April 27, 2023

Navigating the Noise

 Ten years ago, I first read about UBI, a welfare proposal that had gained some academic, and even political interest until the pandemic introduced a better method of wealth distribution, stimulus. In my opinion the concept of the wealth effect as a tendency to spend more when an individual feels financially secure, is at the core of our current inflationary environment. I bring this up because I’ve frequently expressed my opinion that an economy designed to fuel consumer activity is always at risk of some degree of inflation. And the wealth effect has been observed through data since 1870 suggesting a close correlation between inflation and money growth. That’s why I’ve often tracked the behavior and data set called M2 that tracks the Federal Reserve’s estimate of the total money supply, such as money in consumer pockets, checking and saving accounts for example. And M2 is where I’ve followed inflation and concluded that inflation appears to have peaked in September 2022. But there’s no shortage of narrators, including Modern Monetary Theorists who question that conclusion. Hence, volatility rules.


The broad markets finally let off some steam this week, and while not technically oversold, neither are the primary indexes still overbought, as the volatility is keeping it all neutral. The change in conditions can be attributed, in part, to a mixed earnings season and concerns brewing over the upcoming debt ceiling debate. Interest rates resumed their rise to prepare for the upcoming Fed meeting and international markets are having their own positive year, even in the face of continued weakness of the US dollar. For now, in my opinion, there is enough left for the narrative to digest, that could push the broad indexes to a more oversold, and desirable, condition.


Last week saw additional declines in economic activity, including Housing Starts (-0.8%) and Existing Home Sales (-2.4%), both likely to see additional declines as interest rates revert closer to their recent highs, and with a Fed rate hike around the corner. One area that is showing some increased activity is Manufacturing tracked by the Manufacturing Purchasing Managers Index, which went above 50 for the first time since October 2022, but is still down over the same period. This week saw some additional pickup in manufacturing thru New Orders, and New single Family Home Sales (different from Existing) saw an increase (9.6%), but still down 3.4% from a year ago. Today, the first release of the First Quarter 2023 GDP come in at 1.1% down from the previous quarter of 2.6%. Interesting enough was the Core Personal Consumption Expenditure (PCE), which came in at 4.9%, higher than expected and the GDP Price Index, otherwise referred to as the GDP price deflator, came in at 4%, higher than economic consensus of 3.7%. In short, all the GDP data was, in my opinion, enough to keep the Fed on track next week to increase interest rates at least .25%. Whether they see reason to continue, will be in their customary post meeting comments.

 External Events

The big headwind, in my opinion, facing the capital markets, is the debt ceiling debate. So far, the House Speaker has stated the debt ceiling will be raised when the legislation includes a pause in government spending, and the house voted in favor. The Administration says no extra deals, lots of political food for the fight to follow. And the pundits will throw a bone to our Algochums to brew up a little volatility. In the meantime, patience is still the best strategy, as markets are too efficient, in my opinion, to be predictable. So, in my future, opportunities will reach more desirable entry points and the overall picture should become ever clearer.

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