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Monday, May 6, 2024

2024-05-06

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


Economic and Market Fare:


Tracking economic indicators is challenging at the best of times, but lately it has been especially so, with key variables moving in ways that often differed from what economists expected. Job gains, for example, have often surprised to the upside, as discussed in a recent blog. Real GDP had done the same for a few quarters, though in 2024:Q1 it lagged expectations to the downside (1.6% actual versus 2.5% expected).

Thus, we are once again left trying to pull signal from noise. When we do, we see a strong U.S. economy wherein healthy consumer spending—almost 70% of nominal GDP—is continuously supported by a strong job market and consistent real wage growth. Inflationary pressures, while down significantly from their peak, have not abated, but have seen progress in some key categories. Most importantly, our cost-cutting policy agenda rolls on, with rule changes and legislation targeting lower costs for American households. 

Real GDP, the broadest measure of economic growth, came in at 1.6% in Q1 of this year, below expectations for a stronger report. However, the growth rate reflected negative contributions from the most volatile components of GDP—inventories and net exports. To get a better signal of underlying growth, economists often look at real consumer spending plus private business fixed investment (private domestic final purchases, or PDFP), which grew at an annualized rate of 3.1% over the quarter, about the same as the pace of growth in 2024:H2. ............



Last year's consensus was that the U.S. economy was headed for a recession, but that didn't happen. This year's consensus is that we'll have a soft landing, where the economy slows but won't tip into a recession. That could be wrong too.

Doubling down on his contrarian view, Citi chief U.S. economist Andrew Hollenhorst told Bloomberg TV on Thursday that he sees a hard landing. In fact, inflation and the labor market will weaken enough that the Federal Reserve will cut benchmark rates four times this year—far more than the one or two cuts Wall Street expects. .........



With a third of 2024 now in the books, it’s fair to say that the major shift from 2023 has been investor perception that sticky inflation will remain a problem for central banks longer than anticipated. This has caused interest rates to rebound and market leadership to shift from Growth to a combination of Value and Defensives. In his presser last Wednesday, Fed Chair Jerome Powell continued to sound optimistic that inflation will moderate further, but he sounded less certain than he did at the end of last year. Our chart this week shows that based on the four new bits of information we received last week, the Fed should not be particularly concerned about tight labor markets preventing inflation from falling further. Hiring has slowed, but layoffs remain rare and fewer workers are finding it attractive to seek greener pastures. Absent a supply shock to a commodity like oil, it’s hard to maintain high price inflation when wage inflation is falling because of how closely tied consumer spending is to incomes. In our opinion, the Fed may soon come to regret waiting longer to reduce interest rates, especially if unemployment resumes its rise in the coming months.



Once again the US Federal Reserve is in a quandary.  Does it cut its policy interest rate soon in order to relieve pressure on debt servicing costs for consumers and businesses and perhaps avoid a stagflationary economy (ie low or no growth alongside higher inflation); or does it hold its current interest rate for borrowing in order to make sure inflation falls towards its target of 2% a year?

That’s what mainstream economists and investors in financial assets want an answer to.  But it’s not really the important issue.  What the Fed’s current quandary really shows is that yet again ‘monetary policy’ (ie central banks adjusting interest rates and money supply) has little effect on controlling inflation in the prices of goods and services that households and businesses must pay. ...............

.............................. And that brings us to the ‘stickiness’ of inflation.  Which components of the inflation index have not fallen despite central bank rate hikes?  The answer is housing costs and motor car insurance, which have risen sharply.  As the FT article admits: “Both are partly a product of pandemic supply shocks — reduced construction and a shortage of vehicle parts — that are still percolating through the supply chain. Indeed, dearer car insurance now is a product of past cost pressures in vehicles. Demand is not the central problem; there is little high rates can do.” ............




US stocks are seeing no evil and certainly hearing none, but Berkshire Hathaway’s ever-growing cash pile should hold a tacit warning for those who are overexuberant.

Berkshire’s war chest surged to a record $189 billion at the end of the first quarter, ...


Stocks rallied on Friday after the markets interpreted the April non-farm payrolls data as providing just the right backdrop for the Federal Reserve to cut rates eventually. Considering that since of the end of 2022 alone, the S&P 500 has surged about 33% and the Nasdaq almost 50%, one would think that all the good news out there and more is already reflected in their price tag.

Over the long term, stocks can’t yield returns in excess of corporate earnings and economic growth, but investors have been in no mood to listen — and they may yet stay complacent in the short term. The S&P 500 now promises an earnings yield of less than 5%, well below the historical average. The Nasdaq 100 is, of course, trading even loftier, offering a prospective earnings yield of less than 4%.

At the moment, investors are paying a lot for stocks on the premise of promise. That is what Buffett may characterize as too much risk.



There are two reasons, lower interest-rate sensitivity and strong demand tailwinds.

Specifically:

A) Lower interest-rate sensitivity:

1) 40% of homeowners don’t have a mortgage, and 95% of mortgages are 30-year fixed that are not sensitive to the Fed raising interest rates.

2) During Covid, most firms termed out their debt at very low levels, and with the IG market having grown from $3 trillion in 2009 to $9 trillion today, see the second chart, the interest-rate sensitivity of corporate America has declined.

3) A growing share of capex spending is intangibles (R&D and software), which generally is less sensitive to Fed hikes.

B) Strong cyclical and structural demand tailwinds:

1) Fiscal spending, including the CHIPS Act, Inflation Reduction Act, and Infrastructure Act, is still a strong tailwind to growth.

2) Excess savings have recently started to rise again for higher income households, see the third chart.

3) Immigration has been unusually strong, supporting overall employment growth.

4) The Fed turning dovish in December 2023 has eased financial conditions significantly ............

In summary, the economy is strong for two reasons:

A) Consumers and firms locked in low interest rates during Covid, which made the economy less sensitive to higher interest rates (i.e., bullet points No. 1 to 3 above), and

B) Strong demand tailwinds coming from fiscal, excess savings, immigration, and easy financial conditions (i.e., bullet points No. 1 to 7 above).

With this backdrop, it is not surprising that inflation and labor costs remain high, and these 10 forces will keep the economy strong for at least several more quarters. 

Eventually, the Fed will get inflation back to 2%, but it is increasingly clear that it will require a meaningful slowdown in the labor market and the housing market.

In short, GDP and earnings should remain strong for the rest of 2024.






Thomas: Valuations for Multi-Asset Investing

Learning Goals
  • Understand application of valuation concepts in multi-asset investing
  • Use relative value principles for active asset allocation decision making
  • Apply value signals to gauge risk vs opportunity in a multi-asset context
Concepts
Valuations are an integral input for multi-asset investing.  They tell us information about expected risk and opportunity both for individual asset classes, and in relation to other assets — helping us prioritize allocations and manage portfolios. 

As an asset allocator, your job is to navigate risk, return, and opportunity-cost over typically longer-term timeframes but certainly through cycles and short-term gyrations.  Extremes in absolute and relative valuations help with identifying and proactively managing risks, as well as prioritizing opportunities through cycles and over the longer-term.

It’s not necessarily about maximizing returns, although that is an important objective, but being valuation-aware can help with what is arguably more important: protecting capital.  Indeed, it takes a 100% return to get back to square from a 50% drawdown. So a risk signal from an extreme expensive valuation reading can be just as important as an opportunity signal from an extreme cheap valuation reading.

The principles are simple, but the practice is complicated by consensus thinking (especially in the presence of peer/benchmark risk) on the way up, and fear during downturns. There is always going to be a reason to not buy when things are cheap or not to reduce exposure when things are expensive, there is always an argument to go with the flow, and always a voice in your head talking you out of doing the right thing at the right time.

That’s why the reliability, efficacy, and explainability in valuation indicators across asset classes is critical.  You need a solid quantitative and objective valuation signal that can help you keep your head when everyone else is losing theirs.

So it’s important to build the indicators (or at least obtain visibility on valuations from a reliable third party), understand the principles behind them and appreciate the actually wide range of investment insights that a solid suite of absolute and relative value indicators and skilled interpretation can yield. .......






Traditional economics makes ludicrous assumptions and poor predictions. Now an alternative approach using big data and psychological insights is proving far more accurate



China Fare:

Pettis: China’s problem is excess savings, not too much capacity
Policymakers on either side of bitter trade dispute seem to confuse two issues



Crypto Fare:


..................................... No question that the next great monetary reform will be to globalize a central bank digital currency with track-and-trace capability and the power to turn money on and off on political whim. In order to make this possible, government now needs to eliminate all the competition, just as they did in 1813.

None of this mucking around with the money is in the public interest. It is in the government’s interest and also its industrial partners in banking and finance. A full denationalization of money is the fix for the whole problem but getting there from here will require dislodging the government of its penchant for controlling the economic forces of the whole realm. It’s an age-old problem and perhaps the greatest challenge of all ages.



Vid of the Week:


Quotes of the Week:

Ian Shepherdson: Payrolls. I hate payrolls. Unforecastable. Revised forever.
Still: 150. 3.8. 0.3.
Or:  Something totally different.



Charts:
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(not just) for the ESG crowd:


................ What it means is what we perceive as a need today is a function of what currently exists in the world and consequently what is the current level of development. In Roman times nobody felt the need for a smart phone, nor a frustration if they did not have it. Likewise, we do not experience the need to spend a weekend on Mars simply because such a good is unavailable.

If needs are a historical category, then new needs arise with technological progress. If new needs are constantly born, the abundance that was presumed in the opening paragraphs cannot be achieved because sufficient material means to satisfy these new needs will always be deficient.  ..............

When can all needs be covered by societal production? Only in a society which does not experience technological progress and where no new needs can arise. .........

This then means that the stationary society that is compatible with full satisfaction of all human needs cannot be capitalist. Capitalism, by definition, means limitless change and limitless progress. With the society of limitless change and limitless progress we cannot have abundance.

Degrowth advocates therefore might have a valid point when they argue for an end to capitalism if they believe that climate change can be stopped only if society is stationary. Stationary society, end of capitalism, and abundance are logically consistent.


A new study that looked at nearly 40 million flights in 2019 was able to calculate the greenhouse gas emissions from air travel for nearly every country on the planet. At 911 million tonnes, the total emissions from aviation are 50 per cent higher the 604 million tonnes reported to the United Nations for that year.



Use of enclosed combustors leaves regulators heavily reliant on oil and gas companies’ own flaring data




Nitrogen, Agrochemical Corporations and International Trade: A Perilous Mix

Yves here. Despite the clunky headline, this is a very important post that covers a lot of ground effectively. It starts by discussing why nitrogen is foundational to growing proteins but is relatively scarce in soil, how our cereals-intensive food system and other modern practices undermine replenishment, and the consequences of the growth of nitrogen fertilizers as the work around. The talk with Gilles Billen also discusses how this problem is not insoluble, but can be significantly remedied by changing the organization of food production and creating regional networks. .........


Tailing Dams

........................... And yet, the biggest problems we face, tend to be the most esoteric, understood by just a small number of people. .................

But there are problems like this emerging elsewhere too. The most esoteric of all perhaps has to be the tailings dams. This is something nobody thinks about, except for the people who are stuck managing these tailings dams. When it goes wrong, it looks like this: ............

You know who is paying to look at this problem? The European Commission and the European Bank for Reconstruction and Development. Why are Europeans poorer than Americans? Because we’re looking at the problems, while you earn your money selling us fake solutions (like electric cars). ...........


Eleanor Johnson on How Medieval Christian Writers Accepted Ecological Collapse



.......... One reason the empire is losing young people is because the imperial status quo has given them no investment in it. They’ll never own property. They can’t support a family or retire. They’ve been given no reason not to want to rock the political boat. So they’re rocking it.

The only vested interest young people have left is an interest in breathable air and a livable planet, and the possibility of a future that isn’t intolerably dystopian. All of which are diametrically opposed to the interests and trajectory of the status quo politics of the western empire.

So they’re going for it. They’re beginning to see that there’s no reason for them not to plunge headlong into a push for real change, in direct opposition to the mainstream politics of our time. Like Bob Dylan said, when you got nothing you got nothing to lose. .........



Geopolitical Fare:


We had a joke back in the Bush Jr. administration.

“Evil or stupid? Why not both?” ........

......... This is true late Roman Emperor level dysfunction. Absolute morons getting everything wrong, capable of nothing but alternating between pandering to elites and making cruel shows of ineffective force, while the fall everyone with sense knows is coming storms forward from the horizon. ...........


...................................... Maybe this story has a happy ending for Russia, but what of us in the West? What will become of the fascist forces unleashed here, especially if there won’t be any Red Army coming to the rescue this time?

We probably need to first come to terms with history. We went from an insistence on the uniqueness of Nazism and the Holocaust to attempts to relativize Nazi policies by comparing the regime’s crimes to those of Soviet communism, and ultimately an attempt to blame them on a reaction to Russian communism.

All of these readings conveniently absolve the systems of capitalism and imperialism from which Nazism was derived. None of this asks how fascism was a part of the modernizing forces of industrialization or how it fits into the crisis cycles of finance capitalism or what its role is today. .........








In the campus protests over the war in Gaza, language and rhetoric are—as they have always been when it comes to Israel and Palestine—weapons of mass destruction.

.............. But sometimes ethical philosophy reënters the arena, as is happening right now on college campuses all over America. I understand the ethics underpinning the protests to be based on two widely recognized principles:
  1. There is an ethical duty to express solidarity with the weak in any situation that involves oppressive power.
  2. If the machinery of oppressive power is to be trained on the weak, then there is a duty to stop the gears by any means necessary.
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Did it warm your heart to see all those blue and yellow Ukrainian flags waved by our elected officials in Congress Saturday night with the passage of the $60-plus-billion aid bill to the Palookaville of Europe? You realize, don’t you, that the tiny fraction of that hypothetical “money” — from our country’s empty treasury — that ever reaches Ukraine will rebound on the instant into Mr. Zelensky’s Cayman Islands bank account. The rest of the dough enters the recursive shell-game between US weapons-makers and the very hometown folks in Congress waving those blue and yellow flags, who will receive great greasy gobs of fresh “campaign donations” from the grateful bomb and missile producers. No wonder they’re cheering.

What the $60-plus-billion won’t do is provide any fresh arms and equipment to Ukraine’s sad-sack army soon enough to prevent Russia from bringing this cruel, stupid, and unnecessary war, which we started, to a close. Yes, we started it, not Russia, in 2014 with our Intel blob overthrowing elected President Viktor Yanukovych in the so-called “Maidan Revolution of Dignity” (what Wikipedia calls it). And for what reason? To jam Ukraine into NATO as a prelude to “weakening” Russia sufficient to bust it up and gain control over Russian oil, ores, and grain.

Yes, that was actually the neocon’s game, equal parts megalomania and hubris, a fiasco as strategically ill-fated as Hitler’s push to gain control of Russia’s oil fields via Stalingrad ......


The liberal world order is collapsing once again

Few 20th-century thinkers have had such a lasting and profound influence as Karl Polanyi. “Some books refuse to go away — they get shot out of the water but surface again and remain afloat,” Charles Kindleberger, the economic historian, remarked about his masterpiece The Great Transformation. This remains truer than ever, 60 years since Polanyi’s death, and 80 since the book’s publication. As societies continue to wrestle the bounds of capitalism, the book arguably remains the sharpest critique of market liberalism ever written. ...........

Polanyi set out to explain the massive economic and social transformations that he had witnessed during his lifetime: the end of the century of “relative peace” in Europe, from 1815 to 1914, and the subsequent descent into economic turmoil, fascism and war, which was still ongoing at the time of the book’s publication. He traced these upheavals back to a single, overarching cause: the rise of market liberalism in the early 19th century — the belief that society can and should be organised through self-regulating markets. For him, this represented nothing less than an ontological break with much of human history. Prior to the 19th century, he insisted, the human economy had always been “embedded” in society: it was subordinated to local politics, customs, religion and social relations. Land and labour, in particular, were not treated as commodities but as parts of an articulate whole — of life itself.

By postulating the allegedly “self-regulating” nature of markets, economic liberalism turned this logic on its head. Not only did it artificially separate “society” and “the economy” into two separate spheres, it demanded the subordination of society, of life itself, to the logic of the self-regulating market. For Polanyi, this “means no less than the running of society as an adjunct to the market. Instead of economy being embedded in social relations, social relations are embedded in the economic system”.

Polanyi’s first objection to this was moral ................

And yet, even Polanyi’s ideological enemies, neoliberals such as Hayek and Mises, were perfectly aware that the self-regulating market is a myth. As Quinn Slobodian has written, their aim was “not to liberate markets but to encase them, to inoculate capitalism against the threat of democracy”, by using the state to artificially separate the “economic” from the “political”. In this sense, market liberalism can be considered a political project as much as an economic one: a response to the entrance of the masses into the political arena from the late-19th century, as a result of the extension of universal suffrage — a development most militant liberals of the time were vehemently opposed to. ............

............. Polanyi would have argued that a backlash was inevitable — and indeed it came, beginning in the late 2010s, though the populist uprisings of the past decade also failed to replace the system with a new order.

The result is that, just as a century ago, the intrinsic contradictions of the “international liberal order” are once again leading to a breakdown of the system, and to a dramatic intensification of international tensions. If Polanyi were alive today, he probably wouldn’t be as optimistic as he was when he published his book. We are definitely in the midst of yet another “great transformation” — but the future it heralds couldn’t be farther from the democratic, co-operative international order he envisioned.



Sci Fare:

By suppressing questions they considered too ‘philosophical’, post-war physicists created an unquestioning orthodoxy that influences science to this day



Book Review:

Everything Must Go: The Stories We Tell About the End of the World



Other Fare:

wow, this really resonates with me:
Autism, Loneliness, And Solitude

................................ Last year I realized that I’m autistic. I’m still figuring out what that means for me. When you learn that you’re autistic as an adult, you look back at your life through a new lens. I see now that I’ve been trying to fit into a neurotypical world; no wonder life has been so challenging. I’m learning that there’s nothing wrong with me. I’m not a failed normal person; I process my experience of the world differently, in ways that generally make the neurotypical world a poor fit.

Through this lens, I can also see that my frequent experiences of depression—which I’d framed in terms of neurochemistry or childhood trauma or a genetic predisposition, or some unhappy combination of these things—are largely a consequence of trying to fit into a world that wasn’t made for people like me. It’s such a relief to see that I’m not broken.

I’ve learned about masking, where neurodivergent people try to appear neurotypical and meet the social expectations of others. Sometimes masking takes the form of trying to hide things about yourself that other people find uncomfortable or inconvenient, such as stimming (repetitive behaviors), or sensory sensitivities, or needing more time to transition between activities. 



Satirical Fare:




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