DIASTOLE ECONOMIC AND MARKET COMMENT
June 21, 2021
Inflation, inflation, inflation. It’s all anyone can talk about. Except Prime Days at Amazon (today and tomorrow) and the fact that Amazon’s hourly workers have 150% annual turnover. And of course the discovery that a new species of giant rhino existed 31 million years ago in Asia that was the size of eight elephants and is the largest species of mammal ever discovered. But aside from that, inflation. Except of course that someone paid $28 million to join Jeff Bezos on his upcoming ten-minute-long rocket ride. Oh, and that tens of thousands of people have signed a petition that Jeff Bezos should not be allowed back from space. But other than that, you know, inflation.
Here are some of the data that support the idea that inflation is already here:
The Federal Reserve now predicts that inflation will hit 3.4% this year, and is anticipating two rate hikes in 2023. It kept current interest rates unchanged at its Open Market Committee meeting last week.
Consumer prices rose 5% in May versus May of 2020 - the fastest growth in 13 years.
Clothing and accessory sales were 200% higher in May than a year earlier.
The value of the dollar rose more than 2% last week.
Oil prices have reached $71 per barrel, the highest level in two years.
The May Producer Price Index (PPI) rose 6.6% year over year. The PPI measures final sales prices for manufactured goods.
Despite generally falling stock prices, bank stocks were higher on the news from the Fed, indicating that they anticipate profitably rising interest rates.
And here are some of the data that counter the inflation narrative:
May retail sales overall fell 1.3% from April.
Initial jobless claims last week were higher at 412,000, versus 360,000 anticipated.
Bitcoin has fallen to about $32,500 - half of its recent high value.
Lumber prices, which soared last year, have fallen 40% in the past month from May highs.
So, overall, inflation is winning. But it’s still hard to predict, because of course some of the current demand for goods and services was pent up during the past year, and once supply chain issues work themselves out, demand will not necessarily exceed pre-pandemic levels. Expectations of inflation have fallen since the Fed announcement, as investors have decided that the Fed is on top of the situation. Current inflationary expectations are about where they were in 2018.
Lots of people are also worried about the Biden Administration’s proposals for tax hikes. As it currently stands, we don’t believe the changes will be enacted, but those odds change if the Senate filibuster is repealed. However, it is also possible that if repealing the filibuster becomes a possibility, a bipartisan tax change will be agreed upon to forego that happening.
The Buffett Indicator hit 133% recently. The Indicator compares market capitalization of all U.S. stocks to the size of our Gross Domestic Product (GDP). GDP encompasses all goods and services produced in the country. If the value of all stocks combined exceeds the value of annual GDP (i.e. a reading above 100%), Buffett considers this a signal that stocks are overvalued. But at 133%, is Buffett selling? In the first quarter of this year, yes. Berkshire Hathaway sold more than it bought. Berkshire is currently sitting on a mountain of cash ($145 billion), waiting for opportunities to buy.
Recent market losses may have enticed Mr. Buffett. After all, the Dow Jones Industrial Average fell 3.5% just last week, ending, at least temporarily, the dominance of value stocks over growth stocks this year. The Standard & Poor’s 500 lost 1.9%, and the Nasdaq Composite Index dropped 0.2%
If you thought the giant rhinoceros was interesting, you should be aware that a new giant dinosaur species was discovered in Australia. The Australotitan cooperensis is estimated to have weighed 70 tons, and measured close to 100 feet in length. Luckily it was a plant eater, but also, it lived 92-to-96 million years ago, so your garden was never in danger.
For the week ending June 18th, the S&P finished at 4,166, the Dow at 33,290, and the Nasdaq at 14,030. The yield on the ten-year Treasury Note slid slightly to 1.45%. U.S. crude cost $71.64 per barrel, N.Y. gold cost $1,767.90 per ounce, and one Euro was worth $1.1864, down about $0.03 from last week.
Elizabeth E. Cook
News and information presented here was gathered from sources believed, but not guaranteed, to be accurate, including, but not limited to, The Wall Street Journal, Barron’s, The New York Times, The Washington Post, USA Today, CNN, CNBC, Business Insider, Yahoo Finance, Bloomberg, The Economist, Kiplinger, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220, or reply to this email to reach me, Liz Cook.
While we’ve all been aware of the monstrous heat wave and drought out West, it has just been brought to my attention (sorry, duh) that water shortages in lakes and reservoirs endanger electricity production since hydroelectric power is in common usage in that region. For instance, Lake Powell is projected to receive only 25% of its usual rainfall and runoff this year. Lake Powell feeds Lake Mead, where Hoover Dam is situated. The dam is currently generating 25% less electricity than usual, and that power is slated to go to Arizona (19%), Nevada (23%), and the rest to Southern California. It could be a very hot and dry summer.