YouTube vs. Netflix vs. Twitter; Sky-High Lumber Prices Are Back; The Year of Inflation Infamy; Congress members trading stocks; Prospects for Build Back Better; Final pictures from the Masai Mara
1) The chart in this tweet is one important reason why Alphabet (GOOGL) remains a core holding in both our Empire Stock Investor and Empire Investment Report newsletters: YouTube is an unbelievably great business!
2) Stories about inflation continue to dominate the headlines. There's little sign that it's going away soon – and it's even accelerating in some sectors, as this Wall Street Journal article highlights: Sky-High Lumber Prices Are Back. Excerpt:
Lumber prices have shot up again in a rise reminiscent of a year ago, when high-climbing wood prices warned of the hinky supply lines and broad inflation to come.
Futures for January delivery ended Friday at $1,089.10 per thousand board feet, twice the price for a prompt delivery in mid-November...
Though lumber is traded in esoteric markets, two-by-fours became a proxy in the debate over whether inflation would fade with distance from the lockdown. In June, Federal Reserve Chairman Jerome Powell pointed to lumber prices plunging from a shocking peak as evidence that surging costs would subside.
3) Nobel Prize-winning economist and New York Times columnist Paul Krugman has many haters among my readers, but I think even they would have to admit that his recent missive about inflation, "The Year of Inflation Infamy," is thoughtful and balanced.
While he continues to believe that high inflation will prove to be transitory, Krugman acknowledges that he's been wrong so far and outlines what evidence could cause him to change his mind:
So why has inflation surged this year, and will it stay high?
Mainstream economists are currently divided between what are now widely called Team Transitory and Team Persistent. Team Transitory, myself included, has argued that we're looking at a temporary blip – although longer lasting than we first expected. Others, however, warn that we may face something comparable to the stagflation of the 1970s. And credit where credit is due: So far, warnings about inflation have proved right, while Team Transitory's predictions that inflation would quickly fade have been wrong.
But this inflation hasn't followed a simple script. What we're seeing instead is a strange episode that exhibits some parallels to past events but also includes new elements...
I'm a card-carrying member of Team Transitory. But I would reconsider my allegiance if I saw evidence that expectations of future inflation are starting to drive prices – that is, if there were widespread stories of producers raising prices, even though costs and demand for their products aren't exceptionally high, because they expect rising costs or rising prices on the part of competitors over the next year or two. That's what kept inflation high even through recessions in the 1970s.
So far, I don't see signs that this is happening – although the truth is that we don't have good ways to track the relevant expectations. I've been looking at stories in the business press and surveys like the Fed's Beige Book, which asks many businesses about economic conditions; I haven't (yet?) seen reports of expectations-driven inflation. Bond markets are essentially predicting a temporary burst of inflation that will subside over time. Consumers say that this is a bad time to buy many durable goods, which they wouldn't say if they expected prices to rise even more in the future.
For what it's worth, the Federal Reserve, while it has stopped using the term "transitory," still appears to believe that we're mostly looking at a fairly short-term problem, declaring in its most recent statement, "Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation."
Still, an unmooring of inflation expectations is possible. Given that, what should policymakers be doing right now? And by "policymakers," I basically mean the Fed; political posturing aside, since, given congressional deadlock, nothing that will make a material difference to inflation is likely to happen on the fiscal side, inflation policy mainly means monetary policy.
4) After a 60 Minutes story aired in November 2011 that documented all sorts of insider stock trading by members of Congress, our elected leaders were finally shamed into action: Six months later, they passed, and President Barack Obama signed into law the Stop Trading on Congressional Knowledge ("STOCK") Act, which prohibits the use of nonpublic information for private profit, including insider trading by members of Congress and other government employees.
Well, here we are almost 10 years later, and I'm sure you will be shocked – shocked – to learn that a recent study by Insider revealed that:
Dozens of federal lawmakers and at least 182 top congressional staffers are violating a federal conflict-of-interest law known as the STOCK Act. Others are failing to avoid clashes between their personal finances and public duties.
In light of this, House Speaker Nancy Pelosi on Wednesday was asked if she supported barring members of Congress and their spouses from trading individual stocks while in office, and she replied (video here):
No... We are a free-market economy. They should be able to participate in that.
I suppose her response isn't surprising, given that, while she doesn't own any individual stocks herself, her husband, "investor Paul Pelosi, frequently trades significant numbers of stocks."
Speaker Pelosi is dead wrong on this. The optics are terrible – why give Americans one more reason to distrust Congress?
I think if you're going to serve or work at a high level in Congress, which almost definitionally means you're regularly gaining access to stock- and market-moving information, neither you nor your spouse should be able to trade stocks (though I see no problem allowing people to hold stocks they owned before entering Congress).
5) Speaking of Congress, Sen. Joe Manchin (D-WV) dropped a bomb on President Joe Biden's Build Back Better program on Sunday, saying: "I cannot vote to continue with this piece of legislation."
Conventional wisdom is that the legislation is dead, with Republicans celebrating and Democrats mourning, but all of this may be premature...
According to real-money betting site PredictIt, there's a 63% chance that some version of Build Back Better will pass in the first half of next year, likely in the $1 trillion to $1.8 trillion range. Here's a table of the latest odds:
I share this for two reasons: First, since we all have political biases, it's important to seek out independent, nonpartisan sources of information.
Second, maybe there are some investment opportunities here. What companies stand to benefit if this legislation passes? And are any of their stocks beaten up because investors think it won't pass?
6) We flew back from the Masai Mara today and will spend a couple of days at my parents' home outside Nairobi before heading down to their beach house on the island of Lamu on Thursday. Here are some final pictures from the Mara (I've posted more on Facebook here):
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.