This Week’s Message: Unique to Our Lifetimes — And — No, Inflation’s Not So Concentrated…

Eight times each year each Federal Reserve Bank interviews key business contacts, economists, analysts, etc., in their respective districts to assemble what we can view as a real-time general conditions snapshot for the U.S.

Suffice to say, the gist across the 12 Federal Reserve districts, not to mention today’s release of the latest job openings number (10.9 million), does not (given continued epic top-down support) reflect an economy that is on the verge of collapse.

U.S. Job Openings:

Which ironically, if not counterintuitively, makes for a precarious financial market setup when we consider what clearly drives the bullish action these days. That would be ultra-easy monetary policy.

Chatting with a friend earlier today I found myself declaring that the present overall setup is unique to his and my lifetimes. Not in terms of market dependence on policymakers, but on the utter lack of policymakers’ ability to take the measures that current conditions would typically call for. I.e., should the Fed indeed implement the tools they proclaim they have to quell inflationary forces, well, overwhelming probabilities point toward an epic bursting of what we’ll deem are right here historic equity and debt bubbles.

Hence, tapering of bond purchases notwithstanding, there’s nothing consequential, in terms of a Fed-induced tightening of financial conditions, coming down the pike.

Now, that’s not to suggest that the market won’t deliver notable tremors upon the Fed announcing a tapering timeline, it’s just that there’s no course they’ll embark on that isn’t subject to immediate reversal at the mere sign of a serious market meltdown.

So, I said to my friend, “the key question is, do we simply go where everyone continues to go, and assume the Fed has the market’s back ad infinitum?” I.e., do we just buy U.S. growth companies like they’re going out of style? “Or do we exploit the areas that would likely outperform in a weak-dollar environment ad infinitum?” I vote the latter…

You see, as macro thinker Julian Brigden puts it, we’re staring down an “impossible trinity”; the credit market, the equity market and the dollar. Something absolutely has to give! All three simply can’t hold at these levels, let alone continue to ascend.

Clearly, the dollar’s the loser (read long-run rising inflation). Which, ironically, stands to rectify, for the second stretch in our history, an over 100% government debt to GDP ratio. 

The first time occurred during the 1945 through 1947 period.

Here’s a look at the S&P 500 (white line) vs our now top 3 equity exposures — Asia-Pac (blue line), emerging markets (purple), Eurozone (green), along with the dollar (blue) in the bottom panel — from the bottom of the 2008 financial crisis to current:

Note the dollar trend from the point where the U.S. began to outperform.

Here’s the same chart, but for the period that captures the previous bull market (from the tech bubble bottom to the real estate bubble top):

Note the performance premium for non-US equities as the dollar trended lower. 

Yes, throw in our commodities exposure (your classic weak-dollar play), and I’m feeling long-term very good about our current core mix of assets.

Now, make no mistake, a weak dollar can be a good thing for U.S. equities as well, it’s that when we factor in long-term return patterns, valuations, dividend income, etc., non-US presently has distinct advantages that warrant what for us is a slight overweight relative to our U.S. exposure.

In closing, watch White House Economic Council Director Brian Deese downplay present inflation pressures. Then read the below taken directly from today’s release of the Fed Beige Book (I.e., no, inflation’s not so concentrated, not nearly!):


Highlights by Federal Reserve District

Economic activity in the First District expanded at a modest to strong pace over the summer of 2021. Contacts reported higher prices and wages but complained more about an inability to get supplies and to hire workers. Contacts were optimistic and hoped supply issues would ease in 2022.

New York
Growth in the regional economy moderated, though contacts remained optimistic about the near-term outlook. Employment and wages increased, with businesses reporting widespread labor shortages. Tourism leveled off, and service-sector businesses reported some deceleration in activity. Input price pressures remained widespread, and more businesses have raised or plan to raise their selling prices.

Business activity continued at a moderate pace of growth during the current Beige Book period – still below levels attained prior to the pandemic. The rise of Delta variant cases has trimmed growth in some sectors, while labor shortages and supply chain disruptions continued apace. Overall, wage growth increased to a moderate pace, while prices continued growing moderately and employment continued to grow modestly.

Economic activity grew solidly, but supply constraints limited many firms’ ability to meet demand. Staff levels increased modestly amid intense labor shortages. Reports of rising nonlabor costs, wages, and prices continued to be widespread. Firms expected demand would remain strong in the near term, but they were less optimistic that labor and supply challenges would abate enough to ease the upward pressure on wages and costs.

The regional economy expanded moderately, but many firms faced shortages and higher costs for both labor and non-labor inputs. Port and trucking volumes picked up from already high levels, but manufacturers and services firms experienced delays and long lead times for goods. Employment rose moderately as labor shortages and wage increases were widely reported. Price growth picked up and was robust compared to last year.

Economic activity expanded moderately. Labor markets improved and wage pressures became more widespread. Some nonlabor costs rose. Retail sales increased. Leisure travel was strong and hotel occupancy levels rose. Residential real estate demand remained solid. Commercial real estate conditions were steady. Manufacturing activity expanded. Banking conditions were stable.

Economic activity increased moderately. Employment increased strongly, manufacturing grew moderately, business spending was up modestly, construction and real estate rose slightly, and consumer spending decreased slightly. Wages and prices increased strongly while financial conditions slightly improved. There was some retreat in prospects for agricultural income.

St. Louis
Economic conditions have continued to improve at a moderate pace since our previous report. Across all industries, contacts are concerned about the Delta variant and its economic impact. Contacts continued to report that labor and material shortages. Overall inflation pressures remain elevated, but firms reported varying degrees of pass-through to customers.

The District economy saw moderate growth despite continued inventory shortages and higher prices. Employment grew strongly but hiring demand continued to outstrip labor response by a wide margin. Consumer demand remained strong, leveraging growth in services, tourism, and manufacturing. Drought took a growing toll on agriculture, though higher prices benefitted farmers. Minority and women-owned business enterprises saw moderate growth in activity.

Kansas City
Economic activity continued to grow at a moderate pace through August. Demand remains elevated for most businesses, and a majority of contacts expect activity to remain elevated amid the recent surge in COVID cases. Wages grew at a robust pace, but labor shortages persist. As a result of widespread drought, pasture and range land in several states was in poor or very poor condition.

The District economy expanded at a solid rate, with broad-based growth across sectors. Employment growth was robust, with a pickup seen in the service sector. Wage and price growth remained elevated amid widespread labor and supply chain shortages. Outlooks stayed positive, though surging COVID-19 cases has added uncertainty to outlooks.

San Francisco
Economic activity in the District expanded moderately. Hiring activity intensified further, as did upward pressures on wages and inflation. Retail sales increased modestly, while conditions in the services sector deteriorated somewhat. Activity in the manufacturing and agriculture sectors increased slightly. Residential construction edged down somewhat, while lending activity remained largely unchanged.

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