'9-1-1: What is your emergency?'
The unelected, nonpartisan Senate parliamentarian may be the most important person in D.C.
Did you know there are approximately 6,100 call centers throughout the U.S. handling roughly a quarter billion calls annually? Each operates 24/7, with the operator tasked with determining what types of emergency services are required. The U.S. Senate parliamentarian, who is neither a politician nor elected official, arguably is the most important person in D.C. these days. She has quashed Democratic hopes to get several bites at budget reconciliation, a process that allows for simple majority approval of key legislation. Instead, Elizabeth MacDonough ruled that the Senate needs to pass a new budget, unless there is an emergency, to pursue a new budget reconciliation measure and suggested only one reconciliation maneuver is available for fiscal 2022 that begins in October. This creates pressure for Dems to merge President Biden’s American Jobs Plan with the American Families Plan into one package, creating a huge ($4 trillion) bill with tax increases unless it makes changes progressives won’t like but moderate Dems are certain to demand. With less than four months left in the current fiscal year, the clock’s ticking, midterms are getting closer and the “emergency” nature of the Covid crisis is fading fast. Bolstered by exceptional growth and with the country on pace for the strongest year of state tax revenue growth on record—up 11% in Q1 even before $190 billion of new federal aid to states in March’s $1.9 trillion relief bill—half of states have said they’re ending the extra $300 weekly in jobless benefits included in the March bill. Sorry, the emergency was what?
Signs of worrisome inflation are everywhere. Manheim's used-car price gauge is at a new high, as is Citi's inflation surprise index. At 88%, ISM manufacturing capacity utilization is at a post-1995 high, home prices are setting records, oil is at 3-year high, other commodities are soaring and gas is averaging above $3 a gallon. A recent Barron’s cover story ran down shortages across supply chains, while the business inventory/sales ratio is near its all-time low set in 1950 at the dawn of the post-war boom. Price pressures aren’t going away anytime soon. The issue for investors is what all the pent-up demand means for inflation. As always, it depends on the time frame. Within two years, the effect of surging capital spending (more below) could prove disinflationary. Until then, Gavekal Research sees inflation continuing to build, creating a threat to markets even if predictions of an impending rerun of the 1970s are overdone. Might these inflation expectations be running too far ahead of reality? Treasuries sure have priced emerging inflation with a yawn, with real rates negative across most of the curve and 10- and 30-year Treasuries trading well off March highs. The St. Louis Fed’s measure of price pressures that considers more than 100 indicators puts the odds of PCE inflation topping 2.5% over the next 12 months at 84%, one of the highest readings since 1990. But the Fed's said it’s fine if inflation runs hot a bit—it wants it to. It’s trying to lift the long-run average to 2%, after 25 years of falling short. For now, it seems the bond market's a believer.
Blockbuster reports this week on manufacturing and services (more below). GasBuddy, the No. 1 downloaded app in the Apple App store as of mid-May, reported the best gasoline demand for a Sunday since summer 2019. TrendMacro reports restaurant utilization, which many had said would never recover, has risen above pre-pandemic levels as pandemic-weary Americans rediscover the pleasures of eating out. The New York Fed says higher-income households have just begun to splurge on services. The recovery isn’t just at home, as our especially vigorous appetite for imports is spilling over to Europe and EM suppliers. Meanwhile, capacity-challenged companies are investing heavily—Jefferies says its capital expenditures measure has “literally gone ballistic,’’ and capital goods orders have broken out to new highs. Bank of America’s proprietary business cycle indicator is stuck in a “boom” regime versus the last expansion’s extended “soft patch.” Massive fiscal and monetary stimulus have helped. The U.S. already has enacted Covid-related stimulus spending equivalent to more than 25% of GDP. Bank of America thinks another $2 trillion (9% of GDP) is likely. A bipartisan compromise? Hmm. For its part, the Fed’s sticking with the narrative that it intends to be cautious about tapering $120 billion of monthly quantitative-easing purchases and raising policy rates. Easy money all around. Stocks love it. The MSCI World equity index that tracks shares in 49 countries hit a record high this week, and with money supply growth at home hovering above 20% y/y, SIS Research sees the S&P 500 reaching 4,500 by November. With GDP and inflation expected to grow well above trend, what’s the risk that at some point the punch bowl gets taken away quickly? Meanwhile, “the Covid emergency … Operator? … Operator? … Are you there?”
- ISMs surprise across the board The services gauge jumped to a record high in May and manufacturing hit its second highest level since May 2004. The separate Markit manufacturing survey rose to a new high, too, as new orders and export orders expanded at record rates.
- A synchronous V The latest country PMIs put global growth at its fastest pace in 15 years, and the OECD raised its 2021 worldwide GDP growth forecast to 5.8% from 5.6% in March on government stimulus, the rapid pace of vaccinations and business resilience.
- Prices always adjust The Covid crunch that pulled forward housing demand, driving prices to record highs, has some prospective buyers balking, creating a minor headwind as housing sales slip. The industry remains on solid ground, but this consumer “protest” of high house prices could be a sign of what’s to come in other costlier sectors, such as used cars, up 48% year-over-year (y/y), according to Manheim, and furniture, up 8% y/y.
- Jobs disappoint again May nonfarm payrolls came in at 559K, doubling April’s upwardly revised miss but short of consensus as businesses struggle to find workers in a rapidly reopening economy. As we debate the reasons for this amid record job openings and half of states cutting extra jobless benefits, we’ll watch this play out. Other labor-market signals were more robust. ADP private payrolls jumped to nearly 1 million, Challenger layoffs declined and initial weekly jobless gains fell below 400K.
- Covid isn’t over Asia’s facing a fresh wave as countries such as Taiwan, Vietnam, Singapore and Malaysia that initially did well report rising cases and restrictions. Even hyper-controlled China’s had a fresh outbreak in Guangdong, its richest province. Japan and South Korea still have high caseloads, Indonesia and the Philippines never suppressed their second waves and India remains a mess.
- The MMT experiment Low real interest rates caused by rising inflation and a friendly Fed historically are consistent with subpar growth as they undermine savings and investment. Put another way, Ned Davis says the Modern Monetary Theory experiment we seem to be living sounds good and has helped commodity producers but for most, its excessive money printing tends to create weak currencies and inflation—among the worst things for investors. Thank you!!
Uh, thanks, Mr. President The White House tasked Vice President Harris to lead the administration's new efforts on voting rights. Biden previously put the VP in charge of addressing the southern border crisis. Both represent politically polarizing issues that could hurt her 2024 presidential aspirations.
This week was my 37-year anniversary with the mister… life is good In a University of Michigan/AARP poll, 80% of adults aged 50 to 80 said their mental health is as good as, or better than it was 20 years ago. A psychiatrist at Michigan concluded, “I really think resiliency, life experience, the ability to put things in perspective can really help … [people] shoulder some of these stressors a little bit better.”
Now, what about lawyers Bank of America shares a poll that found 51% of Europeans would like to replace their politicians with artificial intelligence.