Special Feature on Wages and Inflation: “The Lookout” from Catalyst
Joe Tigay of Equity Armor Investments provides a broad market overview on inflation, the job market, and more in this extended edition of The Lookout. Simon Lack and his team at SL Advisors outlines their perspective on the transition to a green economy.
Also worth noting, Hunter Frey of Catalyst and Rational recently released a Chart of the Week focused on sector-by-sector asset class performance and where opportunities could appear. Click here to read the Chart of the Week.
Major Market Events:
Wednesday, June 8: USD Crude Oil Inventories
Thursday, June 9: ECB Monetary Policy Statement, ECB Interest Rate Decision, USD Initial Jobless Claim
Friday. June 10: US Core CPI
Joe Tigay, Equity Armor Investments, Portfolio Manager of a volatility-hedged equity fund
Economic Data continues to be mixed, but there are some data points everyone agrees upon:
1) Inflation is high
2) Unemployment is low
3) Job openings are high
The unemployment rate is historically low and job openings are at record highs. The supply of labor is low and the demand of labor is high. Now it shouldn’t take an economist to tell us that this will lead to higher wages. And we know the number one macroeconomic data point that everyone is talking about is inflation.
The good news on inflation is that some of the pandemic-driven inflation is bleeding off. Inventories have gone from a shortage to a surplus and housing prices are cooling. These factors have have led “team transitory” to declare victory and note that the Fed should lay off rate hikes. I don’t want to say they are wrong, but in my view, they cannot declare victory given the current labor market.
The upward pressure on wages will eventually cause companies to raise prices to compensate for the rising costs. When that happens, and the supply and demand of labor still favors workers, people will turn around and ask for another raise to pay for the cost of living or find a new job.
In my view, there is no soft landing unless the supply and demand of jobs works itself out. Either workers rejoin the workforce to put downward pressure on wages, or there is an economic slowdown which causes job losses. Short of that, wage growth will continue and is likely to accelerate until there is a slowdown in hiring and job losses begin.
The alternative result is inflation that is sticky at best and runaway at worst. There are some calling for the Fed to lay off, and they might win because it’s always easier for them to kick the can down the road, especially when politics are involved. In my humble opinion, the best solution is to rip the band off and nip inflation in the bud.
Stock selection will remain critical in this environment. It remains critical to maintain portfolio diversification among assets, volatility protection key among them.
Simon Lack and the team at SL Advisors, Portfolio Manager of an energy infrastructure fund on the week ahead and green climate plans
- Saudi Arabia raised its official selling price to Asia for July signaling it sees strong reopening demand.
- Getting to zero emissions by 2050, the goal set by the UN in order to limit global warming to 1.5° C above pre-industrial times, is technically well within reach. However we don’t see this happening just with intermittent solar panels and windmills – extracting all the minerals necessary for their manufacture plus the enormous battery back-up makes this implausible. Kinder Morgan’s enhanced oil recovery process pumps CO2 into mature oil wells to push out additional crude. This is Carbon Capture, Use and Sequestration (CCUS). The CO2 emitted by power plants, cement and steel factories and other industrial users can also be captured for permanent burial without being used (CCS).
- JPMorgan estimates that to sequester 15-20% of US CO2 emissions via CCS would require moving 1.2 billion cubic meters of CO2 – more volume than U.S. crude oil production. This would require significant new infrastructure.
- JPMorgan estimated a range of costs for DAC (Direct Air Capture) of between $191 and $454 per MT. At some scale the price could be at the low end of the range but could also exhaust availability of critical inputs, increasing costs.