Our Growing Cloud Dependency
And just like that, the markets give back. After several weeks of fear and uncertainty, the markets all gained approximately 3.5% this week. While still flat for the month, it appears momentum is beginning to pick up into the end of the year. Better late than never!
On the economy, it was a momentous week. Perhaps the main surprise was the steep rise in inflation to 6.8% y/y with core inflation rising 4.9%. The largest contributors are gasoline, shelter, food, new and used cars, and energy. You know… the stuff we use every day! Fed Chair Jerome Powell wasn’t kidding when he said we need to retire the word “transitory” as it now appears he was quite wrong in his assessment earlier this year. Any which way you cut it, inflation is running red hot and represents the biggest jump since June 1982. While COVID remains a concern, the real issue going into 2022 will be inflation. I expect it will take center stage as the Federal Reserve reconsiders its timeline for monetary tightening. Analysts now expect the bond taper program to end in March instead of June with expectations of the first rate hike as early as mid-year.
However, hope and optimism for the coming year is running high which is a unique phenomenon to this time of the year. As analysts work on projections, they inevitably estimate too high which is an annual occurrence. The analogous phenomenon is consumer sentiment which also rises at this time of year, perhaps buoyed by the holidays. The University of Michigan Consumer Sentiment index rose considerably in December versus both the prior period and the consensus expectation. Interestingly, the biggest gains in sentiment were among those households with income in the lowest third of the income distribution. This portends well for the labor market and suggests maybe people are ready to return to work in 2022.
Along those lines, job openings rose past eleven million, but the quits rate eased to 2.8%. The biggest gains were to be found in the hotel and entertainment industries, followed by nondurable goods manufacturing. However, it is a mixed bag as productivity in the third quarter had the largest decline in six decades (June 1960). Labor costs rose at an annual rate of 9.6% in Q3, which was made up of a 3.9% increase in hourly compensation and a 5.2% decrease in productivity. I have yet to see an explanation for this precipitous fall in productivity. Yet at the same time, weekly jobless claims fell to 184,000 which is the lowest level in 52 years. If you are beginning to see a trend, good for you. The economic data is both the best it has ever been and in some cases the worst it has ever been. In large part, this contributes to the schizophrenic nature of the stock market these days. While the data suggests that the economy is running too hot, for many it just doesn’t feel like it. Long lines, inflation, and COVID continue to act as a wet blanket. Yet underneath it all, the economic engine is running faster and hotter than it has in a very long time.
In other news, researchers this week announced that Viagra can lower the risk of Alzheimer’s disease. While further trials are necessary, there is evidence suggesting its potential to improve the dynamics of cerebral blood flow. New Zealand is banning cigarettes for future generations. In an attempt to ensure young people never start smoking, those born after 2008 will not be able to buy cigarettes or tobacco products in their lifetime under a new law expected to be enacted soon. And lastly, Uber has expanded its delivery offerings from food to other items including, Christmas trees and wreaths in select markets. It makes me wonder what won’t they deliver? With workers slowly but surely returning to the office, consumer sentiment rising, the debt ceiling deadline extended again, and the evidence suggesting Omicron is less serious than initially believed, I am certain better days are ahead.
In closing, I turn to Amazon whose cloud-computing division on Tuesday experienced a historic outage. It is easy to underestimate just how connected everything is these days. Due to the outage, robotic vacuum cleaners couldn’t be summoned, Whole Foods orders were suddenly cancelled, fulfillment center and delivery operations were brought to a standstill, delivery drivers internal apps used to scan packages and load delivery routes stopped working, an online teaching platform with over 30 million users went dark, and an online test proctoring service which many colleges use (while in the middle of finals week) left teachers cancelling exams. Even self-cleaning litter boxes stopped working! It took Amazon roughly nine hours to resolve the issues during which time many were left wondering how we got here. It once again points to our dependence on technology and increasingly on fewer and fewer vendors. Fortunately, the self-feeding cat bowls continued to work preventing a potential catastrophe. Now you know.
Bruce J. Mason, MBA