@theMarket: Stocks Drop as Fed Delivers Same Dire Message
It was another "read my lips" moment for equity investors. Federal Reserve Chairman Jerome Powell out hawked the hawkish as he reiterated the Fed's tightening stance on monetary policy after the Federal Open Market Committee meeting on Sept. 21.
That should come as no surprise for those reading this column every week. A 75-basis-point hike, which was expected, was followed by a promise to continue raising interest rates higher, and longer than investors expected.
The eventual terminal rate where investors hope the tightening will be done, has now ratcheted higher to 4.6 percent. Expectations are now set for another 75-basis point increase in October, and 50-basis point hike by the end of the year. These actions have now forced most investors into a more defensive camp. The markets' actions reflect that.
And it is not only the U.S. central bank that is raising interest rates. It is almost as if bankers are outdoing themselves in their single-minded intent on seeing who can raise rates faster and further. After the Fed's actions on Wednesday, a half-dozen countries from Norway to Indonesia followed suit with hikes that were of similar size within hours.
Remember, too, that normally, as interest rates rise, so does a country's currency. The dollar is already at 20-year highs, which is crippling many countries ability to pay interest and principal on their U.S. dollar-denominated debt. Foreign governments need to at least keep exchange rates at their present levels. They do so by matching the Fed's rate hikes with those of their own.
One might wonder how all these frenzied rate hikes will impact the global economy. Not well, I suspect. The conversation here in the U.S. is now flipping from a focus on inflation to how much damage the Fed's action will inflict on the economy. It is no longer "if" we get a recession, but how deep and long will it be? The debate between the bulls and the bears centers on judging how badly the Fed will err on the side of tightening.
Naturally, equity investors are also concerned about how all of the above issues will impact corporate earnings. Over the last few months, I warned investors that at some point we will begin to hear corporate managements lower their outlooks for future sales and earnings. That is already happening.
Companies across the country are announcing layoffs, but the fall out is still uneven across many sectors.
Energy companies, for example, are still looking for workers, while many high-tech companies are reducing staff. I expect as recession begins to take hold, we will see more sectors succumb to this lethal dose of inflation, rising interest rates, and slowing economic growth.
As quarterly corporate guidance and results continue to decline, so does the "E" in the Price/Earnings Ratio (P/E). I have explained in the past that the P/E ratio for the overall market is a key metric when valuing the stock market. The average P/E of the markets is now hovering around 16, but there are many companies that are trading anywhere from 20 to 23 times earnings or more. Others are trading much, much lower.
Several of the high P/E stocks happen to be favored by investors, like the FANG stocks. The bears are betting that markets won't see a bottom until those high-valuation stocks catch-up to the rest of the market on the downside. That makes sense to me.
So where do we stand after this week's latest Fed disappointment? As of Friday morning, we are just a few points above my first target, which is the year's low (3,666) on the S&P 500 Index. We are at historical levels of pessimism, according to the sentiment readings of the American Association of Individual Investors (AAII). Only 17 percent of investors are bullish, while 61 percent are bearish. Presently, there is an inverse relationship between the U.S. dollar (up) and the S&P 500 Index (down). Both are at extreme levels right now.
Given the dire mood of most investors (except those readers who have followed my advice, and are either short, or in cash). As a contrarian investor, I expect we will get a countertrend bounce in the early part of next week before turning down again at quarter's end.
It remains to be seen whether we bottom at the lows or break lower. I'm leaning toward the 3,500 level on the S& P 500 Index. In either case, I am looking for another bear market relief rally starting in October through November 2022, but it may be led by precious metals and not equities. To me that simply gives investors another chance to reduce their stock exposure.
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The Retired Investor: The Dishwasher Debates
In most new homes there is a litany of appliances that buyers almost automatically purchase, one of which is the dishwasher. While ovens, refrigerators, washers, and dryers are used almost daily, the dishwasher is among the least-used appliances in American homes.
The global dishwasher market is well over $7 billion and projected to grow by 7.5 percent to $10 billion by 2025. Much of that future growth is due to smaller-sized food service organizations. This list includes companies, businesses, institutions, and organizations that prepare meals and serve them to consumers and other customers. Of course, restaurants, cafeterias, hotels, and catering businesses are included in this demand base.
On the consumer side, busier lifestyles, increased employment, especially among women, and the expansion of nuclear families in both the developed and developing world have contributed to dishwasher demand. The increased convenience of shopping, thanks to the internet, has also made the purchase of most household "white goods" easier and faster. The COVID-19 pandemic disrupted supply lines, reduced travel, and increased prices for most home appliances, including dishwashers. However, these issues are beginning to lessen.
Dishwashers go back a long way. The first mechanical dishwasher was patented in the U.S. in 1850. It was made of wood and cranked by hand. Other machines improved the first, but few were commercially viable.
It required the widespread use of indoor plumbing and running water in the home before dishwashers could be considered as a viable household appliance. The postwar boom of the 1950s saw some of the wealthier households purchase such machines, but it wasn't until the 1970s that dishwashers became commonplace in both the U.S. and Europe. By 2012, more than 75 percent of homes on both sides of the pond had dishwashers.
However, unlike other kitchen appliances like the refrigerator or the electric stove, the dishwasher has not proven to be indispensable. Today, more than 89 million American homes have a dishwasher, according to the U.S. Energy Information Administration, but almost 20 percent (nearly one in five), fail to use it.
A breakdown of weekly dishwasher use statistics reveals that about 4 in 10 households don't use theirs in a given week, and just 11 percent of Americans use it once a week. Only 11 percent use it daily. In our own household, I would guess we run the dishwasher every other day between the two of us.
The reasons for its scant use are varied. There will always be a segment of the population that simply distrusts technology of any sort. Then there are those, usually older folk, that grew up washing dishes by hand. They don't see a reason to start letting some automated contraptions do what a little elbow grease can do better, and in a shorter time period.
Recently, climate change and the resulting worldwide drought has added another reason for not using the dishwasher. The growing recognition of water scarcity and the estimated lack of access to safe water for an estimated 771 million people worldwide, according to Water.org, has influenced even more people to use their dishwasher sparingly. All in the name of wasting less water.
That is a mistake. The Environmental Protection Agency says Energy Star dishwashers use nearly 5,000 gallons less water per year, compared to those who wash dishes by hand. This has not escaped the attention of companies that produce or sell products that require water to work. Proctor & Gamble, for example, the maker of the dishwasher detergent, Cascade, has argued and promoted the idea of "rethinking the sink." The company argues that skipping the pre-rinsing of dishes and instead running the dishwater daily will save you gallons of water. Another detergent brand, Finish, sold by consumer products company Reckitt, is urging consumers to "skip the rinse" as well.
This summer, our area (Berkshire County) is under certain restrictions to conserve water. I confess that my wife and I are in the habit of pre-rinsing dishes before putting them in the dishwasher. My thoroughly modern daughter, who uses her dishwasher daily, simply shakes her head at this practice. She says it in not only redundant but wastes water. I promise to stop that practice, and at the same time, up our use of the dishwasher further. What about you?
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@theMarket: Consumer Price Index Triggers Market Decline
Sticky inflation, as represented by Tuesday's Consumer Price Index (CPI), caught most investors off guard. The resulting equity market rout drove the three main averages down over 4 percent. It was the worst market day in more than two years. Is the selling over?
I doubt it. The rampage lower spared few stocks. The dollar soared higher and most commodities as well as precious metals plummeted. That's what happens when you get everyone on one side of the rowboat.
Many analysts, traders, economists, and retail investors had bid up stocks in the days prior to the report in anticipation that the CPI would result in a cooler inflation print. The opposite happened and everyone headed for the exit at the same time. On Wednesday, Sept. 14, the Producer Price Index (PPI) was a bit better and came in at the consensus forecast.
It only required an hour or so before strategists were hiking their expectations for how long and how high the Fed will raise interest rates. At least one Wall Street analyst I follow raised his expectations for next week's FOMC meeting rate hike from 0.75 basis points to 100 — a full 1 percent.
I am sticking with a 0.75 basis points hike. And after this week's CPI, most of the financial community have given up on their mistaken notion that the Fed may be moving into a more dovish stance next week.
This week the Biden administration intervened to avoid a U.S. railroad strike that could have been a disaster for the economy. Aside from the backup in product shipments, the strike could have added a percentage or two to the inflation rate depending on the duration of the strike. However, the markets barely acknowledge the Biden "save."
The overall macroeconomic data still points to an economy that is chugging along, especially the labor market that still appears to be growing and with it, rising wages. That is bad news for the markets, but good news for the economy. The Fed needs to see demand start to slow and the labor market cool off before they even think of pausing in their tightening policies.
That means the stock market will continue to be pressured downward by higher interest rates and further quantitative tightening. As markets tend to do, everyone is now crowding to the other side of the rowboat. From expecting easing earlier this week, investors are suddenly convinced that the Fed's tightening is going to cause a deep recession. You can't make this stuff up!
If you are looking for proof that the Fed will over tighten and cause a disastrous decline in economic growth, look no further than Friday, Sept. 16.
Some companies are sounding warnings on the future health of U.S. and global economies. In just one day, FedEx issued a profit warning due to declining package delivery volumes around the world. International Paper said it was being hurt by decelerating orders and an inventory glut. And General Electric revealed that the company's cash flow remained under pressure as supply chain issues continued to impact their ability to deliver products.
FedEx dropped more than 20 percent on the news taking the entire transportation sector down with it, since the company is a leading indicator on the future health of economic growth.
In my opinion, the strong CPI number has stretched out the duration of the Fed's tightening regime by a quarter or two. The big money in the market believe that the Fed has lost its way and that remaining "data dependent" suggests the Fed does not know what it is doing.
I am still expecting that this next week's FOMC meeting will deliver bad news — more hawkish statements — which allow investor hysteria to expand. But maybe, just maybe, Fed Chairman Jerome Powell may try to restore some of the Fed's credibility by offering a target terminal Fed funds interest rate for this tightening regime. The historical average of the Fed funds rate is 4.25 percent, and assurances that it won't go higher could help markets recover.
As I said last week (and many weeks before that) "a retest of the year's lows in the weeks ahead," was, and still is, my call. If we break the year's lows my terminal value on the S&P 500 Index is 3,500. It doesn't have to go straight down, however. We could see bounces that could take that index up 100 points or more, and then down again.
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The Retired Investor: Too Late to Stop Climate Change?
Invest in energy infrastructure now. Our grandchildren's future depends on it.
The argument over climate change has been going on for years. Disagreement over how bad the effects will be, how long we have left to act, and, how much needs to be spent in combating this worldwide danger has resulted in delays, underspending, and even ignoring the threat altogether. And now it may just be too late.
Here in the U.S., we tend to focus on our own needs. After years of wrangling, we have finally passed the $1 trillion, bipartisan Infrastructure Investment and Jobs Act. It promises to address America's dilapidated infrastructure. On the shopping list of investment projects is an upgrade in power infrastructure and additional spending to increase the "resiliency of our infrastructure" in relation to climate change, cyber-attacks, and extreme weather events.
While I applauded the effort, I was disappointed with the amount of spending, and said so in past columns. As far as Congress is concerned, the subject is now closed with this one-and-done spending effort. To me, this spending is not only insufficient, but will cost a heck of a lot more to resolve in the years ahead — if we have the will to do so.
Almost everyone agrees the globe is getting hotter. Fossil fuels, as we know, contributes a great deal to global warming. Renewable energy seems to be the answer. Unfortunately, we need to develop both alternatives for the foreseeable future thanks to the geopolitical state of world affairs. Equally important, we need the capability to move the power generated from these energy sources to where they are most needed. That is where the electrical grid becomes of vital importance.
Here in North America, the power grid is divided into five distinct regions. Texas, Alaska and Quebec comprise three smaller grids, while two larger ones serve the East and West.
Although some money in the infrastructure law addresses the grid, it is woefully inadequate, in my opinion. A recent Princeton University research paper estimates just upgrading the U.S. transmission grid alone will cost $2.4 trillion by 2050. That sum is many times the amount of investment spending earmarked for the power grid in the new legislation.
Most readers are aware of the precarious state of the power grid in Texas. Recently, California's grid has made the headlines as it joined several states buffeted by heat wave after heat wave that threatens widespread blackouts. These heat waves are expected to continue. Switching to hydroelectric power and its transmission, the Colorado River Basin supplies 57 percent of renewable energy in the West through hundreds of hydroelectric dams along the river's main stem and tributaries. Drought is threatening that power generation output.
Take Lake Powell, the nation's second largest reservoir. Its water moves through generators that churn power to more than 5 million people in seven Western states. Thanks to the historical, 21-year megadrought, the water levels of the Colorado Rivers biggest dams are fast-approaching, or already at record lows. Power generation is already down 20 percent in the last two-plus decades. Further declines are expected this year and next.
In prior columns, I explained that the decline in the number of U.S. oil refineries has translated into a lack of refining capacity. It has hamstrung the nation's abilities to process usable grades of oil, no matter how many barrels we pump out of our wells. I could go on and on, but what is happening here is also happening overseas.
In Europe, the Ukraine War, Russia's response to European Union (EU) sanctions, and the continents over reliance on Russian gas has thrown the EU's energy infrastructure into chaos. Germany, Europe's economic powerhouse, has been especially short-sighted in its energy decisions. For years, cheap Russian gas has allowed the country to produce and pursue economic leadership, while reducing alternative sources of energy such as nuclear power.
China is also reeling from its own policy mistakes in infrastructure. Its massive, decades-long, decision to replace coal with hydropower as their source of power generation has been crippled by drought. Unfortunately, the government failed to diversify sufficiently into alternative forms of energy. Instead, they are now expanding their coal-fired power capacity with 258 coal-fired power stations proposed, permitted, or under construction. India and some African nations are even worse off. These large coal users have yet to even consider energy infrastructure investments.
Climate activists, some policy makers, university think tanks, environmentalists and many economists have spent more than a decade begging global governments to spend or borrow the multi-trillion dollars necessary to address climate change and its damage to world economies. It was a time when interest rates were practically zero, and the cost of borrowing trillions was historically low. That window has closed.
Interest rates are rising and are predicted to keep rising. Economies are slowing and inflation is adding additional costs to solving what is fast becoming an insurmountable problem that will make COVID-19 look like child's play.
There are estimates out there that the cost of achieving a net-zero global economy by 2050 would require $5 trillion in spending per year between today and 2030. The financing cost of such spending in a rising interest rate environment is anyone's guess.
The hard truth, however, is that expansion of power generation capacity throughout the energy space faces opposition from voters who do not want a smelly refinery, or bird-killing windmill in their backyards or mountain tops. Politicians are only too happy to oblige. After all, why should they worry about what happens to your grandchildren when they are no longer running for office? Unless we all do something now, those grandchildren may not be around to solve this problem.
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The Retired Investor: Where Have All the Workers Gone?
Help wanted posters continue to populate storefront windows in a multitude of service-related businesses across the nation. The U.S. has 3 million more job openings than it did before the pandemic. This labor imbalance is entering its third year. Why has it been so difficult to remedy?
First, I would like to dismiss any assumption you may have that American workers are lazy and simply don't want to work. That attitude is neither true, nor particularly helpful, in understanding the major forces that are at play in this nation. Instead, I see four main areas that largely explain America's labor dilemma.
Let me start with older workers like myself, who left the work force. Prior to COVID-19, neither my wife nor I had any plans to retire, although we were both close to, and over, the typical retirement age. However, the risk to our health and life in the pre-vaccination days convinced us to leave the work force. More than 3 million Baby Boomers did the same and retired early. That was 2.6 million more people than labor experts predicted. That left a big dent in the available work force.
In addition to early retirement, COVID-19, itself, continues to be an important reason for our labor shortage. The Brookings Institute believes COVID could be keeping as many as 4 million workers out of the labor force,
Despite its disappearance from the daily news feeds, mutations of COVID-19 are everywhere. In just 13 days, between June 29 and July 11, 2022, more than 3.9 million workers took sick leave due to catching the virus or having to care for someone who was infected. That is double the rate of sick leave due to COVID-19 in the same time period last year.
Another factor in this lopsided labor imbalance is the shortage of women in certain areas of the workforce, especially Black and Hispanic women without college degrees. These women made up a goodly portion of the work force in some service sectors like restaurants and retail stores. COVID infections are a factor in the decline in numbers, but the lack of access to affordable childcare is the bigger problem keeping many women at home.
The simple fact is that there just are not enough people working in the child-care sector to meet demand. Employment levels are 8.45 percent lower today, than in February 2020. Even before COVID-19, the child-care industry was in trouble, but its poor financial health today prevents most programs from offering competitive compensation in an already-tight labor market.
As it is, child-care expenses are equal to or higher than the wages earned in many minimum wage jobs.
Immigration, or the lack thereof, has also crippled efforts to address the supply/demand imbalance of labor in the U.S. Normally, when a country can't find enough workers to do the jobs necessary to keep an economy humming, they import labor from abroad. Not so under America's recent immigration policies.
From picking apples in New England, to staffing high-tech positions in Silicon Valley, our present partisan policies have reduced those workers to a mere trickle. The U.S. issued 4 million nonimmigrant visas in 2020, which is half as many as it issued in 2019, and nowhere near the 10 million issued in 2016.
Last year, the number of L-1 visas (used to transfer an employee from a foreign country to the U.S.) dropped 68 percent to only 24, 863, while temporary work visas saw a similar drop in numbers. The situation is expected to get worse as old visas expire and new visa issues continue to decline. Many of the sectors that have the highest rates of unfilled positions are those that historically were filled by immigrants like hospitality and transportation. The unfortunate truth is that many immigrants often take jobs that Americans do not want to do. Most businesses know that, but that does not seem to matter to the voters and their representatives opposed to immigration.
There is some good news. Recent data has pointed to a rebound in workers re-entering the job market, which has caused a rise in labor force participation. In August 2022, 786,000 people re-joined the labor force. My wife, for example, decided to go back to work, part-time this year.
However, the rate of gain for workers over 55 years of age fell in August 2022 to only 38.6 percent of the work force. Overall, just 2.8 percent of early retirees went back to work since the beginning of this year, according to data from the Census Bureau's Current Population Survey.
As a result of these factors, the wage growth spiral we are experiencing will continue. And as it does, the inflation rate will continue to be a major problem for the Fed, for the economy, and for the stock market. Is there a chance that somehow the labor shortage will fix itself?
Doubtful, since I see little enthusiasm to expand immigration, nor for a comprehensive and universal answer to child care. The rate of COVID-19 infections will continue to grow, since most Americans have decided to pretend it does not exist. And as for Baby Boomers like myself, we aren't getting any younger.
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