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Weekly Market Pulse: Opposite George

It all became very clear to me sitting out there today, that every decision I’ve ever made, in my entire life, has been wrong. My life is the complete…



It all became very clear to me sitting out there today, that every decision I’ve ever made, in my entire life, has been wrong. My life is the complete opposite of everything I want it to be. Every instinct I have, in every aspect of life, be it something to wear, something to eat… It’s all been wrong. Every one.

George Constanza

If every instinct you have is wrong, then the opposite would have to be right.

Jerry Seinfeld

From the Seinfeld episode The Opposite

I was talking with a friend last week about the markets and the economy and she said she didn’t understand why the market went up after the GDP report. After all, it was the second quarter in a row of GDP contraction and that’s a recession. Shouldn’t I be selling stocks? I explained that markets are forward looking and that stocks bottom well before the end of a recession (about 4 months on average). So, I said, if you want to buy stocks near their recession lows you have to buy before the recession is over. She looked at me and said, Opposite George! As a devoted Seinfeld fan I immediately got the reference and thought, what a wonderful way to think about investing. We may not be as hapless as George Constanza when it comes to most of our life but investing? Our instincts about investing are horrendous, almost always wrong. Last year when stocks were booming and all the talk was about another Roarin’ Twenties, it was hard to resist the urge to buy. This year, when stocks are falling and we’re arguing about whether inflation or recession is the worse of the two evils we face, it is hard to resist the urge to sell.

The GDP report for the 2nd quarter was indeed negative (-0.9%) and there is now an argument about whether this constitutes a recession since Q1 was negative as well. It is mostly a political Rorschach test where Republicans are certain that it is and Democrats are just as certain that it isn’t. Mostly. For the record, I don’t know and don’t much care. The economy has certainly slowed since last year but what you call that is irrelevant. Q1 GDP fell by 1.6%, mostly due to trade which reduced it by 3.2%. That was reversed in Q2 as trade added 1.43%, pretty close to my back of the envelope calculation last week. What changed in Q2 was inventory, which subtracted 0.35% in Q1 but a full 2% in Q2. What does that tell you? Not much if you ask me. The trade figures were distorted in Q1 by, among other things, the China shutdown. The inventory figures for the first half of this year are just a correction of the large inventor build up in Q4 2021. It is just the economy trying to adjust to the end of COVID – maybe – and it isn’t easy since no one has any experience with recovering from a pandemic.

Inventories have risen recently and there has been a lot of commentary about how this will negatively impact the economy. If you follow these things you’ve probably seen a chart that looks something like this:

It certainly looks scary with inventories rising much faster than sales and there are plenty of macro gurus who are willing to tell you that production will have to be cut until inventories come back down. That means layoffs and all the other things we normally associate with recessions. Things are about to get a lot worse, right?

Here’s another chart that represents the same data. It’s a ratio called inventory/sales:

Not nearly as dramatic as that first one, huh? The ratio is about average for the data back to the early ’90s. I would also note that we entered recession in 2008 with the ratio falling and we avoided recession in 2016 despite a ratio much higher than the current one. Inventory and production decisions are not simple and they are especially difficult today. Do you really think companies are going to lay off a bunch of their workers to address a – likely – temporary inventory problem? In an economy where workers are so hard to find? What is an acceptable level of inventory in the post-COVID economy with supply chains still not back to normal? Maybe we are in recession but it isn’t because of inventories.

My outlook for the economy hasn’t changed. We came into COVID growing at an average of 2.1% over the prior decade. During COVID we didn’t do anything to improve the potential growth rate of the economy. And I don’t think we did anything that significantly reduces that potential either. What that means is that we are ultimately headed back to whence we came, a 2% growth trend. What we’re doing right now is removing the COVID distortions – from the lockdowns and the stimmie checks and the easy money policies of the Fed. What those distortions did was drive goods consumption well above trend and services consumption well below trend. As they move back to trend, the goods side of the economy will slow and the services side will rise. Forget the noise of trade and inventories everyone else is arguing about. When you look at the report, what you find is that goods consumption has subtracted from GDP and services have added to GDP over the last two quarters. And, just to be clear, services added more than goods subtracted (+1.78% vs -1.08%).

If you shift to the investment part of the GDP equation (again, ignoring inventory) we see something that is also acting just as one might expect with the Fed raising interest rates. Gross Private Domestic Investment subtracted 2.73% from Q2 GDP but we know that 2% of that was inventory. Of the -0.73% left over, -0.71% of that was residential investment – housing. Even in the non-residential side, the biggest detractor was “structures” which sounds a lot like real estate. I don’t know about you, but I’m not exactly shocked that real estate activity has slowed with higher interest rates.

The GDP report last week was a non-event. The economy is doing exactly what one would expect given these conditions. The inventory and trade figures of the last 2 quarters are nothing more than distractions for investors and the commentary nothing more than calls to your inner George Constanza to follow your instincts.

Another non-event was the Federal Reserve’s FOMC meeting that kicked the stock market rally into high gear. That was so because Jerome Powell’s press conference was widely perceived to be a message from the Fed that they are now “data dependent”. One might think that should always be so, but the Fed is in the same boat as investors, trying to interpret data from the past to predict the future. What they ought to be doing is watching the market rather than the economic data but that seems a lost cause; the Fed is always behind the curve. If the market perceives that the economy is headed for recession, short term interest rates will fall rapidly as the market prices in future Fed rate cuts, no matter what the data says about yesterday. What the market is saying today about growth is that it is slowing but not precipitously. Inflation expectations have also fallen but the Fed’s perceived dovishness on rates did cause breakevens to tick higher last week.

Will stocks keep going up? Well, obviously I don’t know the answer to that question but I can offer some data about previous periods of negative GDP growth. What should you do if we have just had 2 consecutive negative GDP quarters? History says you probably ought to think about doing some buying:

Just to be clear, I’m not saying you should back up the truck and load up on stocks. We don’t even know yet whether we really had two negative quarters in a row. GDP data has been subject to some pretty big revisions in the past and the first 2 quarters were such small contractions that either or both could be revised away. And that is especially true of Q2 since it was mostly inventories and an estimate was used for June because the data isn’t yet available. Furthermore, there’s no where near enough data here to make this meaningful from a statistical standpoint. It is interesting because of the things listed under notes as people seem to think today’s conditions are somehow unprecedented. Russia’s regular threats today about nuclear weapons pales in comparison to the Cuban Missile Crisis. But this could just as easily be similar to 2008 (from a market standpoint not an economic one) as 1975 or 2020/21.

My brief overview of markets is that large growth stocks are still overvalued even as they led the recent rally. Large value stocks are cheaper and small and mid cap stocks are cheaper still. International is very cheap but the dollar is still in an uptrend – we may be seeing a peak there but it is very premature to call that – and as long as that is the case, it’s an uphill battle. There is also the small matter of the stranglehold Russia has on Europe’s largest economy via the energy markets. I do think the recent rally probably has more to go based on my reading of sentiment. Large specs are still holding sizable short positions in the futures markets and my sense is that most people think this is a bear market rally. Put/call ratios aren’t as high as I’d like but they aren’t so low that we need fret too much either.

Don’t waste your time thinking about whether this is a recession or not, it really doesn’t matter. What does matter is that the economy is slowing just as expected and most companies are, so far, finding ways to cope with it. I know you are worried about the economy right now and you should be. We don’t know if things will get worse before they get better (and they will get better). But for goodness sakes don’t make decisions based on your “instincts” or “your guts” or because some chart charlatan scared you. Remember Opposite George!

The rising dollar/rising rate environment remains intact although both are moderating. The 10 year Treasury yield is no no higher than it was in April but it is still in an obvious uptrend when viewed from a longer perspective. The overshoot in rates this year is quite similar to the overshoot in early 2021. Once it corrected the overshoot the uptrend resumed. That could happen again but I’ll wait, as always, for evidence of that. Right now, we are still in correction mode for the 10 year rate. The 2 year rates has not corrected as much as the 10 year so the 10/2 yield curve is still inverted. As I said above, if the market perceived that the economy was very weak and headed for a bigger slowdown, the 2 year yield would be falling rapidly and that just isn’t the case. Will it do that soon? Maybe but I don’t make guesses about the future. If it does, that will affect our outlook for the economy. But just be aware that both rates can still fall quite a bit and still be in long term uptrends.

The dollar uptrend has also started to correct, down about 3% from the recent high. To be clear though, the uptrend here is more intact than for rates. The dollar index hasn’t even traded below its 50 day MA on this move. If we break that level (about 104.75) I would expect further weakness down to 103. And for further clarity, the index could trade down to about 100 and still be in an uptrend. That’s how far and how fast the move up was and breaking that uptrend is not going to be easy.

Most markets were higher last week with Asia (China) the lone exception. We are now facing a conundrum with our portfolios. Should we continue to maintain our cash cushion or get fully invested? As one of our clients has put it to us repeatedly, you’ve done well on the downside but how will you do when things turn higher? I am always reluctant to chase big short term moves but that sentiment is still negative after a big up move may be telling us something. I want to see how the markets trade after last week but I am leaning toward adding some risk here. That doesn’t necessarily mean stocks and it certainly doesn’t mean large growth stocks. But commodities are acting well technically and real rates dropped pretty good last week. The 10 year TIPS yield is down from 89 basis points to just 20 since July 8th. That’s why gold is finding a bid and if growth holds up it will likely mean higher commodity prices as well. That’s also why I’m still a little tentative about adding stocks by the way. The market may think the Fed is pivoting to a less aggressive policy but that will only be true if inflation really does come down, something that it hasn’t done yet. Real estate is also attractive if inflation persists but it is also rate sensitive. Midcap stocks are cheap though and I think we can probably add some high quality exposure there with less risk than large caps.

There wasn’t much difference in performance between growth and value last week but growth has led this rally off the bottom. That’s another reason to be a little skeptical of the overall stock market rally. The large growth stocks are not cheap by any measure and they are mostly rallying on the back of lower rates. If rates turn up that will come undone in rapid fashion. Be careful out there if you’re trading that part of the market.

Energy stocks led the way last week and it may be that crude is done on the downside. I had thought we’d see the mid to high 80s and that is still possible but it’s looking less likely. We don’t usually buy energy stocks anyway because we have direct commodity exposure which we are busy rebalancing after the correction (we’re buying to bring our exposure back up to our target). Defensives and health care stocks were down as the market chased beta but utilities had a great week with lower rates. Cyclicals also had a good week. I guess if the Fed is slowing down investors think the odds of recession faded. I don’t give the Fed that much credit or blame but as I’ve said many times, my opinion doesn’t really matter.

Credit spreads have narrowed by a little over 100 basis points since the July 5th peak. That is a significant positive move in spreads that indicates a lessening of recession fears. Indeed, it isn’t just junk bonds rallying but high grade corporates as well. The high grade corporate bond ETF (LQD) is up over 7% since its June low. Shorter term corporates are also higher. Muni bonds have also rallied, up about 3.5% since mid-June.

One indicator going in the wrong direction is the CFNAI, the 3 month average of which fell to -0.04 last week. With 0 as trend growth, we are now just slightly below trend. But the trend is also down so we’re not out of the woods. A reading of -0.75 means we are likely in recession.

The sentiment about the economy is still quite negative but there is still little evidence of actual recession in the real world – or almost any economic statistics that aren’t sentiment surveys. The Dallas Fed Manufacturing survey from last week is a good example. The comments are the most interesting part of the report in my opinion. Here’s a sample from the July version released last week:

  • The concerns of a looming recession have increased over the last month. With supply-chain issues continuing, the cost of raw materials remaining high and significant interest rate hikes, overall business activity has to slow. It is just a matter of when—which I believe is soon.
  • We are experiencing a temporary increase in business but have a pipeline that is beginning to decline due to inflation’s impact on interest rates and slowing construction starts.
  • We cannot find the qualified people to expand our output.
  • President Biden going overseas to beg for more oil supply instead of working with the domestic producers really adds uncertainty to the domestic producers and their budgets. This will affect our plans dramatically for expanding our business.
  • About 20 percent of our backlog was not taken by customers as ordered, but we were able find homes for that product and, therefore, continued to sell almost everything we produced. With incremental capacity coming online, we were able to grow finished-goods inventories a bit. We did see weakness in handsets and personal computers consistent with general commentary with the broader industry. Other markets are mixed; industrial markets continue to have pockets of strength, while others are beginning to show signs of weakness. We are expecting that weakness to begin to spread as we move into the second half of the year.
  • Broad-based inflation, together with difficulties in recruiting while our customers’ activity is strong, creates a puzzling and uncertain environment.
  • The economy is in shambles. There’s no way out that isn’t bad.

And my favorite comment of all:

November can’t get here fast enough.

What we see with these comments is an economy that is probably slowing – although not in all industries – but mostly expectations/concerns that things will get worse. That appears – certainly based on the last comment – to be more a political belief than one based on reality. Media bias has always existed but not to the degree we see today and not when information or disinformation could be spread so easily and quickly as it is today. What that means to me is that most survey data can be safely ignored or heavily discounted. Politics ends where the income statement starts for most businesspeople. Watch what they do, not what they say. And whatever else you do, don’t let your politics dictate your investment strategy.

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…



$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…



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.

  • Fed’s Kashkari: concerning inflation is spreading; we need to act with urgency
  • 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
  • “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.”


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.



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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