Wall Street Breakfast

Author: bmotrader   |   Latest post: Wed, 23 Jun 2021, 10:49 AM


Wall Street Breakfast: The Inflation Debate

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A higher-than-expected inflation print in the U.S. yesterday showed prices soaring by 5% in May compared with a year ago, marking the biggest increase since the Great Recession. While it was somewhat distorted by the pandemic, dueling narratives are taking shape to what this will mean for the economy going forward. The Consumer Price Index also showed a gain of 4.2% back in April, calling into question current fiscal policies and the direction of interest rates.

The bulls: The Fed is sticking to its "transitory" inflation thesis, which maintains that supply shocks and production bottlenecks have led to recent price pressures. Many are also quick to point out that the recent inflation print was once again driven by a jump in the cost of used cars and trucks, which accounted for about a third of the CPI's monthly advance. Meanwhile, the Biden administration argues that rising inflation is not only temporary, but it is also a feature of a rebounding economy. A broad vaccine rollout and lower COVID-19 case counts have seen Americans return to their old habits by spending months of pent-up savings.

The bears: Many Republicans and some economists acknowledge the post-pandemic supply problems and surging demand, but also flag the cost of the $1.9T stimulus package President Biden signed in March. They further point to coming proposals from the White House, like spending $4T on infrastructure, as a possible risk that could trigger a full-blown recession. While a large share of May's CPI came from the auto market, prices are jumping for many other categories like furniture, airfare and apparel, while labor costs, transport and raw materials are also skyrocketing.

Outlook: Will inflation be here for the long haul? It could take months before it's clear whether the current upsurge is temporary. As the economy reopens, both sides predict that rising costs will continue until supply chains and consumer demand recalibrate, but the real question is how prices will fare after that against a backdrop of massive fiscal and monetary policy support.

Stocks - Shrugging it off

Something interesting happened in the stock market on Thursday. Shortly after the release of the Consumer Price Index, which showed sizzling inflation figures for May, the major averages opened higher, with the S&P 500 even setting a new record at the close. In another surprise, Nasdaq had a better day than its cyclical peers as the growth trade outperformed value. Dusting off the old textbooks, rising inflation should weigh on corporate profits, reduce purchasing power and trigger fears of higher interest rates, but that's not being felt this time around.

What happened? Some investors may be following the "transient" camp, especially interest rate watchers that are listening to every word of Jay Powell. There is also a lot of buying power still out there and many traders are looking to ride the momentum. For others, new dynamics may be playing out in equities. Some fearful of government spending and a weaker dollar see risks in converting to cash. That could result in some sort of unconventional hedge in the stock market, especially in one that increasingly appears disconnected from the fundamentals (similar sentiment that's boosted crypto?).

"The technical setup for the broader market remains constructive," said Craig Johnson, technical market strategist at Piper Sandler. "Momentum indicators have improved and the majority of SPX stocks remain above their 200-day MAs and in MACE defined uptrends. We reiterate our year-end SPX price objective of 4,625." Overnight, stock index futures inched up slightly and continue to point green ahead of the open.

From the SA comments section: "Not a surprise. Markets rarely sell off on the same news, especially when the news is well anticipated," points out Charles Agbakwu. "Cash is trash. Park it in something that goes up," writes nothing_lasts. "The stock market is indestructible," adds Investing4FIRE, while calvinfroedge asks "Does anyone still think we have free markets?"

Vertical Aerospace

Autonomous vehicles, supersonic aircraft, point-to-point space voyages... There are many trends in store for the future of travel and companies are sinking big bucks into many of the emerging industries. American Airlines (AAL) is the latest to join the revolution, investing $25M in Vertical Aerospace Group, a U.K.-based electric aircraft startup. The world's largest carrier by traffic also said it would purchase as many as 250 of Vertical's planned flying taxis, pending approval by regulators and other milestones.

Details: Called the VA-X4, the electric vertical takeoff and landing (eVTOL) aircraft can carry four passengers and a pilot. It's also capable of flying at speeds up to 200 mph, with a range of more than 100 miles. The first test flight is planned to be conducted later this year, with certification of the zero-emissions aircraft as early as 2024.

There's bigger news: Vertical Aerospace is combining with SPAC Broadstone Acquisition (BSN) in a transaction that's expected to close in the second half of 2021. It values the combined company at a pro forma equity value of $2.2B and would result in gross proceeds of $394M. Vertical will be listed on the NYSE under the ticker "EVTL", and has also received investments from Avolon, Honeywell (HON) and Rolls-Royce (OTCPK:RYCEY).

Elsewhere in the industry: Vertical Aerospace joins several other flying taxi companies that have announced SPAC deals this year, including Joby Aviation, which is going public through a deal with SPAC Reinvent Technology Partners (RTP), and Archer Aviation, which is hitting the markets via SPAC Atlas Crest Investment Corp. (ACIC).

Trending - Unemployment fraud

A new report from Axios suggests that unemployment fraud rose heavily during the pandemic, with criminals stealing as much as half of the benefits being doled out over the past year. Blake Hall, CEO of fraud-prevention service ID.me, said the U.S. lost $400B to fraudulent claims and as much as 50% of the total claims might have been stolen. At least 70% of pocketed money also left America, with a large chunk ending up with groups in China, Russia, and Nigeria, according to LexisNexis Risk Solutions' Haywood Talcove.

The criminal plot: Data logs were stolen by crooks, or individuals would be fooled into sending their personal information to scammers. Oftentimes, "mules" (a.k.a. low-level criminals) armed with debit cards would withdraw the illicit funds from ATMs. The money was then sent abroad, most commonly via Bitcoin.

"Widespread fraud at the state level in pandemic unemployment insurance during the previous Administration is one of the most serious challenges we inherited," said White House economist Gene Sperling. "President Biden has been clear that this type of activity from criminal syndicates is despicable and unacceptable. It is why we passed $2B for UI modernizations in the American Rescue Plan, instituted a Department of Justice Anti-Fraud Task Force and an all-of-government Identity Theft and Public Benefits Initiative."

Go deeper: States weren't prepared for the tsunami of unemployment claims when the pandemic hit in March 2020. While fraud was likely, many chose to keep the money flowing for those that desperately needed it, rather than spending precious time on checking the veracity of the applications. On May 28, the Office of the Inspector General even found that $39B in unemployment money from the 2020 CARES Act had been misused, partly due to fraud and improper payments. President Biden also said last week that while the temporary boost in unemployment benefits had been effective thus, "it makes sense" for them to expire in September.

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