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Sunday, April 30, 2023

2023-04-30

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


Economic and Market Fare:


… Going back to the late 1960s, the average recession start date occurred when the Leading Index registered a growth rate of -4.8%. The Conference Board sets a recession threshold at -4.2%, which is the median of the past recession start dates.

In either case, today’s growth rate of -8.1% is far worse than the average recession start.


Recession? Anyone? Anyone? Anyone?





The news today was supposedly disappointing—GDP growth in the first quarter was weaker than expected, while inflation was a bit higher than expected—but I disagree. I see the economy continuing to grow at about a 2% rate and I see inflation falling. Here are two charts which I think give you a better picture of what's happening on the growth and inflation front. .....


Carrier sentiment in Q2 now negative; brokers and shippers still positive




Roberts: Inflation: causes and solutions

..... I and others have spent much ink in showing that both these theories do not explain inflation in prices, either now or in the past.  And it’s not just leftists. For example, economists at the Bank for International Settlements (BIS), hardly a leftist body, found that: “by some measures, the current environment does not look conducive to such a spiral. After all, the correlation between wage growth and inflation has declined over recent decades and is currently near historical lows.” 

........ But central bankers and mainstream economists ignore the evidence and continue to promote monetarist or wage-push inflation theories.  Why is this?  Gavyn Davies, former chief economist at Goldman Sachs, once explained why the theory that inflation is caused by wage rises persists even though it has been discredited theoretically and empirically. Davies: “without the Phillips Curve, the whole complicated paraphernalia that underpins central bank policy suddenly looks very shaky. For this reason, the Phillips Curve will not be abandoned lightly by policy makers”. 

........ As Vernengo and Ramon conclude: “The persistence of contractionary demand, mostly monetary, policy as the main tool to contain inflation seems to respond more to the prevailing prejudices and the ideological biases of the profession, than to the analysis of the real causes of inflation.” On the other hand,“It is not helpful that the main challenge to this consensus has been to blame corporations for increasing their profit margins, since this view also provides an incorrect explanation for the recent acceleration of inflation.





Banking Fare:


... The possibility of a repetition of 1929 or 2008 indeed looks slim, and the stakes for First Republic are not as high as they were in many of the tense meetings in the fall of 15 years ago. But the possibility that the difficulties for the banks continue to put a lead weight on the economy is very real. With rates and the yield curve where they are at present, there’s a real chance of a serious economic slowdown. And that in turn is why so many are prepared to bet that the Fed won’t keep rates where they are for much longer, and that encourages them to keep paying for stocks.


Quotes of the Week:

Donovan: The US will deliver an ill-educated guess at how fast its economy grew in the first quarter, with the first estimate of GDP. This number will be revised for years to come, and may well end up having little resemblance to today’s release. None of this will stop the breathless sensationalism of media reporting, nor politicians spinning the data right round (like a record).


Delwiche:  Investors, especially those in the US, have grown accustomed to stocks moving up and to the right over time. Zoom out long enough and the data confirms those expectations. But history also reveals extend periods of little or no progress. Adapting our expectations and adjusting our behavior to account for that reality can reduce volatility and make the overall journey less stressful.




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Tweet Vid:


Vid Fare:





*** The Real Global Macro. Nate Hagens




(not just) for the ESG crowd:




Sci Fare:

Coyne: BBC discussion on the discovery of the double helix of DNA, featuring Matthew Cobb, Nathaniel Comfort and Angela Creager

If you have half an hour to spare, you may want to listen to the BBC Radio 4’s version of the new article by Matthew Cobb and Nathaniel Comfort on DNA structure (with special emphasis on Rosalind Franklin’s work). ....



Other Fare:

Taibbi: America, the Single-Opinion Cult
Narrowing permitted ideas on both left and right, one unsuitable voice at a time

Not long ago I was writing in defense of Alexandria Ocasio-Cortez. When she first entered Congress as an inner-city kid who’d knocked off longtime insider Joe Crowley with a Sandersian policy profile, her own party’s establishment ridiculed her as a lefty Trump. Nancy Pelosi scoffed that her win just meant voters “made a choice in one district,” so “let’s not get carried away.” Ben Ritz, director of the Progressive Policy Institute, an offshoot of the old Democratic Leadership Council, groused, “Oh, please, she just promised everyone a bunch of free stuff.”

This was before AOC decided to be the next Pelosi, instead of the next Sanders. The above sit-down on MSNBC shows the transformation. Having shed the mantle of an outsider who shook the old guard with online savvy, she appeared in soft light for a softball “interview,” by a literal Biden official (Inside With Jen Psaki is as close as you can get to a formal dissolution of the line between White House and media). In it, she seemed to argue for the outlaw of Fox News. “We have very real issues with what is permissible on air,” she said .....



The first clause is almost certainly self-evident. We are awash in a sea of words. Words on our screens. Words in our earbuds. Words on the walls. Words everywhere we turn. The internet has given all of us a ready means to speak our mind and say our piece (whether anyone was listening has always been another matter). The result is a practically infinite stream of words. AI tools now promise to effortlessly generate even more words, and by orders of magnitude. ........



Pics of the Week:



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Sunday, April 23, 2023

2023-04-23

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


Economic and Market Fare:



A US recession is looking increasingly imminent, but the usual playbook of a deep equity selloff and Treasuries acting as a hedge may not apply to the same extent. The US looks as if it will be in a recession very soon, if it isn’t already in one. The chart below shows the average evolution of the main assets around a downturn.

The chart shows that gold typically fares best of the selected assets shown after a recession, followed by USTs and corporate debt. Equities and commodities (Bloomberg Commodity index) come off worst in the six months after the recession begins. But this recession will come with an unwelcome helping of elevated inflation, which means the usual rules cannot be relied upon. ......


Traditional leading economic indicators place a heavy focus on data from the construction and manufacturing sectors.
Over the last several decades, the US economy has become less cyclical, with more service sector jobs and fewer construction and manufacturing payrolls.
The shrinking share of the cyclical economy has led many people to question the validity of traditional leading indicators that still focus on the construction and manufacturing sectors.
Construction and manufacturing jobs have declined from almost 40% of total employment to 13% today. 
While the construction and manufacturing sectors are a relatively small share of total employment, the data proves that the cyclical economy still drives almost all the job losses around recessionary periods.
.... Job losses from the manufacturing and construction sectors consistently make up most of the job losses around recessionary periods.
Job losses in other sectors usually result from the secondary damage caused by the earlier decline in the cyclical economy. 
.... Business cycle analysis must remain heavily focused on the cyclical economy. Despite the shrinking size, the construction and manufacturing sectors will more than likely drive the majority of job losses in the next recession.
In fact, at the start of the last 12 business-cycle recessions, service payrolls were at a peak.








Chart watchers looking to technicals to assess the recent rally are taking positive cues from measures of market breadth that are expanding in ways that have signaled further gains in the past. ........................ That said, there’s more room for improvement. The share of S&P 500 constituents with a rising 200-day moving average line needs to go from above 40% to above 70% to confirm that a bull market is in full force, the analysis by SentimenTrader shows.


US Leading Economic Indicators Tumble For 12th Straight Month, Signal Recession Imminent


After February's massive surge in existing home sales, expectations were for a modest pullback in March. The 14.,5% jump in Feb was revised down to 13.8% surge (still huge), but March printed a 2.4% MoM decline (worse than the expected 1.8% drop). ... That is the 13th monthly decline in the last 14 months and leaves existing home sales down around 22% YoY




.....“The latest survey adds to signs that business activity has regained growth momentum after contracting over the seven months to January. The latest reading is indicative of GDP growing at an annualized rate of just over 2%. Growth is also reassuringly broad-based, led by services thanks to a post-pandemic shift in spending away from goods, though goods producers are also reporting signs of demand picking up again."


As amazing as it sounds, ECB President Christine Lagarde is making sense.







Quotes of the Week:
AMEX: 
  • “Our first-quarter results reflect strong growth in Card Member spending and continued high engagement with our premium products.”
  • Revenue grew 22% year-over-year, to a quarterly record
  • Card Member spending rose 16% on an FX-adjusted basis.
  • Travel and Entertainment spending soared 39% on an FX-adjusted basis.
  • ...
  • “Millennial and Gen Z customers also continued to be our fastest growing U.S. cohort in terms of spending, growing 28% from a year earlier.”


Vid of the Week:




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(not just) for the ESG crowd:



Most of the green energy tax benefits provided by President Joe Biden’s $750 billion Inflation Reduction Act (IRA) of 2022 are going into the coffers of big banks and billion-dollar corporations, according to House Ways and Means Committee Chairman Jason Smith (R-Mo.).






To get people to shift to more climate-friendly behavior, what works best? Education? Payments? Peer pressure?



Sci Fare:

Researchers can "clearly see features of this invisible world that are hundreds of millions of light-years across"


A new theory of embodied consciousness


Income and emotional well-being: A conflict resolved
Abstract
Do larger incomes make people happier? Two authors of the present paper have published contradictory answers. Using dichotomous questions about the preceding day, [Kahneman and Deaton, Proc. Natl. Acad. Sci. U.S.A. 107, 16489–16493 (2010)] reported a flattening pattern: happiness increased steadily with log(income) up to a threshold and then plateaued. Using experience sampling with a continuous scale, [Killingsworth, Proc. Natl. Acad. Sci. U.S.A. 118, e2016976118 (2021)] reported a linear-log pattern in which average happiness rose consistently with log(income). We engaged in an adversarial collaboration to search for a coherent interpretation of both studies. A reanalysis of Killingsworth’s experienced sampling data confirmed the flattening pattern only for the least happy people. Happiness increases steadily with log(income) among happier people, and even accelerates in the happiest group. ....


Decades of research support the fact that much age-related deterioration is the result of the effects of sedentary lifestyles and the development of medical conditions rather than of aging itself. Elite older athletes, who demonstrate enhanced performance compared with historic cohorts and even some younger peers, are models of this paradigm. Many non-elite middle-aged adults and older adults continue to remain increasingly active throughout middle age and beyond. A continually growing body of basic science and clinical evidence demonstrates how active persons modulate physical decline through training. An updated understanding of how active adults defy age helps orthopaedic surgeons not only manage their patients' performance but also improve their lives. A large segment of sedentary older adults will benefit from counseling that encourages the pursuit of more active and healthier lifestyles



Other Fare:

Who to read, and why

Sometimes people ask which political writers and thinkers I like to read, and they usually end up surprised when I name a lot of centrists and leftists.

Apparently, most people prefer authors who tell them what they want to hear, even while paying lip service to the idea that a healthy intellectual diet involves exposure to a wide range of individuals with different political views. But I don’t believe in simply seeking out ideological diversity for the sake of diversity. I think there are entire movements, bodies of research, and ways of thought that add nothing to human knowledge and are better to avoid. If my favorite writers don’t share a common ideological orientation, exactly what separates them from other authors that I choose to spend less time reading and engaging with?

After giving the topic some thought, I’ve found that the writers I think are most insightful tend to have certain traits that are worth spelling out. My thinking here was heavily influenced by covid-19. It was important to get policy in this area right, so I spent a lot of time looking into various issues surrounding how to respond to the pandemic. ....

............ That being said, I noticed that there was a group of writers who came to the correct position throughout the pandemic, and they crossed the right-left divide. In February of last year, Ezra Klein interviewed Alex Tabarrok on the failures of the FDA, and they basically agreed on everything. I noticed that many of the liberals skeptical of NPIs after vaccines became available were the same ones I found to be reasonable on other issues, like the influence of teachers unions. And the conservatives or more right-leaning intellectuals tended to also be the most sensible thinkers on their own side.

Yet I’ve seen strikingly little analysis of what these individuals do have in common, if it wasn’t a conventional political ideology or orientation.

I would propose that we call them “Enlightened Centrists” (EC). In politics, we usually think of a centrist as someone who is a moderate on most issues, like say Joe Manchin. That’s not the way I use the term here. In this context, a centrist is simply someone who has a constellation of views that don’t completely line up with either the right or the left. This centrism is “enlightened” based on certain traits, listed below, that such individuals share that I think make for sound political and social analysis.

If you’re going to understand important issues, it is Enlightened Centrists you should seek out. ......

EC is not, and will not become, a political movement. Nor is it simply a cognitive style. Some degree of rationalism is necessary but not sufficient for being an Enlightened Centrist. Rationalists are known to think in probabilities, take cost-benefit analysis seriously, have reasonable priors and weigh them against new information in measured ways, and be low in tribal instincts. The same is true for Enlightened Centrists, but one can think of the term as referring to how rationalist thought tends to manifest itself in how one approaches political and social issues. ...........................




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Sunday, April 16, 2023

2023-04-16

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


Economic and Market Fare:


A purely price-based signal suggests the bottom is in for stocks despite several lingering risks.

This is a hard column to write. Deposit flight, poor liquidity, weakening earnings, a credit crunch, recession – it would be much easier to list reasons why equities should be lower. But that doesn’t necessarily mean it will be so. As anyone who has spent enough time in markets understands, they have a habit of being “anti-utilitarian”: causing the most people the maximum amount of pain. It thus always pays to consider the other side of the case. ....

... The Coppock is at base a momentum oscillator, which triggers when medium and longer-term measures of momentum begin to turn up on a persistent basis. Based on adapted parameters, it triggers only rarely, but the times when it has done – e.g. October 1982, August 1988, April 2003, August 2009 – are a catalogue of generationally good buying opportunities. ...

If technical signals’ strength is their simplicity, it is also their weakness. No trader or investor could ever take a decision based purely on them (unless part of a more sophisticated quant strategy). It would be tricky, to say the least, to explain to a client or your CIO that you went long purely because one arbitrary moving average passed above another.

On the other hand, it pays to incorporate them into one’s view. In today’s case, the message is that despite everything pointing toward weaker stocks, the price action is whispering that that just might be wrong.




The Federal Reserve has a mandate to maintain long-run employment and price stability. However, lags in monetary policy and unexpected shocks can lead to short-term deviations from these targets. This column argues that the Fed’s objective is asymmetric, with inflation overshoots being more costly than undershoots. Using data from the Summary of Economic Projections it shows that the Bernanke Fed was too hawkish, the Yellen Fed was too dovish, and the Fed under Jerome Powell has at times been too hawkish and too dovish. Modern macroeconomic models should integrate such asymmetries when analysing monetary policymaking.


Non-monetary policymakers haven’t risen to the challenge.

The financial sector is still roiling from the failure of Silicon Valley Bank. At the epicenter of factors triggering the collapse is the Federal Reserve’s strategy of hiking interest rates. This would be a good time to ask: How else might we tamp down inflation? 

Rapidly ratcheting up interest rates is intended to “cool down” the economy by inducing unemployment, or at least reducing job openings. Policies that lower labor demand make it easier for companies to compete for employees without triggering so-called “wage-price” inflation. And lower employment, in turn, also means there are fewer people with “excess wealth” demanding goods and services and thus driving inflation. 

The alternative is an economy that meets or over-supplies goods and services. Such an economy is disinflationary because it drives competition and thereby lowers prices. Economists like to point out that such supply-side solutions are “time-consuming to implement.” They are. So too are the effects of rate hikes. As Congressional Research Service economists wrote recently, it can take “from 18 months to several years for the effects of Fed policy changes to feed through to inflation.” .....



.... My take: There are only two things you need to know about inflation today: 1) without the Owners' Equivalent Rent component (which makes up about one-third of the CPI), the CPI would have declined at a -1.6% annualized rate in March, and 2) OER inflation has peaked and will almost surely decline significantly in coming months. In short, our national inflation nightmare is over. If the economists at the Fed can't understand this, they should be fired. There is absolutely no reason the Fed needs to raise rates further, and every reason they should begin cutting rates—beginning with the May 3rd FOMC meeting if not sooner. 

.......... To paraphrase Wayne Gretzky, the Fed should be focused on where CPI is going, not on where it has been. It's on its way to zero, and that means the Fed should cut rates—and the sooner the better.


#50: Now, how long can they hold...

........... More broadly, buying equities on the Fed’s pause has surprisingly mixed results. Recessions tend to hurt stocks eventually, but big gains can happen in the interim. In 2000, the Fed’s pause coincided with the market top. In 2006, the S&P 500 would gain another 25% after the Fed paused before cratering in the Great Recession. Stocks loved the 2018 Powell Pivot, gaining 43% before the COVID crash. But this cycle is different in so many ways - perhaps historical analogs will prove less useful.



..... Even the US Federal Reserve accepts that a recession is unavoidable.  At its last meeting, its economists agreed that there would be a ‘mild recession’ in US economic activity this year. And according to economists at  the Bank of America, there are plenty of signals that suggest a recession in the US has not been avoided and they provide several charts to back that up. ... 


..... Much has been made on the left about the huge rise in corporate profit margins after the end of the pandemic.  And this is undoubtedly the main contributor to the inflationary spiral experienced in all the major economies in the last 18 months – not any wage-cost push as the Keynesians argue; or too much money supply as the monetarists argue.  A January study from the Federal Reserve Bank of Kansas City found that “markup growth”—the increase in the ratio between the price a firm charges and its cost of production—was a far more important factor in driving inflation in 2021 than it had been throughout economic history. ...........



Timing and predicting recessions is an important task, not only for traders looking to make a profit but also for policymakers looking to correctly time stimulus measures. Not many people are against government stimulus measures during difficult times, but the problem is that recessions are difficult to spot in real-time, and policymakers often provide help too late and then offer support for too long.

In 1980, Victor Zarnowitz and Geoffrey Moore, two pioneers of business cycle research, proposed a signaling system that could help alert policymakers to recessions. The concept was that policymakers could be alerted to recessionary periods in a series of stages, helping to conduct timely stimulus measures because the effectiveness of any stimulus effort is only as good as the timing. Most, if not all, government stimulus today is highly reactionary, which has amplified the boom-bust cycle. .........

Signal #1: Warning of Below Trend Growth

....... Signal #1 was triggered in May 2022. The last time Signal #1 was triggered, in 2006, the Fed paused monetary tightening. This time, the Fed got more aggressive and hiked interest rates even faster after Signal #1 was triggered. After the Leading Index warns you of below-trend growth, the next signal defines actually arriving at that below-trend growth. 

Signal #2: Transition to Below Trend Growth (Pre-Recession)

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Signal #3: The Recession

Signal #3 confirms a recession, but at this point, significant problems have hit the economy. Signal #3 is triggered when the Leading Index is negative, and the Coincident Indexes are negative. This is an undeniable recession. On average, this signal occurs two months after the recession start date, which is why investors and policymakers must key off Signal #2.

Signal #2 has a 100% track record of spotting recessions. Waiting for Signal #3 will leave policy lagging. The official recession dates aren’t known for well over a year, and the Federal Reserve, average economist, and average investor don’t realize the recession until it’s well underway. 

The Most Dangerous 8-Month Period

On average, there is an eight-month lag between a Signal #2 reading, which is a reliable recession flag, and Signal #3, the undeniable confirmation of a recession. This eight-month gap is the most dangerous period for the Federal Reserve and for investors. The recession is virtually assured, but most investors and the Fed still can’t see it or refuse to believe it. Only when Signal #3 comes does the Fed panic and investors give up as the waves of job losses create defaults and deflationary pressure.

With the Leading Index deeply negative and the Coincident Indexes below 2%, we have a sustained Signal #2. This signal was triggered five months ago, and the average recession starts six months after getting a Signal #2. Policy should be easing already as a result of this, but the Federal Reserve is still raising interest rates targeting lagging economic indicators. Monetary policy has never been this opposed to the business cycle signals in the last 50 years.


Watch them go POOF



.......... So which option is true? In this post, I let the evidence speak for itself. Looking at cross-country evidence, I find that interest rates are decidedly non-neutral. As interest rates rise, three things happen:
  • the interest share of income increases;
  • the labor share of income decreases;
  • income inequality increases.
In short, the evidence suggests that interest rates play a key role in the game of class warfare. And that makes sense. Interest, after all, is a rate of return. And when it comes to divvying up the income pie, rates of return are always zero sum.


Beijing’s economic policymakers largely accept that China must rebalance its economy so that growth is driven more by domestic consumption and less by investment. But once China begins to take seriously the need to rebalance its economy, China’s annual GDP growth is unlikely to exceed 2–3 percent for many years, unless there is a substantial increase in the growth rate of consumption.






How bailouts are corroding America's economy

.................. More so, with a likely rise in unemployment as well as tighter lending conditions, it is bound to fall further, likely hitting the historical lows of the last inflationary boom-bust cycle in 1974

However, there is a disturbing difference to 1974: back then, debt levels were negligible, today they stand at 370% public and private debt to GDP

The combination of a stalling economy and high debt levels historically always lead to mass defaults and other credit events. For the US today, with Silicon Valley Bank as prelude, the next source of trouble is taking shape - US office real estate. It only requires some very basic math to see why: ....



The crisis that has engulfed crypto in the last year is a crisis of fractional reserve banking. Silvergate Bank and Signature Bank NY were fractional reserve banks. So too were Celsius Network, Voyager, BlockFi, Babel Finance and FTX. And still standing are the crypto fractional reserve banks Coinbase, Gemini, Binance, Nexo, MakerDAO, Tether, Circle, and, I would argue, every one of the DeFi staking pools. All of these are doing some variety of fractional reserve banking. Custodia Bank and Kraken Finance claim to be full-reserve banks – but 100% reserve backing for deposits is both hard to prove and not a guarantee of safety.

What do I mean by “fractional reserve banking”? My definition might surprise you. For me, fractional reserve banking simply means that the composition of a bank’s assets is less liquid than that of its liabilities.

Fractional reserve banking is not dead

The well-known fractional reserve banking model taught to economics students proposes that: 

banks keep 10% of deposits in reserve and lend out the rest (no they don’t)
for every $10 a bank receives in deposits it can create $90 of new loans (no, this is not how bank lending works)
every $1 of bank reserves becomes $10 of bank money (no it doesn’t).
This was never more than a toy model, a wildly over-simplified description of banking that bears little resemblance to what banks actually do. It conflates lending with payments and thus creates a wholly fictional relationship between lending and reserves. And after a decade of QE, the relevance of this model of fractional reserve banking, based as it is on the mistaken notion that banks “multiply up” their reserves by some percentage set by the central bank, is extremely doubtful. 

But though the model may be past its sell-by date, this does not mean the concept of “fractional reserve” is dead. Far from it. The current crisis has once again brought to the fore the fundamental risk of fractional reserve banking – namely that banks, and other financial institutions doing bank-like things, can literally run out of money. .......


Factor timing has its champions and skeptics — so academics set out to find an answer to the controversial practice.



Quotes of the Week:

Goolsbee: "Given how uncertainty abounds about where these financial headwinds are going, I think we need to be cautious," Goolsbee said Tuesday in prepared remarks for an Economic Club of Chicago event. “We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation.”



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(not just) for the ESG crowd:





Buying a gas car in 10 years will be about as difficult as buying a sedan today.



AI Fare:

Unlike with other tech tools, working with generative AI is closer to collaborating with humans



Other Fare:

not everyone can do everything

Recently I watched a surprisingly-good movie called Chang Can Dunk with my girlfriend, chosen pretty much at random from Disney+’s lineup. We weren’t expecting much, but it’s a fun and surprisingly delicate consideration of “never give up on your dreams” culture and its inevitable limits. It’s right in my wheelhouse in its willingness to point out a certain reality: everybody can do some things, but there are some things that some of us just can’t do. And all of the rhetoric about believing in yourself and never giving up, all of the social justice platitudes about accessibility and equity, can’t change that. The world isn’t fair. One of the ways it’s unfair is that some people are simply better than other people at certain skills and abilities. Born better. That’s true in athletics, it’s true in academics, and it’s true in creative fields. There’s an awful lot of mystification and obstruction when it comes to this reality, but I doubt there are very many people in the world at all who don’t understand it. Like so many other sad realities in human life, the fact that we aren’t all equally good at things has become impolite to mention



Fun Tweet Vid of the Week




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