The war in the middle east continues with protests breaking out in many US college campuses, we finally have a fully functioning House of Representatives, SBF was quickly convicted of a $10 billion fraud, the Fed left rates flat and the Texas Rangers broke one of the longest droughts in sports to win the World Series. This is your week in news.
The Fed agreed to hold the Federal Funds Rate at its current target (5.25%-5.5%) for the second consecutive month. Fed Chair Jerome Powell also indicated that "the process of getting inflation sustainably down to 2% has a long way to go". He also indicated that the FOMC is not considering or even discussing rate reductions at this time.
Two key themes to watch over the next six months. First, the US is running a staggering budget deficit. The net interest cost to fund this debt is growing at an alarming rate. In 2022, the United States net interest costs were $476 billion. This is expected to rise to approximately $700 billion for 2023 which will make debt service a larger budget item than Medicaid. This is clearly unsustainable.
Second, in what could be a canary in the coal mine moment, Maersk, one of the largest shipping firms in the world, just announced another layoff which would amount to a total reduction of 10% of its workforce for 2023. It appears the post pandemic pent-up demand for goods has lost steam. While technology firms have led all industries in layoffs in 2023, our expectation is that this will pick up into the end of the year.
Lies, Damn Lies and Statistics
While the Biden Administration celebrated the adding 150,000 jobs in October, many economists were concerned in the uptick in unemployment in addition to the slowing pace of job growth. All may not be bad in this report as a slowing economy could lead to quicker interest rate cuts.
However, not everyone is sold on the jobs numbers being accurate. The widely reported jobs numbers is tabulated by the US Bureau of Labor Statistics. There are two data sets that are widely followed: a payroll survey (often referred to as establishment) and a household survey. From the bls.gov website:
"The payroll survey (CES) is designed to measure employment, hours, and earnings in the nonfarm sector, with industry and geographic detail. The survey is best known for providing a highly reliable gauge of monthly change in nonfarm payroll employment. A representative sample of businesses in the U.S. provides the data for the payroll survey.
The household survey (CPS) is designed to measure the labor force status of the civilian non-institutional population with demographic detail. The national unemployment rate is the best-known statistic produced from the household survey. The survey also provides a measure of employed people, one that includes agricultural workers and the self-employed. A representative sample of U.S. households provides the information for the household survey."
Some notable differences between two measures:
The household survey includes agricultural workers, self-employed workers whose businesses are unincorporated, unpaid family workers, and private household workers among the employed
The household survey includes people on unpaid leave among the employed.
The household survey is limited to workers 16 years of age and older.
The household survey has no duplication of individuals, because individuals are counted only once, even if they hold more than one job.
The establishment survey indicates the US has added 150k jobs in the last month. According to the household survey, the US lost 348k jobs in the same period, a difference of nearly 500k jobs. We will continue to monitor this in future months but something is amiss.
Stocks were up sharply this week as the questionable jobs data has led many to believe rates will come down in 2024 despite Fed Chair Powell's comments this week. The ten year yield also dropped nearly 30 basis points which was its largest weekly drop since the banking crisis in March.
As Republicans rally around conservative House Speaker Mike Johnson, many fear this will cause a grid lock in Washington. President Biden has been asking Congress for $100 billion to assist Ukraine and Israel in addition to fortifying our southern border with Mexico. On Thursday, the House approved an aid plan for Israel for $14.5 billion with no additional funding for Ukraine. While there were defections from both sides on the bill, the bill also requires cuts at the IRS. As House Republicans seemed unified in cutting spending or putting through balanced spending bills, it seems dead on arrival in the Senate as Majority Leader Schumer called the bill a "joke".
The extreme differences in how to run the US government is expected to continue until the 2024 election which is not good for the Opportunity Zones Transparency, Extension, and Improvement Act which seems destined to be delayed until 2025.
While the OZTEI Act remains in limbo, some interesting data has started to emerge from the OZ program. Since inception, 3800 communities have received investment from the program. It took the New Markets Tax Credit over 18 years to reach that level. While the data is somewhat old, 48% of OZ tracts received investment as of the end of 2020. We would expect that number to be much higher after 2023.
The US government announced a partnership with SAFE to shore up critical mineral supply chains. Blackrock recently issued a warning for the lack of investment in mining companies. Mines with heavy dead loads have not always panned out which has cooled many to the sector. Blackrock indicated that the need for these minerals "is poised to surpass all prior estimates".
Cobalt is in the news as a massive mine in the Democratic Republic of the Congo is up for auction with strong Chinese interest. Cobalt is another essential component of electric vehicles. While China is not a large producer of cobalt (DRC produces over 60% of the worlds cobalt) it is seeking to buy as much of the worlds production as possible. This would dovetail with their strategy to curb exports on critical minerals where they are the dominant player (gallium, germanium and graphite).
While the EV business continues to grow globally, the wind power business is in trouble. The plan to build two wind farms off the coast of New Jersey was scrapped this week as the company cannot produce affordable power without additional government subsidies.
The Christmas Rush is On
Despite being over seven weeks away, the Rockefeller Christmas tree has been selected from Vestal, NY and will arrive on Saturday November 11th. Be ready to be inundated with Christmas ads for the next 50 days....