FEP - Janet Yellen Undermines Powell's Positive Message

2023-03-28 05:00:00 ET

Summary

• The primary reason why China wants a cease-fire in Ukraine is that the G7 has started sanctioning Chinese companies that do business with Russia.
• The European Union and Canada’s goals of reducing carbon dioxide emissions can have severe consequences for themselves and the world.
• Durable goods have been dragged down by a weak transportation sector, which has declined in three of the past four months.

At his press conference after the FOMC statement on Wednesday, Fed Chairman Jerome Powell came off as dovish, which the financial markets liked. Investors responded positively, at first. However, Treasury Secretary Janet Yellen (who is technically Jerome Powell's boss) was testifying in front of Congress on Wednesday during Powell's press conference and said, "I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits," a statement that seemed to imply that not all bank accounts would be covered by government backing, and that sent the market back down again.

Previously, at a Tuesday American Bankers Association conference, Treasury Secretary Yellen had said, "Let me be clear: the government's recent actions have demonstrated our resolute commitment to take the necessary steps to ensure that depositors' savings and the banking system remain safe." The next day, Yellen's doublespeak to Congress spooked financial markets, creating unnecessary investor uncertainty.

Then, Treasury Secretary Yellen made matters worse on Thursday, when she tried to correct her previous comments in front of Congress, saying, "Certainly, we would be prepared to take additional actions if warranted," which some interpreted to mean that the bailout of all depositors was not yet certain, or even warranted. Yellen's comments reignited recent banking fears and caused the stock market to sell off, so she was 2-for-2 in spooking the stock market last week. As a result, I propose that Treasury Secretary Yellen sticks to her prepared script since some of her unscripted comments keep getting her in trouble!

Overall, her gaffes didn't kill the market, as the Dow rose 1.18% last week, the S&P 500 rose 1.39%, and NASDAQ rose 1.66%. For the year so far, the Dow is down 2.7%, the S&P is up 3.4%, and NASDAQ has soared +13%, as tech and growth stocks in general have enjoyed a revival. Still, the global banking crisis is creating new stresses in the banking system and is anticipated to cause economic growth to slow.

Forecasting global GDP is difficult, but my bullish outlook on crude oil is based on the fact that demand usually rises in the spring, so by the time the Fourth of July and Labor Day arrives, there should be much more crude oil demand, which is why crude oil prices are historically higher in the summer months.

One factor putting pressure on crude oil prices is that Russian seaborne crude oil shipments this month have only fallen by 90,000 barrels a day to 3.23 million barrels a day through March 17th. The March cut of 500,000 barrels that Russia announced has yet to materialize, but a slowdown in Russia's Siberian oil fields takes time to show up in the Baltic Sea and the Black Sea. Russia's crude oil exports to Europe have collapsed, with just Bulgaria on the Black Sea still receiving a reduced amount of Russian crude oil.

China and Russia Form a More Open Alliance

Chinese President Xi Jinping arrived in Moscow last week. President Xi said that "political mutual trust is deepening" between Moscow and Beijing. However, President Xi did not seem to convince Vladimir Putin to agree to a cease-fire with Ukraine. After China issued a 12-point position paper calling for talks toward ending the conflict with Ukraine, President Xi said, "We are always for peace and dialogue. We stand firmly on the right side of history." Interestingly, President Xi is expected to call Ukrainian President Volodymyr Zelensky after his Moscow trip, so it will be interesting if a cease-fire can ensue.

The primary reason why China wants a cease-fire in Ukraine is that the G7 has started sanctioning Chinese companies that do business with Russia. Now that the G7 has accused Russia and Vladimir Putin of war crimes, and the International Criminal Court has issued an arrest warrant for Vladimir Putin, the West is not expected to have any grounds for negotiating with Russia on any cease-fire agreement.

It is obvious that China is relishing its new role as international peace arbiter since the U.S. refuses to negotiate without full NATO representation present. In the event that China eventually gets Russia to agree to a cease-fire, the stock market could stage a big relief rally. However, the sanctions on Russia will likely remain in place until the West successfully negotiates some package of Russian war reparations.

One outcome of President Xi and Vladimir Putin's meeting is that China and Russia are deepening their cooperation on key atomic technology. Specifically, Xi and Putin announced a long-term deal to continue developing fast neutron reactors. Last December, Russia transferred (via its nuclear giant Rosatom) 25 tons of highly enriched uranium to China's first fast reactor, the CFR-600, a facility that could produce fuel for 50 nuclear warheads per year. Naturally, this has the Pentagon and Congress very nervous, as Russia is the world's largest supplier of nuclear fuel and its nuclear exports have surged in the past year.

The war in Ukraine disrupted worldwide food production last year, but thanks to a 55% increase in Canadian wheat production, Canada can help prevent mass starvation in the third world. However, Prime Minister Justin Trudeau has been gearing up to tell Canadian farmers to switch from chemical to organic fertilizers to reduce carbon dioxide emissions, which would dramatically reduce Canada's wheat output.

Essentially, Trudeau is following Dutch Prime Minister Mark Rutte's agriculture reforms, but there was a political earthquake recently in the Netherlands when the Dutch Pro-Farmer Party swept the provincial elections to become the biggest party in the Senate. Amazingly, the Pro-Farmer Party did not exist four years ago, but PM Rutte's agriculture reforms, which included seizing up to 30% of farmland to reduce carbon dioxide emissions, caused outrage with Dutch farmers, who are the most productive per acre in the world. As a result, Rutte's goal of cutting carbon dioxide emissions by 50% by 2030 is now in jeopardy.

Obviously, the European Union and Canada's goals of reducing carbon dioxide emissions can have severe consequences for themselves and the world. Although Canada is blessed by tremendous hydroelectric output and can more easily reduce its carbon dioxide emissions, as soon as Justin Trudeau tries to tell farmers how to fertilize their fields, the potential blowback could be much more severe than the recent Canadian trucker's strike. Trudeau seized truckers' bank accounts (and some guns) throughout Canada, but messing with Canadian farmer families in the vast prairie provinces is destined to fail.

As a result, I suspect that chemical fertilizer companies will fare much better than expected during this coming growing season, despite the fact that green police in Europe and Canada are trying to force farmers to switch to less productive organic fertilizers.

Here in the U.S., Environmental, Social & Governance ((ESG)) investment policies remain under scrutiny, since Congress passed the Congressional Review Act to overturn a Labor Department rule protecting pension funds that invest based on ESG criteria. This rule protects retirement-fund managers from fiduciary duty lawsuits if their investment choices cause lower returns or losses because the funds indulge in too many climate change or social-justice causes. Under traditional fiduciary standards, funds are obliged to maximize client returns. However, President Biden vetoed the Congressional Review Act, so my thoughts are, ESG investments can continue to fleece investors since they no longer have a fiduciary duty! Obviously, this legislation - to exempt ESG investments from fiduciary duties - is changing the rules of investing.

Home Prices are Declining, but Housing Costs Keep Rising?

The housing component of the Consumer Price Index (owners' equivalent rent) keeps rising at near double-digit annual rates, but the National Association of Home Builders on Tuesday announced that existing home prices declined on a full 12-month basis for the first time in 11 years (since February 2012). Since June, when median home prices peaked at a record $413,800, median home prices have declined 12.3%, and median home prices declined another 0.2% in February to $363,000.

The good news is that the volume of existing home sales rose 14.5% in February to an annual pace of 4.58 million. Mortgage rates have fallen in the last five weeks and are now at 6.48% according to the Mortgage Bankers Association. Spring is a seasonally strong time for home sales, so if mortgage rates continue to decline, sales may continue to pick up, especially if home prices keep falling.

The Commerce Department reported on Thursday that new home sales rose 1.1% in February to a 640,000 annual pace - the sixth straight month that new homes sales rose. The backlog of new homes being built rose to the highest level in 11 months (since March 2022). The number of new homes for sale at the end of February was 436,000, an 8.2-month supply at the current sales pace. Due to this strong inventory backlog of new homes, median prices will likely decline in the upcoming months.

Prices are coming down. We just need the Fed to realize this and pause their rate-raising cycle for a while and turn their attention to flattening the yield curve to help rescue banks in the red with their bond holdings.

In other economic news, the Commerce Department announced on Friday that durable goods orders declined 1% in February due in large part to a 2.8% decline in transportation orders for autos and commercial airplanes. Excluding transportation, durable goods orders were unchanged. Overall, durable goods have been dragged down by a weak transportation sector, which has declined in three of the past four months. There is no doubt that higher interest rates are now impeding vehicle sales, so hopefully - as with housing sales - lower interest rates will help stimulate vehicle sales in the upcoming months.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

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