Nobody knows what’s up with prices and jobs

Plus Musk screws crypto, Israel risks downgrade, Palantir reports

Thank you for reading another edition of Contention! This week we have about seven minutes of hedonically unadjusted dissident business news. Our stories:

  1. Markets flip on inflation fears

  2. Housing crisis an unseen job market risk

  3. Rapid Round: Musk tanks BTC, resistance rocks Israel’s economy, Palantir gets new work

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Markets flip on inflation fears

Even a Friday rally couldn’t bring equity markets up from a week-long tumble -- the Dow lost 1.1%, the S&P 500 1.4% and the Nasdaq fell 2.3%. It was the fourth straight week of declines for the tech-heavy benchmark.

Inflation fears dragged stocks down -- finally undeniable to almost everybody. Investors may want to get used to it: nobody really knows what is going on right now. 

The most significant indicator moving markets on the week: the U.S. consumer price index (CPI) blew expectations out of the water, gaining 0.8% in April when economists only expected 0.2%. This was the second straight month that CPI set a post-Great Recession record. Year-over-year prices jumped 4.2%, a big step up from March’s 2.6% which was already bad enough. 

For once, the stats couldn’t hide all of the damage. “Core” CPI is supposed to limit volatility by stripping out fuel and food costs -- conveniently obscuring the real cost of living for working people -- but it was higher than CPI overall: 0.9% for the month and 3% year-over-year, the biggest monthly gain since 1981. On a three-month, annualized basis official inflation now stands at about 7% -- far above the Federal Reserve’s “stability” guideline of 2%. 

As for those rigged calculations, they showed up in the numbers too. Housing costs account for a quarter of the CPI, but the Labor Department calculates the prices with “Owner-Equivalent Rent” (OER), a measure of how much owner-occupied houses would rent for if they were on the market. How do they determine that price? They do a survey of homeowners asking them how much they think their house would rent for, hypothetically. 

Not surprisingly, OER is a meaningless figure -- April’s CPI showed a 2% year-over-year increase in housing costs, while the National Association of Realtors reported a 16.2% increase in home prices. Inflation is far worse than even the worst stats in a generation would suggest.

Consumers are responding accordingly. April retail sales also came in with a wrong-way surprise last week, unchanged over March’s historic 10.7% increase. Economists expected about a 1% gain as more families get their stimulus checks, but instead “core” sales -- excluding gas, autos, building materials, and food services -- fell 1.5% for the month. Rising prices constrain the “pent-up” demand that is supposed to keep the recovery humming. 

Enter the Federal Reserve to assure everybody that there’s nothing to see here. Last week saw a wave of “Fed speak” and Fed leaders nearly unanimously downplayed the present pricing havoc. 

The only problem with this certainty: it has zero basis in reality. The current global monetary order dates to 1971 with two basic regimes for dollar prices: a decade of high inflation as uncertainty about the new system fed price volatility, followed by 40 years of low inflation held down by globalization. 

Nobody has ever game-planned slamming the brakes on the world economy, launching central bank market interventions at scales never even considered before, abandoning four decades of austere fiscal policy in rich countries to prop up consumer markets with enormous deficits, and then trying to restart everything 15 months later down 3.4 million people. Prices are the signals businesses send to one another about where capitalists need to invest resources to recreate and iterate a market economy -- of course a radical reallocation of resources like we’ve seen over the last year has unleashed pricing chaos. 

Meanwhile, the high priests of the system claim to know something we don’t -- the source of all their power. The question is whether they’re just trying to fool us or if they’ve convinced themselves too. 

Housing crisis an unseen job market risk

Jobless claims hit yet another pandemic low last week, dipping down to 473,000. The weekly indicator has finally dropped below the level in mid-March 2020 when shutdowns began. The decline also beat expectations for 490,000 claims. 

But the bigger story: bizarre contradictions in labor statistics suggest that business might have pushed workers into a position of desperation that the market just can’t accommodate.

Last week saw a new reported record for job openings: 8.1 million. It is the first time the number ever breached 8 million, and while the dataset is a delayed one -- measuring conditions in March -- more recent figures from Indeed.com confirm the trend: the site’s listings were up 24% from February 2020, before the pandemic struck. 

Other indicators signalled an historically tight labor market:

But official unemployment is not low right now -- in fact, it is increasing, with 9.8 million people out of work, significantly more than the number of openings. How is this possible?

The respective sides of U.S. politics have taken up predictable explanations. Conservatives blame too-generous unemployment benefits, with 16 Republican-led states (and counting) cutting off enhanced payments. Liberals blame disease fears and a lack of childcare. 

All of these factors may play into the situation, especially the disease fears. The occupations most likely to have died from COVID-19 were in the food, transportation/logistics, facilities, and manufacturing industries -- exactly the areas most in need of labor right now. Cooks and bakers were two of the top three most common jobs for COVID-19 victims; packaging machine operators and construction laborers were also in the top five. 

Forcing people back to work prematurely shrank the labor pool for these industries by killing off thousands of workers. 

One other factor nobody seems to be taking into account: a huge number of American families are not sure where they are going to be living in the next few months. More than 2 million homeowners remain in forbearance with their lenders, with more than 47% of these would-be delinquent loans past the 12-month mark

A majority of the plans expire in May or June, just as the moratorium on foreclosures of federally-backed mortgages ends. The situation is even worse for renters. In March, the Consumer Finance Protection Bureau estimated that 11 million Americans are behind on their rent. At least 2 million of those leases are three months delinquent or more, behind by an average of $5,000 to $6,000

There is a moratorium on evicting these families too, but it also expires at the end of June. A federal judge struck the policy down earlier this month, but issued a stay while the decision is under appeal. The two stimulus bills passed this year contain a combined $46 billion in renter assistance, but little to none of it has been distributed. MIllions of families face forced relocation in the next several months.

These workers are the traditional slack in the workforce that keeps labor supply flowing and wages under control, but it is hard for them to commit to a new job if they have no idea where they will be living in 60 days. As of right now there is no plan for retiring hundreds of billions of dollars in housing arrears while keeping families in their homes. As long as that uncertainty persists, so will the unusual sclerosis in the labor market. 

The most likely outcome: bosses convince the politicians to let the landlords force millions of people out of their homes just as they lose their last bit of income, even as food, housing, and transportation prices soar. The experts seem to think this will work out, and for their communities maybe it will. 

Rapid Round

Musk tanks bitcoin, criminals advance adoption

Tesla suspended car sales using bitcoin last week, citing environmental costs of energy-intensive cryptocurrency mining, less than three months after first accepting the digital currency. Tesla CEO Elon Musk said the company wouldn’t sell any of its extensive bitcoin holdings, but then cryptically implied on Sunday that he could -- or did. Bitcoin prices fell sharply below $45,000 on the news.

Stablecoin issuer Tether Limited -- whose cryptocurrency accounts for a majority of bitcoin transactions -- also revealed a breakdown of its reserves for the first time last week. The company used to claim every Tether token issued would always be backed one-to-one with real U.S. dollars. Last week’s report showed that only 2.9% of Tether’s cash reserves are in cash, the rest is a combination of anonymous commercial paper, fiduciary deposits, secured loans, and corporate bonds.

It’s clearly a wildcat bank,” University of California computer scientist Nicholas Weaver said.

The other big bitcoin adoption event of the week: Colonial Pipeline. The pipeline operator paid a 75 bitcoin ransom, or around $5 million, to the DarkSide hacker group, which infected the company’s business systems with ransomware, slashing 45% of the U.S. East Coast’s fuel supplies. The incident may serve as a proof of concept for other bitcoin advocates/extortion gangs. 

Palestinian resistance puts Israel’s credit at risk

Fitch Ratings, one of the world’s Big Three credit ratings agencies, warned of “significant economic repercussions” for the Israeli government from its current military conflict with Palestinian forces in Gaza. The latest round of struggle began earlier this month with forced evictions of Palestinian families in East Jerusalem and police storming the Al Aqsa mosque on May 7. 

Fitch’s warnings influence the interest rates paid by Israeli corporations and the government, potentially raising borrowing costs if uncertainty continues.

The Palestinian resistance has fired around 3,000 rockets from the Gaza Strip in large volleys -- too many for Israel’s flawed Iron Dome anti-rocket weapon to shoot down. The system was designed by two Israeli weapons firms, with its missiles manufactured by U.S. arms giant Raytheon. The shift in tactics has forced Israel to shut down some of its airports including the international Ben Gurion Airport just as Tel Aviv was beginning to reopen the country to vaccinated tourists.

The Israeli army has killed at least 145 Palestinians, including 41 children, in bombing attacks since last Monday. The Boycott, Divestment and Sanctions (BDS) movement has called for consumers to vote with their wallets and boycott Israeli companies and multinational firms complicit in human rights abuses.

Palantir beats on revenue, lands more war business

Software and analytics firm Palantir reported 49% revenue growth in the first quarter, bringing in $341 million vs. $332.2 million expected. The beat follows more deals for the CIA-funded company including with the National Nuclear Security Administration, responsible for handling the United States’ nuclear weapons stockpile.

The British Royal Navy also reupped a contract this month with Palantir for its Foundry data integration software to handle supply chain management. Other companies Palantir made deals with or invested in during the first quarter include Pentagon-linked Sarcos Robotics, flying-taxi startup Lilium, and Pacific Gas and Electric.

Cathie Wood-led ARK Invest also loaded up on more Palantir stock last week even while taking a massive hit given rotation away from so-called growth stocks concentrated in tech. George Soros, on the other hand, liquidated his Palantir shares in the last quarter. Soros Fund Management sold 18.5 million shares valued at $435 million.

Disclaimer 

Our only investment advice: Long J. Cole

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