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Delta Air Lines is expected to furlough almost 1,950 pilots in October as the industry struggles to recover from the virus-induced downturn. Some pilots, not necessarily ones from Delta, who see the writing on the wall, are mulling over the idea of an occupation switch. 

CNN spoke with airline pilot Michelle Bishop, who is anticipating pilots like herself will be laid off in the coming months, has explored other options: 

“I’m just trying to fly as much as I can, while I can, because I love it,” Bishop said, who has been an airline pilot for two decades, is now considering becoming a drone pilot. 

Bishop, along with 2,000 other pilots, and 1,500 members of the general public, have signed up to become drone pilots for Connecticut-based startup Aquiline Drones.

Think of Aquiline as the Uber or Lyft for drone pilots. Customers log into an Aquiline smartphone app for drone services. The app matches the customer with the closet pilot to conduct a wide array of services, including aerial footage for weddings, real estate listings, and property surveying. 

Bishop, including thousands of other pilots and non-pilots, will start Aquiline’s licensing program, called “Flight to the Future” on September 01. 

Airline pilots receive a cheaper rate for the Aquiline’s licensing program than non-pilots.

The program is a six-eight week virtual course that will train folks in becoming drone pilots and familiarize themselves with Aquiline’s backend systems. Once the students pass the Aquiline course and the Federal Aviation Administration’s test, each drone pilot will be given an LLC, an option to finance a $4,000 drone, and insurance. 

“I actually know zero about drones,” Bishop said. “But if I was going to have to stop flying, I wanted the opportunity to learn something new.” 

Pilots are expected to earn a minimum of $300 per job, at a $150 per hour rate. CNN said:

“The business model comes straight from ridesharing business’ playbook, and it’s a model that’s hailed by gig economy proponents as one that offers workers flexible hours and a “be your own boss” ethos. But it’s also a model that comes with some drawbacks for workers: Independent contractors are not guaranteed affordable health insurance, paid time off, or any of the other benefits offered to full-time workers.” 

Bishop plans to start classes next week, though she said she’s also interested in becoming a realtor. 

With the travel and tourism industry busted, the airline industry in collapse, and carriers grounding fleets for the next couple of years – will airline pilots like Bishop, who are slated to be furloughed, transition to become drone pilots? 

Authored by Tsvetana Paraskova va OilPrice.com,

Amid a heatwave in the West, the largest U.S. solar state, California, is grappling with power issues and with keeping its electricity grid stable as demand exceeds supply. And in a looming renewable future, those power disruptions just might be a sign of things to come.

California energy consumers were warned of rolling outages as there is insufficient energy to meet the high demand during the heatwave, the California Independent System Operator (ISO) said over the weekend. 

The warning to Californians about the outages and strained grid should serve as a warning for policymakers and system operators across the United States and elsewhere: a rush to boost renewable energy power generation should be coupled with – and even preceded by – more careful planning on how to ensure the reliability and stability of the power grid.  

California’s Struggles With Power Reliability

In the case of California, where solar power supplies more than 20 percent of electricity as per the Solar Energy Industries Association (SEIA), the rolling outages this week were the worst such outages since the 2000-2001 energy crisis in the state.   

Some blame the current power crisis on California’s aggressive renewable energy rollout and retirement of natural gas-powered plants. Others say that there is a way for the state to reconcile renewables with reliability, although this would not come in the near term and certainly not soon enough to help with the current power supply issues.

It would seem that California has put the renewable cart before the proverbial horse.

The blame game and the debate about how exactly to cope with reliability in a heavily renewable power grid highlight the fact that meeting clean energy goals and reducing emissions should be made only after careful planning on how to ensure reliable power supply to customers and how to prepare the grid for an increased share of solar and wind power.

Earlier this week, California Governor Gavin Newsom sent a letter to California Independent System Operator (CAISO), the California Public Utilities Commission (CPUC), and the California Energy Commission (CEC), demanding “an investigation into the service disruptions that occurred over the weekend and the energy agencies’ failure to predict and mitigate them.”

At the same time, Governor Newsom signed an emergency proclamation designed to free up energy capacity and reduce the need for temporary energy service disruptions.

“These blackouts, which occurred without prior warning or enough time for preparation, are unacceptable and unbefitting of the nation’s largest and most innovative state,” Governor Newsom wrote in the letter.

Are Renewables To Blame For Outages?

In a joint response to the letter, CAISO, CPUC, and CEC said that California’s clean energy plans were not to blame for the rotating outage, although they needed to do more to integrate renewables into the grid.

“Collectively, our organizations want to be clear about one factor that did not cause the rotating outage: California’s commitment to clean energy. Renewable energy did not cause the rotating outages,” they said.

“Our organizations understand the impacts wind and solar have on the grid. We have already taken many steps to integrate these resources, but we clearly need to do more. Clean energy and reliable energy are not contradictory goals.”

The current situation, however, would suggest that that is indeed the case at present.

CAISO President Stephen Berberich said at a meeting on Monday, as carried by Greentech Media,

“The situation we are in could have been avoided.”

The grid operator has been warning regulators for years about the insufficient availability of power supply during the so-called net peak in the evenings when solar power generation is no longer available.

CAISO has warned that “there is inadequate power available during the net peak, the hours when the solar [generation] has left the system,” Berberich said. 

“California, in many ways, is the canary in the coal mine,” Todd Snitchler, CEO at nationwide trade group Electric Power Supply Association, told The Wall Street Journal.

“Many of the natural-gas units that some in California would like to see go away have been exactly what’s needed to keep the system operating,” Snitchler told the Journal.

What’s The Solution?

For California, the solution could include scaling battery storage capacity, not shutting down the Diablo Canyon – the state’s last nuclear power plant – as planned in 2024, and counting nuclear power as part of California’s renewable generation target of 60 percent renewable electricity by 2030, analysts told Los Angeles Times’ Sammy Roth.

According to CAISO’s Berberich, batteries alone will not be enough to solve California’s grid reliability issues while the share of renewable power is set to rise.  

“Batteries won’t fix this alone. They will help, and they’re an important part of a renewable-heavy system. However, they don’t generate any power, and during extended periods of cloud cover over the solar field, there won’t be any energy to charge them,” Berberich told the ISO board this week, as carried by the Financial Times.

Commenting on California’s outages, Rocky Mountain Institute (RMI), a non-profit advocating for a transition to clean energy, said that more batteries would contribute to meeting evening peak demand.

The planned battery capacity increase to 923 MW by the end of the year “could have played an important role in preventing these outages and are poised to play a growing role in the diverse portfolio of resources that is needed to maintain reliability,” RMI said, dismissing the idea that renewables were to blame:

“Such speculation is premature, incomplete, and almost certainly incorrect.”

California’s power supply issues during peak demand serve as a warning for overzealous advocates for a swift shift to renewables and complete decarbonization of the power grid. Such efforts require careful planning to ensure reliability and stability, preferably before utilities, grid operators, and governors realize that even in a heatwave, the sun cannot help with evening peak demand.

Consumer confidence was expected to rise modestly in August (as hope and a record high stock market trump reality once again), but instead it tumbled to 84.8 from a revised lower 91.7 in July (and well below expectations of a 93.0 print)…

• The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – decreased sharply from 95.9 to 84.2.

• The Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – declined from 88.9 in July to 85.2 this month.

This is the lowest headline print since June 2014…

Source: Bloomberg

“The Present Situation Index decreased sharply, with consumers stating that both business and employment conditions had deteriorated over the past month. Consumers’ optimism about the short-term outlook, and their financial prospects, also declined and continues on a downward path. Consumer spending has rebounded in recent months but increasing concerns amongst consumers about the economic outlook and their financial well-being will likely cause spending to cool in the months ahead.”

– Lynn Franco, senior director of economic indicators at the Conference Board, said in a statement.

The share of consumers saying jobs are hard to get jumped to 25.2% from 20.1%. ..

Source: Bloomberg

About 30% of consumers said they expect better economic conditions six months from now, down from 31.6% in July.

The report points to a bumpy economic recovery as Americans grapple with high unemployment and uncertainty about future federal stimulus, with a new version of jobless aid just starting to reach Americans.

Once again the jaws of un-reality snap shut as confidence catches down to savings rates…

It appears the double-dip in confidence is here.

The National Hurricane Center (NHC) published a tropical cyclone update Tuesday morning for Laura, indicating the storm strengthened from a tropical storm to hurricane status in the overnight hours and could deliver a devastating punch to the Gulf Coast late Wednesday. 

“NOAA Hurricane Hunter reports that Laura has become a hurricane,” NHC’s statement read, adding that data from the hurricane hunter aircraft showed maximum sustained winds of 75 mph, with higher gusts. 

“Significant strengthening is forecast during the next 48 hours, and Laura is expected to be a major hurricane at landfall,” NHC warned. 

“Residents along the Texas and Louisiana coasts should anticipate the possibility that Laura will rapidly intensify right up until landfall,” said meteorologist Jeff Masters of Yale Climate Connections, who was quoted by AP News.

Tracking models already suggest landfall will be along the upper Texas coast or southwest Lousiana late Wednesday or Thursday morning.

“In addition to the fierce winds, the hurricane is expected to bring a huge storm surge of Gulf seawater ashore, forecasters warned, potentially as high as 11 feet near the Texas/Louisiana border. On top of that, up to 15 inches of rain could fall in some spots in Louisiana,” AP said. 

Port Arthur, Texas, Mayor Thurman Bartie issued mandatory evacuations for the metro area’s 54,000 residents ahead of the landfall. 

Louisiana Gov. John Bel Edwards told reporters Monday: 

“We’re only going to dodge the bullet so many times. And the current forecast for Laura has it focused intently on Louisiana.”

State emergencies have already been announced in Louisiana and Mississippi as Laura continues to churn in the Gulf of Mexico. Tropical Storm Marco struck the Gulf Coast on Monday has been downgraded to a Tropical Depression. 

The 2020 Atlantic hurricane season has been a record-breaking year so far. Laura is the earliest L-named storm in the Atlantic Basin. At the start of the season, we outlined how there could be “above average” storms, “with 13 to 19 named storms.”

 

After June’s continued resurgence in US home sales, July is expected to see a significant slowdown in that recovery, with new home sales expected to rise 1.8% MoM. Instead, new home sales soared a stunning 13.9% MoM. This means new home sales in the US rose 36.3% YoY – the most since 1996…

Source: Bloomberg

Driven by and 81.4% increase in Midwest New home sales, highest since Jan 1992

New Home Sales SAAR is 901k (against expectations of 790k), the most since Jan 2007…

Source: Bloomberg

Median new home price rose 7.2% y/y to $330,600; average selling price at $391,300

Is this more evidence of the mass exodus from cities?

Authored by Lance Roberts via RealInvestmentAdvice.com,

Why this isn’t 1920 has everything to do with starting valuations and future returns. While, generally, I’m not too fond of comparisons between today’s markets and the past, Ed Yardeni made a comparison too bombastic to disregard in his blog:

“We live in interesting, though not unprecedented, times. The Roaring 1920s could be a precedent for the Roaring 2020s.

The good news is that the bad news during the previous precedent was followed by the Roaring 20s. So far, the 2020s has started with the pandemic, but there are plenty of years left for the prosperous 1920s to become a precedent for the current decade.

The 1920s ended with a stock-market melt-up followed by a meltdown. The 2020s may already be seeing a melt-up, begun on March 23.”

Ed’s point was the economic and industrial revolution that occurred following WWI is a precedent for the next decade. The urbanization of populations moving from farms to cities, the rise of manufacturing and technological innovations from Henry Ford and the Model T, to the “bulldozer,” to refrigeration and not to mention the radio.

1920 Was The Bottom

Yes, the ’20s marked the start of a period of marvel and rapid change.

1920 also marked the end of a 20-years of economic destruction. A series of events rocked the turn of the 20th century, which deeply suppressed financial markets. ((Imagine 20-years with negative total real returns.)

• Panic of 1907

• Recession in 1910-1911

• Recession in 1913-1914

• World War I ran from 1914-1918

• Economic Depression in 1920-1921

The market “melt-up” was undoubtedly driven by an economic recovery, a surge in innovation, etc. but was supported by historically low valuations. (Current valuations align with 1929 more than 1920.)

While I certainly agree with the fact the companies today are spending a tremendous amount of money on technology and innovation, this is a significant difference.

The innovations in the early 1900s put increasing numbers of people to work. Those increases in jobs led to higher wages and more robust economic growth. Today, companies are spending money on innovation and technology to increase productivity, reduce employment, and suppress wage pressures.

Look at the chart below. The history of the economy and related events shows the difference between then and now. Notice the strong economic growth rates in the 1920-1940 period as compared to today.

Yardeni’s primary point is that history suggests a massive melt-up is coming for the financial markets. There are challenges to this view based on what history tells us about valuations and forward returns.

Valuations Don’t Matter

In the short-term, a period of one year or less, political, fundamental, and economic data has very little influence over the market. Such is especially the case in a late-stage bull market advance where the momentum chase has exceeded the grasp of the risk undertaken by investors.

In other words, in the very short-term, “price is the only thing that matters.” 

Price measures the current “psychology” of the “herd” and is the clearest representation of the behavioral dynamics of the living organism we call “the market.”

But in the long-term, fundamentals are the only thing that matters. Both charts below compare 10- and 20-year forward total real returns to the margin-adjusted CAPE ratio.

Both charts suggest that forward returns over the next one to two decades will be somewhere between 2-3%.

“P/E’s don’t matter anymore because of Central Bank interventions, accounting gimmicks, share buybacks, etc.”

However, as we will discuss in more detail in a moment, they do matter. The chart below compares trailing valuations to forward 5-year returns on stocks. Again, as noted above, the disparity between current CAPE valuations today at 31x versus 5x earnings in 1920 could not be starker. 

There are two crucial things you should take away from the chart above.

1. Market returns are best when coming from periods of low valuations; and,

2. Markets have a strong tendency to revert to their average performance over time.

Bogle And Thaler

The late Jack Bogle, the founder of Vanguard, confirmed the same:

“The valuations of stocks are, by my standards, rather high, butmy standards, however, are high.”

[Note: Bogle’s method differs from Wall Street’s. For his price-to-earnings multiple, Bogle uses the past 12 months of reported earnings by corporations, GAAP earnings, which includes ”all of the bad stuff.”]

‘Wall Street will have none of that. They look ahead to the earnings for the next 12 months and we don’t really know what they are so it’s a little gamble.’

[Note: Bogle also noted that Wall Street analysts look at operating earnings, “earnings without all that bad stuff,” to come up with a lower price-to-earnings multiple.]

“If you believe the way we look at it, much more realistically I think, the P/E is relatively high. I believe strongly that [investors] should be realizing valuations are fairly full, and if they are nervous they could easily sell off a portion of their stocks.”

Richard Thaler, the famous University of Chicago professor who won the Nobel Prize in economics, also stated:

“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping. I admit to not understanding it.

I don’t know about you, but I’m nervous, and it seems like when investors are nervous, they’re prone to being spooked. Nothing seems to spook the market.”

Wash, Rinse, & Repeat

As noted, the flood of liquidity, and accommodative actions, from global Central Banks, has lulled investors into a state of complacency rarely seen historically. However, while market analysts continue to come up with a variety of rationalizations to justify high valuations, none of them hold up under real scrutiny. The problem is the Central Bank interventions boost asset prices in the short-term; in the long-term, there is an inherently negative impact on economic growth. As such, it leads to the repetitive cycle of monetary policy.

1. Using monetary policy to drag forward future consumption leaves a larger void in the future that must be continuously refilled.

2. Monetary policy does not create self-sustaining economic growth and therefore requires ever-larger amounts of monetary policy to maintain the same level of activity.

3. The filling of the “gap” between fundamentals and reality leads to consumer contraction and, ultimately, a recession as economic activity recedes.

4. Job losses rise, wealth effect diminishes, and real wealth is destroyed. 

5. The middle class shrinks further.

6. Central banks act to provide more liquidity to offset recessionary drag and restart economic growth by dragging forward future consumption. 

7. Wash, Rinse, Repeat.

If you don’t believe me, here is the evidence.

The stock market has returned more than 130% since 2007 peak, which is more than 12x the growth in corporate sales and 3.6x more than GDP.

Tobin’s Q

As noted, valuations, by their very nature, are HORRIBLE predictors of 12-month returns should not be used in any strategy that has such a focus. However, in the longer term, valuations are strong predictors of expected returns.

In the following series of charts, I am using forward 10-year returns just for consistency as some of the data sets utilized don’t yet have enough history to show 20-years of forward returns.

The purpose here is simple. Based on a variety of measures, is the valuation/return ratio still valid, OR, is this time different?

Tobin’s Q-ratio measures the market value of a company’s assets divided by its replacement costs. The higher the ratio, the lower the future returns.

Just as a comparison, I have added Shiller’s CAPE-10. Not surprisingly, the two measures not only have an extremely high correlation, but forward return outcomes remain the same.

Importantly, notice that when both measures are low, as in 1920, 1950, 1980, and even 2009, forward returns for investors were strong. Forward returns from high valuations have not been so beneficial. 

Rates, Sales & Buffett

One of the arguments has been that higher valuations are okay because interest rates are so low. Okay, let’s take the smoothed P/E ratio (CAPE-10 above) and compare it to the 10-year average of interest rates going back to 1900.

The analysis that low rates justify higher valuations does not withstand the test of history.

But since earnings are manipulated through a variety of accounting gimmicks, we can look at “sales” or “revenue,” which occurs at the top-line of the income statement. Not surprisingly, the higher the level of price-to-sales, the lower the forward returns have been. You may also want to notice the current price-to-sales is pushing the highest level in history as well.

Even Warren Buffett’s favorite indicator, market cap to GDP, clearly suggests that investments made today will have a rather lackluster return over the next decade.

If we invert the P/E ratio, and look at earnings/price, or more commonly known as the “earnings yield,” the message remains the same.

Conclusion

No matter how many valuation measures you use, the message remains the same. From current valuation levels, the expected rate of return for investors over the next decade will be low.

There is a large community of individuals who suggest differently, as they make a case as to why this “bull market” can continue for years longer. Unfortunately, any measure of valuation does not support that claim.

Such does not mean that markets will produce single-digit rates of return each year for the next decade. The reality is there will be some great years to be invested over that period. There will likely also be a couple of tough years in between.

That is the nature of investing. It is just part of the full-market cycle.

While I certainly hope Mr. Yardeni is correct in his thesis, valuations suggest differently.

The economic cycle, demographics, debt, and deficit, also suggest his optimistic view is unlikely. 

Mr. Yardeni is correct on the point he made with his quote from Mark Twain:

“History doesn’t repeat itself, but it often rhymes.”