02122021 :: Friday finance

A partial digest

Philip Valenta, MSF
Feb 13 · 7 min read

It’s day 24 of the Biden-Harris administration.

Concern is growing over the worsening worldwide semiconductor shortage, the news of which began in earnest a couple of weeks ago, but traces some of its roots to the Trump administration’s trade wars. Since chips are a critical component of so many goods we consume in our increasingly digital world, one question is how one hedges such a thing, now that it’s reached a point of critical mass.

First, we’d want to seek out the source of the bottleneck. Sometimes, that can be with the most primary ingredients in the making of the product that is in a state of scarcity. In the case of chips, the principal raw material at this time is silicon, obtained from mined quartz. That said, the inputs vary depending on the type of chip and may include other elements such as copper and zinc.

The problem doesn’t appear to be with the availability or sourcing of the raw materials, however, but rather firmly with the manufacturing of the chips themselves. Ever-increasing demand and supply side shocks over time have coalesced into the current reality. Relief can only come in the form of an immediate and complete alternative to semiconductors, or patience while the manufacturers figure out how to expand their capacity to make more of all kinds of chips. Obviously, we’re looking at the latter (though semiconductor alternatives are being researched).

In that case, it’s possible that the chipmaker industry will benefit the most from current circumstances, as the situation seems to spell prolonged demand for the product. Through sector trading, it may be possible to capitalize on a shortage that may negatively impact everyone else who’s left scrambling to adjust their own business operations. (GM and other auto manufacturers come to mind, though the US government says it will step in to help while Toyota, for its part, thought ahead and already stockpiled several months’ supply.)

SOXL, a highly leveraged Direxion-branded ETF, may be a suitable vehicle for the trade in question, but there are others, including Defiance’s QTUM fund that also concentrates on quantum computing. In other words, any ETF that offers significant exposure to the semiconductor space via holdings of multiple chipmakers could be a decent pick. VanEck’s SMH, iShares’ SOXX, and State Street’s XSD would fit the bill as well, and without the additional volatility of SOXL (unless you’re purposely seeking amplification).

A side note on the extreme demand for semiconductors: It’s no coincidence that the shortage coincides with pandemic-fueled spending on technological goods and innovation, but also perhaps no coincidence that it coincides with immense interest in crypto.

[tracking: SOXL, QTUM, SMH, SOXX, XSD]

On that note, total crypto market cap is nearing $1.5 trillion. Corporate America is furthering its adoption, including the likes of Mastercard and BNY Mellon. No matter what government and central bank officials have said up to now, they tend not to say no to America’s corporate giants, for better or worse.

[tracking: VYGVF, ETH, BTC, BITW]

Oil has been fulfilling its role as an inflation hedge, even though it’s hedging inflation expectations, not actual systemic inflation. Indeed, this past week inflation came in under expectations, the 10Y has ceased rising for now, and the Federal Reserve is going to keep doing what it’s doing: the Fed funds rate plan stays in effect, and asset purchases are to continue.

In a speech given earlier in the week, Powell stated the following, reiterating the Fed’s commitment to its policy shift towards average inflation targeting (key phrases bolded for emphasis):

Recognizing the economy’s ability to sustain a robust job market without causing an unwanted increase in inflation, …our policy decisions will be informed by our “assessments of the shortfalls of employment from its maximum level” rather than by “deviations from its maximum level.” This means that we will not tighten monetary policy solely in response to a strong labor market. Finally, to counter the adverse economic dynamics that could ensue from declines in inflation expectations in an environment where our main policy tool is more frequently constrained, we now explicitly seek to achieve inflation that averages 2 percent over time. This means that following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time in the service of keeping inflation expectations well anchored at our 2 percent longer-run goal.

…In particular, we expect that it will be appropriate to maintain the current accommodative target range of the federal funds rate until labor market conditions have reached levels consistent with maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, we will continue to increase our holdings of Treasury securities and agency mortgage-backed securities by $80 billion and $40 billion per month, respectively, until substantial further progress has been made toward our maximum-employment and price-stability goals.¹

Initial jobless claims fell to 793k (SA) for the week ending February 6 from an upwardly revised 812k for the week prior. One year ago, we saw 204k.²

To add to this, close to 335k on an unadjusted basis applied for PUA, down from the previous week’s upwardly revised 369k.

As of January 23, over 20.4 million people (UA) were still claiming unemployment benefits of some kind, up 2.6 million from the week prior. In the comparable week one year ago, the US witnessed almost 2.2 million people claiming unemployment insurance from all programs together.³ The PUA program saw the biggest gain at close to 1.5 million additional individuals, with the PEUC not far behind at almost 1.2 million from January 16 to January 23.

For the one year period covering December 2019 to December 2020, more metropolitan areas than not saw employment decline.

Mortgage applications decreased a blended 4.1% for the week ending February 5, due to a decrease of 4% in refis and 5% in homebuyer applications. The 30Y fixed came in at 2.96%.

The expectation here is still for incoming housing market weakness. Some 2.7 million households remain in a state of mortgage forbearance. That number has been steady for a little while, implying that without material improvement in the economy and labor market in particular, we could eventually begin to see some foreclosures.

Indeed, a recently released study indicated that after December of last year, 1.2 million mortgagors at large believe they are at risk of being foreclosed upon. This same study found that 2.38 million mortgagors at large missed their December mortgage payment.

Meanwhile, loan originators have continued to relax standards in an apparent bid to keep the credit flowing and the housing market party going. We have seen that show before.

[tracking: NLY, XLRE, DRV]

Used car trends: The latest Carvana car count as of February 12 increased 1.91% to 35,383 vehicles from 34,721 the week prior, while the CarGurus average price index interestingly rose ever so slightly to $22,373 from $22,317 (0.25%). This is the highest car count reported since the start of data gathering for this newsletter in November of last year.

Elsewhere, total new and certified pre-owned (CPO) vehicle sales declined for the month of January from December levels, according to Autodata Corporation. These are actual monthly figures that have not been seasonally adjusted or annualized.

Sovereign matters:

  • Fitch revised downward Japan’s outlook to negative, citing more economic contraction as the pandemic grinds on; projected increases in fiscal deficits; the potential for additional coronavirus containment measures that may dampen economic activity; and the country’s demographics and workforce trends, among other elements.
  • Moody’s has upgraded Lithuania on account of its growth prospects — driven by things like growing eurozone investment and institutional reforms — and solid fiscal health, in spite of the pandemic.
[tracking: EDC/EDZ, VWO]

As of the CDC’s February 12 update, the US witnessed 179,424 fatalities strictly classified as “pneumonia” with no acknowledgement of COVID-19 on the death certificates, per excess deaths data. That’s an average of 439 people per day. As the CDC points out, many of these could be miscategorized COVID-19 fatalities going unrecognized in official tallies, meaning we’re undercounting. This, in addition to the official coronavirus death toll of 475,224, puts the probable COVID-19 death figure somewhere north of 570k. Across all causes of death, we suffered 118% of the deaths in 2020 that we would have expected in non-pandemic times given historical trends. Along with other situations where COVID-19 was not designated as a cause of death but where SARS-CoV-2 likely triggered a condition or exacerbated a preexisting one — heart disease, hypertension, diabetes, dementia — the “real” fatality count is probably much higher.


¹ Powell, Jerome H. “Speech by Chair Powell on Getting back to a Strong Labor Market.” At the Economic Club of New York (via webcast). Board of Governors of the Federal Reserve System (February 10, 2021).

² The data quality of these numbers may still compromised, as outlined in a prior issue and based on a GAO report.

³ “Unemployment Insurance Weekly Claims News Release.” Release Number: USDL 21–261-NAT. US Department of Labor (February 11, 2021).



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