the citations, we inadvertently stumbled on a methodology to automate one of the most challenging and time-consuming aspects of legal practice: legal research.

The scientists at MITRE used a methodology called “graph analysis” to create visual networks of legal citations. The graph analysis enabled us to predict whether a brief would “win” based on how well other briefs performed when they included a particular citation.

Later, however, we realized the process could be reversed. If you were a lawyer responding to the other side’s brief, normally you would have to search laboriously for the right cases to cite using an expensive database. But our research suggested that we could build a database with software that would just tell lawyers the best cases to cite. All you would need to is feed the other side’s brief into the machine.

Now we didn’t actually construct our research-shortcut machine. We would need a mountain of lawyers’ briefs and judicial opinions to make something useful. And researchers like us do not have free access to data of that sort – even the government-run database known as PACER charges by the page.

But it does show how technology can turn any task that is extremely time-consuming for humans into one where the heavy lifting can be done at the click of a button.

 

Not long ago, stock charts were updated by hand.Technology has led to automation of updating stock movements. This frees the
investor to focus on other details.

 

A History of Partial Automation

Automating the hard parts of a job can make a big difference both for those performing the job and the consumers on the other side of the transaction.

Take for example, a hydraulic crane or a power forklift. While today people think of operating a crane as manual work, these powered machines were considered labor-saving devices when they were first introduced because they supplanted the human power involved in moving heavy objects around.

Forklifts and cranes, of course, didn’t replace people. But like automating the grind of legal research, power machines multiplied the amount of work one person could accomplish within a unit of time.

Partial automation of sewing machines in the early 20th century offers another example. By the 1910s, women working in textile mills were no longer responsible for sewing on a single machine – as you might today on a home sewing machine – but wrangling an industrial-grade machine with 12 needles sewing 4,000 stitches per minute. These machines could automatically perform all the fussy work of hemming, sewing seams and even stitching the “embroidery trimming of white underwear.” Like an airline pilot flying on autopilot, they weren’t sewing so much as monitoring the machine for problems.

Was the transition bad for workers? Maybe somewhat, but it was a boon for consumers. In 1912, women perusing the Sears mail order catalog had a choice between “drawers” with premium hand-embroidered trimming, and a much cheaper machine-embroidered option.

Likewise, automation could help reduce the cost of legal services, making it more accessible for the many individuals who can’t afford a lawyer.

 

 

Indeed, in other sectors of the economy, technological developments in recent decades have enabled companies to shift work from paid workers to customers.

Touchscreen technology, for example, enabled airlines to install check-in kiosks. Similar kiosks are almost everywhere – in parking lots, gas stations, grocery stores and even fast-food restaurants.

At one level these kiosks are displacing paid labor by employees with unpaid labor by consumers. But that argument assumes that everyone could access the product or service back when it was performed by an employee.

In the context of legal services, the many consumers who can’t afford a lawyer are already forgoing their day in court altogether or handling legal claims on their own – often with bad results. If partial automation means an overwhelmed legal aid lawyer now has time to take more clients’ cases or clients can now afford to hire a lawyer, everyone will be better off.

In addition, tech-enabled legal services can help consumers do a better job of representing themselves. For example, the federal district court in Missouri now offers a platform to help individuals filing for bankruptcy prepare their forms – either on their own or with a free 30-minute meeting with a lawyer. Because the platform provides a head start, both the lawyer and consumer can make better use of the 30-minute time slot.

More help for consumers may be on the way – there is a bumper crop of tech startups jostling to automate various types of legal work. So while our research-shortcut machine hasn’t been built, powerful tools like it may not be far off.

And the lawyers themselves? Like factory and textile workers armed with new power tools, they may be expected to do more work in the time they have. But it should be less of a grind. It might even free them up to meet with clients.

 

Suggested Reading:

Preparing Investors for the Artificial Intelligence Revolution

AI and Skyborg Technology Will Create Huge Tech Winners

Trading Technology Continues to Level the Playing Field

Tax Treatment of Crypto Miners Could Cause U.S. Exodus

 

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	Image Credit mike01905 (Flickr)

Is a Fourth Stimulus Check Coming?

 

When previous stimulus payments hit the mailboxes and bank accounts of recipients three separate times since April of 2020, each time the stock market reacted positively. There are many stimulus initiatives currently being debated or active.  Investors are wise to keep track of these initiatives, the immediate impacts and the long-term effects could again play a large part in market moves or economic growth. 

 

Various Payments in Play

While almost $1 million jobs were filled in July, driving the unemployment rate down to levels comparable to 2015, there remain calls from both lawmakers and civilians for various new cash payments.  Recently a petition has surfaced with nearly 3 million signatures calling for payments of $ 2,000 for adults and an additional $ 1,000 for children. There are a number of senators that support recurring these payments that would be triggered anytime the unemployment rate rises above 6%. Congress, for its part, is busy working on an infrastructure bill with the potential passage before the end of the month. It’s expected that there would be no movement on other agendas until that deal has been hammered out.

But there is still other money for many in the pipeline. The IRS continues to send additional “plus-up” payments for stimulus amounts owed and it is providing millions of families monthly cash through the extended child tax deduction.

“Thank you payments” in the amount of $1,000 are being sent to teachers and other school staff in several states. This would be funded by state and local governments which received from Washington $350 billion in aid as part of the U.S. rescue plan. Much of this aid will go to schools. Some states chose to offer their teachers and other school staff a “thank you” bonus of up to $1,000. The current states are Georgia, Florida, Tennessee, Colorado, Texas, and California. It’s expected that other states will approve similar disbursements. They have until 2024 to use the funds. 

California will soon issue another round of “Golden State Stimulus Checks,” this will give $600-$1,100 to millions of residents meeting certain criteria. Golden State Stimulus II was approved under a $100-billion budget plan signed by California’s Governor. The stated goal is to spur the state’s economy following an extended period of economic shutdowns. California has approved two rounds of state-level stimulus payments to eligible residents. Nearly two-thirds of residents qualify for the payments. The checks will be available in September.

The President is asking states and cities to use “rescue funds” to send $100 payments to the newly inoculated against Covid. This is viewed not as a means to stimulate the economy but instead to stimulate an increase in interest in receiving the measure.

New rules for child tax credit give parents the potential to get monthly advances for extra cash in 2021, or a lump sum of up to $ 3,600 per child in 2022. The advance was a stipulation in The American Rescue Plan Act. The first monthly child tax credit payments were sent out in July.

 

Other Stimulating Proposals

Since the American Rescue Plan began being implemented in March, the White House has proposed two additional packages – the American Jobs Plan and the American Families Plan. There is no stimulus component to either. The current White House focus is on the infrastructure spending package. The President is said to be “open to a number of ideas” regarding stimulus aid.

Other

Job openings are setting new records allowing opportunity for individual economic well-being and economic growth as a country. A total of 10.1 million positions were open in June. At the same time people are quitting their positions at a rampant pace. During May 3.9 million people quit their jobs. The amount resigning has averaged 3.6 million per month during the last quarter. As open positions rise, the resignations could indicate various personal decisions. For some it indicates confidence in the ability to find a suitable position elsewhere. For others it suggests they’re holding out for higher wages (which have been increasing).  They might also just be burnt out, it has been a difficult year for many, particularly for hospitality and retail workers. A July survey from Joblist, found that one in three service workers wouldn’t return to the industry, and half wouldn’t return to their old roles. Their reason was unsatisfactory pay, conditions, and benefits.

 

Take-Away

The economy is being managed quite different than at any other time in U.S. history. The creation of money and redirection from some segments to others provides many obvious opportunities. While it is easy to see how a subsidy to an industry could help the industry, and create opportunity, money placed in the hands of individuals also could have pronounced effects on segments of the market where the cash is likely to be spent.

Suggested Reading:

Are Earnings Important for Young Media Companies?

The Next Round of Stimulus and Industries Impacted

Is the U.S. Dollar Slipping as the Dominant Currency?

How Much is a Trillion?

Sources:

https://www.the-sun.com/money/3319154/stimulus-check-update-fury-thank-you-payments-teachers-july-2021/

https://ktla.com/news/california/golden-state-stimulus-checks-when-will-payments-go-out-who-qualifies-and-how-to-check-the-amount/

https://www.bbc.com/news/world-us-canada-58020090

https://www.businessinsider.com/jolts-july-job-openings-labor-market-worker-shortage-hiring-data-2021-8

https://www.joblist.com/jobs-reports/q2-2021-united-states-job-market-report

 

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	Vladislav Reshetnyak (Pexels)

Is the U.S. Dollar Slipping as the Dominant Currency?

 

The U.S. dollar has been the world’s dominant currency since the end of World War II.

According to the Congressional Research
Service, roughly half of international trade, international loans, and global debt securities are denominated in $USD. The same goes for many of the world’s most traded commodities including gold, silver, and crude oil. In the chart below the Visual Capitalist has created a visual depiction that shows the standing of the U.S. dollar.

 

Graphics and information
in this article provided by The Visual Capitalist and New York Life Investments

 

Top
Traded Currency Pairs

The foreign exchange market is the largest financial market in the world, with an average daily trading volume of almost $7 trillion. The majority of this volume is driven by banks, corporations, and other financial institutions.

More than 70% of this volume is generated from the top seven currency pairs, all of which include the U.S. dollar.

Currency Pair	Share of Global Transactions
EUR/USD	27%
USD/JPY	13%
GBP/USD	11%
AUD/USD	6%
USD/CAD	5%
USD/CHF	5%
NZD/USD	4%
EUR/JPY	4%
GBP/JPY	4%
Other	21%

The EUR/USD pair is the world’s most traded currency pair and is commonly referred to as “fiber”. It indicates how many U.S. dollars are needed to purchase one euro.

Foreign
Exchange Reserves by Currency

Central banks typically hold foreign exchange reserves for purposes such as:

• Influencing exchange rates
• Maintaining liquidity in the event of a crisis
• Backing debt obligations

Given its status as the world’s dominant currency, the USD naturally represents a majority of these reserves.

Currency	Share of Total Reserves
US dollar	60%
Euro	21%
Japanese Yen	6%
Pound sterling	5%
Chinese renminbi	3%
Australian dollar	2%
Canadian dollar	2%
Other	3%

 

Japan and China are the world’s largest foreign holders of USD, with stockpiles of over one trillion each. These are often accumulated by purchasing U.S. Treasury bonds, a strategy for devaluing one’s domestic currency.

Because a large portion of China’s GDP is generated from exports, the country benefits when its currency, the renminbi (RMB), is weaker relative to the dollar. A relatively weak RMB means Chinese exports become cheaper than American-made goods.

Will
The U.S. Dollar Continue to Reign?

Today’s shifting geopolitical and economic landscape presents challenges to the U.S. dollar’s global status.

China has overtaken the U.S. as the world’s major trading partner, and is looking to leverage its power to expand the presence of the RMB. Two factors that limit the RMB’s potential as an international currency are tight government controls and a lack of transparency.

Another threat to the USD’s dominance is the use of financial sanctions, which limit foreign access to the U.S. financial system. While these sanctions may be effective from a foreign policy perspective, they can also undermine the global role of the USD.

The following chart illustrates how Russia has circumvented the U.S. dollar in the face of American sanctions.

 

 

More specifically, Russia and China have been working towards a closer financial alliance. As of Q1 2020, just 45% of trade between the two nations was denominated in USD, down from 90% in late 2015.

Impact
on Inflation

America’s M2 money supply has grown significantly since the 2008 global financial crisis, and even more so during the COVID-19 pandemic. M2 includes cash, checking deposits, and liquid vehicles such as money market securities.

Looking forward, U.S. inflation is expected to accelerate. In August 2020, the Federal Reserve announced it would switch to an inflation-averaging policy. This means that annual inflation will be allowed to exceed 2% in a given year, so long as the 2% target is achieved over a longer timeframe.

In some respects, higher inflation can be a positive. The U.S. debt to GDP ratio is currently over 100%, and by 2050, it’s expected to reach 195%. With so much debt being issued, sustained inflation can gradually undermine the real value of these liabilities. The tradeoff, of course, is a further weakening of the U.S. dollar.

 

Suggested Reading:

Some Color on Prices and the Markets Fixation on Inflation

A Look at Real Estate Risks to the Stock Market

How Much is a Trillion?

Money Supply is Like Caffeine for Stocks

 

Information and graphics are largely based on an article by
The Visual Capitalist for New York Life Investments. Ancillary Sources are
provided below:

https://advisor.visualcapitalist.com/how-dominant-is-the-us-dollar/

https://asia.nikkei.com/Politics/International-relations/China-and-Russia-ditch-dollar-in-move-toward-financial-alliance

https://fred.stlouisfed.org/series/M2SL

https://www.newyorklifeinvestments.com/?utm_source=VCweb&utm_medium=MM-ad&utm_campaign=Viscap-NYLhttps://www.statista.com/statistics/246420/major-foreign-holders-of-us-treasury-debt/

https://www.statista.com/statistics/246420/major-foreign-holders-of-us-treasury-debt/

https://crsreports.congress.gov/product/pdf/IF/IF11

 

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Clearer Future for Low-Carbon Investments

 

U.S. Automakers just committed to producing fuel cell electric, plug-in hybrid, and battery-powered EVs at a level where they would be 40% to 50% of sales eight years from now.  In a joint statement, Stellantis (manufacturer of Chrysler/Jeep), General Motors, and Ford pledged voluntary compliance with targets set to be defined Thursday (August 5) by the Biden administration, which has committed taxpayer and other government support.

Roughly Half of all
New Cars Sold Next Decade

The car manufacturers said their actions “represent a dramatic shift from the U.S. market today.” While the automakers’ commitment is for alternate fuel vehicles to comprise 40% to 50% of sales, the U.S. President is expected to sign an executive order this week setting a voluntary target of 50%.

How a “voluntary” “order” is administered may be made more clear when presented.  The order is believed to be non-binding for the manufacturers.

Cost of Non-Binding
Support

The infrastructure that will be needed in fewer than ten years is immense. EV charging stations, hydrogen distribution or point of sale manufacturing, and cleaner electricity to provide for both. The Detroit big three car builders said the aggressive EV sales goals could only be met with billions of dollars in government incentives, including consumer subsidies.

Separately, Hyundai supports the 2030 40%-50% EV sales goal. Toyota, which had always officially preferred a hybrid model, said in a statement, “you can count on Toyota to do our part.”

 

Investor Opportunity

In a June 17 press release, consulting firm AlixPartners forecasted investments in electric vehicles by 2025 could total $330 billion. As of now, electric vehicles represent about 2% of total global vehicle sales. Biden has, to date, called for $174 billion in government spending to boost EVs, including $100 billion in consumer incentives. A new bipartisan Senate infrastructure bill includes $7.5 billion for EV charging stations but no money for new consumer incentives.

 

Your Investment Portfolio

With hundreds of billions being reallocated and transferred to fulfill these aggressive goals, the opportunities for investors seem high.

At the most basic level, this immense undertaking will include a need for more raw materials. Among mining stocks, investors in copper producers could be big beneficiaries as the metal is needed to distribute electricity from generation to charging stations, and also within vehicles.  Silver which is used to build solar panels could also see more industrial demand. Lithium, cobalt, and other rare earth metals currently used to manufacture batteries will also be in higher demand. Although wind and solar power generation is expanding, it is not expected to create enough reliable energy. Therefore, companies that produce uranium could also benefit from increasing demand as more nuclear plants go online.

 

 

Direct manufacturers of necessary components would also benefit. Renewable Energy Magazine predicts $60 billion worth of batteries will be needed to meet the coming growth. This places lithium-ion high on the list of component manufacturers. According to USA Today, there are 42,000 charging stations in the U.S., but only 5,000 are considered “fast charging.” In comparison, there are 150,000 gas stations (according to API.org). There are large and small companies building charging stations; it may not come as a surprise that more than a few of them are recognizable companies that are better known for selling gasoline. Hydrogen fuel cells are currently a better solution than lithium-ion for distance or heavy cargo travel. Refueling, however, is even more challenging than recharging a battery. Manufacturers of fuel cells include start-ups and large industrial conglomerates. As with charging stations, the manufacturers that are going to see an erosion in one product while growth in another may not pay off to investors as significantly as smaller more focused companies. The technology to produce pure hydrogen and do it affordably and with low or no emissions is still in its infancy. Recent reports suggest existing gas mains can be used as part of a distribution system, owners of these lines would lose one product and gain another. Onsite hydrogen production may turn out to be the winning technology, to solve this piece of the puzzle.

Car manufacturers themselves will get an influx of taxpayer-funded subsidies. Additionally, if consumer adoption of new vehicles is high, sales may be rampant over the next decade. Conversely, if the infrastructure is behind the car makers’ timeline, buyers may wait, and automakers could find buyers unwilling to buy either the old technology or the new.

Take-Away

With change, there is opportunity. When government spending is involved, the opportunities could be even greater. The promise by car manufacturers to have 40%-50% of their sales electric by 2030 is a huge change in a very big industry an industry that touches many others. Even if partially fulfilled, many companies and fledgling industries will do well. Smaller, more focused companies have the greatest potential to “be the next AAPL.”

It’s easy to find and explore smaller companies in all the various industries affected by going to the company search bar here on Channelchek.

 

 

Suggested Reading:

Recipe for Higher Uranium Prices

Un-hyped Hydrogen Investments

The FOMC and Senate Help Copper Advance

Lithium-ion Battery Recycling Heats Up

 

Sources:

https://www.alixpartners.com/media-center/press-releases/2021-alixpartners-global-automotive-outlook/

https://www.renewableenergymagazine.com/electric_hybrid_vehicles/which-industries-could-benefit-most-from-electric-20210113

https://www.usatoday.com/story/money/cars/2021/07/13/electrify-america-chargers-ev-charging-electric-vehicles-cars/7950468002/

https://www.api.org/oil-and-natural-gas/consumer-information/consumer-resources/service-station-faqs#:~:text=How%20many%20service%20stations%20are,are%20convenience%20stores%20selling%20fuel.

 

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	Image Credit: Jevgenijs Slihto

“Core PCE” Inflation Spike – Highest 3-Month Rate since 1982

 

Fed Chairman Powell doubled down on inflation being temporary and transitory during the post FOMC meeting press conference. Despite his official position, the Fed head admitted that the recent rate of inflation was “not moderately above” the Fed’s 2% target but “way above target.” The inflation measure that the Fed says it uses for its target is the annual “core PCE,” this spiked even higher on Friday (after the Powell’s Wednesday Press conference).

In 2012, the PCE Price Index became the inflation index used by the U.S. Federal Reserve for making monetary policy decisions. Personal consumption expenditures are among the three main parts of the Personal Income and Outlays report, the most recent was released on Friday (July 30). According to the BEA, this Personal Consumption Expenditures price index, without food and energy, jumped by 0.45% in June, from May, after having jumped by 0.5% in May, 0.7% in April, and 0.4% in March. What’s noteworthy is the Fed’s 2% target compared to the gauge they use which is up 3.5% from June last year, it is the highest year-over-year rise since May 1991.

The graph below from the St. Louis Federal Reserve website is a percent change in PCE inflation measures on a semiannual basis over 20 years. The visual makes it clear that this inflation measure is currently behaving well outside of normal parameters.

 

 

The annualized rate of core PCE over April, May, and June was 6.7%, this is the highest run-rate since July 1982. Inflation has suddenly throttled up this spring and into summer. Although we’ve experienced higher inflation data historically, those price increases were always met with the Fed and the interest rate markets reacting strongly. What we have now is government officials broadcasting that inflation is not going to be long lasting, to many this temporary talk sounds reminiscent of Washington’s “only a 14-day lockdown,” and then we’ll have business as usual. It’s understandable that professionals and economic hobbyists are at home looking at the data and feeling uncertain that it is temporary. The bond market to date, often viewed as the more informed money (over stock and real estate speculation), has accepted the idea that these increases are only temporary.

 

 

So far in 2021, Fed officials have not had a perfect record.  The PCE price index, which includes food and energy, also released Friday, jumped 4.0%. Every three months (roughly, as the FED only meets eight times per year), the meeting is followed by the release of “Projection Materials,” which memorializes where FOMC members think the economy and inflation are headed. The median projection for core PCE inflation is now way behind expectations. For example, in December, core PCE projection for 2021: 1.8% the actual was only actual =1.5%. In March, the core PCE projection for 2021 was 2.0% the forecast of the surge to 2.0% was perfect. By June the core PCE projection was 2.1% the actual was 3.5% when the monthly surges are added in. A miss by an additional 1.4% over the 2.1% expectation is significant and could demonstrate a lack of grasp on what’s possible.

Fed Chair Powell was asked to explain and define at Wednesday’s press conference both why monetary policy should remain easy with inflation surging,  and to clear up what exactly “temporary” and “transitory” mean to him. He admitted that there was nothing temporary or transitory in the current inflation. The loss in dollar purchasing power is permanent; prices are not expected to go back to where they were.

What is expected to be transitory is the current pace of price increases. The starting point down the road could be 6% higher, but prices aren’t expected to continue increasing at the highest speed we’ve seen in 40 years. In that sense, each rate increase stands alone, so the pace is “transitory” or “temporary.” The use of semantics by Fed officials is an art form all to itself. 

 

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

Trimmed PCE Inflation vs. the PCE Deflator

Is Inflation Going to Hurt Stocks?

A Look at Real Estate Risk to the Stock Market

Is the Bubble Michael Burry Warned About Still Looming?

 

Sources:

https://www.bea.gov/news/2021/personal-income-and-outlays-june-2021-and-annual-update

https://www.investopedia.com/terms/p/pce.asp

https://www.bea.gov/news/2021/personal-income-and-outlays-june-2021-and-annual-update

https://fred.stlouisfed.org/graph/?id=PCEPILFE,#0

 

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