Pages

Sunday, February 12, 2023

2023-02-12

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


Economic and Market Fare:

The recent stock-market rally isn’t just about a new version of the not-too-hot, not-too-cold economy, but a wild race to load up on risk

...... Perhaps the Federal Reserve has it all wrong, and investors are right to be pricing in both lower rates later this year and a decent economy, as wage growth moderates and inflation falls. At the very least, those of us who worried that the market was ahead of itself in preparing for a soft landing need to revisit our assumptions.

The puzzle comes from the mix of three lots of data. Last month’s payrolls figures showed strong job creation, even stripping out the end of some public-sector strikes. The unemployment rate was last lower in 1953. Inflation is down, with the Fed’s preferred measure running at an annualized three-month rate of 2.9% in December, from 6.7% in June. And wages are rising more slowly, with private-sector wage costs up an annualized 4.2% in the final quarter of last year, sharply below a 6.5% increase in the second quarter and not much above the 3%-4% compatible with the Fed’s inflation target. ...........



............. If you think of fairy tales, one may also think of some projections of western central banks. Currently, the ECB and the Fed are assuming that Europe can avoid a recession while the US economy could do the same, or at worst, will only suffer a very mild recession.

Yet, not only do the ECB and the Fed think that that is the most likely scenario, market participants and a majority of economists agree with them. Larry Summers, a powerful critical voice regarding the Fed, said this week that a soft landing is more probable than it was a few months ago.

Especially the robust NFP data that was published last week supports that assumption. While consensus estimated an average increase of nonfarm payrolls by 189,000 dollars in January, the actual number beat it by a wide margin. Nonfarm payrolls rose 517,000 dollars in January and are now on their longest streak in history, where they continuously beat the consensus estimate.

US unemployment fell further, from 3.5 to 3.4 %, while economists expected a slight increase to 3.6 %. In December, there were 1.92 job offerings per unemployed person, which means that the labor market is still extremely tight, holding up wage pressures. Average hourly earnings rose by 4.4 % year-over-year, while the annualized number for January was 3.6 %.

However, it is worth looking a bit beneath the surface of the NFP headline number. ......

.... Despite the compelling NFP numbers, let us remember that the labor market is a lagging indicator. An observation of prior recessions shows that the unemployment rate always reaches its low right before the downturn begins and then, during the recession, spikes. Therefore, one can argue that the labor market is no help in estimating whether the Federal Reserve can achieve the goal of a soft landing. Yet, concerning current labor market data, one can conclude that the Fed has no reason to end its restrictive monetary policy stand any time soon. .......

But even if we do not consider that scenario, another essential indicator that counterargues the Goldilocks or soft landing scenario that central banks and market participants consider as the most possible one: the inverted yield curves in the US and Germany. A negative spread of 3 months - 10-year yields correctly predicted all US recessions in the last sixty years, where the yield curve inverted two to six quarters before the recession started. The three months - 10-year spread inverted in October of last year, and therefore, it forecasts a recession to happen somewhere between April 2023 and April 2024. However, two Fed economists recently challenged the theory and argued that the indicator would not be valid this time. .......

... The statements of Greenspan and Bernanke are remarkably similar to the current Fed statements. Did neither Greenspan nor Bernanke know what was coming? The number of economists working at the Fed makes me doubt that. Instead, I would assume that the Fed is not forecasting a recession because it fears that the mere announcement would lead to a self-fulfilling prophecy and that the Fed wants to avoid that.


Why the Fed faces some very uncomfortable choices ahead

................ In light of this debt, the tightening that has occurred so far likely already has tremendous consequences for the corporate sector

If historical relationships hold, and there is no reason to believe they wouldn’t, then today’s tightening in bank lending standards is likely followed by a substantial corporate default wave over the coming 9-12 months

However, this contraction of credit is only due to the monetary tightening that occurred last year.

It still excludes the additional interest rate hikes in 2023, as well as the further deterioation in the economic outlook which also affects banks’ lending behavior

Now, all this would be less problematic if the economy re-accelerated from its current lows. Regular readers will know that I do not agree with this view, as laid out in “Hard Landing, Soft Landing or Moon Landing”

Many lead-lag relationships suggest further weakening ahead, such as the increased cost of capital as measured in the 2-Year Treasury rate delta, which points to a continuous decline in order activity from the manufacturing sector ........

..... So while for consumers monetary conditions may still not be tight enough, or at the very least may have to be held tight for longer, corporates are likely to get increasingly crushed by the high rates

A stark contrast illustrates that well. When the ISM Manufacturing New Orders index was as low as today, historically the Fed had always already cut rates - even under Paul Volcker (!) .....


US inflation is likely to show further material signs of deceleration next week, which is of importance to both rates, FX and equity markets. Here is why!

... Based on our models and indicators - leading as well as lagging - we project the print to come in in the neighborhood of 6.1% and 5.3% for headline and core, respectively.

Goods prices will continue to drop (even used cars) on a monthly basis, while food prices are also likely to show signs of “fatigue”, while contributions from energy will once again be positive on a monthly basis. Wages have decelerated in all meaningful forward looking gauges, while housing is printing at extremes relative to reality in the CPI, meaning that we see a larger downside risk/reward in core relative to headline.


or:

Trades favoring disinflation are soon set to reverse as price increases prove more entrenched than anticipated.

This year, higher-duration sectors, such as tech, telcos and consumer discretionary have led stocks’ advance, while low-duration ones such as energy and utilities have underperformed. This is a reversal of the trend from late 2021, where investors started to shun high-duration stocks as inflation began to rise rapidly.

Duration is the ultimate driver of investor preferences in an inflationary cycle such as the current one. This year growth has begun to outperform value again, and cyclicals are outpacing defensives, but these obscure the bigger picture of how long-duration assets are best avoided when inflation risk is high.

Investors re-embracing higher-duration stocks is a signal they are also embracing the disinflationary narrative, one endorsed by the Fed and priced in to inflation swaps.

That narrative may soon run into trouble though. Headline inflation is falling, but this is almost all due to the drop in cyclical inflation. We can estimate cyclical and structural inflation by looking at the sub-components of CPI that are persistently above trend (structural) and those that are not (cyclical).

The chart below shows that while cyclical inflation has fallen, structural inflation is barely off its peak. ......



Well, things are getting interesting in the US. The Federal Reserve started hiking interest rates in April 2022 and its decisions are underpinned by an theoretical framework that suggests the unemployment rate is above what it thinks is the natural rate (the rate where inflation is stable). So the rate hikes are meant to slow spending and increase the unemployment rate and cause price setters to stop accelerating prices up. Except the data isn’t obeying the theory and inflation is falling despite the rate hikes rather than because of them. This is another demonstration of how flawed the dominant mainstream economics has become ......



Yesterday, the Reserve Bank of Australia lifted the interest rate target for the ninth consecutive time (they didn’t meet in January) claiming that they had to do this to stop inflation accelerating and restoring price stability. Except inflation already peaked in the March-quarter 2022 as a result of the driving factors abating. Further, none of the major driving factors are remotely sensitive to domestic interest rate movements. The RBA’s excuse is that there are dangerous domestic demand pressures that need to be curtailed. Except the evidence for that claim is lacking. Most of the demand measures are in retreat. So what gives? Well there is a massive income redistributing being engineered by the RBA from poor to rich and if they keep going unemployment will certainly rise, in part, because the lame Australian government is claiming it has to engage in fiscal restraint to ensure the RBA doesn’t hike rates even more than they are. It would be comical if it wasn’t damaging the prosperity and solvency of tens of thousands of the most vulnerable Australians. Disgraceful. ......

....... It is amazing that the Governor and his Board of unelected and largely unaccountable members blithely just dismiss all this. ...........

6. “The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments” – the fact is that the RBA Board has little idea of the lag structure of the impacts of its interventions.

It doesn’t know:

– when the impacts occur over time.

– the quantitative impact – there is plausible evidence that interest rate rises push inflation up due to the short-term impact on business costs.

– further, it has no knowledge of the distributional impacts – creditors gain, debtors lose. What is the net impact? The RBA hasn’t a clue. 
.........





Fed rolls out 2023 stress-test scenarios, with wrinkle for biggest banks




What crappy beer demand tells us about the economy




Bubble Fare:


U.S. stocks that took a beating last year are surging in the early weeks of 2023, leading markets higher. Some investors believe that trend is unlikely to last.

Stunning gains in shares of companies such as Nvidia (NVDA.O), Netflix (NFLX.O) and Meta Platforms (META.O) are lifting sectors that struggled in last year’s selloff, including technology (.SPLRCT), and communication services (.SPLRCL).

Smaller stocks that tumbled in 2022 have also burst out of the gate: a Goldman Sachs basket of unprofitable tech stocks that tumbled over 60% in 2022 has rebounded 21% in 2023, dwarfing the S&P 500’s 6.5% gain. ......



...... No one questions this insanity. Monetary policy operates on a lagged basis, so traders will learn far too late the Fed has already over-tightened on interest rates. Their balance sheet is a whole other story. No one questions that at the current rate of run-off the Fed balance sheet will take FOUR YEARS to return to the pre-pandemic level. Meanwhile, interest rates are 3x higher than pre-pandemic. 

Below, I call this the moral hazard death spiral:

Investors keep front-running Fed bailout, and therefore the Fed must keep raising interest rates imploding the economy. Monetary policy is lagged, therefore the dunces at large don't question it.

Consider that at a 6% target rate, we now have the highest bullish sentiment since the market's all time high in December 2021. ......


But many ask, why would this death spiral all of a sudden end now? Why can't death spirals last forever?

That's a good question - Can the market keep stair stepping lower or does it reach an acceleration point and explode?

For that we must rely upon Elliott Wave Theory, so here's the short lesson on EWT: Basically, the fundamental tenet of EWT is that markets are driven by emotions - greed and fear. Sure there other factors involved in market performance, however, at the extremes greed and fear are the dominant forces.  .........

Emerging Markets are sticking to the annual rollover schedule that has been in place since 2018:




detailing the Biden Admin's coordinated, ongoing effort across virtually every US financial regulator to deny crypto firms access to banking services

What began as a trickle is now a flood: the US government is using the banking sector to organize a sophisticated, widespread crackdown against the crypto industry. And the administration’s efforts are no secret: they’re expressed plainly in memos, regulatory guidance, and blog posts. However, the breadth of this plan — spanning virtually every financial regulator — as well as its highly coordinated nature, has even the most steely-eyed crypto veterans nervous that crypto businesses might end up completely unbanked, stablecoins may be stranded and unable to manage flows in and out of crypto, and exchanges might be shut off from the banking system entirely. Let’s dig in. ...........

..... In sum, banks taking deposits from crypto clients, issuing stablecoins, engaging in crypto custody, or seeking to hold crypto as principal have faced nothing short of an onslaught from regulators in recent weeks. Time and again, using the expression “safety and soundness,” they’ve made it clear that for a bank, touching public blockchains in any way is considered unacceptably risky. While neither the Fed/ FDIC/ OCC statement — nor the NEC statement a few weeks later — explicitly ban banks from servicing crypto clients, the writing is on the wall, and the investigations into Silvergate are a strong deterrent to any bank considering aligning itself with crypto. What is clear now is that issuing stablecoins or transacting on public blockchains (where they could circulate freely, like cash) is highly discouraged, or effectively prohibited. ...



Charts:
1: 
2: 
3: 
4: 

5: 



...



(not just) for the ESG crowd:

The inexorable rise of ocean heat is now evident off the coast of West Antarctica, potentially disrupting critical parts of the global climate system and accelerating sea level rise.


With the Ukraine war, international collaborations with Russia on Arctic research and oversight have been strained or broken off. This loss of critical cooperation is compromising efforts to confront mounting environmental risks in the Arctic, from shrinking sea ice to pollution.







China has ended zero-Covid. The resultant viral tsunami is crashing through China’s cities and countryside, causing hundreds of millions of infections and untold numbers of deaths. The reversal followed widespread protests against lockdown measures. But the protests were not the only cause—the country’s sagging economy also required attention. Outside of a few strong sectors, including EVs and renewable energy technologies, China’s economic dynamo was beginning to stutter in ways it had not in decades. 

Whenever global demand or internal growth faltered in the recent past, China’s government would unleash pro-investment stimulus with impressive results. Vast expanses of highways, shiny airports, an enviable high-speed rail network, and especially apartments. In 2016, one estimate of planned new construction in Chinese cities could have housed 3.4 billion people. Those plans have been reined in, but what has been completed is still prodigious. Hundreds of millions of urbanizing Chinese have found shelter, and old buildings have been replaced with upgrades. 

The scale of construction has been so prodigious, in fact, that it has far exceeded demand for housing. Tens of millions of apartments sit empty—almost as many homes as the US has constructed this century. Whole complexes of unfinished concrete shells sixteen stories tall surround most cities. Real estate, which constitutes a quarter of China’s GDP, has become a $52 trillion bubble that fundamentally rests on the foundational belief that it is too big to fail. The reality is that it has become too big to sustain, either economically or environmentally. 

Recognizing this danger, in 2020 China implemented limits on developers’ ability to borrow. Firms that crossed the three “red lines”—liabilities-to-assets ratio of 70 percent, 1:1 net-debt-to-equity ratio, and cash greater than short-term borrowing—would be cut off from accessing more loans, an attempt to reduce the leverage of developers who had become addicted to debt-fueled growth. Evergrande, a mega developer, became the poster child of unsustainability, defaulting with over $300 billion in debt. Other developers such as Kaisa, Fantasia, and Modern Land also failed to repay creditors in 2020 and 2021. 

Many buyers who bought their homes in “pre-sales”—that is, paid for their houses prior to their construction—now find that those funds have been squandered, causing some to boycott mortgage payments on homes that may never be built. ..... 

... All of this is symptomatic, however, of a deeper problem facing China’s economy, a complex interaction of finance, land, and real estate that I call the carbon triangle. ....................



Other Fare:

I'd seen [and enjoyed] the 2nd video included herein before, but had no idea about the Laurie-Fry videos, such as the 1st video, also well worth watching here:
Encounter with Writers: 8

..... On my list of people with whom one day I would love to have dinner, Stephen Fry ranks near the top of my list, now that I’ve been lucky enough to dine with John Irving twice in the last three months!

I’ve written before in this space of my admiration for polymaths, those rare individuals of wide-ranging knowledge and learning. You know, Leonardo da Vinci, Alexander Graham Bell, Benjamin Franklin. Odd as it may sound, I consider Stephen Fry to be a polymath, too—though perhaps not of da Vinci’s stature, a polymath nonetheless. He is a prominent public intellectual in the UK with deep knowledge of many fields. The label most often applied to him is “national treasure.”

He and his first co-conspirator, and still best friend, Hugh Laurie, met at Cambridge and were key players in the famed sketch comedy troupe, The Cambridge Footlights alongside other brilliant artists like Emma Thompson. .......



Pics of the Week:

CARNAGE IN CANADIAN TELECOM: MORE COMPETITORS ELIMINATED




Posted by at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)