*** denotes well-worth reading in full at source (even if excerpted extensively here)
Economic and Market Fare:
EPB Research: GDP Report: What The Data Is Saying
Positioning Watch – Is this a bear market rally or the beginning of a bull run?
We look into how traders are positioned every Saturday to assess whether we are leaning with or against the wind. Is this a new bull run or just another bear market rally?
Equities: Markets are still short, meaning that the short-squeeze can continue
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Sci Fare:
The prehistoric genetic roots of the Chinese
The 50,000 year adventure
On this episode of Unsupervised Learning Razib explores the history of China through the lens of genetics and ancient DNA. This podcast is a companion to the recent two pieces, Genetic history with Chinese characteristics and Venerable Ancestors: untangling the Chinese people's hybrid Pleistocene origins. Today 92% of the citizens of the People’s Republic of China are ethnic Han, accounting for 16% of humanity. With China’s new prominence in genomics over the last decade, the genetic structure and relatedness of the Han and other ethnic groups in modern China have been extensively mapped. While India is fractured into thousands of endogamous groups, the Han Chinese are surprisingly homogeneous, with most variation dividing the North Chinese from the South Chinese. .......
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Final Thoughts
So what we know from this report is that main engine of the US economy, the 20% of the economy that really drives the boat, is struggling badly under the pressure of higher interest rates, inflation and weakening profits.
These sectors are also considered leading indicators meaning that the broader economy follow their direction.
Since the cyclical engine of the economy is contracting, that means it will be very hard for the broader economy to stay afloat over the next few quarters. This GDP report is much more consistent with recession ahead than it is a story about an accelerating or resilient economy.
and, from here, also from EPB:
And for somewhat more economically speaking, EPB Macros weekly macro update:
Here are the most important themes from this past week’s economic data and market action. (Jan. 22nd - 28th)
- Baring revisions, the economy has likely descended into recession.
- Aggregate coincident data peaked in October and has contracted on a 3-month basis.
- Inflation is also cooling. The collapse in nominal growth is dramatically under appreciated.
- The cyclical engine of economic growth continues to contract which means more downside for the broader economy is ahead.
***** Mack Attack
HIStory of Business Cycles
If you are bored and dorky enough to be reading this Substack, you’ve likely heard of Milton Friedman and possibly even Geoffrey Moore. The former needs no introduction, while the latter was the “father” of leading indicators and founded Economic Cycle Research Institute (ECRI) in 1996. ECRI is part of the Circle of Trust at Kayfabe Capital, and today’s focus is upon someone whom you likely have not heard: Ruth Mack.
Mack was a contemporary of the two men and also worked as an economist at NBER. I first came across her work almost twenty years ago when she was referenced in ECRI’s book, Beating the Business Cycle, in which they referenced her analysis of the shoe industry in the 1950s ........
..... Notable that a seminal work of research in the field of economics conducted by a woman would subsequently become known as the “Bullwhip Effect.” That phrase was coined by Proctor & Gamble about 40 years after Mack’s work - note all of the citations in this linked piece, with none referencing Mack. HIStory, indeed.
The phenomenon will heretofore be called the “Mack Attack” here at Kayfabe Capital, in honor of one of the infinite number of women whose prodigious contributions to history have gone uncredited and/or overlooked. ...........
.......... High inventories lead to cutting orders, which leads to falling production, which leads to job cuts, which leads to lower incomes, which lowers demand, etc. etc. etc.
Yes, the US economy is far less cyclical than it used to be, but the volatile components of the economy have already begun to contract. The service sector has only contracted in modern times during the most severe US recessions such as 2007-2009.
The NBER does not place much weight on quarterly GDP data- they look at a wide breadth of monthly data because GDP is not broad enough and subject to large revisions. Co-incident economic data for the US that the NBER looks at is already near a zero growth rate, and the US and G7 countries STILL have a ton of inventory and central banks are STILL tightening. ...........
Where the economy stands, and why I am back to short equities
Currently there is an intense debate on the trajectory of the economy. Views range from a serious recession, a.k.a. hard landing, to a soft landing or even to a “no landing” (i.e. continuous growth)
As equity markets started the year euphorically and narrative always follows price, the overwhelming view is now that of benign outcome, aided by lagging data such as the Q4 +2.9% US GDP print. This post shows why I believe this likely to be misplaced, and why a hard landing likely unfolds over the coming months and quarters, together with a rise in unemployment and a material decline in corporate profits
It further illustrates the very tough job the Fed faces. If it tightens too little, it entrenches inflation. If it tightens too much, it crashes an overlevered global economy. To stay with the analogy, its endeavour resembles the moon landing in both challenge and complexity, however with less faith in the “astronauts” given their prior mistakes ............
In more than 40 years trading and covering markets, never have I witnessed a market fighting the Fed as boldly as this one.
Even as one Fed speaker after another preaches higher rates for longer, bond traders continue to price 10-year Treasuries some 150bps to 200bps below where the Fed says the overnight rate must ultimately be, in my estimation. ....
Positioning Watch – Is this a bear market rally or the beginning of a bull run?
We look into how traders are positioned every Saturday to assess whether we are leaning with or against the wind. Is this a new bull run or just another bear market rally?
Equities: Markets are still short, meaning that the short-squeeze can continue
- The short squeeze in equities seen through January can continue as positioning remains very short
- Nasdaq positioning is less short than a week ago, but we remain far from the positive lean in Nasdaq seen when we discussed a soft landing in Q3-2022
- No material change to positioning in S&P 500 and Russell 2000 over the past week
Friend of Fringe Finance Lawrence Lepard released his most recent investor letter this week, with his updated take on the state of macro heading into 2023.
I truly believe Larry to be one of the muted voices that the investing community would be better off for considering. He’s the type of voice that gets little coverage in the mainstream media, which, in my opinion, makes him someone worth listening to twice as closely. .........
We have seen this movie before. The Fed tightens, things break, the Fed reacts by opening the monetary flood gates and the cycle begins all over again. Before things break you generally see signs that trouble is coming. We call this rivets popping.
There is always a lag effect between monetary policy and economic results. This current period reminds us of Summer 2007 when the Bear Stearns CDS funds failed. The GFC was 15 months later in the second half of 2008.
One very large rivet that has already popped is Great Britain as we described above. Another hugely important rivet that has not popped yet, but in our opinion is close is the US Stock Market.
We think the pain has just started. Particularly in the stock market where as the chart below shows, street estimates (blue bars) are looking for continued earnings growth as if no recession is imminent. Green bars show earnings decline in recessions. The economy is slowing rapidly and will almost surely enter a recession given the record inversion in the yield curve as seen in the 2year/10year bond spread. With softening demand and increased labor costs, earnings will suffer. The Wall Street analysts who are projecting further earnings growth are on drugs in our opinion. Additionally, with higher interest rates, price multiples to earnings will compress. .........
At a big picture macro level, the economic downturn that is about to ensue due to the Feds aggressive tightening actions is completely misunderstood and under rated in our opinion. Real estate is in the process of rolling over and ultimately employment will follow. People behave and spend based upon their level of wealth and when the biggest asset they own, their home, begins to decrease in value they are going to pull back.
Most of the country looking at their stock portfolios down 20% this year think to themselves - it will be OK. We should buy the dip. It has worked since 2009. This is where they are going to get surprised. When the stock market is down another 20 to 30% in 2023 as we believe it will be, then the real pain begins. At that point you have a real economic downward spiral and the Fed will be forced to pivot or else watch the Great Depression II unfold. Suddenly inflation will no longer be the Fed’s top concern. A collapsing economy will lead to monetary easing.
We believe that when either enough rivets pop, or the downturn occurs and becomes fully obvious, the Fed will be forced to pivot and will have to print until their eyes bleed. This will completely destroy their last remaining shred of credibility and our portfolio will perform well again. .........
Variant Perception: Fundamental gold buy signal triggered
.... We mostly avoided gold through 2022 as cyclical headwinds were strong (surging real yields) and tactical tools pointed to a negative trend for most of the year. Now cyclical conditions are more favorable for gold and tactical headwinds have cleared: gold is an attractive recession hedge.
Our fundamental gold signal triggered in mid-Dec 2022. This signal has historically flagged the start of a bullish gold regime. ............
The key bear case is that USD gold prices have been defying surging real yields left (using break evens, left chart below) and could close the gap lower. This has also kept gold trading above our fair value through all of 2022 (right chart below). However given the rollover of our US inflation and growth LEIs, we suspect real yields have peaked. At the margin this removes a headwind for gold.
On balance the tactical, cyclical and structural set up for gold is compelling. In an Age of Scarcity, we expect the politicization of credit, inflationary government spending and elevated energy prices to support real assets. Financial repression is likely to continue in order to finance a capex supercycle.
Reverse engineering Burry's VIC write-ups to learn how he dissects stocks.
......... Burry prefers microcaps because they’re one of the least fished areas of the market. Most investors ignore them for a few reasons.
First, microcaps are often illiquid. There aren’t many shares traded so it’s difficult to build a position in them without affecting the stock price and it’s even harder to quickly exit them. They are basically quasi-private market investments.
Second, micro-cap stocks have a sketchy reputation. They’re like the Red Light District of public markets filled with frauds, inept management teams, and businesses that make you wonder why they’re even public.
However, there’s tremendous alpha in highly illiquid and micro-cap stocks for those willing to dumpster dive. ..........
Roger Ibbotson found that the most illiquid stocks generate the highest market returns. From 1980 – 2013, Low Liquidity stocks generated a 15.57% ~4% higher than the Russell 2000s 11.66% CAGR.
The results were even better when Ibbotson combined low liquidity with micro market caps. From 1972 – 2013, the least liquid and smallest market capitalization companies generated a 16.30% CAGR. Large, highly liquid stocks posted only a 9% CAGR during that time.
But once you add a value filter, the results get silly. Ibbotson found that the least liquid, most “value-based” stocks returned 19.3% annually from 1972 – 2013.
Low liquidity + cheap price + small market cap = excess returns .......
A collection of my favorite PDFs, podcasts, YouTube lectures, and more from Value Investing OG Bruce Greenwald
......... Googling “Bruce Greenwald PDF” produced a treasure trove of value investing learning documents. Do yourself a favor and print these out. You’ll do tons of underlining, highlighting, and learning! ......
Most important takeaway from Q4 GDP data is that short rates are finally above inflation and nominal growth for final sales of domestic product. “Tight” is a matter of opinion, but monetary policy is no longer “easy” and now getting “tighter” -- growth and inflation decelerated through the quarter. My expectation of a mild recession beginning in Q2 appears on track. There is the swing to positive real rates, the beginnings of a mild inventory correction, and the “asset crunch” softening growth on into the current quarter (I wrote how the asset cycle changes how monetary policy works in Oct 2019). Next week’s 25 BP hike has all the earmarks of being the last hike. Cuts arrive once employment turns negative, or even just softens to 100,000/month.
Optically strong US growth data does not take 2023 rate cuts off the agenda.
My colleague, Ed Harrison, reckons the Fed rate cuts in 2023 are likely off the table.
In the words of Samuel L. Jackson in Pulp Fiction: “Allow me to retort.”
The first release of 4Q22 GDP just came out, ahead of expectations, at 2.9%.
The problem with a lot of economic data is it is lagging and frequently revised.
GDP is one of the more lagging economic series. But if we look at what is leading lately, the figures point to significant growth deterioration over the next six to nine months. This is plenty of time for the Fed to stop hiking and begin cutting before the year is out.
The largest percentage-point contribution to fourth-quarter GDP was the change in private inventories. This is one of the most volatile GDP components. On top of that it lags inventory-to-sales ratios, which have risen sharply. Inventories are likely to be strongly negatively contributing to GDP growth by the second or third quarter. ....
Stenos: The big recession scam of 2022?
The Bureau of Labor Statistics just released the Business Employment Dynamics Summary from Q2-2022 and it points to NEGATIVE job-growth last year. Is the job market already MUCH weaker than anticipated in the US, and were we already in recession in 2022?
On one hand, the non-farm-payrolls report continued to show increasing employment through Q2-Q4 in 2022, while the househould survey hinted of flatlining employment at best and on the other hand the BLS just revealed that the net job gains of Q2-2022 were -287k (Press release: https://www.bls.gov/news.release/cewbd.nr0.htm)
Were we already in a recession in 2022?
This question could be of major relevance to this years asset performance, if it indeed was the case that 2022 was a recession. ........
“The risk of over-tightening by the European Central Bank is nothing less than catastrophic” says Prof Kenneth Rogoff .
At Davos he also said: “Italy is extremely vulnerable. But this could pop anywhere. Global debt has gone up massively since the pandemic: public debt, corporate debt, everything.”
Rogoff believes that it is a miracle that the world averted a financial crisis in 2022, but the odds of a major accident are shortening as the delayed effects of past tightening feed through.
As Rogoff said: “We were very fortunate that we didn’t have a global systemic event in 2022, and we can count our blessings for that, but rates are still going higher and the risk keeps rising.”
But lurking in the murkiness is also the global financial assets/liabilities which is almost $500 trillion including the shadow banking system at 46% of the total. ....
A new report via Massachusetts-based International Data Corporation (IDC) revealed worldwide smartphone shipments experienced the most significant quarterly drop on record over the holiday season as cooling consumer demand suggests trouble for smartphone manufacturers ahead of earnings releases.
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Concluding Remarks
The best way to be mis-informed about inflation is to read market or popular economic commentary, given the amount of cherry-picking that is on display. At the minimum, you need to get your hand on as many price charts as possible so that you have a better idea of the overall picture, and not the subset of charts someone with an analytical agenda is pushing on you.
Roberts: The demographic future and labour
Meeting the social needs of the world’s population through the production of goods and services depends on the amount of labour employed (in numbers and hours) and on the productivity of those of employed. Under capitalism, of course, what matters more is the profitability to the owners of the means of production from employing workers and in investing in productivity-enhancing technology. It is a fundamental contradiction of the capitalist mode of production that the required profitability of those owning the means of production becomes an obstacle to the required production to meet the social needs of the billions of humanity (and, for that matter, to sustain the health of the planet and other species).
About three years ago I posted some thoughts on the global decline in population growth and the future size of the global workforce available for capital to exploit. It’s worth updating the story. .........
............................ Capital can expand if it can increase value from the exploitation of more labour or increase the rate of exploitation of the existing workforce. The latter is increasingly difficult and growth in the former is decelerating – except in Africa. This continent has suffered centuries of slave exports to the advanced world and the break-up through colonial occupation of its native lands. Now it must face the prospect of increased exploitation of its burgeoning workforce as capital seeks new sources of labour to boost profitability.
Well, maybe not that certain, because one year later stocks did drop, but nowhere nearly as much as Grantham predicted, with the S&P sliding 20% in 2022 and the Nasdaq losing a third. Hardly the catastrophic bursting of a superbubble which has inflated stock prices by order of magnitude.
But with Grantham, now 84 and eager to make at least one more historic call before his career is over, is not giving up and in a new paper published today titled "After a Timeout, Back to the Meat Grinder!", the value investor is doubling down on his call from last January (and January 2021... and June 2020), and warns - again - that the popping of the bubble in US stocks is far from over and investors shouldn’t get too excited about the strong start to the year for the market. .....
Prepare for Brown Swan Event
A Black Swan event - coined by Nassim Taleb - is a rare and highly unpredictable event that no one sees coming. A Brown Swan event - coined by me - is a rare and highly predictable event that no one sees coming. ....
.... In order to be a true contrarian investor and otherwise survive the entire business cycle, one must be willing able to endure times like these when the herd is stampeding off of a cliff. I can tell from my Twitter stats, that many bears capitulated in January and joined the stampeding bulls. That's what happens at the end. ....
To paraphrase, in English - crashes are far more common than a normal aka. random distribution would have us believe. However, recall that in "Fooled By Randomness" when Nassim Taleb introduces the Black Swan event he calls it a RANDOM event. Hence the name of the book. However, the problem is that as the CBOE admits, crashes are NOT random. They are highly correlated to WELL KNOWN risk factors such as over-valuation, interest rates, positioning, lack of hedging, and SPECULATION. In the Minsky Hypothesis, crashes are inevitable and usually caused by monetary tightening in an inflationary economy such as the one we are in right now:
"Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values"
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Quotes of the Week:
Mac: The Fed is set to raise rates again next week and STILL not one pundit has caught on to the fact that interest rates are too tight and Fed balance sheet is too loose. The Fed is imploding the economy, but not the markets. Which is driving a chasmic divergence between fantasy and reality. This week, the Conference Board Leading Index confirmed that the economy is heading for a hard landing. The Fed has never hiked rates with leading indicators at this level. Therefore we have now officially crossed the Rubicon of unprecedented policy disaster aka. "BTFD".
Charts:
1:
............ “Global demand for critical minerals is going to skyrocket over the next decades…Electric vehicles help reduce carbon emissions and they support the global response to the climate crisis,” the Secretary of State continued, draping the plundering of Africa’s wealth in friendly green-speak.
Siddhartha Kara, an academic and author of four widely-praised books exposing the business of human trafficking and slavery in Africa, has spent several years in rural Congo documenting the most hideous – and largely hidden – abuses of US multinational supply chains and mining operations.
Kara remarked to The Grayzone that the agreements hashed out at the US Africa Summit “will mean more demand for minerals used in EVs, leading to more exploitation, abuse, and misery for the women, children, and men who scrounge the world’s cobalt out of the dirt in the DR Congo.” .......
“The crisis over the Colorado River is the latest example of how climate change is overwhelming the foundations of American life — not only physical infrastructure, like dams and reservoirs, but also the legal underpinnings that have made those systems work.”
The Coming Dust Bowl
I'm a [more than a] bit skeptical of anything that Zeke has to say, but, fwiw:
I'm a [more than a] bit skeptical of anything that Zeke has to say, but, fwiw:
Sci Fare:
In a post-Covid world, the emergence of digital kiosk systems has allowed businesses to offer consumers a new tipping option. These high-tech point-of-sales machines are popping up across all sorts of businesses, not just restaurants.
Or, to expand the acronyms in the family blog-friendly headline, “Artificial Intelligence[1] = Bullshit.” This is very easy to prove. In the first part of this short-and-sweet post, I will do that. Then, I will give some indication of the state of play of this latest Silicon Valley Bezzle, sketch a few of the implications, and conclude.
Fortunately for us all, we have well-known technical definition of bullshit, from Princeton philosopher Harry Frankfurt. From Frankfurt’s classic On Bullshit, page 34, on Wittengenstein discussing a (harmless, unless taken literally) remark by his Cambridge acquaintance Fania Pascal:
It is in this sense that Pascal statement is unconnected to a concern with truth: she is not concerned with the truth-value of what she says. That is why she cannot be regarded as lying; for she does not presume that she knows the truth, and therefore she cannot be deliberately promulgating a proposition that she presumes to be false: Her statement is grounded neither in a belief that it is true nor, as a lie must be, in a belief that it is not true. It is just this lack of connection to a concern with truth — this indifference to how things really are — that I regard as of the essence of bullshit.
So there we have our definition.
Yet commentators and politicians keep missing it
Dynamics of gender and class in the Covid-era labor market
........ In what follows, we highlight the gendered dimensions of “The Great Resignation” in both the United States and China, which have been mostly neglected thus far. Although there is a growing literature which shows that women tend to be more (and differently) affected by economic crises than men, analyses of “The Great Resignation” have so far largely overlooked the gender dynamic. In this context, gender-blind policy responses have thus created a pretext for recovery which ignores the needs of women and minority workers. ........
The 50,000 year adventure
On this episode of Unsupervised Learning Razib explores the history of China through the lens of genetics and ancient DNA. This podcast is a companion to the recent two pieces, Genetic history with Chinese characteristics and Venerable Ancestors: untangling the Chinese people's hybrid Pleistocene origins. Today 92% of the citizens of the People’s Republic of China are ethnic Han, accounting for 16% of humanity. With China’s new prominence in genomics over the last decade, the genetic structure and relatedness of the Han and other ethnic groups in modern China have been extensively mapped. While India is fractured into thousands of endogamous groups, the Han Chinese are surprisingly homogeneous, with most variation dividing the North Chinese from the South Chinese. .......
