On Tuesday, Nov. 30, during testimony before the U.S. Senate Banking Committee, Jerome Powell, chairman of the Federal Reserve bank, did an about face on monetary policy. Powell appeared to take on a new mantle, that of the nation's chief inflation fighter, casting aside his former dovish stance towards continued easing of monetary stimulus. Investors are asking "what changed?"

 

"We're now looking at an economy that's very strong and inflationary pressures that are high," Powell said. He went on to say that it might be "appropriate to wrap up our purchases a few months earlier."

 

Powell was referring to the planned tapering of the Fed's monthly purchases of fixed income assets. Since March 2020, the Fed has purchased at least $120 billion in Treasury bonds, and mortgage-backed securities as part of an emergency monetary stimulus program to combat the effects of the pandemic on the economy.

 

Last month, the Fed, after months and months of preparing the market for a purchase reduction, finally announced they planned to reduce purchases by $15 billion per month until the purchase program ends sometime next summer. Investors, having taken that on board, were suddenly told this week that the timetable may be accelerated.

 

For weeks, central banks have been struggling with rising prices throughout the global economy. Several nations have already taken steps to rein in inflation by raising interest rates. Here in the U.S., the annual inflation reached its' highest level in 30 years two months ago. As inflation continues to climb and spread throughout the economy, the pressure for the Fed to do something has mounted.

 

Inflation, like almost everything else in this nation, has become a political football. Republicans have used the fear of inflation to scuttle the administration's Build Back Better spending proposal. At the same time, Democrats have argued that pulling back support for the economy until unemployment returns to its pre-pandemic levels would be a mistake. As it stands, the nation has recovered about 75 percent of the jobs lost, but there are still millions of Americans that have yet to return to the labor force.

 

The fly in the employment ointment continues to be the coronavirus. Each new variant of the virus delays further gains in labor force participation. Over the Thanksgiving weekend, for example, another variant called Omicron, presented itself with the first case discovered in California. Depending upon the outcome of this new threat, the risk to inflation could rise as supply chain problems worsen throughout global economies.

 

At this point, however, inflation is increasing its hold on more and more areas of the economy, regardless of the supply chains problems. "I think the risk of higher inflation has increased," Chairman Powell said, adding that he fears inflation will persist "well into next year."

 

Powell's testimony before Congress was his first public appearance since President Biden nominated him for a second term. As I mentioned, inflation has become a political problem, especially for the president. Was it an accident that Powell's stance on inflation altered just a week after his nomination?

 

No one knows what the two men discussed during their meetings, but it doesn't take a rocket scientist to imagine that the issue of inflation came up. Some think that Fed vice chairman, Lael Brainard, lost out for the top spot because she was perceived to be a little less hawkish on inflation.

 

Whether political or not, Jerome Powell's decision to tighten monetary policy in the months ahead, while the coronavirus continues to be a serious issue, heightens the risk to investors in the future. 

 

Consumers are making up for last year's subdued Thanksgiving holiday. Air travel has jumped. Traffic on the roads is expected to be heavy. Grocery stores are crowded, and families are getting back together again all over the country. Hurrah!

 

As most readers know, last year's holiday was a bit of a dud largely because of the pandemic. Fewer people travelled. Instead, many of us decided to play it safe. Across the nation, family members decided to remain home, avoid the possibility of contagion, and postpone celebrating together until this year. That was a smart decision. In the meantime, the coronavirus cases have declined, vaccinations rates have risen, and America has reopened its borders to vaccinated foreign travelers

 

For tourists and other visitors, New York City, Las Vegas, and Disney World top the list of favored holiday destinations during Thanksgiving week, according to Trivago, a leading global accommodation search platform. On the domestic front, Triple A is predicting that 53.4 million people plan to travel during the holiday (myself included). That is up 80 percent from last year. This uptick in travel is likely to cause some chaos on the roads, rails, and airports, but nothing out of the ordinary for one of the most traveled holidays of the year.

 

Inflation and supply chain issues, however, are presenting a variety of obstacles for consumers.  Higher gasoline prices are raising the cost of travel. The average price at the pump is around $3.40 a gallon for this week, which is the highest price in seven years. The supply chain shortages in the semiconductor sector have hurt new vehicle production overall, which has led to a scarcity of rental cars. Car rentals prices (if you can find one) are through the roof.

 

Thanksgiving dinner will also be more expensive, according to the American Farm Bureau Federation.  A dinner for 10 people is pegged at $53.31, which is a 14 percent increase from last year. That sounds awful high, but last year prices were depressed. The average total cost of that same dinner in 2020 was $46.90. That was a $2.01 decrease from 2019, and the lowest price tag for a Turkey Day dinner since 2010.

 

Supply shortages have also cropped up on the grocery shelves. Canned jellied cranberry sauce, produced by Ocean Spray, a cooperative of more than 700 farms, may not be easy to find this year. It seems that there is a can shortage that has forced the cooperative to switch can sizes. The disruption created a scarcity of the Thanksgiving staple just in time for the holiday. Supplies of cold storage frozen turkeys are also at their lowest level ever. Prices for items such as pie crusts, dinner rolls, veggie trays, and fresh cranberries have seen double-digit increases. The good news, however, is that stuffing mix, for some reason, suffered a 19 percent price decline.   

 

Consumer data indicates that shoppers also hit the grocery stores somewhat earlier this year to get ahead of rising prices and worries that there might be product shortages. Shoppers have also been switching to lower price brands and are visiting multiple retailers in search of lower prices. Count me as guilty of all the above.

 

As a side note, I will be visiting with family for the holiday and staying over into the weekend. As a result, I won't be posting my usual Friday market column this week. To all my readers, have a Happy Thanksgiving.

 

Stocks and bonds traded in a tight range for most of the week. Some stocks were rewarded, while others punished, based on their earnings results. The U.S. dollar hit a series of new yearly highs, and just about everyone is waiting for President Biden's pick to head the Federal Reserve Bank.

 

That announcement could come as early as this weekend. Chairman Jerome Powell's term will end in February 2022. He is a Republican, picked by former President Donald Trump. He had a somewhat rocky relationship with the ex-president but did manage to maintain the independence of the central bank despite Trump's attempted interference. His track record through the pandemic makes him a strong choice for a second term.

 

An equally strong candidate for the job is Lael Brainard, a Fed Governor since 2014, and an economist (as well as a Democrat). She is perceived to be a bit more dovish than Powell (if that is possible), but as far as policy is concerned there is little difference between the two candidates.

 

There has been some talk that there may be a more hawkish dark horse candidate in the wings. Inflation has become both an economic as well as a political problem for the president. While the pandemic and its aftermath are the reasons inflation has risen, it is the person sitting in the White House who catches the blame. As such, some think Biden might be tempted to look further afield, picking someone who might be able to reign in inflation a little faster. 

 

The House was scheduled to vote Friday on the $1.7 trillion Biden social spending program. The Congressional Budget Office (CBO) released its estimate of what all this spending will ultimately cost the country in the years ahead. The CBO found that the bill would contribute $367 billion to the deficit over a decade. The Democrat leadership immediately pushed for a vote and will likely succeed. Next, the legislation goes to the Senate where it will be debated and changed before coming up for a vote. That process will probably require several weeks.

 

Expectations for a strong holiday spending season were reinforced this week by several big retail companies who are predicting that the consumers will be willing to spend, despite labor shortages, supply chain issues, and higher price tags due to inflation. While this is good news for the economy, it creates additional worries over the future rate of inflation for investors.

 

We are already seeing the impact of inflation on some companies where profit margins have suffered due to higher input costs. Passing those costs on to consumers works for now in some sectors, but there will come a time when consumers reduce their spending in the face of still-higher price increases.

 

The higher the inflation rate climbs, the more pressure it places on central banks to control it by raising interest rates. As I have written, several central banks (especially in emerging market countries) have already begun that process. Investors fret that the Fed has miscalculated the strength of inflation and will be forced to taper faster and raise interest rates sooner than they have indicated. The bond market is assuming the Fed will raise rates three times in 2022 — in June, September, and a third hike in December. A change in those assumptions could spell trouble for the financial markets.

 

Normally, the holiday-shortened week ahead is kind to the stock markets. But there is no such thing as normal in today's markets. Technically, financial markets are open all week, except for Thursday and half of Friday, but most traders take Friday off. Therefore, it wouldn't take much to move markets given the anemic volume and lack of participants. It wouldn't surprise me to see an abnormal week ahead, either up or down.

 

The U.S. labor shortage is hitting the public education sector hard. Yes, COVID-19 and its mutations have had a lot to do with the lack of teachers, but the problem predates the pandemic. In just the last two months, 65,000 public education employees left the industry.

 

Across the United States, in October 2021, there were 575,000 fewer state and local education employees than in February 2020, according to the latest employment report of the Bureau of Labor Statistics. The pandemic, in some ways, was simply the straw that broke this camel's back.

 

Stagnant wages, or worse, falling wages, have beset the teaching industry for years. In 2018, for example, the wage gap between teachers and a comparably educated U.S. workforce was roughly 21 percent. Twenty-five years ago, that same wage gap was only 6 percent, but beginning to grow. And while most teachers, like everyone else, have enjoyed yearly wage gains of about 0.7 percent, that is less than half the average annual gains for the rest of the civilian workforce.

 

The pay issue extends beyond the teachers, however. Support staff and school bus drivers have had the same issues. In today's strapped labor market, public education support workers have a choice.  Why continue to file school records, answer phones, or maneuver a bus load of kids when private sector offices and trucking companies are paying far more (with benefits) for that labor?

 

As you might imagine, fear of COVID-19 and continued stress brought on by the pandemic provided the impetus many teachers needed to make the decision to retire, or simply quit. Some hoped that as the pandemic waned, teachers and support staff would return, but that has not been the case. As a result, schools are making do where they can.

 

Some schools are continuing and extending their efforts to provide virtual learning. Others are shortening teaching hours, or in some cases, simply closing for a day or two per week. A school administrator's worst nightmare today is finding substitutes for a teacher on holiday, sick, or who enters quarantine after testing positive for the coronavirus. Those who might be willing to fill in as a teaching substitute are opting instead for different jobs. That is because temporary teaching wages are so low that cooking burgers at fast food restaurants pays more.

 

Unfortunately, the present demand for teachers is far outstripping the supply.  Less and less college and university students are willing to embark on a teaching career. Many would face decades of repaying student loan debts on skimpy salaries with little or no prospects of ever making ends meet.

 

The public school labor shortage is worse, depending upon geographic location, grades, and subject matter. High schools and middle schools have always been harder to staff than elementary schools. STEM areas (science, math, special education and foreign languages) have always been chronically understaffed and have become more so since COVID-19. The Southern, Southwestern, and Western U.S. have historically struggled with teacher shortages. It is also the case when comparing urban and rural schools, versus easier to staff suburban schools.  

 

Those teachers who have maintained their careers and jobs over the last year or two have had to contend with an overwhelming amount of responsibility during the pandemic. Overworked and stressed, many teachers are in burnout mode with few avenues to reduce their immediate symptoms. And while my heart goes out to this beleaguered group of workers, the impact of this shortage has severe ramifications for the future of education in America.

 

As most readers know, the U.S. continues to slip in educational rankings when compared to the developed world. It is most apparent in science and math. However, we are still perceived as having the best all-around educational system in the world. In order to remain at the top, we need good teachers — well-paid, well-educated people — who are proud and fulfilled in their chosen careers. As a first step, raising wages would seem to me to be a no-brainer. 

 

The stock and bond markets knew inflation was coming. This week's 6.2 percent jump in the Consumer Price Index drove home the fact that inflation has become a fact of economic life, at least for the near future.

 

The jury is still out on whether inflation will prove to be "transitory" as the Federal Reserve Bank argues and as some economists believe. Others fear that we could be on the verge of something a little more serious. The fear is that the Fed might be forced to raise interest rates if that were the case.

 

The Producer Price Index (PPI) and the Consumer Price Index (CPI) both came in a little warmer than forecasted on a year-over-year basis, but not as high as some expected. And yet the U.S. dollar spiked to new highs, the yield on the U.S. Treasury rose by more than 10 basis points, gold and silver jumped, and stocks dropped.

 

The culprit behind the ongoing pressure on the inflation rate, as readers know, is the heightened consumer demand caused by the reopening of the economy and the supply chain issues that do not seem to be easing. The pandemic can be blamed for both conditions.

 

For me, the markets were so over-extended and in need of a pullback that traders were just looking for a reason to take down the averages. As you may recall, I had been expecting a minor bout of profit-taking, no more than 3 percent or so, in the markets. This week, the S&P 500 Index lost almost 2 percent, while some other indexes like the small-cap, Russell 2000 Index and some technology areas were down more than 3 percent before rebounding.

 

Between the good news on the passage of the $1 trillion infrastructure bi-partisan spending program (which now awaits signing by President Biden) and the climbing rate of inflation, the market winners have been mostly in sectors that benefit from construction and inflation. Mines and metals, gold and silver, basic materials, lithium, uranium and rare earth plays have climbed during the past few days. These sectors have played a back seat to large-cap technology stocks over the last two months. We have seen this kind of rotation many times in the past. Once prices have been bid up to unreasonable levels, short-term traders will switch their focus back to technology, or reopening plays. What is important to understand is that the overall markets tend to rise, or at worse move sideways, as some sectors that are out of favor are simply replaced by those in favor. 

 

Consolidation is healthy for the markets. A period of digesting gains, possibly over the next few days, would do wonders for reducing the overbought conditions that presently plague many stocks and sectors. Investors should keep their eyes on the U.S. dollar, which appears to want to climb even higher. If it does, it could squash the present rise in commodities.

 

Gold is another asset I am tracking closely. It has been one of the world's worst performing assets in 2021. If inflation fears continue to worry investors, there is a possibility that gold may reemerge in its traditional role as an inflation hedge.

 

Last, but not least is the cannabis space. A bill introduced by Nancy Mace, a Republican House member from South Carolina, to decriminalize and regulate what is now a federally illegal substance, sent pot stocks higher. This could be a huge boost for the U.S. cannabis industry. Stock prices in this industry has languished all year, despite improving profitability in many cases.