Daily Comment (May 3, 2021)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

Good morning!  It’s Monday and the first trading day of May.  Various global markets are closed or seeing light trading today due to lingering May Day celebrations.  U.S. equity futures are trending higher this morning.  Economics and policy lead off our coverage today.  International news comes next, followed by an update on China.  We close with our usual pandemic update.

Economics and policy:  Labor markets, inflation worries, and colleges dominate the news.

  • One of the factors economists are trying to discern is the effects that follow a pandemic. We know that policy actions have flooded households with cash.  This wall of money has raised inflation fears.  However, we have contended that it is critical to follow the money.  In other words, the mere presence of liquidity does not mean inflation will follow.  The WSJ notes that much of the cash is being held in older households, where it is less likely to be spent.  The latest data, which for Q4, from the Fed’s Distributional Financial Accounts, shows that cash held by the top 10% of households rose $451.6 billion from Q3.  For the 89% to 51% middle, it rose $89.9 billion, and for the bottom 50%, it rose $47.7 billion.  Some of this data will change with recent fiscal injections, but there is clear evidence that the bulk of the liquidity is in households that will either hold it for a while or likely use it to buy financial assets.
  • That doesn’t mean we are not seeing price increases. Lumber prices are soaring, the consequence of rising demand that hit an industry that has been contracting supply since the Great Financial Crisis (here’s a great podcast on the topic).  We are seeing numerous reports that industries, from restaurants to food processors, are struggling to find workers.  Some of this is due to households having all that cash.  Workers can be more discerning in employment opportunities.  However, there is also another issue.  During the pandemic, some workers who were laid off as businesses closed may have trained or found work in other industries.  Some of these industries had rather poor labor practices—often, they demanded flexible schedules that burdened workers and prevented them from managing childcare or working multiple jobs.  If these workers moved on, these industries would be forced to train new workers, and in a high growth period, will probably be forced to pay more or restructure jobs to make them more attractive.
  • Some of the pricing issues are due to the nature of this recovery. The last fast recovery from recession was 1982.  In every recession since then, the recovery has tended to be slow.  Businesses assumed this recovery would be too.  But, unlike previous business cycles, the fiscal and monetary response was so aggressive that we are seeing a true “V” recovery.  Expectations of a slow recovery led firms to downsize dramatically a year ago.  They shed labor and cut inventories.  Based on the past three decades of experience, that made sense.  Unfortunately, it was a mistake this time around.  Now, businesses are scrambling for workers and materials.[1]
  • The consensus of policymakers is that the rise in prices will be temporary. We tend to agree with this assessment.  For now, the key to inflation is expectations.  We will know inflation is a problem when (a) firms begin to treat inventory as an asset instead of something to be minimized[2] and (b) when households buy, now fearing higher prices later.  We are watching residential real estate closely; home prices have been rising, as have mortgage rates.  If buyers continue to bid prices up on fears of the lack of supply, this would be a concern.  However, we would not be surprised to see prospective buyers start to balk at prices in the near future.  If they don’t, it would be evidence that inflation expectations are building.
  • College enrollment is down 5.9%. Some of this is due to the uncertainty surrounding the pandemic, but demographics and a drop in international students are also affecting it.  Although the highly selective colleges are turning away students, there are scads of colleges still looking for students even at this late date.
  • There is a global sand crisis.
  • European banks are building a plan to take on American payment firms.
  • How did big tech get big? Through acquisitions.

International roundup:  Iran is in the news, the EU and G-7 counter Russian propaganda, and Kim Jong-un won’t be ignored.

China:  Regulators are cracking down on fintech, small businesses are struggling, and a new opioid is emerging from China.

COVID-19:  The number of reported cases is 152,946,524 with 3,204,301 fatalities.  Global cases have reached a new peak.  In the U.S., there are 32,422,234 confirmed cases with 577,046 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors.  The CDC reports that 312,509,575 doses of the vaccine have been distributed, with 245,591,469 doses injected.  The number receiving at least one dose is 147,047,012, while the number of second doses, which would grant the highest level of immunity, is 104,774,652.  The FT has a page on global vaccine distribution.


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[1] Semiconductors are a classic example.

[2] When we move from just in time to just in case inventory management.