How do you suppose they became billionaires?
Market marches forward as Dems scale back.
Crisscrossing the country again, and I have some dreadful news. My feet are very unhappy with me. I’ve dusted off my Vera Wang’s and they might as well have been stilts. Indeed, female clients in Palm Springs and Wichita scolded me as to the damage 4-inch heels can do to your feet—“watch out for bunions.” (Teary eye emoji!) Otherwise, it’s great to be on the road again! From the West Coast to the Midwest and finishing off in Hershey, Pa., advisors and investors were cheerful. The common refrain though, “Our country’s debt will do us in.” At this writing, the Dems’ reconciliation “soft” infrastructure package keeps shrinking. It’s now roughly half its initial $3.5 trillion price tag (though with all the sunsets, it may end up that high in reality … Nothing so permanent as a temporary government program). The plan to tax billionaires? Dead … but I thought everybody hated billionaires? Same for a hike to top-line corporate rates. In their place, for now: tax surcharges on those earning $10 million and up, and a 15% minimum corporate tax aimed at multinationals. With the bipartisan $1 trillion “hard” infrastructure plan already at the altar, whatever Dems ultimately say “I do” to ensures trillion-dollar deficits for years. The sausage making hasn’t been good for Biden—his popularity is at new lows—or Dems. Market surveys see rising odds of regime change in the midterms.
Productivity-enhancing capex keeps climbing (more below). Companies all over are increasingly replacing workers with machines. Buffalo Wild Wings is testing a robotic chicken-wing fryer called “Flippy Wings.” Flippy’s cousin, which flips burgers and makes fries, was tested in a White Castle last year and is being added in 10 more locations. Many other robots are looking for restaurant jobs, too. Peanut Robotics cleans and sanitizes restrooms; SoftBank Robotics makes Whiz, which vacuums floors; Makr Shakr makes robotic bartenders; and Servi delivers food to tables. A Lightspeed/OnePoll survey of hospitality merchants found 67% see automation as the best way to combat employee turnover. It’s not just services. Construction workers and suppliers are being replaced, too. Builder Lennar is set to break ground on 100 3D-printed homes in Austin. But for now, worker shortages and supply-chain woes are common themes this earnings season. So is pricing power, with many S&P 500 companies reporting record-high profit margins due to their ability to pass on costs. Analysts think this will continue, at least in the intermediate term. Q3 per-share estimates already have been revised up nearly $1.50 since the reporting season started, bringing the quarterly consensus to near $51, up 31% year-over-year (y/y).
Q3 was terrible (see below) and the market hit new highs. A Q4 pickup appears in the cards. Regional manufacturing indexes are turning up, jobless claims keep hitting new pandemic lows, wages are rising and consumer optimism is rebounding (more below). Higher interest rates and energy prices may be viewed as headwinds, but they’re also products of economic vibrancy. While inflation is on front pages, there literally are tons and tons of goods waiting offshore to be unloaded, shipped and put on retailers’ shelves—a big pending deflationary force, particularly with pandemic pulled-forward demand waning. Among early signs of supply clearing: 1) Covid cases, which have led logistics trends, are plunging (fingers crossed as Northerners go indoors this winter); 2) Some ocean freight rates have hooked down; 3) Trucker rates are off their highs; 4) Rail dwell days—the time it takes a container to depart by rail after being offloaded and trucked out of the terminal—have dropped sharply. Core goods price increases have started to moderate amid accelerating supply and a shift toward services spending as infections wane. Cornerstone Macro thinks core CPI could drop to 2% y/y by year-end 2022. This could take some pressure off the Fed, which meets next week and is falling out of line with other central banks and markets. Futures are pricing in two rate hikes by the end of next year. That’s a worry for later. For now, the economy is reigniting, money is cheap and plentiful, and Congress is about to throw on more stimulus. BTW, the net worth of Nancy Pelosi and her husband reportedly jumped 176% over the past three years to $315 million. She’s not a billionaire yet. But I wouldn’t bet against her.
- Santa won’t disappoint Delta’s fade caused October Conference Board confidence to unexpectedly rise, ending three straight months of decline. While they expect the highest inflation since 2008, consumers’ buying plans for homes, cars and appliances rebounded on optimism about employment and income prospects. Michigan’s final read on October sentiment also ticked up. A confident consumer bodes well for cyclical stocks and the holidays—JP Morgan and the National Retail Federation expect record holiday sales, with increases in the 10% range.
- Capex on a roll Orders for non-defense capital goods ex-aircraft hit an all-time high in September, prompting Evercore ISI to estimate real capex will have risen nearly 14% in Q3 once the final tally is in. Overall durable goods orders slipped as chip shortages slowed autos and aircraft. But ex-transportation, orders increased more than they did in August, a sign of resilient underlying demand for manufactured goods.
- On housing, there was good news … Sales of new single-family homes surprised, jumping 14% month-over-month in September to a 6-month high, aided by a shortage of existing homes (more below). Both the average and median prices continued to climb, though at somewhat more moderate paces.
- … and some not so good news Pending home sales surprisingly fell in September, partially reversing August’s surge. The National Association of Realtors attributed the slowdown to thin inventories, a jump in mortgage rates and seasonal forces that typically see buyers pause until new listings arrive with the new year. Activity is still ahead of pre-pandemic levels.
- Market at new highs, says this is “transitory” Q3 real GDP growth decelerated more than expected to its slowest pace of the pandemic recovery, according to the government’s first take. Spiking Covid cases, fading stimulus and widespread supply disruptions weighed on consumption and production. Growth in consumer spending, which accounts for roughly two-thirds of economic activity, plunged to a 1.6% annual rate vs. Q2’s 12% pace.
- Trade a drag The goods trade deficit, a factor in Q3’s slowing growth, doesn’t look to improve anytime soon. It jumped much more than expected in September as exports plummeted and imports barely rose.
However defined, “normal” elusive for Biden Amy Walter of the Cook Political Report argues the central premise of Biden’s 2020 campaign was he would return things to normal. But “normal” meant different things to different people—a pre-Trumpian model of the presidency with less drama and confrontation; a pre-Covid life without masks and restrictions; pre-Trump policies that aligned with Obama’s; a return to less partisanship. As his flagging poll numbers reflect, Biden’s failing to deliver on all these fronts.
Where are all the workers? A specific tally is elusive. However, at St. Louis Fed study suggests more than 3 million baby boomers retired prematurely during the pandemic. And Fundstrat cites a Census Bureau survey that found about 5 million workers (which represents about 10 months of job growth) are at home, caring for someone with Covid.
Wichita is the “Air Capital of the World” Home to five major aircraft manufacturers (Airbus, Bombardier/Lear Jet, Beechcraft, Cessna and Spirit), a quarter of all planes are made there. While visiting, I spoke at two client events, and the audiences were engaging and chill. My hosts were kind, reminding me why I love the road. My visit included a tour of their offices, complete with an art gallery and glass sculptures throughout. WuShock!!