Portfolio Return as of 08/12/22:
2020: 25.65%
2021: 29.15%
YTD: 6.2%

Tuesday, May 31, 2022

World Bank: Green Energy to be Disruptive to Mineral Markets

The untold story about “green energy” is that it can’t possibly be scaled up to provide anywhere near the energy to replace fossil fuels. (Unless we are headed back to the stone age – which is what some of the “de-growth” advocates favor).

A new World Bank Group report finds that the production of minerals, such as graphite, lithium and cobalt, could increase by nearly 500% by 2050, to meet the growing demand for clean energy technologies. It estimates that over 3 billion tons of minerals and metals will be needed to deploy wind, solar and geothermal power, as well as energy storage, required for achieving a below 2°C future. 

Recently, even some environmentalists are pointing to a the World Bank report showing that moving toward 100% solar, wind, and electric battery energy would be “just as destructive to the planet as fossil fuels.” This was the conclusion of a story in Foreign Policy magazine in 2019, The Limits of Clean Energy.

A low-carbon future will be very mineral intensive because clean energy technologies need more materials than fossil-fuel-based electricity generation technologies. Greater ambition on climate change goals (1.50C–20C or below), as outlined by the Paris Agreement, requires installing more of these technologies and will therefore lead to a larger material footprint.

Moving to a “carbon free” energy future, according to the Foreign Policy article “requires massive amounts of energy, not to mention the extraction of minerals and metals at great environmental and social costs.”

Here are the estimates, of how much minerals would be needed:
  • 34 million metric tons of copper
  • 40 million tons of lead
  • 50 million tons of zinc
  • 162 million tons of aluminum
  • 4.8 billion tons of iron
The World Bank report “Minerals for Climate Action: The Mineral Intensity of the Clean Energy Transition” also finds that even though clean energy technologies will require more minerals, the carbon footprint of their production—from extraction to end use—will account for only 6% of the greenhouse gas emissions generated by fossil fuel technologies. 

The report underscores the important role that recycling and reuse of minerals will play in meeting increasing mineral demand. It also notes that even if we scale up recycling rates for minerals like copper and aluminum by 100%, recycling and reuse would still not be enough to meet the demand for renewable energy technologies and energy storage.

However, the reports points out that the current supply of some minerals would need to be consumed (for example, 87 percent of aluminum) to meet demand for green energy, such as solar panels. 

How this will affect world markets is yet to be seen, but can only be disruptive and inflationary, to say the least. 


Saturday, May 28, 2022

An emboldened Fed

The Federal Reserve minutes of the May meeting gave investors a pretty clear roadmap for the summer. The minutes, out Wednesday afternoon, painted a picture of an FOMC strongly focused on inflation, with rate hikes of 50 basis points in the June and July meetings. But some members also indicated that price pressures may not be getting worse.

Stocks rally: The market appeared to take the minutes as more dovish than hawkish. Half-point hikes were already priced in for the next couple of meetings and there was no mention of 75-basis-point moves that had become the base case for a few Wall Street banks at the end of April.

The S&P 500 (SPY) rose about 1% to finish out the session and S&P futures (SPX) are up again this morning. Treasury yields (SHY) (TBT) (TLT) continued to creep lower Friday.

Data dependence: "We think that after the July meeting the Fed is likely to become more 'data dependent' with regard to rate hikes, which essentially means that the policy path after July will depend upon the trajectory of inflation and progress toward correcting the supply/demand imbalances in the labor market," BlackRock fixed income strategist Bob Miller said.

There are already signs that the U.S. economy is weakening. Of the last 19 major economic indicators, 13 have missed economists' expectations, Nomura noted. The question is whether that will bring about a Fed pause, which stock bulls are hoping for, or will it stiffen the central bank's resolve.

If there are signs of falling inflation and improved labor market imbalances "the Fed gains some breathing room and can shift policy adjustments to 25 bps increments, while still pursuing something in the estimated range of neutral," Miller said.

Pantheon Macro economist Ian Shepherdson says the door is still open to a smaller hike in July given the minutes show policymakers "appear utterly oblivious ... to the rollover in housing demand, which has been evident in the mortgage applications data since the turn of the year." That will change in the June minutes, he added.

But Nomura strategist Charlie McElligott says those hoping for a Fed pause will likely be disappointed, noting Fed chief Powell's willingness to endure "some pain" in getting price stability.

"I think that if anything, the Fed is seeing the results of their (financial conditions index) tightening campaign through these broad measures 'slowing' and could actually become incrementally 'emboldened' to keep PUSHING on their hiking path until they see the 'whites of the eyes' of sustainably lower inflation as opposed to the notion of 'pausing and hoping' for the inflation data to move lower - a view that is increasing held by some in the market," he said.

Tuesday, May 24, 2022

Earth To Powell, Come In Chairman Powell

The wheels are coming off the economy and the stock market has suffered one of its worst two month sell offs in American history, but that’s not the way our esteemed Fed Chairman Jerome Powell sees things. Here are his comments from last week:

“The underlying strength of the U.S. economy is really good right now. The U.S. economy is strong, the labor market is extremely strong. It is still at very healthy levels. Retail sales numbers, the economy is strong. Consumer balance sheets are healthy. Businesses are healthy. The banks are well-capitalized. This is a strong economy.”

Now isn’t that reassuring? Never mind that the growth rate of this “strong economy” so far this year is less than one percent.

But he wasn’t done with his happy talk. When the Fed chief was asked about whether he is behind the curve on raising rates (which he clearly is), Powell had this to say:

"By the standards of central bank practices in recent years, we've moved about as fast as we have in several decades.”

This is a non sequitur because the reason the Fed hasn’t had big rate hikes “for several decades,” Jay, is because we haven’t had to combat eight percent inflation for three decades.

Powell’s lame steps to bring down inflation reminds us of a favorite old joke. What did the snail say when he climbed on the back of the tortoise?

WHEE!

The Law of Supply and Demand: Housing Sales Fall

A normal supply and demand curve indicates that as prices increase, demand will moderate or decline, until the curve reaches a new equilibrium. That is what is happening this year in housing. 

Sales of new single-family homes plunged in April, declining 16.6 percent to 591,000 at a seasonally-adjusted annual rate from a 709,000 pace in March and just slightly ahead of the 582,000 pace at the bottom of the lockdown recession. 

The April drop follows a 10.5 percent decline in March, a 4.7 percent fall in February, and a 1.0 percent drop in January. The four-month run of decreases leaves sales down 26.9 percent from the year-ago level (see chart). Meanwhile, 30-year fixed rate mortgages were 5.3 percent in late May, up sharply from a low of 2.65 percent in January 2021.


The median sales price of a new single-family home was $450,600, up from $435,000 in April (not seasonally adjusted). The gain from a year ago is 19.6 percent versus a 21.0 percent 12-month gain in April. On a 12-month average basis, the median single-family home price is still at a record high.

The total inventory of new single-family homes for sale jumped 8.3 percent to 444,000 in April, putting the months’ supply (inventory times 12 divided by the annual selling rate) at 9.0, up 30.4 percent from April and 91.5 percent above the year-ago level. 

The months’ supply is at a very high level by historical comparison and is approaching peaks associated with prior recessions. The plunge in sales, high months’ supply, and surge in mortgage rates should weigh on median home prices in coming months and quarters. However, the median time on the market for a new home remained very low in April, coming in at 2.8 months versus 3.9 in March.

Monday, May 23, 2022

Beware The Impending Natural Gas Crisis

(Update 5/24: Since publishing this article (May 23), the price of Natural Gas increased to $8.81 per MMBtu or 8.6% on the NY Mercantile Exchange. The price of oil is $110.57 per barrel.)

Since Biden was elected president with his declaration of war against fossil fuel production, the oil price has spiked from $60 a barrel to above $100 a barrel, an increase of about 70%. Gas prices at the pump have surged nationally at a similar pace, from $2.59 a gallon under Trump to about $4.59 a gallon last week. 

But don’t fret, because the Biden White House is “doing everything we can to bring gas prices down.”

Another energy crisis may be brewing, and that is a result of the surge of natural gas prices. (Don’t forget, natural gas is by far the number one source for electric power generation in America.) Here at home, those prices have climbed from less than $3 per MMBtu in 2020 to $7.40 as of last week. (See chart.) This is close to a 150% increase in price.

James Grant from the Interest Rate Observer warns that the price may double or triple in the months ahead. 

Why? Because the overseas price of natural gas is closer to $30 per MMBtu – versus less than $8 here. To arbitrage, this price differential, American and Canadian energy companies are expected to increase exports of liquefied natural gas – which would mean lower prices abroad and higher energy prices here. Grant reports that a big spike in the domestic natural gas prices could be “the next black swan event” and the soaring energy costs could trigger a recession.

Aren’t you thrilled that Energy Secretary Jennifer Granholm is on the job to prevent this calamity from happening?




Saturday, May 21, 2022

Price controls again? Some people never learn

As I've mentioned before these pages, price controls that were last employed on a widespread basis during the 1970s inflation era were eventually discarded by both parties as an abysmal failure. So we shouldn’t be too surprised that House Speaker Nancy Pelosi wants to bring them back.

On Thursday, Pelosi pushed through the House her Consumer Fuel Price Gouging Prevention Act – which would allow the president to declare an “energy emergency proclamation” when prices are rising. During the emergency, companies would be barred from charging “unconscionably excessive” prices for gasoline or any other fuels. The Federal Trade Commission and state attorneys general would be empowered to pursue violators.

There is no legal definition of price gouging, but apparently, it is the new pornography – the pols know it when they see it.

Sadly, only four Democrats – Liz Fletcher of Texas, Jared Golden of Maine, Kathleen Rice of New York, and Stephanie Murphy of Florida – voted no.

Pelosi isn’t done yet. She is now pressuring the administration to file criminal charges against baby formula companies. “I think there might be a need for indictment,” Pelosi said when asked about her plans to combat the formula shortage. No one mentioned that even her own Appropriations Committee chair admits the baby formula shortage was primarily caused by the FDA’s months-long failure to investigate poor sanitary procedures at an Abbott plant in South Dakota.

These price control measures will make supply chain problems worse and cause prices to rise even faster.

Pelosi
Speaker of the House insultingly tears up Trump's speech during his State of the Union. She is one of the most disgraceful and corrupt people to "serve" in the U.S. Congress. 


Thursday, May 12, 2022

US Producer Prices Surge 11 Percent on Higher Food Costs

Wholesale prices in the U.S. soared 11% in April from a year earlier, a hefty gain that indicates high inflation will remain a burden for consumers and businesses in the months ahead.

The Labor Department said Thursday that its producer price index (PPI) — which measures inflation before it reaches consumers — climbed 0.5% in April from March. That is a slowdown from the previous month, however, when it jumped 1.6%.

The cost of groceries in the past 12 months is up 10.8%, the largest 12-month increase since November 1980, The Wall Street Journal reports, citing Labor Department consumer price index (CPI) data. Grocery costs rose 1% in April after increasing by 1.5% in March; they have risen by 1% or more in the past four months. Dairy prices, led by milk, shot up the most in April, by 2.5%.

The April year-over-year increase in the April PPI declined from the 11.5% annual gain in March, which was the biggest increase since records began in 2010.

The producer price data captures inflation at an earlier stage of production and can sometimes signal where consumer prices are headed. It also feeds into the Federal Reserve's preferred measure of inflation, the personal consumption expenditures price index.

Thursday's figures came just a day after the government released consumer price data for April, which showed that inflation leapt 8.3% last month from a year ago. That increase is down slightly from the four-decade high in March of 8.5%. On a monthly basis, inflation rose 0.3% in April from March, the smallest increase in eight months.

Still, there were plenty of signs in the consumer price report that inflation will remain stubbornly high, likely for the rest of this year and into 2023. Rents rose faster as many apartment buildings have lifted monthly payments for new tenants. Prices for airline tickets jumped by the most on records dating to 1963. And food prices continued to rise sharply.

Sources: AP and NewsMax

Wednesday, May 11, 2022

Inflation slows slightly, mortgage applications up

Inflation slowed in April after seven months of relentless gains, a tentative sign that price increases may be peaking while still imposing a financial strain on American households.

Though it wasn't much, markets responded positively.

The Consumer Price Index (CPI) rose 0.3% month-over-month (m/m) in April, above the Bloomberg consensus estimate calling for a 0.2% gain, and compared to March's unrevised 1.2% increase. The core rate, which strips out food and energy, increased 0.6% m/m, topping forecasts of a 0.4% rise and compared to March's unadjusted 0.3% increase. 

Compared to last year, prices were 8.3% higher for the headline rate, above estimates of an 8.1% increase but a deceleration from the prior month's unrevised 8.5% rise. The core rate was up 6.2% y/y, north of projections of a 6.0% gain, and down from March's unrevised 6.5% rise.  

Nationally, the price of a gallon of regular gas has reached a record $4.40, according to AAA, though that figure isn’t adjusted for inflation. The high price of oil is the main factor. A barrel of U.S. benchmark crude sold for around $104 early Wednesday morning. Gas had fallen to about $4.10 a gallon in April, after reaching $4.32 in March.

Beyond the financial strain for households, inflation is posing a serious political problem for President Joe Biden and congressional Democrats in the midterm election season, with Republicans arguing that Biden’s $1.9 trillion financial support package last March overheated the economy by flooding it with stimulus checks, enhanced unemployment aid and child tax credit payments.

In other news, the MBA Mortgage Application Index rose 2.0% last week, following the prior week's increase of 2.5%. The second-straight weekly increase came as a 2.0% drop in the Refinance Index was more than offset by 4.5% gain in the Purchase Index. The average 30-year mortgage rate resumed its jump, rising 17 basis points (bps) to 5.53%, up 242 bps versus a year ago.

Monday, May 9, 2022

ICYMI: Recent Headlines

Why Some Rate Quotes Are So Different And Why "Points" Are On The Rise
It was yet another tough week for the mortgage market with rates rising to their highest levels since 2009, but how high have they actually risen?


Energy up nearly 50% YTD as crude oil climbs to $110 per barrel
WTI crude futures (CL1:COM) jumped 4.9% for the week to $109.77/bbl, July Brent futures (CO1:COM) also added 4.9% to $112.39/bbl, and gasoline futures (UGA) in New York settled at a record high $3.76/gal, three weeks before the start of the U.S. summer driving season.

Losing the People? Then Change the Rules
Court-packing—the attempt to enlarge the size of the Supreme Court for short-term political purposes—used to be a dirty word in the history of American jurisprudence.

The Disinformation Governance Machine
Right out of 1984. Homeland Security Secretary Alejandro Mayorkas announced on April 27 the creation of the “Disinformation Governance Board.”

The Nation's Top Scientists Lied
Scott Atlas stated the simple fact that immunity is higher than those with antibodies, whereupon Dr. Fauci criticizes him without contradicting what was actually said. Stating a simple scientific fact is not ‘extraordinarily inappropriate.’ What is going on?

Fed’s interest rate history: A look at the fed funds rate from the 1980s to the present
Interest rates are on the rise, but they’re still historically cheap. That’s partially because the federal funds rate — a key borrowing benchmark set by the Federal Reserve — has remained below its historic average for the past 16 years. In fact, the Fed’s key rate spent nine of those years at the rock-bottom level of 0 percent, first from 2008 through 2015, and then from March 2020 to March 2022.

Biden Administration Sneaks Unlawful Immigration Benefits Into Ukraine Aid Request
President Joe Biden recently sent an emergency supplemental funding request to Congress for $33 billion in aid to Ukraine. However, the administration used the opportunity to sneak in unlawful immigration benefits for hundreds of thousands of Ukrainian, Afghan, and Russian immigrants—paid for by the American people and at the expense of lawful applicants who have been waiting years to properly immigrate to the U.S.

Wednesday, May 4, 2022

Is there a housing bubble?

Is there a housing bubble?

U.S. housing affordability fell last month to near the lowest level ever as home prices surge. Mortgage interest rates now exceed 5.2% – up from 3.6% two years ago. And the Fed is raising rates again – as it should – but this too will likely raise mortgage rates.

The average mortgage payment is now $1,800 a month. That’s 70% higher than the pre-Covid high. The only other time home payments were this high was in 2007 on the eve of the Great Financial Crisis.

As the chart below from Black Knight’s mortgage monitor shows, home prices are up 19.9% over this time a year ago. Yes, that’s very good news for homeowners as their home equity surges, but a killer for home buyers – especially first-time buyers.

Loan to income levels are also rising, which makes defaults more likely.

Is any of this sounding familiar? All of this has been artificially inflated by years of artificially low rates, Fed policies of purchasing hundreds of billions of dollars of mortgage-backed securities, and Congress passing out hundreds of billions for taxpayer funded rental assistance. 

It’s all helium pumped into a balloon that could soon pop.


Sunday, May 1, 2022

The GDP contraction was due to inflation

We should note that the entire explanation for the lousy GDP number was the 8.5% inflation rate. As the chart below shows, if we still had 2% inflation we had just recently, the economy would have grown in real terms at a brisk pace. But with the current inflation, the economy has to expand by more than 8.5% just to stay even. 

While some also noted (or bragged about it) that consumer spending stayed strong in Q1, that was also due to inflation. Consumers just spent more money because everything cost more.



Inflation Reduction Act: Will Never Reduce Inflation

Joe Biden signed into law the horrific Inflation Acceleration Act – which, as you know, increases government taxes and spending by roughly A...