OPEC Responds to Fed Rate Hikes, Oil Prices as Inflation Indicator, Bogus Jobs Report
By the Curmudgeon with Victor Sperandeo
“Tit for Tat”: the infliction of an injury or insult in return for one that one has suffered. We’ll explore that and much more in this article.
Fed Has a New Opponent – OPEC:
Well, it seems the Fed has just been challenged by an OPEC Touche’! After the Fed raised rates again this March, OPEC agreed to cut oil production by 1 million barrels per day last Sunday. The price of West Texas crude oil increased $5 per barrel on the next day’s opening. From 3/31/23 (Friday) to (Monday) 4/3/23, June Crude Oil Futures climbed from $75.67 to $80.68.
Raising rates are effectively crushing the demand for oil. It’s caused OPEC to lower production to offset the decline in revenue per barrel of oil sold. Does that mean an increase in interest rates will cause an increase in oil prices from now on?
The crushing of demand by the Fed now has OPEC as an opponent. That will harm the economies of other nations and thereby inflict a nasty payback for the Fed!
Fed Report Card:
This brings us to a report card for the Fed… how has its current monetary policy fared in terms of history? Here’s a snapshot:
<![if !supportLists]>· <![endif]>In 1973 there were eight Fed Funds rate hikes totaling 525 bps, or +91.3% from the start. Oil was +31.94% with the CPI +10.0% for the year. That caused a recession which started in November 1973.
<![if !supportLists]>· <![endif]>In 1978 there were also eight Fed Funds rate hikes of 325 bps, or +50% from the start. Oil was +3.82% with the CPI +9.02%. A recession started in January 1980.
<![if !supportLists]>· <![endif]>In 1979 there were six Fed Funds rate hikes of 525 bps, or +43.6%. Oil was +67.89% with the CPI +13.29%. Similar to 1978, the recession started in January 1980.
<![if !supportLists]>· <![endif]>In 2022 there were nine Fed Funds rate hikes of 475 bps or +1800%. Oil was +10.45% with the CPI +6.5%. (Fed Funds increased from 0-25% to 4.75%-5.00%. The recession started in…………………...?
<![if !supportLists]>· <![endif]>The largest number of Fed rate increases of all time were in 2022, while the increase in the CPI was moderating.
<![if !supportLists]>· <![endif]>The Fed will announce its next rate decision on May 3rd.
Let’s now compare the 1978-79 period with 2022-2023:
<![if !supportLists]>· <![endif]>In 1978 the CPI increased by 9.02 % YoY. In 2022 it was much less or 6.45% (28% less).
<![if !supportLists]>· <![endif]>The total rate increases in 1978 totaled 375bps, but in 2022 it was 475bps (27% more)!
<![if !supportLists]>· <![endif]>The next increase in rates was +50bps in April 1979. So, in 16 months the Fed raised rates 425bps.
<![if !supportLists]>· <![endif]>In July and August 1979 (total of 20 months) +25bps each month, which then matched March-December 2022 in the total magnitude (+bps) of Fed Funds rate increases.
<![if !supportLists]>· <![endif]>As previously noted, the 1978-1979 period produce a recession in January 1980. Do you think 2023 will be any different?
We leave it to readers to be the ultimate judge, but we give the Fed a grade of D or F.
Fed Policy Ignores Money Supply Growth:
IMHO, the Fed will never get monetary policy correct as it uses Keynesian Models rather than monetarist formulas.
The “quantity theory of money” is based on MV = PT. Where M is the quantity of money, V is the velocity of money flows (the average number of times a currency unit changes hands per year), P is the level of prices and T is the real value of aggregate transactions. If you believe V and T are stable, then control of the money supply guarantees control of inflation.
Yet the Powell led Fed, in sharp contrast to Paul Volker’s Fed, ignored the huge increase in the money supply it created from QE, which led to the higher inflation we’ve experienced. In the last 12 months, the Fed has tried to reduce inflation by overcompensating with their rapid and large rate increases. We think that will surely produce more negative economic fallout.
Using Oil Prices as an Inflation Indicator:
For a realistic inflation guide, I use the compounded annual increase in Crude Oil prices. Oil is used in virtually everything we do, make, or buy. There are 35 industries which use at least 1% of daily oil production. Although not perfect, it is a far better guide to what inflation is versus the laughable CPI, which is a subjective (made -up) index that is arguably the worst inflation gauge created. From 12/31/70 to 12/31/22 oil increased at a compounded annual rate of +6.27%.
Questioning Friday’s BLS Job Report:
The BLS reported on Friday that U.S. employers added 236,000 workers in March - a historically strong gain, but the smallest in more than two years. The unemployment rate ticked down to 3.5%. Average weekly hours also ticked down in March, suggesting a modest reduction in labor demand.
The seasonally adjusted jobs added for January 2023 was revised down from +504,000 to +472,000, and the change for February 2023 was revised up from +311,000 to +326,000. The net employment change over these months is 17,000 lower than previously reported.
However, several things do not add up:
1. The Job Openings and Labor Turnover Survey for February revealed last week that the number of available jobs in the U.S. tumbled to its lowest level since May 2021. ADP’s private-sector payroll report fell far short of expectations. So where is the hiring coming from?
2. A record number of small business bankruptcies have occurred, yet that didn’t increase the 3.5% reported unemployment rate or factor into the Birth-Death Model (see 3. below). Why not?
According to a UBS Evidence Lab note reviewed by The Epoch Times, the four-week moving average for private bankruptcy filings was 73% higher than it was in June 2020. They also warned the situation may worsen as the repercussions of the recent banking crises start to manifest themselves.
3. The Birth Death (B/D) Model used in the non-farm payroll calculations are the jobs that the BLS assumes are added or subtracted based on companies starting or closing. In the last three months, the B/D model shows a net increase in job growth DESPITE record small business bankruptcies. In particular: January -144K; February +176K; and March -29K. The net B/D model jobs added is +3K. Do you believe in the tooth fairy?
4. The technology sector drop of 9k jobs is quite surprising! Multiple big tech firms (Amazon, Facebook, Google, etc.) have announced major layoffs that collectively are well beyond 9k. More than 140K U.S. tech workers were laid off in 2022 and over 100K tech employees have lost their jobs in the first three months of 2023. Moreover, very few Tech companies are hiring (the Curmudgeon does not know of any)!
5. The BLS wrote: "In accordance with usual practice, BLS will not revise the official household survey estimates for December 2022 and earlier months. (Employment) Data users are cautioned that these annual population adjustments can affect the comparability of household data series over time."
In essence, the BLS admits all its job reports are full of errors and it leaves the errors in place as discussed as per its stated methodology.
-→Victor and the Curmudgeon suggest the BLS should be audited!
Victor’s Market Comments:
No change in the positions of the asset classes. Long Gold, Silver, and U.S. Government Bonds; Short U.S. Stocks.
Happy Easter, Passover, and Ramadan!
“All the rights secured to the citizens under the Constitution are worth nothing, and a mere bubble, except guaranteed to them by an independent and virtuous Judiciary.”
Andrew Jackson <![if !vml]><![endif]>
was a military hero and seventh president of the United States (1829–37). His political movement has since been known as Jacksonian Democracy.
Be well, stay healthy, wishing you peace of mind. Please email the Curmudgeon (firstname.lastname@example.org) if you have any comments, questions, or concerns. Till next time…...
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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