If I had to characterize these last few months of market machinations, the word I would purposefully choose to use is “historic.”
But to paraphrase swashbuckling movie character Inigo Montoya from The Princess Bride, “I don’t-a think it-a means-a what-a-you think it-a means-a.”
As supply chains shake off last year’s rust and the global economy gradually reopens — most countries are lagging the United States in that regard — we are going to see some eye-popping economic data come in. And these four market indicators for 2021 tell the whole story.
The sudden surge of spending — amplified by COVID-19-driven global government largesse — has caused consumer spending to recover rapidly, which has in turn caused prices to soar.
In terms of year-on-year change, we very well may see the highest numbers some of us have seen in our lifetimes… Mostly because we’re just coming off the lowest numbers most of us have seen in our lifetimes.
So I think this year’s “historic” deserves those quotes. Yes, it will technically be true… but also, it’s where soaring spending (which contributes to GDP growth) and soaring prices (or in other words, inflation) wind up that will be most relevant to actual history.
Because those two factors — inflation and growth — are literally what drive economies behind the scenes, while financial media pundits instead cry “CRYPTO!” or “TESLA!” or “GAMESTOP!”
Legendary investor Ray Dalio in his book “Principles” lays this concept out really well.
For most financial analysts like myself, the mantra is straightforward.
If you get GDP right and you get inflation right, then you can get a whole bunch of other things right, too.
That’s literally the entire reason I pay attention to macroeconomic data and consume as much research on the subject as I possibly can.
Most of this data is lumped toward the beginning and end of the month, so these two weeks of transition are pretty intense for me.
This time around, I was also doing work for several different clients across different industries all at once. So instead of the usual garden hose of data pointed at me, it was more like a fire hose.
But I got through it… turns out being both persistent and stubborn has its advantages.
Here’s what I found…
If you want to freak out some old economists, try comparing current inflationary pressures to the 1970’s.
They might not believe you at first, but if you show them this chart, they’ll probably come around.
That white line moving violently up and down is the ISM Prices Paid Index, going all the way back to the year 1960.
This index is one of many surveys (New Orders, Backlog of Orders, New Export Orders, Imports, Production, Supplier Deliveries, Inventories, Customers Inventories, Employment and Prices) that ISM sends out to over 400 industrial companies every month.
The value is derived by calculating the net difference between the number of responses saying prices are going up, and the number that say prices are going down.
This month, it came in at 92.1, which is the highest level since… 1979.
Now, before you clutch your own pearls, realize that this metric is only showing how widespread inflation is — not the rate of change of prices, and not their absolute values relative to particular historical levels.
“I don’t-a think it-a means-a what-a-you think it-a means-a.”
If consumers are tapped out, then prices eventually stop increasing.
That means we also need to look at jobs as one of our market indicators for 2021.
When you first file for unemployment, that’s called an initial claim.
During the COVID-19 lockdowns last year, initial claims went to a historical high — one that was actually historic, and not “historic” in quotation marks.
Thankfully, we are WAY past that part of the pandemic, and initial claims are showing marked improvement, with levels down toward those we saw back in 2013.
If you continue to file for unemployment, then you get lumped into what are called continuing claims.
That data improved this week too, falling down to levels most similar to early 2012.
But when we look at total people claiming unemployment – including those on extended pandemic-related government benefits – we can see we are still well above where we were during the global financial crisis.
So there’s still a very, very long way to go.
Many of the people who fall into this category, however, are about to lose those benefits, as 26 states were slated to eliminate them at the end of June. And as a result, this number is about to come down significantly.
More than likely, those folks will be looking for a job.
The good news is that there’s a labor shortage, and TONS of businesses are hiring!
So the bad news (benefits cut off) could turn into good news (new hires).
“I don’t-a think it-a means-a what-a-you think it-a means-a.”
One of the jobs data points I love to check is the Challenge Job Cuts report, which details planned job cuts — usually downsizing-related position cuts where severance packages are handed out.
And this one is, to be honest, pretty darn bullish.
Job cuts are at their lowest level since the dot-com boom — again, actually historic, and not “historic” in quotation marks… That’s great news.
It also means that those higher-level positions may have cut as much as possible already… If my last consulting client is any indication, they may even be hiring some old workers back!
One of the best ways (in my opinion) to double-check if that’s the case is just to look at the monthly change in nonfarm payrolls.
Economists were already expecting a significant improvement off of last month’s disappointment. But reality blew those expectations out of the water.
The U.S. added 850,000 more jobs in June (vs 720,000 expected). To put that in context, if we filter out last year’s post-lockdown blip, there has only been one other time in history that we’ve added that many jobs — after successfully beating a decade of inflation back in 1983.
Once again, that’s actually historic, and not “historic” in quotation marks.
So we went through four factors here — unemployment, job cuts, payrolls and prices.
Decreases in unemployment and job cuts imply that companies are hiring people rather than letting them go, and the increase in nonfarm payrolls confirms it.
Moreover, a lot of companies are hiring workers back at higher wages.
Keep in mind, that’s something that government officials actually want. It’s on President Joe Biden’s mind so much that he has made a habit/spectacle of whispering “pay them more” into the mic at press conferences.
But what I fear he and his Cabinet might not realize is that those industries are not only paying more for that labor, the ISM Prices Paid Index is telling us they’re paying more for supplies as well.
Well, if companies are shelling out all that money for new hires and supplies, how are they going to make that money back?
Source: Meme Creator, George Lucas’s Brain
Never say never, Han… inflation isn’t quite done with us yet.
But neither is growth.
Seventy percent of U.S GDP is consumer spending, and a whole lot of consumers are about to regain jobs and have more money to spend… they just won’t be able to buy as much stuff with it.
So when it comes to what these market indicators for 2021 are saying… “I don’t-a think it-a means-a what-a-you think it-a means-a.”
All the best,
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