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A Nutty Caper

The markets went sideways this week as investors couldn’t decide whether to be concerned about the prospects for an extended period of high inflation or happy about the Fed’s never-ending 24/7 money printing operation.  It’s telling when the bond market is going one way and the stock market the other.  Perhaps this is setting up for a correction when the Fed eventually does change its policy, but until then it feels like damn the torpedoes, full steam ahead.

Early earnings announcements have begun, and for the most part they are as good as expected.  The banks are among the earliest to release earnings and while they almost all beat expectations, they all are experiencing a drop in net interest income which is the difference between the revenue generated from a bank’s interest-bearing assets and the expenses associated with paying on its interest-bearing liabilities.  In a nutshell, banks are being squeezed in this low interest rate environment.  However, before you think SELL, just know that banks do well in a rising interest rate environment and have broadly outperformed the S&P 500 index this year by over 6%.  I know it’s hard to feel sorry for banks after the years of malfeasance leading up to the financial crisis in 2008, but it really is difficult being a bank these days.

As for inflation, the Federal Reserve admitted this week that it is uncomfortably high (inflation that is, not the Fed).  Jerome Powell, in testimony to the House Financial Committee, under pressure finally admitted that 5.4% is more than the “modestly above 2%” average it had been expecting.  However, all is not lost.  Lumber prices, which had been up 70% year-over-year, have come back down and are right about where they were at the start of the year.  This might suggest homebuilders could begin building new homes again and home prices have peaked.  However, this doesn’t help with the continued issues regarding employment, or more specifically, the lack of employees looking for work.  Rising wage pressures, which continue to put small businesses between a rock and a hard place, show no sign of abating.  Just this week we learned McDonald’s franchises have added tuition, emergency childcare, and paid time off to its list of benefits to win back workers.

However, despite the Federal Reserve’s unease with current developments, it continues to stand by its position that the recent spike in inflation is transitory.  Aside from lumber prices coming back down, one of the biggest factors in the recent inflation spike is used cars.  As chip shortages have slowed production of new cars, consumers have flocked to the used car market which saw price increases of 10.5% in June alone, putting them not much behind new car prices.  The chip shortage will likely take longer to resolve as new production facilities take time to build, but this too does seem transitory, at least in theory.  And as consumers spend down their savings and stimulus checks, we might anticipate demand to slow.  On the other hand, many with children began receiving yet more stimulus this week in the form of a $250 per month advance payment on the expanded child tax credit.  One thing is certain.  There is an awful lot of money sloshing around looking to be spent and, in some cases, saved or invested.

In other testimony, Jerome Powell announced the Fed is considering creating a central bank digital currency, which would in theory replace the paper money we carry around in our wallets.  Aside from the cost savings, it would allow for the faster transfer of assets between institutions and individuals.  He said the Fed plans on publishing a report in September, in a move he characterized as “accelerating” the decision-making process for that endeavor.  As both China and Europe move forward with their own centralized digital currencies, it seems unavoidable the U.S. would follow suit.  It does raise real concerns over privacy, theft, and security, but the march of time seems to make these innovations inevitable.

In closing, I turn to another strange story of theft.  In 2012, I reported on a story out of Quebec which has since come to be known as the Great Canadian Maple Syrup Heist during which 3,300 tons of maple syrup were stolen.  Last month, I came across another theft but of pistachios this time!  More than 42,000 pounds of pistachios, with a street value of almost $300,000, simply vanished.  Between 2014 and 2017, more than $7.6 million worth of nuts was stolen.  With no serial number and little in the way of documentation, it makes these types of thefts hard to trace.  And due to inflation, it may become even more lucrative in the months ahead.  Be on the lookout for black market pistachios and if you find a dealer please don't tell me.  I'm a sucker when it comes to pistachios.  Now you know.

Bruce J. Mason, MBA