September 16, 2022

The Greed Component

The markets responded angrily this week to unexpected outcomes of the Consumer (CPI) and Producer (PPI) data, missing the consensus expectations. Other mixed data was released over the week and the continued decline in the broad indexes has now erased much of he rally that begin in June. The reason is simple, inflation is still a problem, and the market is listening too closely to the bullish narratives. Basically, no matter how much insight and understanding there exists, in my opinion, the rational brain is too often impotent to taking the emotional brain out of the conversation.  What’s missing from the narrative, everything?

Markets

The current decline is predicting the action of the Fed next week as they are expected to increase interest rates .75%. But some interpret the derivative (Federal Funds futures contract) that track the same rate and suggest the possibility of 1.00%. The outcome of the Fed meeting is less important to me than the fact that they are raising rates and have stated in numerous interviews that they will continue to do so. The general reaction from the body of players is the Pindudes are day trading, the Algochums sell aggressively and the investors are sitting on their cash. This is because the stock market will eventually find a bottom and begin the first stage of its future rise, but first has to see the proof to buy. In the interim, the markets will go down, the markets will go up and only a defined buying strategy is worth pursuing.

Economics

The economy is definitely slowing, and the deeper economic moderation of Europe and China are adding to the problem. Retail Sales data this week showed a slight increase (+.3%) for the month of August. But customary activity slows into the early fall as consumers build cash for the holiday season. So just as Manufacturing is showed a slight rebound as the consumer slows, the reverse is likely in the late fall, all in keeping the economy at odds with itself. All this will have some impact on the inflation data, even as one overlooked aspect of the data was that CPI and PPI didn’t go lower as expected, but they didn’t go higher either. Therefore, in my opinion, it’s worth standing by to see if inflation may have already peaked. I admit it’s a huge call, but if the economy slows, and the consumer becomes more watchful, the part of inflation that I refer to as the greed component will also slow down and a more natural level of prices will likely stick around, even when the index’s finally decrease.  This is when economies, like the US, move on. 

External Events

I’ve spent little time over the last few weeks addressing the ongoing external events, unending China lockdowns, continuing war in Ukraine, with some light on the horizon, and the recent challenges faced by the EU regarding their inflation and the contribution made to it from their energy consumption and troubling reliance on unreliable resources. Although the EU appears to be using its problems to better navigate its ambition to manage consumption of fossil fuels in total, the UK on the other hand has moved in a countering direction. This, in my opinion, doesn’t ignore the need to discipline the consumption of fossil fuels but introduces a picture that will be better viewed through a transitional lens. The uncertainties will have to take shape as well as take on resolve, this way the future can become something the markets can predict.

 

September 2, 2022

A Slightly Clearer Picture

 Monthly Unemployment data was released today showing August job growth of 315k, which is strong enough to maintain an expanding economy, but with the previous months being revised down, the number was softer than it appeared. Another good sign was the small drop in wage growth, which has been a big contributor to more discretionary cash and therefore more inflation. The markets liked the data and were focused more on the overall Unemployment Rate, which moved from a historic low of 3.5% to 3.7%. These are the areas the Fed wants to see constructive news in line with recent statements from Fed Chairman Powell, who referred to the “pain that would be felt in household and businesses” that would be needed to bring inflation down. Not a pretty scenario, increasing unemployment could likely push the Fed to raise rates less aggressively than the markets seems to have been suggesting. But, in my opinion, it’s the impact on consumer sentiment that I’m going to focus on, because if the labor market participants are even slightly concerned about job stability, that will directly impact spending, and less spending is the true enemy of inflation.

The rest of the data suggested continued expansion as well as the recent release of ISM Manufacturing PMI remained at 52.8 (above 50 is expansionary), and worth noting, Manufacturing Employment showed a healthy increase in August as well to support that assumption. Although the overall economy is still sector sensitive, the notion that a recession is upon us is, in my opinion, premature, and the unemployment data supports that notion. Overall, I would say that the Fed sees this number and remains content with its aim to aggressively raise rates, content, but not happy yet. That would be necessary to slow the Fed down.

By the end of the day the broad indexes started to give up early gains and move lower, leaving the week, a weak one. It’s worth noting that many of the technicals that I use to track positive and negative momentum have declined to nearly oversold. This is leaving me constructively neutral, and numerous changes to the portfolios have usually consisted of some profit taking and adding to new names. I’m more inclined to pay attention to less defensive sectors, as the economy may not be in a recession, but the markets, exercising their predictive nature, will likely, as through history, begin their rise when that happens, not after.

On September 14th the Consumer (CPI) and Producer (PPI) prices data will give a better picture of where inflation is. The recent increase in the yield of the 10yr Treasury to over 3.25%, not seen since 2018, gives room to the Fed to be aggressive if the inflation data doesn’t move lower. This is why the markets will still be captive to uncertain volatility for much of the month. Add to this the disruptions that continue to occur in the energy markets and vigilance is the key to patience.


August 25, 2022

Full Circle?

     The key focus of managing investments is to take on risk when the markets decline and lighten up on risk when the markets rise. The ensuing changes historically favor a rising markets, but when the two changes become interchangeable, such as they have since the beginning of the pandemic, volatility takes over because of the increase in uncertainty surrounding the facts that are necessary for the markets to self-predict the future.

    The pandemic began with a sharp decline in the markets when governments around the world chose to lockdown their economies in an action that no living person has ever had to experience. The extreme

moves began what, in my opinion, have been an extreme series of outcomes, all to fueling the volatility and the resultant uncertainties of the future. Once the lockdowns began the various medical and geopolitical institutions that become the voice of the narrative, woke a world up to entities we all knew about but never thought about how they impacted the worlds dialogue. The distraction created a headwind that caused careful interactive behavior resulting in remote working, and careful management of businesses, especially those of services and hospitality. The outcome resulted in the first of three broad stimulus packages amounting to roughly $2.3 trillion dollars and the resulting spike in the M2 money supply to the highest level in over 30yrs. Welcome inflation.

    In 30yrs of managing money I’ve used the beginning of my career to measure the historical commonalities that have occurred over time and on the side those commonalities that prevailed humanity throughout history. Inflation has really been a problem, but the blame is never short of narratives, the first being the war in Ukraine. The uncertainty of war, and war with China are is topic of speculation although, in my opinion, with lower probability. But I mention this because so many aspects of our post pandemic world have turned nearly everything into a war; trade, politics, economics (sanctions), and each carries its own unique uncertainty. Wars and their impact on economics have had many precedents in history, including the impact on inflation. 

    So, while no person or entity can stop the reality of economic cycles, letting the markets technical behavior and fundamental vacillations define the right time to take on risk, it’s important to avoid the narratives that want to keep us eternally doubting.  I’ve never been more aware of this reality then when the pandemic struck and various extremities that rose out, massive market decline, massive market rise, historic printing of money to fuel stimulus, business disruption, supply chain disruption and while all occurred, changes in the world that would make a conspiracy theorist melt with glee. Now, the war in Ukraine is moving on, China has enough problems then going to war with the US, traveling is nearly higher than before the pandemic, and the consumer is defying the call of recession. As a well followed economist named Brian Westbury, recently wrote “These aren’t macro-related developments; they are a realignment of economic activity from a distorted world to a more normal one”. I couldn’t have said it better, and if full circle isn’t here yet, in my opinion, it’s definitely around the corner.