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Sunday, August 11, 2024

2024-08-11

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


Economic and Market Fare:

Markets are pretty good at bullying monetary authorities, and now the BOJ has fallen into a pattern that started after Paul Volcker.
  • Moral hazard is back on the agenda; should central banks cave to markets?
  • The BOJ was able to talk the yen back to where it started the week.
  • Meanwhile, US bond vigilantes managed to turn the stock market around.
  • Amazing to relate, a soft landing still looks more likely than a serious recession.


... The turbulence in the equity markets hasn’t been a product of hidden risk, but rather the big stinking obvious risks. Big tech was crowded, thematic beneficiaries jumped the shark, small-caps lagged, growth was slowing, rate cuts were coming, volatility was compressed. This column has covered all of these factors over the past several months, just as most financial publications have. The hard part was knowing when the music would stop.

In many cases, it is hard to pin market moves on a specific catalyst, but in this case it seems pretty clear. The June Consumer Price Index report, released on July 11th set the wheels in motion.

The negative inflation data solidified the expectation of rate cuts, sparking a historic rotation out of mega-cap tech into small-cap laggards as investors absorbed the bright side of rate cuts. The dimmer side of rate-cuts — the implication of a weakened and price-sensitive consumer — came later, taking down stocks both large and small. Macroeconomic concerns led to sudden rush to protection and a collapse in overseas markets led to the biggest squeeze in volatility since March 2020.

Yet after four weeks of chaotic market action, the net results are modest. The bloody month in the Nasdaq, down 11% since CPI, merely unwound the prior month’s gains. Similarly the S&P 500’s close of 5,319 yesterday is unchanged since late May. The Russell 2000 survived a wild round trip and remains modestly positive over the period. ......



............. This brings us to today’s single most important question: is the current shakedown in the Nasdaq, Nikkei, and US dollar an opportunity to buy more of these assets on the dip? Or is it now time for investors to look for new stories?

The answer to this all-important question might well be provided by the Federal Reserve. Unsurprisingly given the recent market action, the clamor for the Fed to cut interest rates is now as loud as a pair of Justin Trudeau’s socks. But what would a cut mean for asset prices?

Let’s start with the old Gavekal notion that assets have value (i) because they are rare, like gold, diamonds, vintage Ferraris and impressionist paintings, or (ii) because they are useful, i.e. because they generate cash flows. Bearing this distinction in mind, it becomes obvious that the bull market of recent years was primarily a bull market in “efficient” assets rather than a bull market in “scarce” assets. And few things are as efficient at generating cash flows as large-cap technology stocks. So, what has triggered the market meltdowns of recent days? ..........


A comprehensive review of the structure of the economy and which segments you should track to understand the state of the Business Cycle.


The Duncan Leading Index was made popular by economist Wallace Duncan and it was designed based on the concept that changes in the economy stem from a few select categories.

Despite popular opinion, most segments of the economy do not contract and are generally extremely stable.

We often hear comments such as:
“The consumer is fine.”
“The consumer is holding up the economy.”
“We are a services economy.”

These comments are generally accepted as true given the frequency that they are repeated, but the reality is that these comments are exactly the opposite of what you want to focus on if your goal is to track and get ahead of major changes in the Business Cycle.

In this post, we’ll review the structure of the economy and which segments you should track to understand the current state of the Business Cycle.

The economy has four primary categories: private consumption, private investment, net exports, and government spending.

It’s true that private consumption, or “the consumer,” makes up about 70% of total GDP, but that leads to the incorrect conclusion that the consumer drives the ebbs and flows of the Business Cycle.

The Duncan Leading Index involves tracking three narrow segments of the economy: durable goods consumption, residential investment, and non-residential investment. 

At EPB Research, we’ve found that it’s very easy to improve the Duncan Leading Index by tracking durable goods consumption, residential investment and business equipment investment. ........






Total household debt rose by $109 billion to reach $17.80 trillion, according to the latest Quarterly Report on Household Debt and Credit. Mortgage balances were up $77 billion to reach $12.52 trillion, while auto loans increased by $10 billion to reach $1.63 trillion and credit card balances increased by $27 billion to reach $1.14 trillion. The volume of mortgage originations remained low, primarily due to subdued refinancing activity. Homeowners continued to increase balances on home equity lines of credit (HELOC) as an alternative way to extract home equity; HELOC limits rose by $3 billion, marking the ninth consecutive quarterly increase.  Aggregate delinquency rates remained unchanged from the previous quarter, with 3.2 percent of outstanding debt in some stage of delinquency.


Why a genuinely alternative economic agenda is not currently on offer in Canada



Bubble Fare:


During each speculative run-up in asset prices – whether the dot-com bubble, the housing bubble, or more recently the rapid rise (and fall) of the stocks of electric vehicle companies – there’s typically a moment when Wall Street strategists, analysts, and investors go all-in on that theme.

At the end of 1999, year-ahead profit margins for the S&P 500 Index were projected to be 8.5%, according to Factset estimates. By the time the market peaked in September of 2000, year-ahead profit margin estimates had jumped by more than 4 percentage points, as analysts looked for large and immediate benefits from the wide-spread spending on technology that occurred during that period. As it happened, S&P 500 profit margins would peak at 8.7% by January 2001, falling by a quarter over the following year. An economic recession would follow later that year. From its peak, the S&P 500 Index would fall nearly 50% by October 2002, as expectations for growth and profitability were reset.

How far and how long periods of “all in” expectations last is only known with hindsight. And it’s impossible to know how optimistic investors might become about the prospects for artificial intelligence. But when looking at current estimates for S&P 500 Index revenues and earnings for the next few years, it can be said with confidence that the all-in phase is already here. Now that we’re in the middle of second-quarter earnings announcements, it’s a good time to highlight some of these expectations. .........
.........................................
............................... If earnings miss estimates by a few dollars next year, that probably wouldn’t be a major event. The larger concern, by far, is that the persistent increase in profit margins in recent decades — and particularly the forecasts for continued expansion — has been a key driver of the current elevated stock market valuations. If the widely held belief that public companies will perpetually become more profitable begins to falter, the steep valuation premium that has been priced into U.S. large-cap stocks over the past decade may evaporate.

It may seem like an overstatement to credit higher margins as a primary catalyst for the rise in valuation multiples during the recent market advance. But the relationship between the change in valuation multiples and the change in profit margins at the company level has been surprisingly strong.

.............. This reliance of high valuation multiples on expanding profit margins is probably one of the most underappreciated risks in the market right now. Not only are investors paying record valuation multiples that rely on record profit margins, but the rise in market valuations has been much more tightly linked to those elevated margins – and expectations for even higher margins next year and the year after – than investors may realize. Record price to sales multiples and expectations for inexorably rising profit margins are tied at the hip.

.............. the chart below highlights how far current forecasts are from longer-term average levels, and also the pace at which margins are expected to keep rising. Profit margins are shown for each overall index and three key sectors of each index. For each benchmark, expected profit margins for this year (in orange) and next year (in blue) are shown.

Additionally, I’ve included the average year-ahead forecasts for the 20-year period ending in 2020. This data provides insight into the improvements already achieved in profit margins but it also underscores the potential risk if these improvements aren’t permanent. The amount of risk at hand can be estimated by the amount of spread between the red dots and the blue dots. The data also reflects the high level of optimism regarding these companies’ continued profitability over the next couple of years. A significant portion of their valuation likely hinges on these optimistic margin projections.

............................
................... What the results suggest is that having some exposure to value is almost always warranted. It typically doesn’t pay to chase profitable stocks at any price.

............  Recovering from the losses incurred by buying stocks at peak multiples on peak profit margins is extremely challenging, even over very long periods.

......... Seth Klarman famously said that the root of all financial bubbles is a good idea carried to excess. By the time this market cycle is complete, investors may find that the expectation of inexorably rising profit margins was the idea that was carried too far. Missing profit margin expectations next year could pose risks beyond just lower reported earnings. The greater risk is that progressively rising profitability has been the primary catalyst driving market valuations higher this cycle. If this central pillar gets knocked out, the premium valuations of U.S. large-cap stocks could be left with little support.



China Fare:

Pettis: Why Is It So Hard for China to Boost Domestic Demand?
Beijing’s unwillingness to boost the consumption share of GDP is not as bizarre as it seems.




Charts:
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4: 
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(not just) for the ESG crowd:


............................................... It is systemic lock-in that explains why the most predictable feature of civilizations’ course to this moment has been the sustainability of accelerating unsustainability.

The emergent thermodynamic-evolutionary adaptations and constraints that have brough homo sapiens and its civilizational niche within the earth system into being situate the trajectory lock-in as natural, systemic, and inevitable.



.........  Of course, he [Rockstrom] is in denial that what we face is a predicament with an outcome rather than a problem with a solution. His denial of the facts, however, does not change those facts, and making recommendations that will lead society in the wrong direction is precisely what Nate has repeatedly talked about with other scientists. .................

I can appreciate the message that Johan brings to the table without embracing his "solutions" which amount to complete garbage. Recently, I have been reading and listening to Tom Murphy's articles and videos regarding modernity and they point out most of Johan's concerns without going into bargaining. This article and video and this article and video are both excellent at pointing all of this out without the constant bargaining crap to go with it. If Tom Murphy can figure this all out and look at the predicaments we face with a critical assessment of where we are, how we got here, and where we're headed, then why are so many other scientists, professors, and people in general out to lunch? Much of the answer has to do with personality types .............

While there are definitely things that people can do to mitigate our circumstances somewhat, the idea of "saving the planet" or "reversing climate change" are misguided ideas based on either ignorance or denial of reality. As long as the goal is to continue civilization rather than search for a more sustainable existence (what I think most of society is motivated to do), we will continue sliding down the ecological collapse ramp.


In 2023 the world’s forests stopped acting as a carbon sink


No Buzz, Just an Anxious Hum: Insect Decline and 2024’s Wet and Silent Spring






Geopolitical Fare:


.......................... Are you not tired of having your intelligence insulted like this? I know I am.



Immediately after Joe Biden announced that he would not seek re-election and instead endorsed Kamala Harris, she was anointed as the Democratic Party presidential nominee with little analysis of her record or her program. In fact, her website, KamalaHarris.com , makes no mention of a political program at all. While foolish debates about whether she should be considered Black garner media attention, questions about policy are largely ignored. Black Agenda Report has been writing about Harris for some time, and we share what we and others have noted about her record over the years.




The Kamala Campaign has a problem.

Kamala’s campaign faces its first real controversy. And it started soon after she picked Minnesota Governor Tim Walz as her running mate.

After his selection, a tweet from @KamalaHQ featured a video of Walz falsely claiming that he served “in war.” ..........




Sci Fare:




........... They point out something unusual is happening right now:

Such high infection circulation rates in the northern hemisphere’s summer months are atypical for respiratory viruses, which tend to spread mostly in cold temperatures.

And they’re right of course. It’s a consequence of a population that’s stuck with an inappropriate immune response to this virus. It doesn’t happen with other respiratory viruses and it didn’t begin until we started vaccinating, there was no such summer wave in the northern hemisphere in 2020. ........

At least the good news is everyone is gradually abandoning the idea now that this would just turn into another benign respiratory virus. That only happens, when you don’t intervene in the development of immunity.

When you intervene in people’s immune response to this virus, you interfere in the mechanisms that would normally lead the population to spread more benign versions of the virus over time. The previous influenza pandemics got better over time. The new hCov that emerged in the 19th century stopped causing us problems after a few years too.

But we didn’t vaccinate against those viruses. When you vaccinate with inactivated vaccines during a pandemic, you get droves of people who are infected before the antibodies have matured to increase their binding strength, so the virus mutates to escape them while they’re still weak. ...........



Poetic Fare:


The Tragedy
of Our
Existence
 
Is not that
Life
is Short
 
And its
Meaning
Inscrutable
 
But that We,
whose Highest
Need
 
Is but To
Huddle
 
Can so
let
ourselves
 
Be
deluded
 
That we are,
in the
Modernist world
 
Living
Unrequitedly
 
*

Entrenched
in Tasks
we loathe
 
Engaged
in rites that
Mean Nothing
 
Giving Fealty
to specious
Idylls
 
Dissipating
precious
Time
 
Ingratiating
Others
 
And Powers
that
Should Not Be:
 
*

Kept apart
from

What/whom
we love
 
Squandering
Vital
energies
 
Vying with
Those
Equally Wrought
 
In Dubious
Struggle(s)
 
That amount to
Less than
Nothing
 
*

And all the
While

Like a
Muffled Chorus
 
In the far
gloaming
 
The Sacred
River of Life
 
Murmuring
Sweet Enticements
 
Meanders
on –
 
Eager ,
racing,

To dissolve
 
In the dank,
sodden,
Estuaries
 
Of ever
hastening
Decline
 
And nameless,
Unmarked
Dread
 
In the
brooding
Backwaters
 
Of the
Ominous
Sea
 
*

There is no
Panacea

Save to
Capitulate
to Love
 
Of that
we cannot
help but love
 
Soon as we
find It
 
Cling ,
adhere,
nay Clench
 
In hoops
of burnished
steel
 
Abandoning
all distraction
 
Despite
the ravening
Wolf
at the Gate
 
And the
hovering
Vulture
 
In the
churning
skies
 
*

Their bite,
their sting

Is not so
keen
 
As Life
frittered
 
In Sysiphian
gather of
faggots
 
To stave
encroaching
Winter
 
Day after
Unavailing
day
 
*
 
‘Tis the Heart
that must be
warmed
 
The Soul
that must be
fed
 
The Spirit
that must be
succored
 
*

We survive
slings
and shot
 
Misfortunes,
calamities
 
But not the
peerie
achings
 
Of the
Yearning
Heart
 
And the
stifled cries

Of the stricken
Soul
 
*

There is no
Anguish
greater

Than Spirit
benumbed
by love’s labors
lapsed –
 
*

So steady
on,
Fond
Traveller
 
In this
confuting

Unchartable
Land
 
Find the
Right
Rudder
 
Not minding
the frothing
current(s)
below
 
*

Most Tests
and
Trials
 
Get
Absolved

When you Move
in Kindred
With your
Master
Spirit
 
The Lodestar,
Lamp,
and Pathfinder
 
*
We were forged
to Live

In Affinity,
not Discord

In cognate,
consanguinal,
Communal Kinship
 
Close to
our
embedded

Anchoring
species-being

That fires
our Anthropic
Flame

In this
Delphic
Realm

And lends
Healing
Solace
 
To the
fulgent
ravages
 
Of parching
Day
 
And the
Phobic
Disquiet
 
Of that
ever so
 
Phantasmagoric
fearful
 
And petrifying
Stairwell
 
That descends
to nether
reaches
 
Of Endless
Augural
Sepulchral
Night
 
*

Love
Alone
Indemnifies

Against the Scylla
of Chance
and the Charybdis
of Chaos




Pic of the Week:


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