"As I often remind our analysts, 100% of the information you have about a company represents the past, and 100% of the value depends on the future." - Bill Miller
h/t @Neckar Value
After a week of Evergrande News - great thread by @Barton_options on Twitter, - continued negotiations over the debt ceiling and associated spending packages, and the Fed's latest policy statement, it is appropriate to reflect on the state of monetary policy.
On Wednesday, the Fed stated that "a moderation in the pace of asset purchases may soon be warranted."
Without the necessity of a "super strong" jobs report for September, markets are eyeing November for the start of tapering and mid-2022 as asset purchases' finish line.
Despite a hawkish tone in regards to the upcoming taper, Jay Powell made it clear that tapering and hiking rates are very distinct from each other. While half of the committee sees a liftoff in 2022, long term expectations for the terminal rate have remained low.
GDP estimates for this year were revised down by 110 basis points while next year's growth forecast was raised by 50 bp. That is ultimately reflective of slower than anticipated hiring, supply chain constraints, and continued uncertainty around the path of the virus/economy.
Simultaneously, short term inflation expectations were raised while longer term price appreciation is expected to stay around the Fed's 2% average inflation target.
Jay Powell was talking about "very modest overshoots" of 2% inflation in coming years, which the Fed thinks will not affect households.
The question is not as much about absolute levels, but rather how inflation and economic growth act on a relative basis going forward.
Ultimately, the Fed can justify more sustained inflation as long as economic growth follows suit. At the point where consumer spending appetite starts to lag behind inflation expectations, central banks could be forced to implement more stringent policies despite an economic slowdown.
The Fed's Dotplot reflects half of all committee members expecting one or more rate hikes in 2022.
Inflation mentions in companies' quarterly earnings reports have gone up significantly.
The housing market has been hot and demographics favor strong conditions going forward. To what degree will short-term leases - potentially via AirBnB, - dominate over the populations' demand to live in a permanent residency?
Whether inflation will stick beyond a slowdown in economic growth is yet to be determined.
"There's a big difference between probability and outcome. Probable things fail to happen - and improbable things happen - all the time." - Howard Marks
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The Debt Ceiling
As the treasury is drawing down its general account, market participants turn to Washington D.C. for a resolution on the debt ceiling.
Multiple packages are currently in the mix and it will depend on finding a consensus amongst policy makers. Politicians are not averse to spending money, but they are certainly eyeing next year's midterm elections.
On October 14, the treasury's general account is set to have $7bn left if the debt ceiling can't be raised or suspended as proposed by the Democrats. Before then, the treasury will enter into emergency mode and start moving money on a discretionary basis towards servicing debt in the absence of a resolution.
To what exact infrastructure bill and funding plans the debt ceiling raise/suspension will be tied to is yet to be determined; Speaker of the House Nancy Pelosi indicated in an interview on ABC that: "I'm never bringing a bill to the foor that doesn't have the votes."
What it means and what we could see get passed in D.C. this week:
"Democratic leaders have attached the debt ceiling increase to legislation that may hold some appeal to Republicans (and some fiscally conservative Democrats): a bill that funds the government until Dec. 3, 2021 and includes emergency disaster relief funding." - NPR, Debt Ceiling Explainer
Food for Thought
Economic Calendar for the U.S.
Durable Goods Orders measuring industrial demand at 7:30am CT
Conf. Board Consumer confidence at 9:00am CT
Initial and Continued Jobless Claims at 7:30am CT
GDP at 7:30am CT
Personal Income and Outlays (PCE) at 7:30am CT
Fed chair and colleagues probe businesses over hiring, prices
Data 'doesn't live' for Fed without hearing from real people
Some might argue they've last heard this type of language during the 1970s where the employment act was "forcing" the Fed to stay accommodative for longer than needed.
Others will stress that the Fed has stated time and again that a 1970s type of environment is highly undesirable.
Hence, Fed absorption is to be seen on a relative basis as opposed to purely eyeing a cut-back on tapering in absolute terms.
Consensus: EPS est. $2.33; Revenue est. $8.21bn
Comments on the state of the semiconductor industry (shortages) are anticipated
Consensuses: est. $1.90 EPS; Revenue est. $6.85bn
Comments on the used car market as national inventories are running low
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