Pins And Needles For Fed Meeting

The Federal Reserve will finish their meeting today after looking at a lot of data.  The Fed governors will discuss the data, if there is anything to do and then release a statement.  The market hangs on for what’s in that statement.  News channels report breathlessly about inflation but the talking heads don’t know what they heck they are talking about nor do they have a clue as to what to do about it.

Over the course of the past few months, it is very clear we have inflation in the US.  The question is why?  Is it long-lasting and ingrained into the economy?  Or, is it transitory?

I think you can make the case that some of this inflation is transitory and not embedded forever in the economy.  The Covid shutdown massively impacted supply chains in every industry.  Lumber is one of the easiest to look at.  Briefly, let’s look at it.

-Covid happens and lumberyards and sawmills shut down. They lay off all their employees.  The expectation was that our economy, especially the sectors that sawmills and lumberyards fill would be significantly slower.  Our economy pre-Covid was humming along pretty well.

-The government decides to spend a lot of money to help citizens cope.  Not just a little. A lot.  What do people do with their government checks? Instead of using it on goods and services to sustain their lives, they decide to improve their homes.  That drains home supply stores of product and drains lumberyards of lumber.  With sawmills basically closed, there is no new supply of lumber.

-Remember, Canada is shut down too and Trump imposed tariffs on lumber crossing the border making it more expensive.

-Lumber futures prices soar in a historic rally never before seen.

-As data comes out on Covid, sawmills begin to call employees back.  But, it’s not enough to meet demand.  Sawmills are not software.  They don’t scale quickly.  They take a couple of years to build and cost millions of dollars.  When 2008 happened, sawmills when out of business and the ones that remained were sufficient to keep the supply chain filled.

-Horrible policy for years on taxes and regulation finally roll over with Covid.  The states that had the worst tax policies also had the most restrictive lockdowns following a centralized playbook and not logical data.  People that were on the edge of moving finally moved en masse.  We see that in data as Illinois, California, New York, New Jersey, and Michigan lost residents to Arizona, Florida, Texas, California,  North and South Carolina, and Tennessee.  Small states like Wyoming, Idaho, and Nevada saw a huge influx of people too.  This put demand on housing and existing housing prices increased.  New housing starts happened at a growing clip, putting even more demand on the lumber market.  By the way, with the ease of Covid, the movement of people hasn’t stopped.

-The government kept, and keeps wanting to throw money at Covid.

-Recently, Lumber markets have crashed and look like they are on their way down.

Lumber isn’t the only market.  Try to get foam for furniture.  There isn’t any.  Try to get anything.  They just don’t exist.  It will take the factories time to catch up and fill the supply chain.  Maybe as long as two years depending on the finished good.

We are doing a rehab of our Las Vegas house.  We were going to use IKEA for our kitchen. There isn’t one 30 inch cabinet box in the entire US and we don’t know when they will be in stock.  Other materials are also out of stock. We were supposed to be demoing this week but we will delay.

What’s going on now?  No one who owns a business can hire labor.  Why?  Government transfer payments roughly work out to $20-$22 per hour.  Because all eviction policies were suspended, if you were a renter you could make more by staying home and didn’t have to worry about paying rent.  Remember the fight for $15?  Republicans got snookered by Democrats and here we are.  Benefits end Labor Day and it will be a war in Congress as to who gets what and how they get renewed.

That will make labor markets super tight all summer.  While raw materials get the lion’s share of headlines, they are not generally the major reason prices increase.  Labor is the largest input into the costs of production.

Raising interest rates will help cool the housing market a little.

The Fed has to be careful.  We have basically been on zero interest rates since 2009.  But, they need to move rates higher.  They also need to unwind their balance sheet. Rick Santelli was saying as much on CNBC yesterday.  They have an unprecedented balance sheet full of who knows what.

Government policy, which the Fed can’t control and never seems to advise on, needs to change too.  Stop spending.  This infrastructure bill should be scaled way back from trillions to just maybe $400 million.  End the transfer payments and have a transparent day all of them will stop.  No continuing benefits until infinity.  If we want universal basic income in the US, let’s have that debate.

An aside, I’d be all for universal basic income, but that would also mean getting rid of every single government program designed to get rid of poverty.  It means getting rid of things like public housing, targeted programs, all of it.

Unfortunately, policymakers didn’t think out of the box on Covid.  They didn’t follow data, and were imprisoned by bureaucracy and old ideas.  They were unable to critically think in a hyper-politicized environment.

Total failure and we will pay a big price.  We just don’t know when.

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