Pages

Friday, November 10, 2023

2023-11-10

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


Economic and Market Fare:


.... Much of what we all consume on a daily basis from Wall Street, media, Fintwit, and the government is kayfabe - fake intertwined with real. This has been a journey to try and offer my framework for attempting to analyze and delineate, while also trying to keep market cycles separate, though obviously also intertwined, with business and inflation cycles. Perhaps the most important non-consensus pillar within that framework is viewing pretty much everything through the lens of complex adaptive systems and self-organizing criticality. ........

My labeling of this cycle as a Frankenstein of 1930 and 1974 is central to the ‘story,’ as we are now seeing clear evidence, even within the flawed coincident government data, of the labor market rolling over materially. The seemingly delayed timeline of this occurring, similar to 1974, has been THE major leg propping up the ‘cyclical table.’

With clear evidence of a business cycle sandpile avalanche having begun in Q4 2022, the labor market finally capitulating amidst the grains of economic sand crumbling around it will unleash the vicious part of the business cycle. .....

Governments and central banks will very likely shift policy directions as the gravity of the current business cycle risks become glaringly self-evident, and the details of those actions will be very important as they unfold, as explored in Regime Change in April 2022 and Bizarro Recession in July 2022.

But the time for preparedness has ended, in my opinion. The recent explosive rally in risk assets over the past two weeks appears to me to be yet another one of Mr. Market’s dastardly tricks, just as the kayfabe singularity is unleashed. As stated on Twitter in August, evidence of the next downward phase of the bear market emerged within the Kayfabe Capital analytical framework, with interludes such as mid-September and now mid-November offering opportunities for people willing and able to get conservative to do so. Contrary to most of the past 15 years, there are alternatives.





.... Before going any further we have to set the terms of reference. It can be argued the US has experienced or is already in a recession, for instance by looking at GDI, manufacturing, goods GDP, or earnings. But with no hard-and-fast definition of an economic contraction (the technical definition of two-consecutive quarters of negative growth is too simplistic), having a referee in the NBER is the best option.

The downside is the NBER doesn’t announce recessions until after they have started, and thus is impractical for investors in real time. The utility instead comes from noting that the times the NBER deems to be recessions are when stocks have experienced their worst downturns — thus trying to figure out ahead of the NBER when there will be a contraction can save investors from considerable losses. ......


........ Credit is the biggest endogenous risk facing the economy and the market. Bankruptcy filings and charge-off rates are rising, indicating underlying stress not reflected in credit spreads. Moreover, the opacity in rapidly growing private-credit markets is becoming a greater concern. Credit should be monitored closely as a fast unraveling would swiftly take the economy into recession territory.

Until then an NBER-recession looks less likely than so over the next 6-9 months. Which is not how the situation looked earlier in the summer. Abnormally high fiscal deficits; the asynchronous recovery after the pandemic disrupting the traditional interplay between the goods and services economy; and money illusion to a degree most haven’t experienced before are all factors why this time is not following the usual script. ..



....... The solid black line is the ratio of M2 to nominal GDP. The dotted line shows its trend. While the ratio is above pre-pandemic levels, it’s well below the trend. Since 2000, when the ratio was below trend, a recession ultimately occurred.


Barring renewed growth in M2, which entails lower rates, a steeper yield curve, and the cessation of QT, a recession is likely.

With a recession, unemployment will rise, wage growth will falter, and consumers will cut back on spending.

The only question in our mind is when.


The economy is slowing, and monetary authorities think financial conditions are tight. A big market rally could upset that view.

.................... Monetary policy, Powell has reminded us, works through tightening financial conditions and deterring economic activity. That takes time to work its way through the system. Or, in the words of Milton Friedman, it has a lag.

.... However, various problems remain. If there’s a monetary lag, and rates have been rising for 18 months, the implication is that conditions could get tighter for another 18 months as well. If that does happen, how exactly will it be possible to avoid a recession?

...
...

... Conditions have been easing in the last few months, but remain tighter than even in 2008. That implies that a recession is harder to avoid than many now seem to assume:


........ That has led in the last year to several out-and-out declines in the money supply, month on month, something that hadn’t happened before, while the growth of the total stock of M2 remains intact: ......

If it’s the change at the margin that matters, then the risk of recession appears acute. Indeed, it might be unavoidable. But the amount of excess money in the system has evidently been enough to contain this problem for much of the year. It’s effectively extended the “lag” that Friedman saw before monetary policy had an effect. How long until tighter money has the dreaded lagged effect?


The private sector continues to de-leverage. Are fiscal deficits big enough to overcome that and drive 5%+ growth?

.................

............ Using my estimates of future public and private balances from above, the forecast annual combined deficit across all sectors averages 6% of GDP over the next 5 years.

This quantum of debt accumulation is associated with nominal GDP growth of 5.5%, with historical results at this level ranging from 4% to 6.3%.

The low end of this range will still produce above average GDP growth in the post-GFC period and is greater than 2% real GDP plus 2% inflation. ......

I was surprised in writing this newsletter that I didn’t end up with a forecast that showed well below trend growth, in a potential “give back” of the above trend growth we’ve seen in the last few years. I thought the fiscal impulse wouldn’t be big enough to offset a de-leveraging private sector. The numbers don’t show this. ....


Why some recent labor market trends are concerning









US could soon see 2% inflation



Where Inflation Stands in the Cycle

It’s important, I think, that I occasionally remind readers of a fact that is supported by overwhelming quantitative evidence, and yet virtually ignored by a wide majority of economists (and central bankers): inflation is a consequence of the stock of money growing faster than real economic growth. Period.

MV=PQ

That doesn’t mean that forecasting inflation is easy if we remember that fact, but at least we can make good directional predictions when, say, the stock of money rises 25% in a year, instead of mouthing some nonsense about inflation in such a case being “transitory.”

However, I realize that when someone mentions that equation a lot of people tune out, thinking this has become a religious argument between monetarists and Keynesians. So let me toss out some data. Keep in mind, there is measurement error in statistics for the money supply, real GDP (especially), and prices. And, as I’ve written before, sharp changes in M can cause a short-term impact on velocity until Q and P can catch up .......

Now, there’s three ways to get back to the line. We can see prices rise. We can see GDP rise. Or we can see the money supply fall. The latter two effects are better for consumers. The “GDP rises” is the best for everyone, although that’s the slowest-moving of the pieces. The “money supply fall” option is the best for consumers, but the worst for investors. Presently, we’re seeing a little bit of all three. 

.... Ergo, I think we’re still looking at higher-for-longer not just in the interest rate structure, but in the trajectory of inflation. ....


China slips back into deflation in worrying sign


Just last year, companies were struggling to keep staff. Now, they say not enough people are leaving their jobs.




Bubble Fare:

2023: Revisiting Reality

From time to time, one must step back to put today's economic events back into their broader context. In retrospect, we now know that the 2008 global financial crisis placed the U.S. and developed world in a state of deflationary Japanification. No growth and 0% interest rates for a decade straight. It was a frustrating time to be an investor, because fundamentals no longer mattered. Only monetary policy mattered. 

Fundamentalists believe that the economy and profits are what drive stock prices. Whereas Elliott Wave purists believe that sentiment and social mood are what drive the economy and stock prices, fundamentals merely follow. I am in the middle camp. I believe that there is a feedback loop between fundamentals and sentiment. When sentiment is RISK ON, demand increases, the fundamentals improve, profits follow. Higher profits stimulate asset prices which in turn raises speculative appetite. 2008 changed all that. Central banks were in direct control over markets for over a decade.

However, now the pandemic has put markets back at the mercy of sentiment and fundamentals. Central banks are no longer supporting markets at this late juncture. .......

After going through this last year, today's unfolding collapse should be very clear to everyone, but it's not. Why? Because Wall Street relies solely upon their proprietary profit models to predict stock prices. What I call the Magic 8 Ball. Their predictions always fail at the end of the cycle.

Which is why it has never been more important to observe risk sentiment. Below is a chart of airline stocks and consumer sentiment. .......

Next, let's talk about inflation and the impending return of deflation. The sources of inflation emanating from the pandemic were first and foremost the unprecedented monetary quantitative easing which dwarfed the stimulus applied after 2008, or any other period in history. ......

In other words, we are to believe that the post-2008 deflationary paradigm is over having been replaced by record asset prices and record debt. .......



Vid Quote of the Week:


Charts:
1: 


...

... 

...
...
...

... 

...

... 

...
...

... 




(not just) for the ESG crowd:


I have tried to point out the reality throughout this entire blog that what we face moving forward is a set of predicaments with outcomes, not problems with solutions. Therefore, prescribing different ideas (whether they are actually labeled "solutions" or not is more or less irrelevant) focusing on ways to mitigate or "fix" these predicaments is a fool's game because no solutions are available. ........



Geopolitical Fare:




........ Of course most of the world has unambiguously condemned the ongoing crime. Millions of people have protested on every continent to express their outrage and revulsion as the sick plot to kill Palestinians en masse and force the survivors to leave their homes intensifies by the day.

Eight nations, including South Africa, Bolivia, and Colombia have cut diplomatic ties with Israel. In Washington DC, headquarters of the aiders and abettors of the genocide, an estimated 300,000 people took to the streets in just one protest. Similar numbers were seen in London and other European capitals.

But these displays of empathy and solidarity pose a problem for the nations known as the collective west. The U.S. and its friends in NATO are committed to imposing their will on the rest of the world and they don’t want to hear from pesky citizens who point out their wrongdoing. ..............



........ The heavily biased western media and well-paid politicians in the US, Canada, Germany, and other members of the European Union have persisted in obscuring the real reason for the Hamas attacks. Hamas is a tiny organization of lightly armed refugees whose parents were driven from their homes in what is now Israel. Calling them ‘terrorists’ explains nothing. It’s not even a ‘war,’ as western media calls the conflict. Rather, It’s a horrifying prison riot. ....................



Most people — even in the highly propagandized West — support at least a ceasefire in occupied Palestine. Even with a mass media constantly explaining why this is fine, most people do not like seeing children destroyed with industrial explosives. But industry does. And that’s who actually rules. That’s the rules-based order. Just follow the money.

One of the core experience of colonization, from the very beginning, is that we were colonized by corporations. The first IPO was for the Dutch East India Company (VoC). The corporations — European greed incarnate — were actually the first AI, as I argue. That was the birth of artificial, algorithmic life that devoured the human and natural world. As it was coded to do, from the very beginning. Corporations, as cybernetic organisms, contain human parts, like so many nuts and bolts. These mouthpieces said it was all about civilization and Christianity, but that was just marketing. It was strictly business. Always was. .............


Laos continues to be crippled by the savage bombing campaign carried out during the Vietnam war, where the U.S. dropped more bombs on Laos than it had during all of World War II.

Americans often wonder why much of the world seems not to like us. Often it is no great mystery; when a country stages brutal coups and bombing operations of epic proportions, it’s no surprise that they’re not greatly loved. Perhaps the country whose hatred of America is the least mysterious is Laos. The United States carried out really horrifying crimes in Laos—crimes that eviscerated any chance of a flourishing society, crimes so brutal that they make much of Laos uninhabitable today. Laos is perhaps the most thoroughly decimated victim of U.S. foreign policy—what we did to Laos is something that must never happen again.

The horror of Laos is so extreme that it should reshape how we view our government. A just government that occasionally blunders does not do what we did in Laos. Laos wasn’t just an error; it was a crime of historic proportions. ......



Yesterday I wrote a very angry article about the genocide Israel is committing in Gaza, with the full aid and complicity of most Western nations, including the US and my own country, Canada.



Other Fare:

We all have a place in our lives where we look the other way and pretend everything is fine. It's a built-in excuse to act selfishly.


The moral bankruptcy of using social justice rhetoric to justify the torture of animals.

.................... Animals are, without a doubt, the most marginalized group on the planet. If we treated any humans the way we treat the 92.2 billion animals we torture and kill every year, it would be undeniable that we had recreated Auschwitz. If one replaced the animals with people, it would undeniably be the greatest holocaust in human history. ...........

We only are hesitant to call factory farms torture chambers because we give so little of a damn about animals that we don’t consider their torture to be real torture.

Every second of every day, over 24 billion land animals are left languishing in these torture chambers. More than three times the population of Earth is being tortured every single instant and most people don’t care in the slightest. We torture and kill more sentient beings every two years than there are people that have ever lived. ....





Science Fare:

Early machine-learning systems were inspired by neural networks — now AI might allow neuroscientists to get to grips with the brain’s unique complexities.
Posted by at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)