Inflation, Fed Tapering, Jobs and the Supply Chain.

October 2021 Economic Report

Fed tapering is set to begin. In response to the COVID-19 related economic shutdown, The Federal Reserve initiated an unprecedented liquidity program which kept interest rates low and supported markets that had severely malfunctioned. The bond purchases put $4 trillion on the Fed’s balance sheet.

Fed Chairman Jerome Powell commented that the “policy will remain accommodative until we have reached” the bank’s targets on unemployment and inflation. It is expected that the Fed will unwind this program by mid-2022. We can derive from this that the Fed expects a strong economy to reach its unemployment target in this time frame.  

Supply Chain

In previous reports I have alluded to the divide among the Fed’s board members on interest rates. Half of the Board is pushing for an increase in interest rates to fight off inflation while the other half is obligated to holding rates low until economic goals are met. The group has raised its inflation expectation for the next year from 3.0% to 3.7%. That sizable jump reflects the understanding that the current supply chain bottlenecks causing inventory shortages will last longer than previously anticipated. Since I last reported on the forty vessels anchored off of the Long Beach and Los Angeles shores, the number has swollen to seventy-seven ships.

Inflation Surge

Year over year CPI (Consumer Price Index) rose 5.3%. This number is much higher than we have been accustomed in the past few decades. Real estate and commodities have historically been held as hedges against inflation.

Inflation Hedge

Commodities do tend to respond quicker in price, they also have carried greater downside risk. There are exchange traded funds that either own the commodity or own futures contracts related to the commodity. CPER, United States Copper Index Fund, is focused on copper through tradable securities like futures and swaps. DJP, iPath Bloomberg Commodity Index ETN (Exchange Traded Note) holds a variety of commodities.

Real estate tends to be less volatile and is designed to produce income while you wait for the value to increase. Real Estate Investment Trusts, REITs, invest in a variety of real estate and related securities. Realty Income Corporation own about 6,700 commercial properties and pays a monthly dividend. Cohen & Steers sponsors closed end funds that hold diversified portfolios of real estate investment companies and related securities. These are just a few examples of how investors can add commodities and real estate to their portfolios. As always, do your research.

Jobs Report

September’s jobs report missed expectations by a wide margin with only 194,000 jobs created. The consensus expectation was 500,000 growth for nonfarm payroll. This is now two months in a row that the jobs report has been weak and analysts have wildly missed the mark. If we look a little deeper, we find that private sector jobs came in at 317,000. This was offset by a 123,000 decline in government payrolls. Even with 317,000 jobs created in the private sector, that’s still a notable miss of the 500,000 expectation. The majority of private sector jobs are in the hospitality and leisure sector. This could well be restaurants and travel accommodations reopening from the COVID shutdown. This weak number may slow the Fed’s tapering and expected rate increases.

Stock and bond markets have experienced high volatility over the past month. Stocks have flip-flopped to extremes from one day to the next a few times. September has historically been a highly volatile month. More of the same in October would not surprise me. I reiterate again that asset allocation using non-correlated assets like real estate can soften the extreme swings in a portfolio.

I am intentionally not commenting on the political drama of the U.S. debt ceiling battle. The two political parties will play out the drama as they always do, each wrangling for power in Washington. When their activities impact my outlook to a notable degree will share my observations.

1 U.S. Bureau of Labor Statistics
2 Federal Reserve Bank of St. Louis, Q2 2021, Reported July 29, 2021 in 2012 chained billions
3 Federal Reserve Bank of Chicago
4 Federal Reserve Bank of St. Louis has put M2 reporting on hold
5 University of Michigan
6 The Conference Board
7 U.S. Bureau of Labor Statistics year over year
8 S&P Dow Jones Indices LLC
9 Paynet, Risk Insight Suite, Equifax
10 U.S. Census Bureau residential housing permits
11 U.S Treasury Department
12 Thomson Reuters
13 Federal Open Market Committee
14 Wall Street Journal Dow Jones & Company Inc.