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Schiff: The Federal Reserve Is Picking A Fight It Cannot Win

Schiff: The Federal Reserve Is Picking A Fight It Cannot Win

Via SchiffGold.com,

The stock market rallied early this week with receding worry about the omicron variant, but the specter of Federal Reserve monetary policy tightening remains…

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Schiff: The Federal Reserve Is Picking A Fight It Cannot Win

Via SchiffGold.com,

The stock market rallied early this week with receding worry about the omicron variant, but the specter of Federal Reserve monetary policy tightening remains. In his podcast, Peter Schiff talked about the anticipation of the Fed’s fight against inflation and explained why it’s a fight the central bank can’t win.

US stock markets saw big gains Monday and Tuesday (Dec. 6 and 7) with both the Dow and Nasdaq up over 3%. The catalyst was Dr. Faucci saying the omicron variant of the coronavirus doesn’t appear to be as serious as some of the other strains. With that news, the markets went to work recovering the losses from last week. In fact, the rally has recovered almost all of the losses suffered since “black and blue Friday.”

But it was really a 1-2 punch that hit the markets last week. It wasn’t just omicron. There was also speculation that the Federal Reserve was going to tighten monetary policy even faster after Fed chair Jerome Powell said it was time to “retire” the word “transitory.” and that it may speed up the taper by a couple of months. That would potentially move “liftoff” on rate hikes forward a couple of months as well, with rate hikes coming as early as April or May.

Supposedly, this tiny adjustment in policy is now going to vanquish this inflation threat that up until now the Fed completely dismissed. But now that it recognizes that it underestimated how big the inflation fire was going to be, well, it is going to put it out by simply accelerating the taper a bit and hitting inflation with a quarter-point interest rate a couple of months sooner than it had initially planned.”

Peter said he thinks the relief over the omicron variant will be short-lived because the markets will have to refocus on the elephant in the room — inflation and the Fed’s supposed commitment to fight it. As far as the markets are concerned, even slightly less loose monetary policy is construed as tightening.

So long as the Fed is committed to fighting inflation, it needs to tighten monetary policy, which means the stock market no longer has the wind at its back, but the wind in its face, and as a result of that headwind, the market needs to move lower, and it likely will move lower.”

But the markets still don’t seem to understand that what the Fed claims it’s planning to do to fight inflation amounts to nothing.

There is no way that merely finishing the taper a couple of months early and raising interest rates slightly above zero, maybe 50 basis points – hell, maybe they even go all the way up to 1%. That’s nothing in the face of the type of inflation that we already have. So, if the Fed is serious about fighting inflation, it’s going to take a lot more than what it’s indicated it’s willing to do. And of course, if it actually does that, the markets would implode.

Peter said he doesn’t even think the markets have priced in the small amount of tightening the Fed claims it’s prepared to do, let alone the actual amount of tightening necessary to really take on the inflation dragon.

If the Fed actually applied the type of monetary cure for this inflation problem, the whole economy would get a whole new disease — because we would have another financial crisis. You cannot fight off inflation by raising interest rates and tightening monetary policy without completely deflating the bubble.”

Of course, when that happens, the Fed will abandon the inflation fight and start setting more inflation fires.

That’s the only policy remedy the Fed has for a recession, for a bear market — it is to create inflation. You can’t fight inflation and create inflation at the same time. So, the markets still haven’t figured out the dilemma that the Fed is in, and that ultimately, even if the Fed starts an inflation fight, it’s not going to win it. It’s going to have to surrender because the collateral damage to the economy is politically unacceptable.”

In this podcast, Peter also breaks down the biggest productivity drop in 62 years, explains why consumer prices are heading much higher and real wages lower, talks about America’s sacrifice during WWII compared to the COVID fight, and points out that the US would have to fund a war with China by borrowing money from China.

Tyler Durden Wed, 12/08/2021 - 14:11

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Economics

The retailers that should weather the coming economic storm

Conditions are about to get tougher for retailers as they face a perfect storm of falling incomes, galloping inflation, and rising interest rates.  These…

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Conditions are about to get tougher for retailers as they face a perfect storm of falling incomes, galloping inflation, and rising interest rates.  These impacts will crimp the discretionary spending power of many people. The one exception could be the under 25-year-old Gen Z demographic, who have fewer non-discretionary costs than other age groups. The retailers who sell to them could fare better than most.

Over the last six months, discretionary retail stocks have been among the worst performers on the ASX, with the S&P/ASX 300 Retailers Accumulation Index underperforming the broader market index by 13 per cent over that period. Admittedly, this recent under performance merely unwinds the 20 per cent out performance of this index in the preceding 18 month period which coincided with the recovery in the market from the pandemic lows.

Over the last six months, only 1 of the 17 stocks in this index has managed to perform better than the broader market, JB HiFi, while four generated losses of over 50 per cent. Notably these stocks, Red Bubble, Kogan, City Chic and Temple & Webster, are all online retailers, and performed very strongly over the first year of the pandemic as they were perceived to be COVID winners.

Figure 1: Total return of retailing stocks between 16 Nov 2021 and 16 May 2022

Source: Bloomberg

The market is concerned that the combination of falling incomes – as households face rising inflation on a broad basis eating into real spending power, and rising interest rates – will reduce discretionary spending power. However, it is not as simple as this. 

While these factors are likely to lead to pressure on overall discretionary consumption, these factors do not affect all segments of the economy equally.

CBA’s economic team has released data for household income and spending growth for the March quarter of 2022. This data is broken down by age demographic.

In looking at the potential impact of spending from cycling the impact of large stimulus payments that were received by households in the prior year, CBA’s data suggests that the percentage of Millennials receiving some sort of government payment has fallen the most relative to the December quarter of 2021 followed by Generation X. Gen Z and Baby Boomers have experienced less of a reduction.

Offsetting the reduction in government benefits is an increase in the percentage of people receiving a salary. This is likely as a result of people returning to work post the pandemic and the current strong labour market.

Figure 2: Share of households receiving government benefits or salaries
(change between 4Q21 and 1Q22)
Source: CBA

This then feeds into the impact on each demographic’s growth in overall income over the last 12 months. This shows that Gen Z has benefited the most from the current strong employment market with increased employment and strong wage growth while the percentage receiving government benefits remains higher than other demographics and above pre-pandemic levels. 

Figure 3: Household income and spending – annual average % change in 1Q22
Source: CBA


Not surprisingly, it is also Gen Z that has shown the strongest spending growth in the March quarter. For the other generations, spending growth has exceeded income growth, implying that their savings rates have declined to fund that growth in spending.

But savings are still well above 2019 levels for all generations and still rising. This will provide a buffer against cost increases and slowing growth in the medium term as inflation and higher interest rates bite. Gen Z has the biggest savings buffer.

Figure 4: Household savings – average deposit and offset balancesSource: CBA

Not surprisingly, overall household wealth is considerably higher than at the end of 2019, primarily as a result of rocketing residential property prices on the back of emergency monetary policy settings. The wealth effect of housing prices is an important driver of discretionary spending in Australia and has benefited retailers over the last two years.

Figure 5: Household wealth – average per household

Source: CBA

Of course, what interest rates can give, they can also take away. With variable mortgage rates likely to increase 1-2 percentage points over the next year, residential property prices are expected to fall, reversing some of this wealth effect.

There is no doubt that conditions are set to tighten for retailers over the coming year. However, reversing wealth effects from falling property prices and falling discretionary income levels will primarily impact those generations that own most of the housing stock, namely the Baby Boomers, Gen X and to a lesser extent the Millennials. Baby Boomers are more likely to be impacted by falls in house prices while Millennials will be more impacted by the need to allocate more of their income toward mortgage repayments.

For those that rent rather than own their home, rents are also likely to rise, as property owners try to pass on rising mortgage, utility and maintenance costs to tenants.

Those with families will be more impacted by rising prices of non-discretionary goods and services like food and utilities. This impact will be concentrated on Millennials and Gen X.

While not immune, the younger Gen Z demographic is likely to fare better than other generations given it faces fewer non-discretionary costs, and is not as exposed to property and wealth effects. At the same time, it is experiencing the strongest income growth and has had the most significant increase in its savings over the last two years.

Hence, we prefer retailers that cater to this younger demographic in the discretionary segment such and Universal Store and Accent Group.

The Montgomery Funds owns shares in City Chic, Universal Store and Accent Group. This article was prepared 18 May 2022 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Goodman Group you should seek financial advice.

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Diesel Costs Deliver Body Blow To Trucking Industry, Impacting Broader Economy

Diesel Costs Deliver Body Blow To Trucking Industry, Impacting Broader Economy

By Noi Mahoney of Freightwaves

With diesel prices remaining…

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Diesel Costs Deliver Body Blow To Trucking Industry, Impacting Broader Economy

By Noi Mahoney of Freightwaves

With diesel prices remaining elevated — forcing significant costs onto shippers and trucking companies — the impact of fuel costs on inflation could put a dent in consumer spending, according to experts.

Diesel pump prices averaged $5.61 a gallon nationwide, 51% higher than diesel prices across the country in January

Economist Anirban Basu said the elevated price of diesel fuel damages the near-term U.S. economic outlook and “renders the chance of recession in 2023 much greater.”

“These high diesel prices mean that despite the Federal Reserve’s early stage efforts to curb inflationary pressures, for now, inflationary pressures will run rampant through the economy,” Basu, CEO of Baltimore-based Sage Policy Group, told FreightWaves. 

Earlier this month, the Federal Reserve announced a half-percentage-point increase in interest rates, the largest hike in over two decades. The U.S. inflation rate is at 8.3%, near 40-year highs.

Basu said consumer spending remains strong, even with elevated diesel prices, but that could change as shippers and trucking companies eventually must pass higher fuel costs on to the public. 

“One of the things we’ve been seeing in the U.S., particularly on the East Coast, is that diesel fuel inventories have been shrinking, which suggests that despite all this inflationary pressure, there’s still a lot of consumer activity, still lots of trucks on the road and the supply is unable to keep up with demand,” Basu said. “The higher price of diesel fuel will become embedded in the cost of everything consumers purchase.” 

Prices of fresh produce rising

Jordan DeWart, a managing director at RedWood Mexico, based in Laredo, Texas, said the types of consumer goods that could be immediately affected by higher diesel prices include fresh produce. Redwood Mexico is part of Chicago-based Redwood Logistics.

“With produce, that’s typically more in the spot rate business, and any of those smaller trucking companies are going to be heavily impacted by fuel costs,” DeWart said.

The U.S. imported more than $15 billion in fresh produce from Mexico in 2021, including avocados, tomatoes, grapes, bell peppers and strawberries, according to the U.S. Department of Agriculture.

“Everything coming northbound from Mexico through Laredo, the rates have been very sustained, but fuel prices keep going up, presumably with any differences being absorbed by the trucking companies in the spot market,” DeWart said. “When we talk to asset-based truckers, especially the smaller companies, they’re really feeling the pinch.”

It’s not only cross-border operators feeling the pinch. Growers and shippers in Texas’ Rio Grande Valley are also suffering because of increased fuel costs, said Dante Galeazzi, president of the Texas International Produce Association (TIPA).

“Our growers, shippers, importers, distributors … basically our entire supply chain has been and continues to be impacted by rising fuel costs,” Galeazzi told FreightWaves. “Between one-third to one-half of the costs for fresh produce is the logistics; you can see how quickly increases in that expense category can impact the base price.”

The Rio Grande Valley is the epicenter of the Lone Star State’s fresh produce industry, stretching across the southeastern tip of Texas along the U.S.-Mexico border. More than 35 types of fruits and vegetables are grown in the valley, which contributes more than $1 billion to the state economy annually.

“More concerning is that this wave of fuel increases is in line with the statistic that our industry is paying anywhere from 70% to 150% more year-over-year for OTR shipping,” Galeazzi said. 

TIPA, which is based in Mission, Texas, represents growers, domestic shippers, import shippers, specialty shippers, distributors and material and service providers. 

Right now, Rio Grande Valley growers and shippers are absorbing higher input costs instead of passing them on to consumers, but that could soon change, Galeazzi said.

“While the fresh fruit and vegetable industry continues to experience rising input costs across the board (seed, agrochemicals, labor, fuel, packaging, etc.), we have yet to experience sufficient upstream returns associated with those expense increases,” Galeazzi said. “Our industry is citing an 18% to 22% anecdotal increase to overhead costs. Meanwhile food inflation for fresh produce is hovering around 7%. That means the costs are slowly being felt by consumers, but it’s not yet at a commensurate level with input expenses.”

Diesel fuel prices at all time highs

The cost of diesel continues to soar across the country. Diesel pump prices averaged $5.61 a gallon nationwide, according to weekly data from the Energy Information Administration (EIA). That’s 51% higher than diesel prices nationwide in January. 

California averaged the highest fuel prices across the U.S., at $6 per gallon of gas and $6.56 per gallon for diesel, according to AAA. Diesel prices are also at an all-time high of $6.41 in New York.

The higher prices of diesel fuel and gasoline are being caused by a combination of factors, including surging demand and reduced refining capacity, along with the disruption to global markets caused by COVID-19, the current lockdown in China and the ongoing Russia-Ukraine conflict, said Rory Johnston, a managing director at Toronto-based research firm Price Street.

“The overarching oil market is feeling much tighter because of the Russian-Ukraine situation,” Johnston, also writer of the newsletter Commodity Context, told FreightWaves. “What we’ve seen is a larger immediate impact from the loss of Russian refined products; in addition to exporting millions and millions of barrels a day of crude oil, Russia also exported a lot of refined products, most notably middle distillates, like gasoline or diesel.”

Several refineries on the East Coast — including facilities in Newfoundland and Labrador, Canada — scaled back during the early days of the pandemic, which has hurt diesel capacity, Johnston said.

“There was also a refinery in Philadelphia that exploded just prior to the COVID-19 period starting,” Johnston said. “There’s not enough refining capacity on the global level, and particularly in the West right now and particularly in the northeastern U.S.”

He said he doesn’t foresee any relief from increasing diesel prices over the next few months or more.

“Things are going to be really tight for at least the next year, barring any kind of economic recession and some kind of demand slowdown materially,” Johnston said. 

DeWart said trucking companies that don’t have a fuel surcharge component or contract in place and are depending on spot rates could be in big trouble over the next several months as diesel prices either keep rising or stay higher than average. 

“Their fuel costs keep going up, but they’re really not able to negotiate higher rates right now with a really tight spot market,” DeWart said. “It’s really impacting small trucking companies, anyone that decided to kind of play the spot market, rather than being locked in contracted rates. They’re really feeling the pain right now.”

DeWart said for trucking companies, it’s critical to get some type of fuel reimbursement program in place “just to protect themselves in case the cost of fuel goes even higher.”

Tyler Durden Wed, 05/18/2022 - 19:25

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Economics

What Is the VIX Volatility Index? Why Is It Important?

What Is the VIX and How Does It Measure Volatility?In finance, the term VIX is short for the Chicago Board of Exchange’s Volatility Index. This index…

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The VIX strives to predict market volatility through the lens of options trades.

Wavebreakmedia from Getty Images; Canva

What Is the VIX and How Does It Measure Volatility?

In finance, the term VIX is short for the Chicago Board of Exchange’s Volatility Index. This index measures S&P 500 index options and is used as an overall benchmark for volatility in the stock market. The higher the index level, the choppier the trading environment, which makes its other nickname pretty apt: the fear index.

It’s important to point out that the VIX measures implied, or theoretical, volatility. It measures the expectation of future volatility based on a snapshot of the previous 30 days’ worth of trading activity.

What Do the VIX Numbers Mean?

  • A VIX level above 20 is typically considered “high.”
  • A VIX below 12 is typically considered “low.”
  • Anything in between 12 and 20 is considered “normal.”

When there is increased activity on put options, which means that investors are selling more puts, the VIX registers a high number. Investing in a put option is like betting that the price of a stock will go down before the put contract expires because puts give investors the right to sell shares of a stock on a specific date at a specific price.

These are bearish investments, ones that can take advantage of emotions like fear. There is a saying on Wall Street that does “When the VIX is high, it’s time to buy” because the general belief is that volatility may have reached a peak, or a turning point.

When the VIX falls, that means that investors are buying more call options. Investing in a call is like betting that the price of a stock will go up before the call contract expires. In other words, a falling reading on the VIX indicates that the overall sentiment in the stock market is more optimistic, or bullish.Although the VIX isn't expressed as a percentage, it should be understood as one. A VIX of 22 translates to implied volatility of 22% on the SPX. This means that the index has a 66.7% probability (that being one standard deviation, statistically speaking) of trading within a range 22% higher than—or lower than—its current level within the next 12 months.

How Is the VIX Calculated? What Is the VIX Formula?

In a nutshell, the VIX is calculated by the Chicago Board of Options Exchange using market prices of S&P 500 put and call options with an average expiration of 30 days. It uses standard weekly SPX options and those with Friday expirations, but unlike the S&P 500 index, which contains specific stocks, the VIX is made up of a constantly changing portfolio of SPX options. The Chicago Board of Options website goes into more detail about its methodology and selection criteria.

How Do I Interpret the VIX?

There are many ways to interpret the VIX, but it’s important to note that it’s a theoretical measure and not a crystal ball. Even the sentiment it tracks, fear, is not itself measured by hard data, such as the latest Consumer Price Index. Rather, the VIX uses options prices to estimate how the market will act over a future timeframe.

It's also important to understand how much emotion can drive the stock market. For example, during earnings season, a company’s stock may report solid growth yet see shares plummet, because the company did not meet analyst expectations. So much of what goes on in the market can be summed up by feelings, like greed, as investors spot appreciation potential and place buy orders, which drive prices higher overall. Fear is evidenced when investors try to protect their investments by selling their shares, driving prices lower.

At its worst, fear-driven selling can send the market into a tailspin and lead to emotions like panic, which can result in capitulation.

But the VIX is not designed to cause panic. It is simply a gauge of volatility. In fact, some investors, especially traders, view the increased turbulence as a signal to buy, so that they make a profit either through speculation or hedging and thus capitalize on the situation.

Can the VIX Go Above 100?

Theoretically speaking, the VIX can top 100, although it has never reached that point since data collection began in 1990.

The two highest points the VIX has ever reached were the following:

  1. On October 24, 2008, at the height of the Financial Crisis, which stemmed from the global implosion of mortgage-backed securities, the VIX reached 89.53.
  2. On March 16, 2020, during the beginning of the COVID-19 pandemic, the VIX recorded a high of 82.69.

Analysts also believe that had data collection begun in the 1980s, the VIX would have topped 100 during the Black Stock Market Crash, on Monday, October 19, 1987.

This chart from FRED, the Federal Reserve’s data center, details the VIX from 1990 to 2022. Shaded areas illustrate periods of recession:

Chicago Board Options Exchange, CBOE Volatility Index: VIX [VIXCLS]

FRED

How Do I Trade the VIX? Can You Buy Options on the VIX?

Investors can’t invest directly in the VIX, but they can invest in derivatives that track the VIX, such as VIX-based exchange-traded funds (ETFs), such as ProShares VIX Mid-Term Futures ETF (VIXM), and exchange-traded notes, like the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) and the iPath Series B S&P 500 VIX Mid-Term Futures ETN (VXZ).

What Is the VIX at Today?

To view the VIX’s current reading, visit the webpage maintained by the Chicago Board of Options Exchange; it is updated daily.

What Are the VIX’s Current Volatility Predictions?

The stock market has been in choppy waters for most of 2022. Tech stocks, the Nasdaq, and stocks with high P/E ratios have taken a beating as investors worry about continued inflation, the Russia/Ukraine war’s effect on energy prices, the aggressive pace of interest rate hikes from the Federal Reserve, and China’s extreme “zero-COVID” policies. All of these things are causing the storm clouds to gather around the possibility of recession.

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