Where Will The Fed's MMT Trillions Land Next?
Summary
- There's still a lot of money in circulation that the Fed created from MMT, and it has to go somewhere. Much of that money will start hiding in 2- to 5-year Treasuries securities while the yield curve remains inverted, but also, fortunately, much will go into stocks that serve as inflation hedges.
- It is very hard for the Fed to engineer a “soft” economic landing as intermediate Treasury yields soar. That essentially means that businesses that do not have big order backlogs are likely to teeter into their own recession in the upcoming months.
- Eventually, a weaker U.S. and global economy will impact crude oil prices and other commodities, which, in turn, will “prick” the current inflation bubble.
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Modern Monetary Theory (MMT) is essentially “unlimited money printing.” It was pioneered by the ECB and adopted by the Fed during the pandemic as a way to avert a recession. There is still a lot of money in circulation that the Fed created from MMT, and it has to go somewhere. Much of that money will start hiding in 2-year to 5-year Treasuries securities while the yield curve remains inverted, but also, fortunately, much will go into stocks that serve as inflation hedges, such as shipping stocks.
The Atlanta Fed is currently estimating 1.3% annual GDP growth for the first quarter, up from a previous estimate of 0.9%. If the Fed can avert a recession and engineer a soft landing, I will give them full credit for their actions; but right now, the tail (i.e., intermediate Treasury yields) is wagging the dog (the Fed), so we must anticipate a series of interest rate hikes until the Fed is more in line with market rates.
It is very hard for the Fed to engineer a “soft” economic landing as intermediate Treasury yields soar. In fact, I cannot remember the last time the Fed successfully engineered a “soft economic landing.” That essentially means that businesses that do not have big order backlogs are likely to teeter into their own recession in the upcoming months. Eventually, a weaker U.S. and global economy will impact crude oil prices and other commodities, which, in turn, will “prick” the current inflation bubble.
The Fed’s favorite inflation indicator - the Personal Consumption Expenditure (PCE) index - rose to a 6.4% annual pace in February. The core PCE, which excludes food and energy, is now running at a 5.4% annual pace. The Fed still has a goal of getting the PCE down to 2%, but that won’t happen this year.
As an example of how higher interest rates impact economic growth, the National Association of Realtors recently announced that pending home sales declined 4.1% in February (vs. January), which marks the fourth straight weekly decline in pending home sales as mortgage rates have steadily risen. In the past 12 months, pending home sales have declined 5.4%, so the housing boom is clearly fizzling.
Meanwhile, the S&P CoreLogic Case-Shiller National Home Price Index reported that median home prices rose 19.1% in the 12 months (through January) as the inventory of existing homes declined to an all-time low of a 1.6-month supply. In the 20 major metropolitan areas surveyed, median home prices rose in 16 areas. Phoenix had the strongest home growth, appreciating 32.6% in the past 12 months. The Tampa metropolitan area had the second strongest appreciation at 30.8% in the past 12 months. As interest rates rise, I expect that the annual pace of home appreciation will moderate.
The supply chain glitches are expected to get worse, since Chinese authorities imposed a two-stage “lockdown” on 26 million people in Shanghai in response to Covid-19. As a result, Tesla (TSLA) had to suspend vehicle production for five days. Disney (DIS) in Shanghai also closed. The largest container port in the world is in Shanghai, so I suspect that container ship prices will remain high. The Shanghai Covid lockdown, plus renewed hopes for peace talks between Russia and Ukraine, caused a bit of a “commodity crunch” last week. In my opinion, energy, natural gas, LNG, fertilizer, and shipping stocks all remain great buys on any pullback, since they are all expected to post strong second-quarter results in the upcoming weeks.
Last Week’s Economic Indicators Still Look Reasonably Healthy
The biggest surprise last week was that the Conference Board reported that its consumer confidence index rose to 107.2 in March, up from 105.7 in February. The “present situations” component rose to 153 in March, up from 143 in February. However, the “expectations” component declined to 76.6, down from 80.8 in February. Overall, consumers are in much better shape than I (and others) had anticipated, so it is still possible that the U.S. economy could skirt a recession if consumer spending remains strong.
On the jobs front, ADP reported on Wednesday that 455,000 private payroll jobs were created in March. Leisure & Hospitality led the way with 161,000 new jobs, and Manufacturing created 54,000 new jobs.
On Friday, the Labor Department reported a similar number of 431,000 payroll jobs created in March, but that was below economists’ consensus expectation of 490,000. As I had anticipated last month, previous payroll reports were revised higher: January up 23,000 (from 481,000 to 504,000) and February up 72,000 (from 678,000 to 750,000), respectively. The unemployment rate declined to 3.6% in March, down from 3.8% in February. Average hourly earnings rose 0.4% by 13 cents to $31.73 per hour in February and have increased 5.6% in the past 12 months. Overall, the job market remains very healthy.
On Thursday, the Labor Department announced that weekly unemployment claims rose to 202,000 in the latest week, compared to a revised 188,000 in the latest week. Continuing unemployment claims declined to 1.307 million, compared to a revised 1.342 million in the latest week. Although weekly unemployment claims were higher than the economists’ consensus expectation of 196,000, continuing unemployment claims were significantly better than the economists’ consensus expectation of 1.34 million. Overall, continuing unemployment claims are now at the lowest level in over 52 years (since December 1969).
Crude oil was on a roller coaster last week. The Biden Administration announced that it is releasing more crude oil from the Strategic Petroleum Reserve - up to 1 million barrels per day. Also notable is that both Austria and Germany are preparing for gasoline rationing, as their supplies could fall short. An even bigger shortage of rare earth metals to build lithium-ion batteries continues to derail the EV revolution. The U.S. is not a major nickel producer and does not have the ability to mine cobalt, which comes mostly from the Congo, where children crawl into dangerous hand-tunneled 100-foot shafts to extract cobalt, so it looks to me like the EV revolution may stall unless the world can find sufficient nickel and cobalt.
Navellier & Associates owns Disney (DIS) in managed accounts and a few accounts own Tesla (TSLA) per client request. Louis Navellier does not own Disney (DIS) or Tesla (TSLA) personally.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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