VIPs

• Cass freight shipping costs saw a 36.2% YoY gain in October, the largest on record, as supply chain disruptions persist; though logistics costs have surged, shipment volume has calmed thus far in Q4 to a 0.8% YoY advance vs. the 29.9% and 9.1% gains of Q2 and Q3
• The American Trucking Association estimates that the trucker shortage will exceed 80,000 drivers by year end 2021; pandemic scarring has also exacerbated the issue, with more than 3,000 trucking companies shuttering last year, per Broughton Capital, up from 1,110 in 2019
• September’s JOLTS saw 589,000 job openings in transportation, more than twice December 2020’s 277,000; this pushed openings to 8% of total sector employment, all while paychecks for long-distance freight trucking rose a record 11.9% YoY vs. the 2.5% long-term average

Some iconic characters in history were born to be wild. Archimedes, of Syracuse, Sicily, wasn’t just a Greek mathematician, physicist and engineer, but also an astronomer and inventor. This radical dude proved a range of geometrical theorems including the area of a circle, the surface area and volume of a sphere and the area of an ellipse. Deriving an accurate approximation of pi on his lunch break wasn’t why he’s considered to be the greatest mathematician of ancient history. Old Archimedes also anticipated modern calculus and was one of the first to apply mathematics to physics with his entrepreneurial startups of hydrostatics and statics. Image you’re the fella to prove the principle of the lever or brandish widespread use of the theory of the center of gravity. Of course, this party animal was best known for formulating the law of buoyancy, known today as Archimedes’ Principle.

Great minds discover more than the complex, they’re also renowned in the equally valued art of making for simple observations. Archimedes was credited with articulating that the shortest path between two points is a straight line. In today’s supply chain constrained world, many suffering their posts in logistics can only dream of applying this straightforward concept to securing deliveries from point A to point B.

To this end, every month since 1995, Cass Information Systems has delivered trusted data on the intra-continental North American freight market from raw materials to finished goods. All domestic modes are included with trucking carrying a heavier weight. In October, Cass freight shipping costs didn’t just reach a record high level – the 36.2% year-over-year (YoY) gain was the largest on record (orange line). This combination of expenditures divided by shipments produces inferred freight rates. As Cass expounded, “there are a lot of excess miles in the system due to all of the supply chain disruptions in the shortage economy of 2021. Chassis production improved this month but remains far from what is needed to address rail network congestion, so West Coast imports continue onto truckload, considerably raising the length of haul in the largest freight market.”

Higher freight costs are tied to more than bottlenecks across the system; driver shortages also impede the lassoing and hog-tying of delivery times. The American Trucking Association (ATA) provided a recent update at the end of October estimating that in 2021, the truck driver shortage will hit a historic high north of 80,000. ATA noted that the shortage is most acute in the longer-haul (not local) for-hire truckload market. Not helping the cause is Amazon Delivery Service Partners offering drivers more than $20 per hour plus a signing bonus of upwards of $3,000 to deliver packages to their local communities.

Permanent scarring from the pandemic also played a crucial role in aggravating the driver shortage. A total of 3,140 trucking companies ceased operations last year, according to a report from transportation industry data firm Broughton Capital, up from 1,100 in 2019. Smaller trucking companies were particularly hard hit; Broughton’s data found companies that closed last year owned an average of 16 trucks. That’s about 40% smaller than the average carrier that shuttered operations in 2019. Moreover, and not surprisingly, larger trucking operations and more well-capitalized firms better weathered the economic fallout from the pandemic vis-à-vis their smaller counterparts. Most critically, ATA adds that small trucking companies and independent owner-operators comprise the majority of the nation’s freight carriers — 91% of fleets operate with six or fewer trucks while 97% operate with 20 or fewer.

The September Job Openings and Labor Turnover Survey (JOLTS) revealed unprecedented demand for transportation workers. The record 589,000 job openings more than doubled from December 2020’s 277,000 figure. This furious run up pushed the job openings rate in the transportation and warehousing industry to 8.0% by 2021’s third quarter (green line). This occurred alongside a 6.0% unemployment rate in transportation during the summer quarter causing a near-record in the job openings-to-unemployment spread of 2 percentage points. Preliminary readings for the fourth quarter suggest 2019’s fourth-quarter widest point in openings-to-unemployment should be eclipsed as transportation unemployment fell to 4.7% in October (purple line).

The labor mismatch is one reason massive incentives are being deployed to lure more warm bodies to get behind the wheel of an articulated vehicle. Annual growth in worker paychecks (not managers) in long-distance general freight trucking hit a never-before-seen 11.9% YoY rate in September, nearly five times the longer-term average of 2.5%.

While costs have surged across the logistics space, shipment volume has downshifted to a near neutral speed so far in the fourth quarter. The quarter-to-date 0.8% YoY advance indicated a major slowdown from the second quarter’s 29.9% increase and the 9.1% gain in the third quarter (red line). Although much more volatile than the Cass shipment series, hires in the transportation sector provide a proxy for added drivers. The unmatched deficit of drivers makes it perfectly logical that the hiring picture is not positive. Transportation hiring has been in the red on an annual basis in every quarter thus far in 2021 (blue line). This losing streak was only rivaled during the Great Recession.

As brilliant as Archimedes was, we think even he would have a difficult time trying to resolve today’s supply chain challenges. While real activity is hitting stall speed, freight rates remain wildly elevated. It’s the latter – pricing, and by extension margin protection – that keeps the bull running for transportation stocks.

VIP

• The record 4.3 million U.S. workers who quit in September total 3.0% of total employment, a sign of increasing worker confidence; geographically, quits were highest in the South at 3.3%, and were outsized in food/accommodation and arts/entertainment at 6.6% and 5.7%
• Though off a record high 7%, job openings still remain at an extraordinarily high 6.6% of total employment; however, per UMich’s most recent survey, Current Conditions slumped to 73.2, an August 2011 low, while Expectations slid further to 66.8, an October 2013 low
• Buying conditions for household goods slipped to a 78 in UMich’s latest read, the lowest since 1978; and despite a record number of quits, one in four households anticipate being worse off in 12 months and the Democrat-Republican expectations divide hit a new high

“Ask no questions, and you’ll be told no lies.”

Charles Dickens
Great Expectations

The last thing you want to read in a Feather top is trite. With that as preamble, I used the quote above from Charles Dickens’ Great Expectations. It better resonated after listening to Janet Yellen and other Federal Reserve officials make their way through the Sunday Big Four TV circuit being asked softball questions, giving softball answers. The truth is, with apologies, trite is the only thing I can’t get out of my head as I take in today’s charts. Indulge me. I quote in its entirety what follows, “…the worst of times.” Dickens’ fullness best captures today’s U.S. economy: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair.”

Let’s start with the best of times for the record 4.3 million U.S. workers who quit in September (green line). This headline has been everywhere since Friday morning as proof of the strength and endurance of the economic recovery. There’s no doubt a 3.0% of total employment Quits rate –Yellen’s proclaimed favorite labor market barometer – at unprecedented heights speaks volumes to the unbridled job security and power over their employers’ workers in desired fields have.

The details of the Quits data are even more remarkable, which is obfuscated by the monthly delta of the 0.1% increase in the Quits rate to 3.0% between August and September. No labor economist in the industry bests QI friend Philippa Dunne when it comes to the weeds of data on employment in America. Here are the details in full that she pulled from the Quits data alone, which are key to appreciating the massive increases in certain industries and surprising declines in manufacturing, both of which I will bold:

“The Quits rate slipped in the northeast, to 2.2%, and in the Midwest, -0.2 percentage points (pps) to 3.0%, but rose a tick in the South, 3.3%, and jumped in the West, up 0.4pps to 3.1%. Sectoral detail was mixed, with quits in construction and logging & mining down 0.1pps, to 2.5% and 1.5%, durable manufacturing unchanged, but nondurables up 0.5pps to 3.5%. Quit rates in education were up, 0.5pps to 1.7% in the private sector, and 0.4pps to 1.1% at the state and local level. Other services saw a big jump from 2.3 to 3.1%, where there were unusually large gains in employment in October, led by laundry services.  After rising a full point to 6.6% in August, the quit rate held steady among food & accommodations workers but jumped from 3.2 to 5.7% among those working in arts & entertainment.Rates in wholesale trade, -0.6pps to 2.2%, and in retail trade, -0.4pps to 4.4%, fell, but rose in transportation and warehousing.”

I can vouch for the laundry services and arts and entertainment spikes. My most recent New York hotel stay included daily cleaning, all the way down to the fresh sheets daily. That uptick in services is impossible without the laundry industry getting JOLT-ed. Ditto for the two last viewings of Daniel Craig’s last Bond movie (tragedy for womankind) – the movie theater audiences in both instances have been full and the counters sending overpriced popcorn fully staffed.

We add that after peaking at 7.0% of total employment, job openings have slid to a still extraordinarily high 6.6%; the declines were led by the South and the West. Why niggle with such details when we’re contemplating an openings number north of 10 million? Take in that middle chart – we’ve grown accustomed to Expectations (blue line), tracked twice monthly, by the University of Michigan (UMich), leading the way down. What stood out in Friday’s report was Current Conditions (orange line), which played serious catch-up to Expectations and has slumped to an August 2011 low (debt ceiling showdown, anyone), and blew past (in a bad way) what consumers expect, which collapsed to an October 2013 low.

But hadn’t we concluded that it was the best of times? Some 4.3 million Americans quit their jobs in September, for God’s sake. The devil is in the details for those without employee empowerment. Or, as half-century UMich economics guru Richard Curtin rightly observed, sentiment is at a decade low due to, “escalating inflation and a growing belief among consumers that no effective policies have been developed to reduce the damage from surging inflation.”

What we are witnessing IS the best and worst of times. We’re taking in, in real time, this inequality divide writ large.

The UMich report showed buying conditions for household goods deteriorated sharply, with a gauge falling to a reading of 78, the second lowest in data back to 1978. At QI, we disdain the superficial, so Dr. Gates dug deeper and aggregated buying conditions across the three majors – homes, cars and durables (yellow line). At 63, the record low is, and remains, unprecedented. One in four households anticipate being worse off in the coming 12 months, the antithesis of the record number of Americans quitting their jobs. For good measure, the U.S. has never been this divided as a country (purple line). We despise one another, which makes it the worst of times indeed.

VIPs

• Per CoreLogic, Memphis is the most desirable housing market for investors, with the rest of the top 10 spread across the South and Mountain-West; conversely, the least attractive housing markets for investors, save for two cities in Louisiana, are in the Northeast
• Pre-pandemic moratorium, Memphis historically had one of the highest eviction rates of any MSA at 6.1%; this suspension of lower-end supply sent rent inflation 19% over the 2014-2020 trend-line, but as evictions resume, new supply should give a reality check to investors
• The share of employees working from home has now fallen from 35.4% of the workforce in May 2020 to just 11.6% last month; with investors doubling down on their housing market purchases in spite of this, oversupply could soon apply pressure to an overheated market

You thought “Walkin’ in Memphis” was only possible in Tennessee. The truth is, you’d have had to first “Walk Like an Egyptian.” Memphis, Egypt is the city from which the one synonymous with Bar-B-Que derived its name. “Memphis” is the Greek adaptation of “Men-nefer,” meaning “enduring and beautiful.” In contrast to Nashville, the Memphis of the Egyptian era was the capital of ancient lower Egypt circa 3000 BC. You don’t have to travel halfway around the world, however, to visit a different Memphis. The states of Alabama, Florida, Indiana, Michigan, Missouri, Nebraska, New York and my home state of Texas boast them. With a population of 2,215, the Texas town was nameless upon its 1889 founding. As legend holds, a reverend saw a letter addressed to Memphis, Texas, to which he said, “There’s no such town in Texas.” With that, the town was christened…accidentally. Though small in population, Memphis, Texas boasts five newspapers and local TV channels and three radio stations.

Unlike the Texas town, investors have swarmed Tennessee’s Memphis. CoreLogic identified Memphis as the most desirable Metropolitan Statistical Areas (MSA) for investors. Note a pattern in the other top 10 – seven are in the South while three are in the Mountain-West. Conversely, with the exception of two Louisiana cities, the least attractive places to invest are in the Northeast. Booming economies vs. metros that have long been on life support. Fair enough.

But there’s a big however as it pertains to Memphis, and to a lesser degree Atlanta, one caught by the eagle-eyed Michael Green, QI colleague and Chief Strategist at Simplify Asset Management. As reported by Realtor.com, at 6.1%, Memphis has historically been the highest eviction market. (Atlanta ranks 3^rd highest at 5.70%).

The background is key to the punchline. On March 27, 2020, the Cares Act imposed a nationwide rental eviction moratorium that expired, after multiple extensions, 18 months later, this past September 30^th. Tack on another 30 days of grace – the notice that must be provided – and we’re about proceedings that started all of 12 days ago.

If we’re speaking in purely economic terms, the question is, “What does a suspension of reality produce?” In Green’s words, “When you cut off evictions, you cut off the left tail of a distribution since evictions primarily hit the lower end.” The upshot, unless you’re an investor buying into the market not aware of the dynamic, the result is that the protracted suspension sent rents in Memphis ripping off the 2014-January 2020 trend by 19%. At 10%, the effect was not nearly as pronounced in Atlanta, but it should still be a reality check for investors who’ve descended upon that MSA en masse.

While few anticipate such a development – payback is primed to be a bitch not just on the rental appreciation front, but also in housing supply, which we’ve described in detail in recent Quills as being approximately five times the 6.8 million housing supply deficit purported by the National Association of Realtors.

The Econ 101 of an unexpected overpricing and oversupply of homes conjures the concept of Owners’ Equivalent Rent (OER). To quote Wednesday’s Quill, OER is as false a proxy as could be devised – it can never reflect the S&P/Case-Shiller home price index or any other home price appreciation metric. Per the BLS: “Owner occupied units are not priced in the CPI Housing Survey.” Rather, owners are asked, “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

To add insult to CPI’s housing inflation, which is purely a hypothetical gauge of rental rates, they’re adjusted for hedonics the same way your iPhone is not more expensive than your Motorola flip phone because it does so much more than that old relic. To that end, if a given home in the six-month rotating pool of properties the BLS tracks sees a spike in this theoretical rental rate, it’s booted out under the assumption a major renovation has so improved the home to render the apples-to-apples comparison that of an apples-to-oranges, thereby disqualifying it.

The bottom line: Despite the hysteria surrounding the threat of home prices bleeding their way into the CPI in coming months, while some of the increase will filter through, reality will never be reflected in the BLS’ flawed metric.

The other reality is demurred by the media. As empowering a message as ‘Working from Home’ (WFH) is, this tony cohort has dwindled from 35.4% of the employed workforce in May 2020 to 11.6% last month. The question home investors: “Define the future into which you’re overpaying for homes to then rent out?” As you see in the upper righthand chart, the two trends are moving against one another – investors are doubling down even as WFH fades…that makes sense how?

To speak out of the other side of our mouth, there’s an undeniability to the long reach of housing at cycle outsets. Construction materials must be transported within U.S. borders or imported. The consumer picks up the baton via post-purchases. The real estate industry acts as a liaison for transactions, and the financial sector underwrites the mortgages and home insurance. Local governments then collect the property taxes. Housing is an economic conduit, which is manifest in the leading role it plays in ex-shelter inflation (bottom righthand chart). Don’t count it out, but don’t give it more credit than due given it’s been artificially propped.

VIPs

• Both the MoM and YoY changes in the CPI and core CPI exceeded every estimate by economists in Bloomberg’s survey; the surprise generated an up-shift in the U.S. Treasury curve, with the greatest bulging seen at the 5-yr point as the 5s30s curve flattened < 70 bps
• In the last five months, six-month annualized core CPI has run between 5.9% and 6.8%, not seen since the early 1980s; with this shorter-run trend running hotter than the YoY pulse, core CPI inflation forecasts are likely to be revised upward from the current 4.6% annual rate
• QI’s Household Budget Inflation Gauge rose to a 6.4% YoY rate in October, the highest since the Great Recession; while wages for non-manager workers has risen from April’s 1.1% to 5.8% YoY in October, the HBIG has outpaced wage gains in five of the last seven months

The Declaration of Independence is the philosophical foundation of American freedom. Of course, it’s U.S. veterans who have protected these freedoms we cherish so. Veterans Day pays tribute to all who’ve honorably served in the armed forces but gives special thanks to those who are still with us. Today’s Federal holiday originated as Armistice Day on November 11, 1919, the first anniversary of the end of World War I. Major hostilities of the Great War were formally ended at the 11th hour of the 11th day of the 11th month of 1918, when the truce with Germany went into effect. Congress passed a resolution in 1926 for an annual observance and Veterans Day became a national holiday in 1938. It wasn’t until 1954 that President Dwight D. Eisenhower, one of the most decorated veterans in U.S. history, officially changed the name from Armistice Day to Veterans Day. For part of the 1970s, Veterans Day was celebrated on the fourth Monday in October. But, due to the historical significance of the date, in 1975 President Gerald Ford sagely returned the holiday to November 11.

Nowadays, references to the 1970s have inflation connotations attached to them. Yesterday’s consumer price index (CPI) clearly qualifies for that characterization, and not just because the forecasting community was caught completely offsides…again. It wasn’t so much that the month-over-month and year-over-year (YoY) changes for both the CPI and core CPI smashed through consensus estimates. It was that every estimate by every economist in Bloomberg’s survey for all four measures fell shy of the official results.

Bond vigilantes assemble! The surprise factor from the CPI generated a level-shift up in the U.S. Treasury curve as shorts were likely fleeced on the back of last week’s rally in the bond market. The bulge was greatest in the belly of the curve, at the 5-year point, generating additional flattening in the 5s30s curve under the 70-basis point mark.

Moreover, both inflation breakevens and real yields rose, the former by more than the latter. Earlier in the trading session, most of the move in nominal yields was driven by inflation expectations, as rates traders adjusted to the reality of higher inflation. Later in the session, vigilantes pushed up real yields, building in a Fed boxed tighter into a corner of its own making. To that end, Fed fund futures priced in one quarter-point hike by July 2022’s FOMC meeting and more than two by the December meeting.

Back to those 1970s references… Nothing gets bond bears more lathered up than an inflation comparison to the bell-bottom decade. As you see on the left, in the last five months, the short-run core CPI inflation trend (six-month annualized) has run between 5.9% and 6.8%. These elevated rates also prevailed in the 1970s. From the early 1980s to (what was the) present, these levels were seen as the ceiling for the short-run core trend.

This narrative will feed on itself, giving bears more ammunition. The short-run inflation trend (six-month annualized) is running above the medium-run path (year-over-year), and the latter usually converges to the former. Core CPI inflation forecasts are likely to be chased up from today’s 4.6% annual rate. And core inflation is the operational target for the Fed – it captures the underlying inflation dynamic by wiping clean those (most meaningful but volatile) food and energy prices that can be subject to supply shocks, geopolitical risks and acts of God.

Playing devil’s advocate: What if the Fed was right in letting inflation run hot? Conventional wisdom and yesterday’s bond market reaction suggest the answer is a decided ‘no’. But what if the kind of inflation that’s brewing was damaging consumer purchasing power, future consumer spending prospects and thereby endangered the Fed’s maximum inclusive employment mandate?

Many moons – Feathers – ago, we introduced the concept of the Household Budget Inflation Gauge (HBIG). Quite simply, it’s “Needs,” or nondiscretionary, inflation. Think of a typical household budget — a compilation of prices for food & beverages, energy, clothing, household supplies, housing services, utilities, health care, home/auto/health insurance, phone/TV/internet, higher education and personal care products & services.

In October, the HBIG rose to a 6.4% YoY rate, the highest since the Great Recession. Applying our favorite normalizer, the z-score (deviation from the mean adjusted for volatility), the October HBIG translated to a 2.1 on the z-scale. Of the seven other documented precedents, five were either leading up to or during the 2007-09 recession or after the massive distortions that came ashore in 2005’s Hurricane Katrina.

A high and rising HBIG is more damaging to household budgets down the income stack. Worker wage inflation from the 80% of employees that are not managers proxies and has run up from April’s 1.1% annual rate to last month’s 5.8% YoY pace; the HBIG has outpaced wages in five of those seven months, October included.

Any veteran can tell you that Needs inflation cannot be avoided. The bond market has been conditioned by the Fed to sell the upside news of upside inflation surprises. The thing is, if the HBIG was the operational inflation target, the Fed should react in opposite fashion – lean easier, not tighter. Based on last week’s signaling from Powell & Co. that it’s not “a good time to raise interest rates…because we want to see the labor market heal further,” the Fed may be inadvertently doing just that.