Focus on Washington

All eyes on Washington…as lawmakers tussle over spending, taxes, and arguing. Sweeping changes are forcing investors, strategists, and analysts to focus more on inflation and corporate profits. Many of the nation’s biggest challenges–pandemic response, the slowing of growth, attention to crumbling infrastructure, and wealth inequality cannot be managed by just monetary means. Fiscal policy can target specific issues that influence the economy, and enable sustainable growth. Most analysts expect a bipartisan infrastructure package to pass- highly modified, which will repair and replace the nation’s water facilities and upgrade transportation systems, and improve broadband, making it more accessible. As noted the package is not likely to get through in its current form. Michael Zezas, head of U.S. public policy research at Morgan Stanley, says his base case calls for a smaller ‘deal’ in the fourth quarter, anywhere from $1.9 trillion to $2.9 trillion over the next decade. Even the smaller package would boost the deficit by a total of $550 billion to $990 billion over the next five years, he says. With investors on edge, the markets survived the debt-ceiling fight, and the oil spike this past week (thanks to Vladimir Putin), as energy prices skyrocketed, and with the approaching earnings season, the indices held pretty much firm. The September employment report missed expectations handily. The economy created 194,000 jobs in September, well below the consensus of 475,000. But August payrolls were revised higher to 366,000 from an initial 234,000. The Fed is still on track to start tapering its monthly asset purchases, possibly before the end of the year. The 10-year Treasury yield jumped again for the second week rising 3 basis points to 1.6%. In the past three weeks, the 10-year yield has surged more than 20 basis points. U.S. crude oil futures topped $80 a barrel level, a multiyear high, but settled at $79.35, up 1.3%. The Dow Jones Industrial Average gained 1.2% this past week, to 34746, while the S&P 500 rose 0.8% to 4391 and the tech-heavy Nasdaq Composite edged up 0.1%, finishing at 14579. For the Dow, it was just the second rise in the past six weeks.

The Everything Shortage… Every industry is under pressure to deliver. And delivery is not assured. Nearly every retail and wholesale item is in short supply, and generally months away from normal stocking. Ratcheting up production will take time, as the workforce begins to slowly assimilate and raw materials begin to flow to manufacturers. As investors worry about widespread shortages, and the effects on many sectors, creeping inflation signals the Fed. As the Federal Reserve ponders the increased costs across the board, of shortages and supply deficits, it could counter with higher interest rates, as has been alluded to by Fed Chair Jerome Powell. Hopefully, bottlenecks will begin to ease a bit and return to pre-pandemic levels, however carrying higher price tags. As analysts predict, prices will surge throughout Fall and into winter and then moderate. The up-trend in wages and the long-term productivity gains have reduced their wage exposure. Today it takes an average of two workers to generate $1 million in revenue, whereas iin 1986 it took eight workers. Anne Mileltti, who oversees active stock shortages at Well Fargo Asset Management reflects: “All the liquidity that has been poured into the market has created alot of development of new companies, but also actually lessened the chance of failure for companies, that probably should have failed,” concerned that there will be fewer workers needed to return to their ‘old’ jobs.

Silver has had a very ‘bumpy ride’ since the pandemic began eighteen months ago. Futures prices gained more than 47% in 2020 alone, then settled at $29.418 on February 1 of this year, with a Reddit-induced rally boosting the value of the metal to the highest since February 2013. Prices then saw a volatile retreat, settling at $21.485 an ounce on September 29, to mark silver’s lowest value since July 2020. The losses for silver have outpaced those of gold for the quarter as of September 30, with silver down nearly 16%, compared with gold’s 0.8% decline. The poor performance of silver is “relatively surprising” as fundamental factors support the metal in the long term, says Carlo Alberto De Casa, an analyst at Kinesis Money. He pointed to a January Silver Institute report, produced by Metals Focus, that said automotive demand for silver is forecast to climb to an estimated 88 million ounces by the end of 2025, from 51 million ounces in 2020. “Silver is getting close to being a bargain,” he said.

RUMBLINGS ON THE STREET

Janet Yellen, Treasury Secretary, U.S., Barron’s “The Federal Government would effectively run out of cash on October 18 based on current trends. Since the debt ceiling was reinstated on August 1, the Treasury has been using what it calls extraordinary measures to pay its bills, a fancy way of saying Uncle Sam has been digging out change from under the government’s seat cushions.”

Gary Gensler, Securities and Exchange Commission head, working on tougher rules for high-speed trading firms, private equity managers, mutual funds and online brokerages, (Robinhood), WSJ “I hope that we address and try to lower the economic rents in our capital markets,” Mr. Gensler said. He noted that finance as a share of U.S. economic output had more than doubled since the 1950’s to about 8% of today’s gross domestic product.

Facebook Whistle-blower Frances Haugen, testifying before Congress, Barron’s “I’m here today because I believe Facebook’s products harm children, stoke division, and weaken our democracy.”

Michel Gayed, a portfolio manager and author of Lead-Lag Report newsletter, WSJ “If anything this is long overdue,” he said. (speaking about the S&P 500 rally since last March). “Markets could become very manic if the bond market says ‘we were wrong about inflation,’ he said.