Is the Government causing Economic issues

Week Ending November 5th 2021&

Treasury yields dropped last week after the Fed confirmed it will begin to taper bond purchases in mid-November. Again, tapering referring to the reduction of purchases which reduces the money supply flowing into the economy. The U.S. central bank would like to see further improvements in the labor market before raising interest rates, particularly in the participation rate, which is still below pre-Covid levels.

Again, Friday’s NFP (Non-Farm Payroll) report revealed 531K new jobs added in October, with the unemployment rate falling to 4.6%. But the participation rate remained at 61.6%, essentially unchanged for the past 16 months even as wages have risen 4.9% YoY.  Earlier in the week the ADP account showed private payrolls rising 571K for October, and weekly unemployment claims dropped to 269K. Keep in mind people leaving the workforce are not counted in theses calculations to the base is lower and misleading if comparing to pre pandemic numbers.

In other economic news, the U.S. ISM Services PMI jumped to a record 66.7 in October, while manufacturing activity slowed to 60.8 from 61.1 on stretched supply chains. U.S. Q3 productivity growth fell 5%, the biggest quarterly drop since 1981, as unit labor costs leapt 8.3%

Employee Benefit Open Enrollment Season

Most employers often renew reevaluate their employee benefits this time of year and with that Open enrollment begins allowing employees to change plans or enroll if they opted out last year.

It’s been often said that people are told to get a job with good benefits, but they rarely think about why.

At many companies this time of year, employees receive a thick booklet in the mail, or their inboxes, listing myriad options for financial, health, and other benefits. Many people become intimidated & overwhelmed by the information which is basically foreign to them and hence skip over the more complicated ones in favor of simple, quick choices.

Going quickly, however, is a mistake. Choosing the right benefits during open-enrollment season can help save money and build wealth. It can also give individuals and families broader support with their health. The importance of benefits like medical coverage is particularly crucial as the pandemic continues. There are other big reasons to be purposeful this year mainly because of the tight labor market many employers are looking to enhance their Benefits packages to not just attract but retain talent. Its important to make sure someone provides you with guidance and gives you some education to help you understand the options and cost but most importantly is that you need to just do the math long and short term to evaluate the value of your decisions. Source: https://www.wsj.com/articles/have-a-job-with-benefits-how-to-make-the-most-of-open-enrollment-11635931802

Is the Government Causing a lot of our Problems

The big news last week was the long-anticipated announcement of the Feds “taper” of asset purchases. Markets had been worried that the Fed would cave to market pressures, become more hawkish, and move to raise interest rates early to combat the media’s incorrect but often repeated “stagflation” narrative.

After the FOMC meeting on Wednesday (Nov. 3), Fed Powell stated: “The inflation we are seeing is not due to a tight labor market, it is due to shortages of inventory, and due to very strong demand meeting those shortages.” 

In addition, Powell said that the Fed does not have the tools to deal with supply issues (and therefore, by implication, raising interest rates aren’t appropriate for the inflation we are experiencing).

Finally, given the ongoing supply issues, Powell suggested (and markets seem to have accepted) that we might have to wait to Q2 or Q3 2022 before we see relief in the current elevated level of inflation. So  “transient” now has a time frame. Ultimately, Powell seems to have convinced markets that it will be “data,” not market pressure, that ultimately determine the path of interest rates administered by the Fed.

The hardest part of writing these economic newsletters is to deal with the misrepresentation coming from the media. If you follow us, you probably know that we are not fans of the media, which is always looking for the sizzle and fear component in every story.  We do believe that some of the rise in inflation is long-lasting, especially involving energy. The move in this the Administration and those countries at the recent Climate Summit to speed up the move to green energy and move away from fossil fuels raises the price of the latter. Its not a light switch that just happens. From an economics viewpoint, it must transition and the cost in the beginning are going to be higher so the consumer will bite the bullet.  

In addition, Housing has also experienced huge increases in price. Much of this was due to the demand set for people leaving large cities and getting away. But the prices have been driven up by institutional buyers of homes. Companies like Zillow (no longer Buying homes) and Blackrock have been buying homes and renting them. We feel that this will have some long-term effects of housing cost as rent is the most weighted segment of the calculation

Shortages are blamed as the prime cause of rising prices. Powell, however, had it right when he said that inflation was due to “very strong demand meeting those shortages.” So how did the demand materialize so quickly?  In our opinion, the “very strong” part of the demand emanated from fiscal policy of the government and all of the helicopter (free) money sent to most American households and from the too long-lasting federal unemployment supplements. For those that had parents from the depression money was held on tightly and spent wisely. This is no longer part of our culture. Free money meant free upgrades and spending on items one could normally not afford “Gucci, Louis Vuitton etc. Rent is not something people thought about.

Some of the issue around the sudden and dramatic shift in demand toward goods (and away from services) and the back-up at ports are due to work rules related to the pandemic.

But the fiscal gifts must take a good portion of the inflation blame for artificially elevating demand while supply has been stymied.

To top off the inflation issue, the Administration has issued vaccine mandates for most working Americans (currently those with 100 or more employees) and many are objecting to these mandates making the labore market tighter.

Every Economic recession is the result of bad decisions. While last year’s pandemic was an anomaly its was still a bad decision to delay the actions necessary to protect the country and immediately shut down travel from abroad. But since then, the bad decisions just keep coming out of Washington and the  consequence will be seen during the next administration.

Piecing together other Economic Data

ISM Manufacturing Index: 60.8 (Oct.) vs. 61.1 (Sept.) While still elevated, the big shock was the fall in new orders to a 15-month low.

ISM Services Index: The services index skyrocketed to 66.7 (Oct.) from 61.9 (Sept.) This was the highest number since these records have been kept (1997), and clearly speaks to the rebound in the services side of the economy. This is good news for Q4 GDP.

On the other hand, Construction Spending fell in September (-0.5%) continuing its decline. Residential fell -0.5%. Mortgage applications also fell -3.3% in the last week of October (could it be rising home prices and/or rising mortgage rates?). And Pending Home Sales were down -2.3% in September.

Consumer Sentiment (University of Michigan), often a leading indicator, hasn’t shown up well for the past few months, and at 71.7, is approaching territory ordinarily reserved for recessions.

Going back to the “transient” notion of inflation, note the recent dramatic plunge in the Baltic Dry index (-51% from 5,650 on Oct. 6 to 2,769 on Nov. 4) (see chart at top of this blog). This appears to validate the “transient” notion, especially if the plunge continues. (This index averages prices paid for the transport of dry bulk goods across more than 20 major routes. It is viewed as a leading economic indicator because changes in the index reflect supply and demand for important raw materials.)

Real Estate Sector:

The Real Estate sector includes equity real estate investment trusts (REITs) that invest primarily in commercial properties (e.g., office buildings, retail centers, apartment buildings), and companies engaged in real estate development and operation, such as real estate agents, brokers and appraisers.

The fallout from the COVID-19 pandemic continues to be a source of long-term uncertainty for the Real Estate sector, but mass-vaccinations, low new COVID cases and relaxed restrictions on public gatherings have reduced investor pessimism. Fiscal relief packages have staved off massive retail lease defaults, but elevated residential delinquencies still pose risks—particularly as the eviction moratorium may not be extended amid legal challenges and unemployment remains high. The outlook for office REITs is highly uncertain and will likely stay so until we know if there will be an enduring shift toward remote working—though the recent trend appears to be for most workers to eventually return to the office. While net debt for the sector is low by historical standards, the risk to cash flow puts many REITs in a difficult position.

There are some exceptions, however. Warehouse/distribution center demand appears to be outstripping supply—resulting in sharply rising rents. And with the rapid rise in home prices amid low rates and de-urbanization, REITs specializing in single-family home rentals and manufactured homes stand to benefit—and this will likely translate into higher multi-family rents, as well. If the economy expansion continues at a brisk pace, people get back to work, and interest rates stay low as the Federal Reserve maintains accommodative monetary policy, the Real Estate sector could do very well. In a generally still low interest rate environment combined with renewed demand for office and retail space, investors’ search for yield and attractive valuations could be a strong tailwind for the sector. However, this would have to overcome the traditionally defensive characteristics of the sector.

Positives for the sector:

Optimism for improving economic growth and vaccine distribution;

Fiscal stimulus is a lifeline for those behind on apartment and retail space rent.

Low interest rates are positive for funding and make REITs dividends more attractive to investors.

Warehouse, data center and telecom towers are benefiting from technology and e-commerce trends.

Single-family residential REITs segments are seeing strong demand and rising rents, which will likely translate into higher multi-family rents.

Valuations are still relatively attractive.

Long-term demographics support recovery in extended-care and assisted-living facilities.

Negatives for the sector:

High unemployment can lead to multi-family lease defaults.

A sharp turn higher in home-ownership rates and de-urbanization is a negative for multi-family housing.

An accelerated shift to internet from brick-and-mortar stores puts retail REIT revenues at risk.

Short-term uncertainty exists about workers returning to the office.

Traditionally defensive characteristics in a rising market.

Risks for the sector:

A quicker-than-expected rise in interest rates could be a sharp headwind.

A permanent rise in work-from-home could reduce demand for office real estate.

The Week Ahead

Even with a robust jobs market, high inflation, and expectations of rate increases as soon as the second half of 2022, 10-year Treasury yields fell 10 basis points last week. The Fed did add a note of caution in its statement, particularly on inflation, and investors have been well prepared for the central bank’s bond buying reduction. Ultimately it reflects an uncertain environment which may continue to drive rate volatility in the near term. The Treasury plans to sell $39B in 10-yr notes and $25B in 30-yr bonds this week. The U.S. economic calendar is light but contains important updates, with PPI on Tuesday and CPI on Wednesday. China releases their inflation data late Tuesday, with producer prices expected to advance even further from last month’s 26-year highs. Other notable events include Australia’s employment numbers, preliminary Q3 GDP from the UK, and Eurozone sentiment and industrial production figures. The week finished up with U.S. Jolts job openings and a preliminary consumer sentiment reading for November.

Major economic reports (related consensus forecasts, prior data) for the upcoming week include Tuesday: October NFIB Small Business Optimism (99.3, 99.1), October PPI Final Demand MoM (0.6%, 0.5%), October PPI Final Demand YoY (8.7%, 8.6%); Wednesday: November 5 MBA Mortgage Applications (N/A, -3.3%), November 6 Initial Jobless Claims (263k, 269k), October 30 Continuing Claims (N/A, 2105k), October CPI MoM (0.5%, 0.4%), October CPI YoY (5.8%, 5.4%), September Final Wholesale Inventories MoM (1.1%, 1.1%), October Monthly Budget Statement (N/A, -$61.5b); Friday: November Preliminary University of Michigan Sentiment (72.5, 71.7). U

This article is provided by Gene Witt of  FourStar Wealth Advisors, LLC (“FourStar” or the “Firm”) for general informational purposes only. This information is not considered to be an offer to buy or sell any securities or investments. Investing involves the risk of loss and investors should be prepared to bear potential losses. Investments should only be made after thorough review with your investment advisor, considering all factors including personal goals, needs and risk tolerance. FourStar is a SEC registered investment adviser that maintains a principal place of business in the State of Illinois. The Firm may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about FourStar’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov/