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Weekly Market Commentary: Counterintuitive

Where there is no hope it is incumbent on us to invent it. Albert Camus The economic data released last week was almost uniformly bad. We started the week…

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Where there is no hope it is incumbent on us to invent it.

Albert Camus

The economic data released last week was almost uniformly bad. We started the week with the NAHB Housing Index, a measure of builder sentiment, which fell from 67 to 55, much less than expected. Next up was more news on the housing market with starts and permits both down in June. The bad news on housing continued with another drop in mortgage applications and existing home sales. Thursday saw the Philly Fed manufacturing index fall for the second straight month to -12.3 with other details like new orders also negative. Jobless claims rose to 251K, up over 50% from the low set in March. Leading economic indicators were down for the 4th straight month. Last but not least in a week of bad economic news was the flash S&P PMI that showed the composite down to 47.5 and services down to 47. So, naturally, stocks were up 2.5% on the week. Wait…what?

I’ve said this so many times by now people are getting sick of hearing it but here goes again. The market is not the economy and the economy is not the market. They can and do – often – move in opposite directions. The correlation between current economic activity and stock market returns is negative. Yes, negative. Slightly negative but negative nonetheless. If you are looking at the economic data to figure out the market, you’re doing this backwards. Economic data represents the past, markets represent the future.

Economic data is also subject to interpretation and most of the above, while negative, is not dire. The NAHB survey is over 50 which is the dividing line between optimism and pessimism. It is falling rapidly so that isn’t good obviously but recessions usually pull this down to 30 or less although that isn’t always true. There have also been a number of readings below 50 that were not associated with recession. And, as I’ve said before, the adjustment in the housing market is a necessary thing. Prices rising at 20%+ per year isn’t healthy either. Housing starts and permits were down but both are still in uptrends. Existing home sales are just down to the level that prevailed from 2013 to 2020. The Philly Fed survey is indeed low but it’s been here many times in the past outside of recession. And again, a slowing in the goods side of the economy is necessary and expected.

I’d be cherry picking if I didn’t point out that new orders did fall to a level we’ve never seen outside recession. I’d just add that we haven’t been in this situation before, coming out of a pandemic that featured a surge in goods purchases. I certainly don’t find a drop in manufacturing new orders to be outside the scope of what I’ve been expecting.

Jobless claims are up 50% from the low but that low was an all time one adjusted for population. There is an obvious uptrend in claims since those spring lows but whether that is positive or negative I think depends on where you sit. In the last NFIB survey of small businesses, 50% reported job openings that couldn’t be filled. For them an uptick in jobless claims may be the best news they’ve gotten this year.

The two reports that worried me the most from last week were the LEI and the S&P PMI survey. The LEI has dropped for 4 straight months and is close to turning negative year over year which has been a reliable indicator of recession in the past. We aren’t there yet but it is dangerously close. The flash S&P PMI was worrisome because of the services component. A pullback in the goods side of the economy is expected and I think healthy, but a drop in services activity is not. The services side of the economy is considerably larger than the goods side and if it really is contracting at that rate, a recession is probably coming fairly soon. There are only two thin reeds for the optimist to hold onto with this report. First is that it is the flash and not the final report which we’ll get on August 1 and 3rd. The second is that it is the S&P PMI (the old Markit survey) which I have mostly ignored over the years because it isn’t as reliable as the ISM surveys. But make no mistake, if this report is accurate we are almost certainly headed for recession.

Having said all that, I don’t think those caveats to the reports are why stocks and other risk assets were up last week. I also don’t think it is because the stock market is just looking past this weakness to future economic strength. One factor was undoubtedly that Russia turned the Nordstream natural gas pipeline back on after maintenance, avoiding, at least for now, a huge shock to the European economy. That and a 50 basis point rate hike by the ECB was almost surely why the dollar was down 1.2% last week and European stocks outperformed their US counterparts. The other factor is the Fed. We’re at a point where bad economic news is good risk asset news because it means the Fed maybe doesn’t have to be as aggressive. I have a lot of problems with that kind of thinking but what matters to markets is what the majority believes not what Joe – or you – believes.

We have an FOMC meeting next week and a couple of weeks ago markets were moving on the fear the Fed would actually hike by a full 1% due to some hot inflation data. Now, after a string of weak economic reports, the market is wondering if they’ll even go the 75 basis points they’ve been prepping the market to expect. Again, I have problems with the logic behind that thinking, mainly that economic growth is tied directly to inflation. A rapidly growing economy doesn’t have to be inflationary and a slowing one certainly doesn’t ensure that inflation will fall. Inflation is a monetary phenomenon but that doesn’t mean the Fed controls it. Money is a creature of the banks and just FYI, unless they shut the vaults in the first three weeks of July, bank lending is still rising at a pretty healthy rate. Expectations of slowing growth and moderating inflation could both be wrong and have nothing to do with the Fed.

However, the Fed is still today somewhat captured by Phillips Curve thinking and so they will likely see a slowing in economic data as a positive for future inflation. I don’t know what they’ll do at the meeting this week other than raise rates but the important information will be in the post meeting press conference. Futures markets have been bringing forward the date of peak short term rates for the last few months, from 3rd quarter 2023 a few months ago to now December of this year or Q1 of 2023 (depending on the market). I’ve said before and will repeat again, the Fed is a follower on rates not a leader. If that proves true again – and I think it will – then this press conference seems a likely time for Powell to announce a slowing in the pace of rate hikes. I think that is what the market was anticipating last week but that could be my own bias; I can’t actually know what millions of traders and investors were thinking.

We will get a slew of new economic data next week and maybe a clearer picture of the current state of the economy. I don’t expect any big positive surprises for the most recent data but the least important report of the week may be one that could surprise people. The 2nd quarter GDP report will be released the day after the FOMC meeting and it is widely expected to be negative for the second quarter in a row, which some think is proof of recession (even though that isn’t what the NBER recession dating committee says). The 1st quarter negative was driven by inventories and trade but mostly trade which shaved 3.2% off GDP. Well, this quarter it is likely to add to GDP as the trade deficit shrunk considerably in the 2nd quarter. If trade for June is estimated at about the same level as May (the actual figures aren’t out yet), then trade should add about 1.5% to 2nd quarter GDP. Whether that will be enough to offset enough of the negatives to produce a positive surprise I don’t know but it certainly seems possible. In reality it doesn’t mean much anyway – the second quarter is over – but a positive report may impact sentiment which has been extraordinarily negative.

More than anything economic, it is sentiment that has led to this month’s rebound in stocks. Most of the negative sentiment can be seen in positioning data. Futures market positioning has moved to extremes in several markets. Large speculators are the most short the S&P 500 since June of 2020 and the Russell 2000 since…well, as far back as I have data. They are also long the dollar index at levels near past peaks. A more dovish Fed would probably correct some of that. We also see the NAAIM (National Association of Active Investment Managers) coming off a recent low in equity exposure of less than 20, another reading associated with past bottoms. I’m sure you saw or heard about the Bank of America fund manager survey:

The Full Capitulation: July BofA Fund Manager Survey (FMS) shows dire level of investor pessimism…expectations for global growth & profits all-time lows, cash levels
highest since “9/11”, equity allocation lowest since Lehman, BofA Bull & Bear Indicator remains “max bearish”

That survey also showed the % saying recession is likely is the highest since March of 2009 and April of 2020. The % who expect global profits to improve is lower than 2008. Say what you will about the current outlook but I have a hard time seeing it as more dire than late 2008 right after the failure of Lehman.

Investing is often a counterintuitive exercise and it is most counterintuitive – and hardest – at turning points. I know I’ve quoted Howard Marks before but I’ll do it again. In one of his most famous market letters (It’s Not Easy), he says:

Remember, your goal in investing isn’t to earn average returns; you want to do better than average. Thus your thinking has to be better than that of others – both more powerful and at a higher level. Since others may be smart, well informed and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see things they miss, or bring insight they don’t possess. You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right than others…which by definition means your thinking has to be different…

For your performance to diverge from the norm, your expectations – and thus your portfolio – have to diverge from the norm, and you have to be more right than the consensus. Different and better; that’s a pretty good description of second level thinking.

One example he gives of the difference between first and second level thinking is this:

First level thinking says, “The outlook calls for slowing growth and rising inflation. Let’s dump our stocks.” Second level thinking says, “The outlook stinks but everyone else is selling in panic. Buy!”

Like I said, counterintuitive.


The one and three month change in the 10 year Treasury yield is now negative and I think it is likely that short term trend has some room to run. The intermediate term trend though is still up:

The long term trend going back a dozen years or so is pretty obvious; there isn’t one.

And the really, really long term downtrend appears to have been broken.

Perspective matters.

The dollar was down last week but the short and intermediate term trends are still up. The really, really long term trend here will surprise some but dollar stability has been more the rule than the exception over the last few decades:

 


 

We’ve had a lot of weeks this year when there was no place to hide. What do you call it when everything goes up? I don’t know but that’s where we were last week.

Growth stocks outperformed modestly last week but value still has a large lead YTD.

Non-US stocks led last week with the positive pipeline news in Europe. I do not expect that to continue only because Putin seems intent on wreaking as much havoc as he can and turning it on and off does more damage than just turning it off for good. It also preserves hope in Europe and keeps them buying Russian gas. If he just turns it off Europe will finally be forced to find alternatives and they’ll never go back to buying Putin’s gas.

The best performing sectors were economically sensitive ones which also would seem to point to optimism about the pace of future rate hikes. Defensive stocks were mostly down on the week.

BTW, I still expect crude oil to have an 80 handle before this correction is done but earnings in the energy patch have been great. We’re getting close to a buy point I think.

Earnings season is underway. It is very early but with 21% of S&P 500 companies reporting so far, 68% have reported earnings better than expected and 65% have reported revenue better than expected. Both of those figures are below the 5 year average (77% for earnings and 69% for revenue). And the margin of the beats (+3.6%) are also less than the 1, 5 and 10 year average. The most interesting fact about earnings so far though is this (from Factset):

To date, the market is rewarding positive earnings surprises and negative earnings surprises more than average. Companies that have reported positive earnings surprises for Q2 2022 have seen an average price increase of +2.2% two
days before the earnings release through two days after the earnings release. This percentage increase is above the 5-year average price increase of +0.8% during this same window for companies reporting positive earnings surprises.
Companies that have reported negative earnings surprises for Q2 2022 have seen an average price increase of +2.0% two days before the earnings release through two days after the earnings. This percentage increase is well above the 5-
year average price decrease of -2.4% during this same window for companies reporting negative earnings surprises.

That is what happens when sentiment gets too negative.

The most interesting movement in these indicators is credit spreads which fell below 5% last week after running up to nearly 6%. Second most interesting is the VIX which continues to trend lower despite everybody and his brother looking for a 40 reading to sound the all clear. Joe’s market maxim #1: The market will always act to frustrate the maximum number of people.

The economic data continues to trend negative but markets have – mostly – stopped responding negatively to negative news. I say mostly because the bond market did react somewhat negatively last week. Bonds rallied on bad economic news just as one would expect. The yield curves shifted down but more importantly the 10 year/3 month spread narrowed to just 28 basis points. The yield curve inversion is moving to the shorter part of the curve now. That is not unusual, just the way this normally progresses in a business cycle; the longer maturities invert first and as you get closer to recession the shorter maturities invert. But the inversion is the warning not the recession signal. In the last three recessions the curve steepened and turned positive before the onset of recession because short term rates start to fall as the economy weakens further. Short term and long term rates will generally fall together before recession but short term falls faster, steepening the curve. In the last three recessions the average time between inversion of the 10 year/3 month curve and the onset of recession is 14 months:

I have called this an unusual economy and market and I stand by that. I don’t know if the yield curve will work exactly as it has in the past. I don’t know if widespread knowledge of it is affecting its shape today or in the future. I will, however, take yield curve inversion seriously and assume it means what it has always meant. But I will not – and have not in the past – tried to anticipate an inversion. They happen when they happen and we adjust. But we aren’t there yet.

I ran across the Camus quote at the beginning of this post recently and it made me think about what it takes to be a contrarian, a true investor in the mold of Howard Marks. I’ve never been much of a Camus fan because I find him depressing; this quote is not, I think, positive. He is saying that even when things are dire, when there is no hope, humans will just invent some to make themselves feel better. But that isn’t what being a contrarian is about. It isn’t enough to just buck the consensus; the consensus can be right for long periods of time. You have to wait until the consensus has become conventional wisdom, when the future is considered obvious and everyone has already placed their bets on the sure thing. Another Camus quote says it well:

Always go too far, because that’s where you’ll find the truth.

What position is too far today?

Joe Calhoun

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$265 Billion In Added Value To Evaporate From Germany Economy Amid Energy Crisis, Study Warns

$265 Billion In Added Value To Evaporate From Germany Economy Amid Energy Crisis, Study Warns

A new report published by the Employment Research…

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$265 Billion In Added Value To Evaporate From Germany Economy Amid Energy Crisis, Study Warns

A new report published by the Employment Research (IAB) on Tuesday outlines how Germany's economy will lose a whopping 260 billion euros ($265 billion) in added value by the end of the decade due to high energy prices sparked by Russia's invasion of Ukraine which will have severe ramifications on the labor market, according to Reuters

IAB said Germany's price-adjusted GDP could be 1.7% lower in 2023, with approximately 240,000 job losses, adding labor market turmoil could last through 2026. It expects the labor market will begin rehealing by 2030 with 60,000 job additions.

The report pointed out the hospitality industry will be one of the biggest losers in the coming downturn that the coronavirus pandemic has already hit. Consumers who have seen their purchasing power collapse due to negative real wage growth as the highest inflation in decades runs rampant through the economy will reduce spending. 

IAB said energy-intensive industries, such as chemical and metal industries, will be significantly affected by soaring power prices. 

In one scenario, IAB said if energy prices, already up 160%, were to double again, Germany's economic output would crater by nearly 4% than it would have without energy supply disruptions from Russia. Under this assumption, 660,000 fewer people would be employed after three years and still 60,000 fewer in 2030. 

This week alone, German power prices hit record highs as a heat wave increased demand, putting pressure on energy supplies ahead of winter. 

Rising power costs are putting German households in economic misery as economic sentiment across the euro-area economy tumbled to a new record low. What happens in Germany tends to spread to the rest of the EU. 

There are concerns that a sharp weakening of growth in Germany could trigger stagflation as German inflation unexpectedly re-accelerated in July, with EU-Harmonized CPI rising 8.5% YoY. 

Germany is facing an unprecedented energy crisis as Russian natural gas cuts via the Nord Stream 1 pipeline will reverse the prosperity many have been accustomed to as the largest economy in Europe. 

"We are facing the biggest crisis the country has ever had. We have to be honest and say: First of all, we will lose the prosperity that we have had for years," Rainer Dulger, head of the Confederation of German Employers' Associations, warned last month. 

Besides Dulger, Economy Minister Robert Habeck warned of a "catastrophic winter" ahead over Russian NatGas cut fears.

Other officials and experts forecast bankruptcies, inflation, and energy rationing this winter that could unleash a tsunami of shockwaves across the German economy.  

Yasmin Fahimi, the head of the German Federation of Trade Unions, warned last month:

"Because of the NatGas bottlenecks, entire industries are in danger of permanently collapsing: aluminum, glass, the chemical industry." 

IAB's report appears to be on point as the German economy seems to be diving head first into an economic crisis. Much of this could've been prevented, but Europe and the US have been so adamant about slapping Russia with sanctions that have embarrassingly backfired. 

Tyler Durden Wed, 08/10/2022 - 04:15

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Will Powell Pivot? Don’t Count On It

Stocks are rallying on hopes that Jerome Powell and the Fed will stop increasing interest rates this fall, pivot, and start reducing them next year. For…

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Stocks are rallying on hopes that Jerome Powell and the Fed will stop increasing interest rates this fall, pivot, and start reducing them next year. For fear of missing out on the next great bull run, many investors are blindly buying into this new Powell pivot narrative.

What these investors fail to realize is the Fed has a problem. Inflation is raging, the likes of which the Fed hasn’t dealt with since Jerome Powell earned his law degree from Georgetown University in 1979.  

Despite inflation, markets seem to assume that today’s Fed has the same mindset as the 1990-2021 Fed. The old Fed would have stopped raising rates when stocks fell 20% and certainly on the second consecutive negative GDP print. The current Fed seems to want to keep raising rates and reducing its balance sheet (QT).

The market-friendly Fed we grew accustomed to over the last few decades may not be driving the ship anymore. Yesterday’s investment strategies may prove flawed if a new inflation-minded Fed is at the wheel.

Of course, you can ignore the realities of today’s high inflation and take Jim Cramer’s ever-bullish advice.

When the Fed gets out of the way, you have a real window and you’ve got to jump through it. … When a recession comes, the Fed has the good sense to stop raising rates,” the “Mad Money” host said. “And that pause means you’ve got to buy stocks.

Shifting Market Expectations

On June 10, 2022, the Fed Funds Futures markets implied the Fed would raise the Fed Funds rate to 3.20% in January 2023 and to 3.65% by July 2023. Such suggests the Fed would raise rates by almost 50bps between January and July.

Now the market implies Fed Funds will be 3.59% in January, up .40% in the last two months. However, the market implies July Fed Funds will be 3.52%, or .13% less than its January expectations. The market is pricing in a rate reduction between January and July.

The graph below highlights the recent shift in market expectations over the last two months.

The graph below from the Daily Shot shows compares the market’s implied expectations for Fed Funds (black) versus the Fed’s expectations. Each blue dot represents where each Fed member thinks Fed Funds will be at each year-end. The market underestimates the Fed’s resolve to increase interest rates by about 1%.

Short Term Inflation Projections

The biggest flaw with pricing in predicting a stall and Powell pivot in the near term is the possible trajectory of inflation. The graph below shows annual CPI rates based on three conservative monthly inflation data assumptions.

If monthly inflation is zero for the remainder of 2022, which is highly unlikely, CPI will only fall to 5.43%. Yes, that is much better than today’s 9.1%, but it is still well above the Fed’s 2.0% target. The other more likely scenarios are too high to allow the Fed to halt its fight against inflation.

cpi inflation

Inflation on its own, even in a rosy scenario, is not likely to get Powell to pivot. However, economic weakness, deteriorating labor markets, or financial instability could change his mind.

Recession, Labor, and Financial Instability

GDP just printed two negative quarters in a row. Some economists call that a recession. The NBER, the official determiner of recessions, also considers the health of the labor markets in their recession decision-making. 

The graph below shows the unemployment rate (blue), recessions (gray), and the number of months the unemployment rate troughed (red) before each recession. Since 1950 there have been eleven recessions. On average, the unemployment rate bottoms 2.5 months before an official recession declaration by the NBER. In seven of the eleven instances, the unemployment rate started rising one or two months before a recession.

unemployment and recession

The unemployment rate may start ticking up shortly, but consider it is presently at a historically low level. At 3.5%, it is well below the 6.2% average of the last 50 years. Of the 630 monthly jobs reports since 1970, there are only three other instances where the unemployment rate dipped to 3.5%. There are zero instances since 1970 below 3.5%!

Despite some recent signs of weakness, the labor market is historically tight. For example, job openings slipped from 11.85 million in March to 10.70 in June. However, as we show below, it remains well above historical norms.

jobs employment recession

A tight labor market that can lead to higher inflation via a price-wage spiral is of concern for the Fed. Such fear gives the Fed ample reason to keep tightening rates even if the labor markets weaken. For more on price-wage spirals, please read our article Persistent Inflation Scares the Fed.

Financial Stability

Besides economic deterioration or labor market troubles, financial instability might cause Jerome Powell to pivot. While there were some growing signs of financial instability in the spring, those warnings have dissipated.  

For example, the Fed pays close attention to the yield spread between corporate bonds and Treasury bonds (OAS) for signs of instability. They pay particular attention to yield spreads of junk-rated corporate debt as they are more volatile than investment-grade paper and often are the first assets to show signs of problems.

The graph below plots the daily intersections of investment grade (BBB) OAS and junk (BB) OAS since 1996. As shown, the OAS on junk-rated debt is almost 3% below what should be expected based on the robust correlation between the two yield spreads. Corporate debt markets are showing no signs of instability!

corporate bonds financial stability

Stocks, on the other hand, are lower this year. The S&P 500 is down about 15% year to date. However, it is still up about 25% since the pandemic started. More importantly, valuations have fallen but are still well above historical averages. So, while stock prices are down, there are few signs of equity market instability. In fact, the recent rally is starting to elicit FOMO behaviors so often seen in speculative bullish runs.

Declining yields, tightening yield spreads, and rising asset prices are inflationary. If anything, recent market stability gives the Fed a reason to keep raising rates. Ex-New York Fed President Bill Dudley recently commented that market speculation about a Fed pivot is overdone and counterproductive to the Fed’s efforts to bring down inflation.

What Does the Fed Think?

The following quotes and headlines have all come out since the late July 2022 Fed meeting. They all point to a Fed with no intent to stall or pivot despite its effect on jobs and the economy.

  • *KASHKARI: 2023 RATE CUTS SEEM LIKE `VERY UNLIKELY SCENARIO’
  • Fed’s Kashkari: concerning inflation is spreading; we need to act with urgency
  • *BOWMAN: SEES RISK FOMC ACTIONS TO SLOW JOB GAINS, EVEN CUT JOBS
  • *DALY: MARKETS ARE AHEAD OF THEMSELVES ON FED CUTTING RATES
  • St. Louis Fed President James Bullard says he favors a strategy of “front-loading” big interest-rate hikes, repeating that he wants to end the year at 3.75% to 4% – Bloomberg
  • FED’S BULLARD: TO GET INFLATION COMING DOWN IN A CONVINCING WAY, WE’LL HAVE TO BE HIGHER FOR LONGER.
  • “If you have to cut off the tail of a dog, don’t do it one inch at a time.”- Fed President Bullard
  • “There is a path to getting inflation under control,” Barkin said, “but a recession could happen in the process” – MarketWatch
  • The Fed is “nowhere near” being done in its fight against inflation, said Mary Daly, the San Francisco Federal Reserve Bank president, in a CNBC interview Tuesday.  –MarketWatch
  • “We think it’s necessary to have growth slow down,” Powell said last week. “We actually think we need a period of growth below potential, to create some slack so that the supply side can catch up. We also think that there will be, in all likelihood, some softening in labor market conditions. And those are things that we expect…to get inflation back down on the path to 2 percent.”

Summary

We are highly doubtful that Powell will pivot anytime soon. Supporting our view is the recent action of the Bank of England. On August 4th they raised interest rates by 50bps despite forecasting a recession starting this year and lasting through 2023. Central bankers understand this inflation outbreak is unique and are caught off guard by its persistence.

The economy and markets may test their resolve, but the threat of a long-lasting price-wage spiral will keep the Fed and other banks from taking their foot off the brakes too soon.

We close by reminding you that inflation will start falling in the months ahead, but it hasn’t even officially peaked yet.

The post Will Powell Pivot? Don’t Count On It appeared first on RIA.

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Airlines Are Going to Hate it if Biden Gets This Through

The administration is considering doing something about one of the things people hate most about flying.

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The administration is considering doing something about one of the things people hate most about flying.

The airline industry has had a very bumpy road back to whatever passes for normalcy in the covid era. This past weekend was a particularly bad headache for air travelers, as 950 flights were canceled on Sunday, and 8,000 were delayed. It was a tough weekend overall, as 657 flights were canceled on Saturday, and 7,267 flights were also delayed that day. 

In fact, according to the Bureau of Transportation Statistics, of the more than 2.73 million flights so far in 2022, roughly 20% have been delayed while 3% were canceled.

The reasons for this are myriad. Climate change is leading to increasingly unpredictable weather. While many people are beginning to act like covid is over, that’s just not the case, and many flights are still getting canceled because crew members have become infected and need to quarantine.

Additionally, the airlines are all understaffed, as the industry lost more than 400,000 workers during the pandemic. Many pilots retired, and the industry has struggled to attract enough people to replace them in a tight labor market. Additionally, the workers who stayed report that they feel burnt-out and overworked, and in some instances fear for their safety.

This leads to more workers quitting or calling in sick, and therefore flights get canceled because there’s not enough people to work them.

Cancelations are a headache no matter which way you slice it. But a proposal from Transportation Secretary Pete Buttigieg might make it easier for customers to get a refund in a timely manner.

Want A Refund For A Canceled Flight? Good Luck!

Getting a refund for a canceled flight is like pulling teeth. 

Technically, it is federal law that consumers are entitled to a refund if an airline cancels a flight and the consumer chooses not to travel, as the Department of Transportation has stated customers can get a refund if the airline “made a significant schedule change and/or significantly delays a flight and the consumer chooses not to travel,” according to the Department of Transportation.

But the problem, as noted by ABC News, is that the “DOT has not defined what constitutes a “significant delay.” According to the agency, whether you are entitled to a refund depends on multiple factors, including the length of the delay, the length of the flight and “your particular circumstances.”

It’s rare for an airline to just say “tough luck” and not give the customer anything after a cancellation. (Imagine the social media firestorm!) But while there’s no industry-wide standard, most airlines just issue vouchers or credits for a future flight instead of a cash refund, which ties the customer to that airline in the future.

What’s even more frustrating is that very often these vouchers will expire within a year, which doesn’t always work for many people’s travel plans. Though to be fair, Southwest  (LUV) - Get Southwest Airlines Company Report did recently announce they would be changing this policy, removing all expiration dates from flight credits.  

Win McNamee/Getty

Mayor Pete Wants To Make Refunds Easier

Buttigieg has announced a proposal that would expand customer rights in terms of protections cancelations and refunds for both domestic and international flights. “This new proposed rule would protect the rights of travelers and help ensure they get the timely refunds they deserve from the airlines,” states Buttigieg.

Under the proposal, passengers who do not accept alternate transportation (i.e. getting bumped to a later flight) will be eligible for a refund for any of the below circumstances. 

  • If your flight is canceled
  • Whenever departure or arrival times are delayed by at least three hours for domestic flights or by at least six hours for international flights, if flyers opt-out of taking the flight
  • Anytime the departure or arrival airport changes or the number of connections is increased on an itinerary
  • If the original aircraft has to be replaced by another but there’s a major difference in the onboard amenities offered and overall travel experience as a result

The proposal would require airlines to issue vouchers, with no expiration date, when passengers are “unable to fly for certain pandemic-related reasons, such as government-mandated bans on travel, closed borders, or passengers advised not to travel to protect their health or the health of other passengers.”

But if an airline or ticket agency received pandemic-related government assistance, they would be required to issue cash refunds instead of vouchers.

In an interview with The Points Guy, Buttigieg said “Every step moves us further towards passengers being more protected,” he said. “This is based on authorities that have built up over time, but it’s clear that the passenger experience isn’t good enough, and we need to do more to clarify airlines’ responsibilities and to make clear what we’re going to do to enforce them.”

While this is just a proposal at the moment, Buttigieg said “I think we can move this one pretty quickly, barring any surprises.” He added that “We are going to be responsive to feedback and the suggestions that come in.”

If you have thoughts on this matter, the public is invited to attend a virtual meeting hosted by the Aviation Consumer Protection Advisory Committee that’s scheduled for Aug. 22, 2022. Any comments you wish to make about this proposal can be submitted here under docket number DOT-OST-2022-0089. 

 

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