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Saturday, December 17, 2022

2022-12-17

*** denotes well-worth reading in full at source (even if excerpted extensively here)


Economic and Market Fare:


After reading John Authers’ piece this morning, I was not really planning to write a note on yesterday’s FOMC meeting. I think he summed up the Fed’s actions very well and correctly analysed the market’s reactions. And I would say that indeed the mantra “Don’t fight the Fed” should be valid in general. But that holds true only if we understand what the Fed is trying to achieve. Here is a more nuanced view on the matter.

If the Fed had only raised the dot plot in the face of slowing down inflation since the last SEP (and obviously reiterated that there would be no cuts next year, etc.), I would have concluded that the Fed intends to keep hiking, regardless, bound not to repeat the ‘mistakes’ of the late 1970s. Don’t fight the Fed in this case would have been the right strategy.

However, raising the dot plot in the face of slowing inflation but also alluding to a smaller hike than priced in the next FOMC meeting (see Authers’ note above) introduces a decent amount of confusion as to exactly what the Fed’s intentions are. ......

... The final possibility is that the Fed has literally and figuratively lost the plot (pun intended) and is planning to stay hawkish (not necessarily continue to hike, but certainly not cut) until the inflation rate crosses back below 2%, regardless of what happens to the economy. It must be clear that in this case “Don’t fight the Fed” firmly holds.

I have no idea what most of the other FOMC members’ intentions are but listening to Fed Chairman Powell’s press conference, I am pretty sure what his are: I think he is firmly in the last camp above. Here is why. .....


Consumer spending power and underlying price pressures are not yet ticking lower. That is worsening the perceived tradeoff between growth and inflation.

Federal Reserve officials are becoming increasingly convinced that prices will continue to rise faster than desired without a sharp economic slowdown. The latest projections of growth, unemployment, inflation, and interest rates “under appropriate monetary policy” imply that they believe that the cost of taming inflation has gotten worse compared to September.

While I hope that their pessimism is unwarranted—and that Fed officials will be nimble enough to adjust their policy if it needs to be recalibrated—their concerns are consistent with the latest data on underlying income growth as well as measures of underlying price pressures. Moreover, if we look at the inflation measures that Fed officials say they are focusing on, it is clear that there has been a persistent acceleration in price growth. While inflation in these sub-categories could slow on its own, there is no sign yet that this is happening. .....






Here Comes The Job Shock: Philadelphia Fed Admits US Jobs "Overstated" By At Least 1.1 Million





............ We’ll get to the math in a moment. But let’s start with a simple example. Suppose that the government runs a lottery financed through deficit spending. Whenever there is a winner, the government prints cash and hands it out.

Let’s imagine you win the lottery and head to your local bar to celebrate. When you get there, two things could happen:

You hand the bartender a wad of cash. He reciprocates by giving everyone in the bar a round of beer.
You hand the bartender a wad of cash. He reciprocates by raising prices and giving you one very expensive mug of beer.
The purpose of this story is to illustrate a simple point; we cannot start with a quantity of money and predict what will happen to prices. Instead, it’s only after we’ve seen the business reaction that we can say anything about inflation. This is the reality embedded in Milton Friedman’s favorite equation: MV = PT

Do you see the problem? Uncle Milton’s equation makes no predictions about inflation. It merely puts formal math to what we already know with words. If the quantity of money increases but we don’t sell more stuff, we know that prices must increase. But if the quantity of money increases and we do sell more stuff (in exactly the same proportion), then we know that nothing happens to prices. In short, the result of printing more money depends not on the money itself, but on the strategy pursued by business. .........

So despite what neoclassical economics claims, the reality is that businesses are constantly pursuing strategies of both breadth and depth. They try to sell more stuff. And they hedge their bets by also trying to raise prices. ........................

............... Let’s wrap things up. As a rule, your best bet for understanding the real world is to forget what you read in economics textbooks. Instead, pay attention to what the powerful say when they talk amongst themselves.

On that front, CEOs have been explicit that inflation isn’t some exogenous force, driven by the money supply. It’s a game that they actively play.

As a case in point, take William Meaney’s recent comments to investors. Meaney, the CEO of an information management company, claimed that he’s been ‘praying for inflation’ because it’s a good excuse to raise prices:
Where we’ve had inflation running at fairly rapid rates, we’re able to price ahead of inflation.
In other words, forget the money supply. Inflation is a business strategy.






Mauboussin: Capital Allocation
Results, Analysis, and Assessment



Quotes of the Week:

Powell: “We have more work to do.” “Where we’re missing is on the inflation side. And we’re missing by a lot.” “We do see a very, very strong labor market, one where we haven’t seen much softening; where job growth is very high; where wages are very high.” “I would say it’s our judgment today that we’re not at a sufficiently restrictive level yet…”

Powell: “We’ve been pretty aggressive,” he said at an event last month in Washington. “We wouldn’t... try to crash the economy and then clean up afterwards. I wouldn’t take that approach at all.”

Blanchflower: Here is a ready reckoner chair Powell on cpi inflation from 7.1% next 7 months we drop 6.4%.
0.3, 0.8, 0.9, 1.3, 0.6, 1.1, 1.4, 0.0, 0.0, 0.2, 0.4, -0.1 
based on last 5mths we will add 0.5%
So by June we should be at 1.2% so why raising?  Why have you missed this? 

Fibonacci Investing: So history has repeated the inverted yield curve many times. Betting on long bonds is NOT betting that the Fed will pivot or lower. It's exactly the opposite, the bet is that the Fed will keep rates too high for too long and crash future growth. That's the thesis for long bonds.

DealershipGuy: This morning I discovered something *extremely* alarming happening in the car market, specifically in auto lending. I'm now convinced that there is a massive wave of car repossessions coming in 2023. Here's what I discovered (and what no one knows):

Hou: Canonical neoclassical macroeconomics is a religion. There are fundamentalist movements from time to time. Depending on when you did your PhD, you’d be exposed to different mvmts that happen to be en vogue. If you were naïve, you’d think you were presented neutral knowledge

Field: Being generous, central banks have demonstrated they have no idea what they are doing (remember Bernanke said 98% of central banking is spewing BS narratives).  If they know what they are doing, not sure that is positive as they are driving global economy into a depression.



Charts: 
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Bubble Fare:


....Bubble inflection points are typically marked by a reversal of speculative flows out of an asset class. After being inundated by flows during the pandemic (especially this year’s first nine months), the “private Credit” boom is suddenly jeopardized by (deferred) redemption requests. And with Blackstone and others limiting monthly/quarterly redemptions, remaining holders will fear being left holding the bag. Fund outflows require asset liquidations (i.e. commercial buildings and corporate loans), which is tantamount to tightening lending and financial conditions. Factor in tightening bank lending standards, and there’s reason to fear an accelerating downside to both the real estate Bubble and corporate lending boom. 

The ongoing crypto Bubble collapse should have us all fearful of the underbelly of “fintech,” “De-Fi” and BNPL (buy now, pay later). Carvana has imploded. NPR: “In a Year Marked by Inflation, 'Buy Now, Pay Later' is the Hottest Holiday Trend.” Hangover.

It took some time. The Credit cycle downturn has accelerated. There is ample justification for joining Moody’s in contemplating the “most pessimistic scenario”. Credit conditions are tightening after historic Credit and speculative Bubbles. Losses – stocks, crypto, options and other speculative trading – continue to mount, as households and businesses burn through their pandemic stimulus cash hoards. Rising rates and market yields are pressuring asset prices. The cost and Availability of Credit are increasingly contractionary. In short, the backdrop is set for a powerful reversal of speculative flows coupled with lender angst to usher in a most painful and destabilizing Credit down-cycle.

Is another crypto shoe about to drop? ......



(not just) for the ESG crowd:

The Arctic is getting rainier and seasons are shifting, with broad disturbances for people, ecosystems and wildlife




Sci Fare:

A new paper claims that intelligent aliens would only be interested in contacting the most technologically advanced planets, and Earth doesn't make the cut.





Other Fare:

A new animal-welfare law raises the bar for experimenting on decapod crustaceans.




Pics of the Week:

An almighty eruption, the cosmos remastered, swirling cells and more.




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