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Saturday, December 2, 2023

2023-12-02

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


Economic and Market Fare:

The latest estimates of domestic income and domestic product are alarmingly inconsistent. The gap is mostly attributable to the bizarre (alleged) decline in net interest paid by businesses.





ECRI: Consumer spending outlook: a tightening purse


........... In sum, consumer spending is on the verge of a significant slowdown that raises concerns about overall economic growth prospects. As Charles Dickens once wrote, "It was the best of times, it was the worst of times," but for the average American consumer today, the scales seem decidedly tipped in the wrong direction.





The European Union’s supporters celebrate the survival of the euro, the fact that public debt is no longer the threat it was, and, crucially, that their mercantilist business model remains intact. But it has come at a steep price: Europe’s permanent stagnation and continuing fragmentation.



Despite the growing popularity of the soft-landing narrative, the current scenario presents a multitude of macro factors forewarning a major recession. The dangerous disconnect of highly inflated valuations of financial assets within a market environment substantially different from the easy money conditions of the past few decades defies logic. With the US economy teetering on the brink of a downturn, the broader equity market is now at risk of a violent selloff and a significant compression of fundamental multiples.

Crescat’s macro model, encompassing 17 macro, fundamental, and technical indicators, is now at one of its most alarming levels in the data record. It’s worth noting that this model has proven highly effective in identifying pivotal shifts in the US business cycle, which inherently oscillates between expansion and contraction in tandem with fluctuations in asset valuations and credit availability. Presently, nearly all indicators have reached historic extremes, corroborating our perspective on the high risk of an impending hard landing. ....


  • Global central bank assets are contracting and significantly deviating from overall stock trends.
  • Yield curve inversions are steepening after being extensively inverted, a classic signal in credit markets that typically coincides with the onset of an economic decline.
  • The unemployment rate has surpassed its 2-year moving average, an indicator that has consistently foreshadowed a recession over the last 50 years.
  • Every time the ISM manufacturing index remained below the key 50 level for 12 consecutive months, a recession ensued.
  • Household saving rates are nearing historic lows.
  • The Conference Board Leading indicator has declined for 19 consecutive months, a trend observed only during the Stagflationary recession of 1973-4 and the Global Financial Crisis.
  • Market leadership has narrowed with technology mega-cap stocks isolated from the rest of the market, reminiscent of the times preceding the 2001 Tech Bust.
  • The recent enormous value destruction in fixed-income assets worldwide
  • The perilous divergence between falling Treasury prices and the Nasdaq 100 Index, which continues to defy gravity in a markedly higher cost of capital environment.
  • Typical late-cycle valuations among equity markets are historically overblown across several fundamental multiples: price-to-book, price-to-free cash flow, price-to-sales, cyclically adjusted price-to-earnings, overall market cap of US stocks relative to GDP, and others.
  • Monetary policy operates with a lag and the Fed has been in a rate hike cycle for 21 months and 20 months into quantitative tightening.
  • Banking credit is starting to contract, reaching levels only experienced during the Global Financial Crisis.
  • An aggregate index of cyclical industries such as banks, retail, homebuilders, autos, and small caps is now down 20% relative to the S&P 500.
  • Trucking employment is contracting at a faster rate than it did during the 2000 and 2008 cycles.
  • Consumer sentiment, in terms of present situation versus future expectations, is currently near record levels, serving as an incredibly reliable contrarian indicator.
  • Federal tax receipts have declined for seven consecutive months, a sequence only observed during recessions.
  • An overwhelming amount of corporate and sovereign debt obligations are maturing in the next 12 months, with effective interest rates on the verge of a drastic rise from historically low levels.
  • Corporate margins are yet to feel pressure from rising wage increases as the cost of living remains high and labor strikes continue to unfold.
  • Less than one-third of all small-cap stocks in the US have turned a profit in the last three years.
  • Aggregate corporate earnings currently reside at the upper boundary of a 70-year channel, historically marking a critical juncture with profits declining significantly in the subsequent years.
  • Warren Buffett has made a strategic move to accumulate the largest cash position in Berkshire Hathaway’s history, comprising 52% of cash relative to total assets.
...



I previously discussed a slate of recessionary indicators with high correlations to recessionary onsets. However, as we head into 2024, many Wall Street economists predict a “soft landing” or “no recession” outcome for the economy. Are these recessionary indicators with near-flawless track records wrong this time? Will it be a soft landing in the economy or something worse? ......









In our World Outlook for 2024, we outline how we’ve had a fairly consistent macro narrative over the past 2-3 years and we continue to see this as a classic policy-led boom-bust cycle that will culminate in a US recession. Ultimately, the impact of rapid rate hikes are yet to take
effect in full, and QT is still continuing in the background. That will make early 2024 a  challenging environment, and we expect a mild US recession in H1 2024. Meanwhile in the Euro Area, we think that a mild recession has already begun that will stretch into the start of 2024. 

We called this outlook “The Race Against Time…”, which refers to the fact that higher rates have caused funding to dry up or tighten considerably for various parts of the economy. Looking forward, the question is now whether lending standards can loosen and yields can fall quickly enough to avoid a funding accident that leads to wider contagion. The risk is that non-linearities kick in, which could turn a mild downturn into a deeper recession. 

Given the subdued backdrop, we think that several central banks will start to cut rates from next year. Over 2024, we see the Fed cutting rates by 175bps in total, along with 100bps of cuts from the ECB. But overall growth is still likely to be weak in 2024, coming in at 0.6% in the US, and 0.2% in the Euro Area.





................ As Moody’s notes, the problem is not a deficit or a debt issuance problem. It’s an interest rate problem. Regardless of logic, markets often trade on false narratives for short periods. So, let’s assume the narrative of massive debt issuance continues to weigh on the bond market. What might the Treasury or Fed do to lower rates?

............. However, as bond investors, we need to understand what drives bond yields and what doesn’t. Having debunked the “massive debt” narrative, we end with a reminder of what drives bond yields.

The graphs below, from our article Bond Market Noise Hides Tremendous Opportunity, show the near-perfect correlation between Treasury yields versus inflation and inflation expectations.



The bull case and the bear case for 2024 are now the same - lower interest rates. Bulls are convinced that low rates are good for stocks - and they are...Unfortunately, the record clearly shows that rate cuts are NOT good for stocks.

It took decades to reach this juncture at which bulls are now praying for a weak economy. The divergence between the economy and stocks began in the early 1980s with the implementation of free trade and mass immigration, but it was kicked off by Fed chair Paul Volcker who famously broke the back of inflation by pushing the economy into a double recession at 10% mass unemployment. Those events set-off a multi-decade deflationary era which has been incredibly beneficial to markets at the expense of middle class labor. Another unhealthy predilection that started in the 1980s was this market addiction to monetary policy which started in 1987 with Alan Greenspan. Over the course of the past three decades, each time the economy weakens, the Fed has arrived with greater and greater monetary bailout policy. Filed under moral hazard biblical scale.

Therefore it can come as no surprise that for 2024 Wall Street expects a recession AND higher stock prices. A brief glance at the chart above will show that none of the most recent recessions led to higher stock prices initially. It took quite a bit of pain first: -50% in 2001, -55% in 2008, -35% in the case of the pandemic. ...

........... In summary, what we are witnessing is the largest policy error in market history. Bought with both hands by complacent bulls at the behest of known con men.


Getting back to the Physiocrats who took Nature and energy seriously



Academic Fare:

Weekend read – The great re-boot. Perhaps.

......... The neoliberal project undermined the legitimacy of economics as a social science.  It is a shadow of what it could be.  Perhaps the collapse of the neoliberal project in the disaster of the 2008/2009 turmoil will lead to a recovery of economics.  That appears to be going on.  But insufficiently.  Academics are averse to calling out their peers for overt politically motivated thought.  Economics, in particular, resists naming names.  It resists looking back at bodies of work to re-appraise how much was the consequence of genuine enquiry and how much was induced by an ideological, or worse, a financial motivation.  How much of the core work undertaken mid-twentieth century was genuine enquiry and how much appeared under the influence of corporate or wealthy individual subsidy?  That’s an awkward question.  One that needs an answer.

Or, perhaps, to save face, we kick the can down the proverbial road.  Perhaps we simply and steadily discard the work from that tainted period.  Perhaps we retreat from the intrusion into other disciplines such as politics and sociology.  Perhaps we toss aside the agenda that allowed economic method to infect sister social studies.  Perhaps we undo the impact of that period on industry and finance — the real world impact of neoliberal economics was manifest in 2008/2009.  And perhaps we allow the famous names associated with all that to fade into history where they belong.

Perhaps, more to the point, we must remember and prioritize, that economics is first and foremost a social science.  It cannot deny the existence of society.  It cannot, consequently, deny the existence of power and politics.  Both the allocation of resources and the distribution of wealth are inherently the expression and culmination of power relationships.  To study such phenomena, economics needs to reacquaint itself with its own path and history.  Its was always about power and politics.  Politics cannot be studied through the lens of economics because economics is already a statement of politics.  Nor can social relationships be studied with an economic method without acknowledging that they exist within a setting mediated by power.

The economics created to support neoliberalism, then, fits within this narrative.  It was designed to justify a certain distribution of wealth and power.  To do that it had to dispense with distribution as a subject of study and to assert that whatever the outcome of economic processes that it deemed “efficient” was both natural and irresistible.

It had to deny power in order to justify a particular sort of power.  And it is this contradiction that has led to its downfall.  The irony, of course, being that back in 1938 the neoliberal project feared far-right populism as much as centrally planned economic activity.  By developing a body of work designed to explain and justify the ascendancy of capitalism and its associated elite, the economists enlisted to the project paved the way for the re-emergence of just that far-right populism.  By advocating the fragmentation of society and ignoring the consequences of distribution they nurtured a social pathology antithetical to their avowed values.   It wasn’t the failure of capitalism they needed to fix.  It was its runaway success.  But that’s why we have democracy and the voice of the people in distribution through politics.  Hopefully our economists have taken note.

The future of economics would then be bright.  Its recent past not so much.


Quotes of the Week:

Waller: "If you think about central banking, we talk about a “Taylor rule” – or various types of Taylor rules – that kind of give us a rule of thumb about how we think we should set policy. And every one of those things would say if inflation is coming down – once you get inflation down low enough – you don’t necessarily have to keep rates up at those levels. So, there’s certainly good economic arguments from any kind of standard Taylor rule that would tell you – if we see disinflation continuing for several more months – I don’t know how long that might be – three months, four months, five months – that we feel confident that inflation is really down and on its way [to target], then you could then start to lower the policy rate just because inflation is lower. It has nothing to do with trying to save the economy or recession. It’s just consistent with every policy rule I know from my academic life as a policymaker. If inflation goes down, we’d lower the policy rate. There’s just no reason to say you would keep it really high if inflation is back at target.”

....... Comments from a bevy of Fed officials this week make it clear the Fed is not ready to signal impending cuts. Markets were having none of it. Richmond Fed President Thomas Barkin: “I think you want to have the option of doing more on rates.” New York Fed President John Williams: “I expect it will be appropriate to maintain a restrictive stance for quite some time…” San Francisco Fed President Mary Daly: “I’m not thinking about rate cuts at all right now.” Governor Michelle Bowman: “My baseline economic outlook continues to expect that we will need to increase the federal funds rate further…”




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(not just) for the ESG crowd:




"It is profoundly shocking to stand on the ice of Antarctica and hear directly from scientists how fast the ice is disappearing."


Insurance markets and climate risk


A political battle over billions in taxpayer money, fought by an army of confused politicians.

.... Whatever Miller was advocating for, the issue that provoked her to take to the pages of The Hill is a high-stakes one: an upcoming and highly anticipated rule-making announcement by the US Department of Treasury that will decide who qualifies for some of the most lucrative (and scientifically dubious) tax credits codified into law by the Inflation Reduction Act of 2022 (IRA). The race is on to pilfer scores of billions from the US taxpayer in the name of chasing green energy unicorns, and there is a full-blown administrative brawl underway between the various factions trying to get theirs while the getting is good. It is a story of cronyism, a failure to learn from Europe’s energy madness, and a familiar scheme guaranteed to incinerate heaps of the public’s money. 



..... Even worse than electric vehicles were plug-in hybrid electric vehicles, which were found to have 150% more issues than traditional ICE vehicles, CBS reported. Ordinary hybrids are the best of the breed, with about 25% less problems than gas cars, the study found.  ........



Sci Fare:


The Hamas Attack and Israel’s War in Gaza

........... On October 7 the repressed reality of Palestinians under direct or indirect Israeli rule literally exploded in the country’s face. From this perspective, while I was shocked and horrified by the brutality of the Hamas attack, I was not surprised at all that it occurred. This was an event waiting to happen. If you keep over two million people under siege for 16 years, cramped in a narrow strip of land, without enough work, proper sanitation, food, water, energy, education, with no hope or future prospects, you cannot but expect outbreaks of ever more desperate and brutal violence. ........




Permissive airstrikes on non-military targets and the use of an artificial intelligence system have enabled the Israeli army to carry out its deadliest war on Gaza, a +972 and Local Call investigation reveals.





Some facts have become clear over the duration of the Israeli/Gaza conflict of 2023.
  • The initial Hamas attack did not have a lot of atrocities committed, despite Israeli claims. No widespread rape, no baby killing and few civilian casualties caused by Hamas. Hamas’s targets were military, plus grabbing hostages and most of the civilian casualties seem to have been caused by indiscriminate Israeli fire, some due to calousness, some due to panic and some due to the Samson doctrine that states Israel will not allow hostages to be taken.
  • Hamas treated its captives humanely. Israel routinely tortures and sexually humiliates theirs.
  • Israel attacked multiple hospitals and deliberately forced them to shut, while cutting off all water, power and food. The population pyramid of known casualties very closely follows the Gaza population pyramid, and the most common age of those killed was five. Most dead were women and children, which means they weren’t soldiers and couldn’t be.
  • Israel is clearly engaging ethnic cleansing and genocide.
........ So, who are the “bad guys?” Pretty clearly those committing and supporting the genocide. In order, Israel, the US, and Europe/Canada. .......






........ Reflected in this dearth of national candor is an uninformed arrogance amongst individualists and collectivists alike with respect to world affairs. ‘We’ have strong views regarding events that this same we have little to no control over. The US proxy war in Ukraine and the genocide currently underway in Gaza have been underway is less visible forms for decades. And the bi-partisan gerontocracy in Washington is doing what it has always done. It is lying to we, the people, regarding its service to capital in the form of the MIC (military-industrial complex).

.......... Americans are repeatedly told that serial military mal-adventures are intended to liberate oppressed people from malevolent tyrants. If so, with 195 nations in the world today, why are the same half-dozen or so nations with the largest proved oil reserves (chart above) the main targets of US regime-change operations? ...

From a different angle, at fifty-eight pages, this list of US military operations finds many of the same states and political actors being invaded and re-invaded by the US over this history, with a notable focus on those resource rich nations that the US political leadership used to loudly proclaim (see Eisenhower’s comments at opening of film) hold resources important to American oligarchs and corporations. From Teddie Roosevelt through Joe Biden, ‘kick their ass and steal their gas’ has been the operating ethos of the US military. .........



Leadership:

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