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Monday, May 8, 2023

2023-05-08

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


Economic and Market Fare:

What’s the situation with the economy? The short answer is not good. Here’s why…

There are literally hundreds of economic indicators either as hard data or sentiment surveys released daily. It’s impossible for any analyst to keep up with all of them.

But with computers, natural language processing and charts, it is possible to follow broad trends. The key for any good analyst is to settle on a subset of data that has the greatest predictive power and a long track record of getting things right.

It’s equally important to know whether indicators are leading, concurrent or lagging.

A lagging indicator may be a measure of how bad things are, but it comes too late to do anything to stop the bad turn. By the time you see it, a recession has already begun.

Concurrent indicators are useful as validation of what leading indicators have been saying, but they don’t put you ahead of the curve.

Clearly, the most valuable indicators are leading indicators — signals that arise six months and sometimes a full year before trouble arrives. Those are the ones to watch most carefully if you want to be prepared in advance.

The Fed Lags Behind
For reasons that are not clear, the Federal Reserve is obsessed with lagging indicators. This partly explains why they always get policy wrong. They tighten monetary policy after recessions have already begun, making the recession worse. They ease monetary policy when booms are underway, making asset bubbles bigger.

Just think of the stock market crash of 1929, the Tequila Crisis of 1994, the Russia-LTCM crisis of 1998, the dot-com collapse in 2000 and the mortgage bubble in 2007. You’ll find a poorly timed monetary policy in every instance. ........



........ The Fed is rarely able to keep rates at their peak for long, looking at tightening cycles going back to 1972. In the cycles after 1990, though, the average period on hold is longer — about four to five months — than cycles pre-1990, when it averaged less than a month. ........



Duality

.......... Regarding wages, Powell argued that current wage growth is still inconsistent with 2 % inflation. However, he correctly pointed out that wage growth is not an initial driver of price increases but rather a result of it. He also correctly noted that this is usually when economic expansion ends. As workers can enforce higher wages, business margins decrease, and workers get a higher share of business profits.

Several journalists asked Powell about future rate cuts, as markets are pricing such a scenario. However, Powell was very clear and assured that the Fed plans to keep interest rates higher for longer. However, history does not support that, especially in an environment of high inflation, where the Federal Reserve historically cuts rates one month after the peak. When inflation is low, the Fed, on average, could keep rates at the peak for 4 to 5 months.

Maybe Powell is correct in his thesis that this cycle is different, and the labor market does not weaken too much because of the rate hikes. Like prior Fed chairs, he also tries to sell the soft-landing narrative to markets, saying there are higher chances the US economy can avoid a recession than experiencing one.

Whether he believes in it or not, market participants disagree and still think that the Fed will have to pivot after the summer. They expect the fastest interest rate hiking cycle in 40 years will be replaced by the most rapid rate-cutting cycle since 1980. Hence, they do not think that it is different this time. ......




Food Inflation Served Hot and Cold




Focus
Economic propagation mechanisms that capture how disturbances systematically feed through the economy over time are central to macroeconomic models. Such mechanisms allow us to understand the behaviour of key macroeconomic variables and help us make more reliable forecasts. Unfortunately, many macro models lack strong propagation based on understandable economic behaviour and instead rely on mechanisms for which there is no economic rationale.

Contribution
We describe a natural propagation mechanism through which new borrowing can systematically affect future output and lead to reversals in activity. The starting point is simple: the majority of debt contracts are long-term and imply regular future debt service payments (consisting of interest and amortisations). These payments pile up during a credit boom and, as time progresses, eventually outweigh the flow of borrowing. When this happens, the positive output effect from the credit boom reverses and output falls. We confirm this pattern using data from many countries over the last four decades.

Abstract
We examine a propagation mechanism that arises from households' long-term borrowing and show empirically that it has sizable real effects. The mechanism recognises that when there is long-term debt, an impulse to new borrowing generates a predictable hump-shaped path of future debt service. We confirm this pattern using a novel multi-country dataset of debt flows. Whereas new borrowing boosts output contemporaneously, debt service depresses output. Credit booms thus lead to predictable reversals in real economic activity several years later. This long-term debt propagation channel is the main reason for why indicators of credit cycles have predictive power for future economic activity.



..... I have long been a fan of the concept of Strong Opinions, Weakly Held. ... It’s not just that we tend to be wrong, but rather, we seem to not accept the mathematics behind the odds of our own errors. They are exceedingly high, and we ignore that reality at our own peril. ... “Don’t just do something, sit there” continues to be sage advice for investors…



Banking Fare:

The FDIC is taking an estimated $13 billion hit after seizing First Republic and selling most of the bank to JPMorgan Chase

The Federal Deposit Insurance Corporation seized First Republic Bank this morning and sold most of the bank’s operations to JPMorgan Chase. The final sentence in the FDIC’s press release states that the estimated cost to the deposit insurance fund will be ~$13 billion. No depositor, whether below or above the FDIC’s $250,000 insurance limit, will suffer a loss of funds since JPMorgan will take over all deposits.

The standard practice is for the FDIC to recover losses to the deposit insurance fund by raising assessments on healthy banks. Ultimately, banks will either pass on these added costs to customers or shareholders will take the hit. In either case, the consequences of the mismanagement of First Republic will fall on individuals and institutions that had no role in the bank’s failure. ....

.... This all sounds like a sweet deal for JPMorgan and another feather in the cap of Jamie Dimon, the bank’s longtime CEO. Mr. Market seems to like the deal with JPMorgan stock up over 3% in morning trading. Although JPMorgan states that this is all the result of a competitive bidding process that minimizes losses to the FDIC, the only other bank rumored to have submitted a bid over the weekend was PNC Financial Services. The other banks large enough to submit a bid, all of which are considered “systemically important”, apparently declined to even enter into the competition. ........


......... Put it another way: the way you normally have bank crises is when bunch of them follow a fad and make too many stupid loans, in the typical Minsky cycle. Even Volcker backed off when banks started looking like they would fall over during his extreme rate increases. Yet the Fed has kept on bloodymindedly with its interest rate jihad, even as more and more evidence confirms that this inflation isn’t caused by too much demand or uppity workers succeeding in getting wage increases. Contacts say there’s still pent up demand for cars due to the prolonged Covid supply chain disruptions. Experts increasingly cite greedflation as a big contributor. As we said early on, the Fed can kill inflation, but for one produced largely by supply issues, it will kill the economy stone cold dead in the process?



Quotes of the Week:

Alpine: The Federal Reserve raised rates again last Wednesday. This was both unnecessary and misguided. The rate hike does little to help the battle on inflation but amplifies underlying stress in the banking system. Therefore, it will likely prove to be a classic case of “one hike too many” and the Fed will be forced to reverse course sooner rather than late.


Ashton: We may never know, but I do have to admit that Chairman Powell impressed me a little in his post-FOMC presser. Not impressed me like ‘he’s the greatest’ but impressed me like ‘this is what I’d hoped we were getting.’ I wrote back in 2017 that the fact he is not an economics PhD was a positive…although the fact that he did not know anything about macroeconomics before joining the Fed suggested that he has learned economics in an echo chamber from some of the most blinkered non-monetarists on the planet, whose main claim to fame is that their forecasts have been consistently, and sometimes colossally, wrong for a long period of time. Still, he has a different background and that always offers hope.



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(not just) for the ESG crowd:



A great question to ask someone is “What conspiracy theory do you think might be true?” If they struggle to come up with even one, then that means they don’t question anything. If they don’t question anything, they’re not thinking at all. If you believe The Official Story about everything that happens, then you’re not thinking, you’re repeating.

❖

One of the worst mistakes you can make is neglecting your responsibility to cultivate a truth-based understanding of reality for yourself. People hand off that responsibility to journalists, pundits, “thought leaders”, teachers, preachers and gurus, but to do this is to neglect a very sacred duty. As Terence McKenna said, “You have to take seriously the notion that understanding the universe is your responsibility, because the only understanding of the universe that will be useful to you is your own understanding.” Don’t pass off that responsibility to someone else.


Dr. Aseem Malhotra's recent appearance on Joe Rogan will red-pill a lot of people

.............. Very few of us appreciate how many different unquestioned assumptions we need to utilize to function in society and just how much work it is to unravel the fact or fiction behind those assumptions (e.g., doing so can call many other unquestioned beliefs into question). Furthermore, the more unquestioned a belief is, the more people become emotionally invested in it. Thus, when evidence is presented questioning any deeply ingrained assumption, people often default to dismissing that evidence.

To some extent, I've gotten around this issue by constructing a belief system designed to encourage the opposite. Specifically, I believe one of my reasons for being alive is to learn as much as I can, and I view learning something I had been sure of, was, in fact, wrong means that I am moving towards a higher level of understanding and thereby fulfilling my life purpose. Empowering belief systems like this one are very helpful, but as the self-help field has demonstrated, most people subconsciously choose to carry disempowering beliefs instead. ........



Pics of the Week:

Visual Capitalist:




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