All Things in Moderation

Vital Statistics:

Stocks are up as we await Jerome Powell’s testimony in front of Congress. Bonds and MBS are down.

Fed Chairman Jerome Powell heads to the Hill today for testimony about the economy. Here are his prepared remarks. He discusses the uptick in inflation and why it is temporary:

Inflation has increased notably in recent months. This reflects, in part, the very low readings from early in the pandemic falling out of the calculation; the pass-through of past increases in oil prices to consumer energy prices; the rebound in spending as the economy continues to reopen; and the exacerbating factor of supply bottlenecks, which have limited how quickly production in some sectors can respond in the near term. As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal.

He sees the labor market recovery as “uneven,” as the labor force participation rate remains low.

As with overall economic activity, conditions in the labor market have continued to improve, although the pace has been uneven. The unemployment rate remained elevated in May at 5.8 percent, and this figure understates the shortfall in employment, particularly as participation in the labor market has not moved up from the low rates that have prevailed for most of the past year. Job gains should pick up in coming months as vaccinations rise, easing some of the pandemic-related factors currently weighing them down.

The big question regarding inflation will revolve around wage growth. The latest JOLTS job openings report showed a marked uptick in the quits rate, which generally precedes wage growth. Presumably people are quitting their jobs to take ones that pay better.

I think the punch line for the economy is that visibility is super-low right now. We have elevated unemployment along with record job openings. We also have a global sovereign debt bubble at the same time that governments have a voracious appetite for spending. It remains an open question how long investors will purchase government debt at negative inflation-adjusted interest rates. Global central banks may have painted themselves into a corner with such broad-based asset support.

Cryptocurrencies are getting whacked as China cracks down on non-governmental stores of value. It wants to shut down all Bitcoin mining operations and has warned financial institutions against converting crypto to cash. I am not sure that governments can put the genie back into the bottle, though most will try, arguing that the only people who care about crypto are criminals, speculators, and conspiracy theorists. Perhaps, but we have seen a flood of new governmental money-printing combined with a sovereign debt bubble.

Blackstone looks to get back into the single-family rental business. After launching Invitation Homes in the aftermath of the real estate bubble, it floated Invitation and exited in 2019. With real estate prices soaring, it has inked a deal to buy Home Partners of America for $6 billion. HPA’s model is different than Invitation or American Homes 4 Rent as Blackstone explains: “The fundamental premise of the HPA platform is to provide residents with the opportunity to live in their chosen home with the option to purchase it—we intend to build on that goal and expand access to homes across the U.S. We look forward to working with HPA’s leadership team to further invest in the properties and continue its role as a valuable resource for people considering home purchases.”

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