Powell soothes the market … inflation stays high … one step closer to another $3.5 trillion in spending … another cybersecurity breach … China eyes $1 trillion of rare earth metals
There’s lots in the news impacting the investment markets. So, today, let’s cover a handful of stories that are influencing your money.
***Stocks ended at all-time highs last Friday as Wall Street cheered what it heard from Federal Reserve Chairman, Jay Powell
Speaking at the Jackson Hole central bankers’ symposium, Powell said he supported scaling back the central bank’s bond purchases this year. However, he did not signal specific timing.
More importantly to the markets, Powell said he still sees interest rate hikes well off in the distance.
From Powell:
The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.
This was an important de-coupling. Many on Wall Street have been nervous that once the bond tapering was completed, an interest rate hike would be soon thereafter – which has the potential to roil markets.
Powell’s statement assures investors that “next” doesn’t mean “soon.”
He added that, though inflation is well above the Fed’s 2% target rate, “we have much ground to cover to reach maximum employment.” You’ll recall that this is the second part of the Fed’s dual mandate, which is necessary before we see a rate hike.
The bottom-line here is that Powell gave investors the bullish comments they wanted. It’s a green light for more market gains.
***On the inflation note, last Friday saw a multi-decade high in the PCE price index
On Friday, the headline PCE Index (personal consumption expenditures) rose again, both on a monthly and year-over-year basis.
From MarketWatch:
The so-called PCE price index, or personal-consumption expenditures, the Fed’s preferred measure of inflation, climbed 0.4% in July, government figures show.
It was the fifth big increase in a row and the 12-month increase in PCE to 4.2% from 4%, was the highest since 1991.
However, the core rate, excluding food and energy prices, over the past 12 months was unchanged at 3.6%, keeping it at a 30-year high.
June’s month-to-month figure was 0.5%. Since July’s number was 0.4%, certain news outlets are declaring this a victory for the “inflation is transitory” camp.
Here’s one such headline:
Inflation is cooling off just as economists, the Fed, and Biden expected
Keep in mind, month-over-month inflation still rose – just 0.1% less than the rate of the gain one month before.
We’ll hold off on the applause until we see successive months of retreating, not just slowing, inflation.
Supply-chain bottlenecks will ease “transitory” inflation, but the trillions of dollars of newly-printed money from the government remains a major, long-term threat to the U.S. dollar.
Yet, inflation can drive the price of assets like stocks, real estate, and cryptocurrencies significantly higher. We expect that to happen as more money floods the economy.
And on that note, we’re one step closer to another flood to the tune of about $3.5 trillion …
***Last week, House Democrats passed a $3.5T budget resolution and moved forward a $1T bipartisan infrastructure bill
From CNBC:
In a 220-212 party-line vote, the chamber passed a $3.5 trillion budget resolution and advanced a $1 trillion bipartisan infrastructure bill.
The vote allows Democrats to write and approve a massive spending package without Republicans and puts the Senate-passed infrastructure plan on a path to final passage in the House.
The holdup had been nine centrist Democrats who pushed the House to consider the $1 trillion bipartisan infrastructure bill before it took up the budget resolution.
To appease these holdouts, this $3.5 trillion plan includes a nonbinding commitment to vote on the infrastructure bill by Sept. 27.
So, what are a few things in this $3.5 trillion package?
Universal Pre-K program for 3- and 4-year-olds – the federal government would invest $200 billion in universal preschool for all 3- and 4-year-olds through a national partnership with states.
Enhanced childcare for working families – low- and middle-income households would pay no more than 7% of their income on child care for kids younger than age 5.
Free community college for two years – the federal government would cover about 75% of the average tuition cost in each state when the program is fully implemented, with states picking up the rest.
An increase in the Pell Grant award and more investments in historically Black colleges and universities – it would provide up to approximately $1,400 in additional assistance to low-income students by increasing the Pell Grant award.
There’s also an extension of the child tax credit… adding dental, vision, and hearing benefits to Medicare… extending enhanced Affordable Care Act subsidies… and much, much more.
The merits or drawbacks of these specific plans aside, the sheer volume of this much spending is astronomical. Plus, much of this will come as a direct cash infusion into the economy.
And what happens when vastly more dollars are suddenly chasing after the same quantity of goods and services?
Prices rise.
Our long-term outlook for the dollar remains bearish. But as we’ve noted before, a bear market in the dollar means a bull market in assets price in those dollars.
***Shifting gears, last week President Biden hosted executives from major technology, financial and energy companies
Joining Biden were Apple’s Tim Cook, Amazon’s Andy Jassy, Microsoft’s Satya Nadella, Alphabet’s Sundar Pichai, JPMorgan’s Jamie Dimon, and Bank of America’s Brian Moynihan, among others.
The focus was cybersecurity, what Biden called “the core national security challenge we are facing.”
From the Wall Street Journal:
Wednesday’s summit was the first high-profile meeting Mr. Biden has had as president with the private sector to discuss cybersecurity.
Senior White House officials have said for months that the problem is one of shared responsibility between government and industries—particularly those responsible for operating the nation’s critical infrastructure—and have recently suggested the administration could look to pursue mandates if voluntary security standards aren’t widely adopted…
Microsoft pledged to invest $20 billion over the next five years to bake security into the basic design of products, a fourfold increase over its previous commitment, and said it would make available $150 million in technical services to help federal, state and local governments modernize technology.
Ironically, within hours of the summit, Microsoft reported a hack that could have allowed intruders “unrestricted access” to databases of many Fortune 500 companies.
From
Reuters:
Microsoft on Thursday warned thousands of its cloud computing customers, including some of the world’s largest companies, that intruders could have the ability to read, change or even delete their main databases, according to a copy of the email and a cyber security researcher.
As we’ve highlighted here in the Digest, the cybersecurity industry is one of the biggest no-brainer investments of the decade. If your portfolio doesn’t have exposure to this sector, it deserves your attention right now.
***Finally, keep your eyes on what happens with Afghanistan, China, and about $1 trillion of rare earth metals
The U.S. economy is dangerously reliant on China in a number of areas, but perhaps none more so than rare earth metals, which are critical in many manufacturing and defense sectors.
For readers less familiar, rare earth metals (or elements) are a group of 17 metals that form under the earth’s surface. They can be difficult to find and extract.
These metals contain unique magnetic, heat-resistant, and phosphorescent properties that make them critical for tech-products such as smart phones, digital cameras, computers, LED lights, and flat screen TVs, among others. They’re also critical in our defense industry.
It turns out that Afghanistan is sitting on rare earth deposits estimated to be worth $1 trillion…and China has its eyes on it.
From Bloomberg:
“With the U.S. withdrawal, Beijing can offer what Kabul needs most: political impartiality and economic investment,” Zhou Bo, who was a senior colonel in the People’s Liberation Army from 2003 to 2020, wrote in an op-ed in the New York Times over the weekend.
“Afghanistan in turn has what China most prizes: opportunities in infrastructure and industry building — areas in which China’s capabilities are arguably unmatched — and access to $1 trillion in untapped mineral deposits.”
One way to play this demand for rare earths that we’ve profiled here in the Digest is the VanEck Vectors Rare Earth/Strategic Metals ETF (REMX).
Below, you can see it soaring over the last 12 months, up 182%. That’s 6X the S&P’s return.
Given how our cutting-edge technologies rely on rare earth metals, we don’t see demand dropping in the future. Couple that with China’s interest in monopolizing this new $1 trillion in deposits, and this will be a critical story to watch.
We’ll keep you updated here in the Digest.
Have a good evening,
Jeff Remsburg
