March 31, 2023

 Follow the Light

 “If you can't explain it to a six-year-old, then you don't understand it yourself”

-Albert Einstein

 Some have heard me comment on my experience in knowing that when I’ve read something written by an academic, my frequent need is often, to read it twice. This is because academic grammar, and the use of syntax as an aesthetic, often navigates the ability to present a position with language that flirts with incompleteness as a shield for being simply wrong. I bring this up because in the world of financial narrative it’s become harder to read between the lines without understanding the line to begin with. This is creating an environment favoring the words of the expert, and even Influencers and Pindudes are sounding like ChatGPT bots these days. So, let’s make it easy.


The Capital markets are finishing the first quarter of 2023 in positive territory. Part of this achievement can be attributed to the overall oversold condition that existed at the end of 2022. And while there has been enough volatility to feed hungry bears, there is a clear shift in the appetite the Bulls are looking feed. As expectations of Fed rate hikes have been disrupted by the various bank problems the narrative used to describe every day is when markets go up, investors feel comfortable with the banking sector, and when it goes down, they fear it. I prefer to pay attention to neither. As outlined last week, the bankruptcy of SVB and depositor challenges facing First Republic could be a gift to the Fed, and it’s a position that has a growing agreement. Overall activity in the equity markets has also reacted favorably to declining treasury yields. For now, the recent technically oversold condition of both equities and bonds has made its way, in my opinion, into overbought territory. Not a reason to sell nor buy, but hold and continue to wait patiently for opportunities to use available cash. Earnings results should provide us with such opportunities.


From the standpoint of the domestic economy, the release this week of GDP data for the last quarter of 2022 shows a slight revision down from the original estimate, from 2.7% to 2.6%. Much of the gain was attributed to inventory growth and consumer spending, and this week .3% rise in Personal Income will likely keep spending active. Most notable, was the decline in corporate profits, an outcome that should make for an interesting earnings season. This week also saw a softening of inflation from the U.S. Core PCE (Personal Consumption Expenditure) Index, which measures the changes in the price of goods and services purchased by consumers for the purpose of consumption (excluding food and energy) from last month, from .05% to .03%. Good news that’s been reflected in the stock market’s recent rise. That said, the Feds recent increase in short rates was followed by Chairman Powell’s speech where he explicitly stated that the board saw the potential for recession before the end of this year. Good or bad news?

 External Events

Currently there are no clear signals of an impending recession, however, in my opinion, it doesn’t historically pay to doubt the Fed. But I would also welcome a slowdown in academic activity for two reasons. One, because a pause in Fed actions would be likely, and two, recessions are a certainty, and the capital markets love certainties. This doesn’t imply that the headwinds to a genuine Bull market won’t sit idly without a fight, as by the end of the year the next election will be news, and we know how much of a distraction that can be. Non-domestic events, such as the war in Ukraine and the increasing presence of China on the capitalist stage, emphasized by their recently launched cybersecurity investigation into semiconductor company Micron (MU), also are both troubling uncertainties. In the interim, in my opinion, a recession will likely have a global impact, and will grab far more attention from the consuming public, leaving a complicated narrative and naysayers with a small audience. A positive for the forward focus of the capital markets.  

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