Where Does the Global Economy Go From Here?

[Viking]

23 minutes ago, Spekulatius said:

@Viking - low consumer confidence has been an extremely reliable contrarian indicator (my guess is it seeps into investment decisions) and when you bought stocks when consumer confidence was at low levels, it has worked very well every single time.

Looks at the lows in 1990 (gulf war) 2002 (9/11, recession) 2008 (GFC), 2010 (Europe). 2020 (epidemic) 2022 (inflation).

 

@Spekulatius any of the 8 points i made above on their own are not a big deal for the overall economy and stock market. What i found interesting is these are all the headlines on just one day. And they are pretty broad based covering large parts of US and global economy. Bear markets can take years to play out. We will see.

 

i am looking forward to seeing earnings from Microsoft, Alphabet and Apple. They have a habit of outperforming expectations. 

[Viking]

I think we just got another Powell pivot. The hawk has been put back in the cage. The beginning of the next pop in stocks?

[Spekulatius]

1 hour ago, Viking said:

I think we just got another Powell pivot. The hawk has been put back in the cage. The beginning of the next pop in stocks?

I don't think it's a pivot. It makes sense to raise slower from here, because some things are moving in the right direction already. Maybe he does another 0.5% next time. The economy is going to get used to higher interest rates.

 

Anyways, I think we should ignore what he is saying, and just watch what he is doing. Everything he is saying is calibrated for market impact.

[changegonnacome]

1 hour ago, Viking said:

I think we just got another Powell pivot. The hawk has been put back in the cage. The beginning of the next pop in stocks?

 

Listened to the statement and Q&A.........heard the same steadfastness in his underlying tone......inflation has to be brought back to 2%, price stability across the economy is the "bedrock" for prosperity..........

 

The most important question was asked half way through the Q&A....the journalist asked what was the greater crime/mistake - "to do too little, cause pain while missing taking inflation down to 2% (i.e. stagflation) or do too much and put the economy into a deeper recession than would have, with perfect information, been required to get back to 2%".........his answer was very very very strongly titled to the former being the more serious error.....& that inflation " just had to be taken care off" end of story type thing.

 

Think what were seeing is a relief rally - that 75bps or 100bps rises aren't locked in at every meeting from now until year end....classic market extrapolating out everything to infinity from last couple of FOMC's......but when did 50bps become a Powell pivot? If the GDP data tomorrow shows no recession I think expectations for September FOMC are going to rise very quickly to a 0.5% rise as the base case. Couple of more hot Core PCE prints and it could be 75bps expectations all over again.

Edited July 27, 2022 by changegonnacome

[TwoCitiesCapital]

On 4/28/2022 at 3:39 PM, TwoCitiesCapital said:

 

Since GDP is simply a measure of aggregate incomes - isn't it bad in general? Whether those be corporate incomes, individual incomes, or a mix - they're pie is getting smaller. 

 

And sure, within that there will be some winners and some losers, but that doesn't even mean the winners' stock goes up. A receding tide lowers most boats. Google had record revenues earnings basically throughout the entire 2007-2009 period and still lost 2/3 of it's market cap. 

 

The sky isn't falling. Don't sell everything. But might be prudent to be trimming gains, selling rallies, and adding some duration here. 

 

Barclays AGG has outperformed the S&P by nearly 7% since this post was made and that was NOT the bottom in bonds. You did better if you kept buying bonds all the way through the June low. 

 

I've stopped adding fixed income here and have been slowly reaccumulating commodity names that I trimmed 15-20% ago. 

 

Equities may bounce 10-20% on a Fed capitulation and a pause in rate hikes, but ultimately I'm still thinking bonds out perform equities over the next 12-18 month period. 

Edited July 28, 2022 by TwoCitiesCapital

[tede02]

I'm just finishing "Trillion Dollar Triage." One thing the book makes clear is the Fed, as an institution, is hell-bent on not repeating the mistakes of the 1970s when they basically caved to political pressure and didn't aggressively fight inflation. Powell DOES NOT want that same kind of thing as part of his legacy. My takeaway is it wouldn't surprise me to see the Fed continue to be more aggressive than the market anticipates. 

 

Also, even though the headline GDP number gets all the attention, nominal GDP was up 7.8% (annualized) in Q2. There's obviously some signs of slowing but the economy is still plowing forward. 

[Ross812]

15 minutes ago, tede02 said:

I'm just finishing "Trillion Dollar Triage." One thing the book makes clear is the Fed, as an institution, is hell-bent on not repeating the mistakes of the 1970s when they basically caved to political pressure and didn't aggressively fight inflation. Powell DOES NOT want that same kind of thing as part of his legacy. My takeaway is it wouldn't surprise me to see the Fed continue to be more aggressive than the market anticipates. 

 

Also, even though the headline GDP number gets all the attention, nominal GDP was up 7.8% (annualized) in Q2. There's obviously some signs of slowing but the economy is still plowing forward. 

Didn't Powell already cave to political pressure when he cut rates in response to Trump's tweets?

[Gregmal]

The continuous obsession with drawing comparisons to the 1970s is simply leading folks to the wrong conclusions, over and over and over. This is nothing at all like the 70s. It’s just so easy and lazy cuz “oh 70s was the golden age of inflation! Must be that! Let’s start forcing comp and using 70s lingo”.
 

I also agree the economy is in better shape than a lot are saying, but it is slowing. We have people saying 2008 style stuff is right around the corner. At blatant lies and misrepresentation has been off the charts? It’s been so rampant in so many areas of the market the past couple years.

[tede02]

1 hour ago, Ross812 said:

Didn't Powell already cave to political pressure when he cut rates in response to Trump's tweets?

 

I don't think so. The Fed caved to the markets in early 2019 following the S&P selling off just shy of 20% and the yield curve flattening. I'd highly recommend reading Trillion Dollar Triage. It provides a great history. That said, I can understand how it optically looks like Powell succumbed to the political pressure because Trump never stopped badgering him. The Fed rate hike cycle pre-2019 is a humorous part of the book because it details many of Trump's tweets and public statements during that period. 

[Spekulatius]

16 minutes ago, tede02 said:

 

I don't think so. The Fed caved to the markets in early 2019 following the S&P selling off just shy of 20% and the yield curve flattening. I'd highly recommend reading Trillion Dollar Triage. It provides a great history. That said, I can understand how it optically looks like Powell succumbed to the political pressure because Trump never stopped badgering him. The Fed rate hike cycle pre-2019 is a humorous part of the book because it details many of Trump's tweets and public statements during that period. 

Powell made a huge mistake implementing his AIT (average interest rate targeting) at just the wrong time in 2020. AIT lead to a slower response when inflation was rising above 2% in 2021. Now we are paying the piper for this:

https://www.federalreserve.gov/monetarypolicy/guide-to-changes-in-statement-on-longer-run-goals-monetary-policy-strategy.htm

 

In the logical sense, this would have to lead to keeping the interest rates higher even if inflation falls below 2%, but I think it was only to work one way and not the other.

[mattee2264]

Yeah I think that currently everything is pointing to a soft landing.

 

Q2 earnings releases so far much better than expected. Q2 GDP only mildly negative. Fed easing off on rate increases so clearly no desire to break markets. And the economy slowing without rates having to get to the point where they create systemic risk is good because it means inflation will probably moderate naturally without the Fed having to do too much.

 

Of course lots of economists out there saying a hard landing is unavoidable and inflation will be sticky and persistent and won't go away without much more aggressive Fed action. But the same economists didn't believe a V shaped recovery from the pandemic was possible and were proved wrong.

 

Also the elephant in the room. For all the talk about QT the Fed's balance sheet has hardly shrunk. And QT was supposed to contribute to the tightening required to tame inflation. 

 

Seems as though Fed will soon start talking about inflation heading in the right direction and use it to justify a pause and wait and see approach going forward. Of course monetary policy works with a lag so will take some time to see the frontloaded rate hikes impact on the economy 

 

What might well happen is that the real recession won't be until next year and the market is prematurely celebrating a soft landing 

[changegonnacome]

3 hours ago, tede02 said:

"Trillion Dollar Triage." One thing the book makes clear is the Fed, as an institution, is hell-bent on not repeating the mistakes of the 1970s when they basically caved to political pressure and didn't aggressively fight inflation. Powell DOES NOT want that same kind of thing as part of his legacy. My takeaway is it wouldn't surprise me to see the Fed continue to be more aggressive than the market anticipates. 

 

Must have a read - this is my base case.......making new mistakes is OK, making old mistakes is for losers. Jay doesnt want to be a loser.......of course if inflation just goes away later this year as some suspect we'll never find out.....but if it doesn't I dont think they'll be found wanting

Edited July 28, 2022 by changegonnacome

[mattee2264]

Powell has already given himself an out by saying he will continue hiking until there is convincing evidence that inflation is falling back towards trend. So all he needs to give himself licence to pause is for some evidence that inflation has peaked and is falling which should happen later this year as the economy continues to slow and supply chain pressures ease. 

 

 

 

 

 

 

 

 

[mattee2264]

Oh and back in 2018 Powell said at 2-2.25% that we were a long way from neutral when inflation was only 2.5%. Now apparently we are close to neutral at 2.25-3% with inflation at 9%. 

 

https://www.wsj.com/articles/investors-love-jerome-powell-federal-reserve-markets-inflation-monetary-tightening-11658959032

 

So really it is just a repeat of 2018 when he was all about getting back to neutral and unwinding QE and then pivoted. 

 

Powell put is alive and well!

Edited July 28, 2022 by mattee2264

[changegonnacome]

6 minutes ago, mattee2264 said:

Oh and back in 2018 Powell said at 2-2.25% that we were a long way from neutral when inflation was only 2.5%. Now apparently we are close to neutral at 2.25-3% with inflation at 9%. 

 

I think he must have mis-spoke..........any amateur central banker will tell you the overnight rate needs to be within about 0.5% of the Core PCE inflation rate to be considered broadly neutral.........we are not even closento that...

[matthew2129]

4 minutes ago, changegonnacome said:

 

I think he must have mis-spoke..........any amateur central banker will tell you the overnight rate needs to be within about 0.5% of the Core PCE inflation rate to be considered broadly neutral.........we are not even closento that...

Idk what the amateur central bankers are saying, but JP and the Fed have been clear in their releases and press conferences that they view the neutral rate to currently be around 2.4-2.5%....

[mattee2264]

My take is that by neutral they are meaning only in relation to the demand side. In other words they are trying not to add fuel to the fire but aren't willing to crush the economy to reduce inflation preferring to blame the war/supply chain issues etc. Pretty typical of central bankers to accommodate supply side inflationary factors. But not really helpful because once inflation gets built into expectations the underlying cause doesn't matter.

[changegonnacome]

Yeah my idea of neutral is exactly what Billy boy explains below - FED is still being highly accommodative:

 

 

[Spekulatius]

Interesting narrative violation - Europe's economy actually outperforms the US in the last quarter:

https://www.wsj.com/articles/eurozone-recovery-picks-up-speed-but-ukraine-war-threatens-deep-contractions-11659087222?mod=hp_lead_pos6

 

Of course the outlook is much more murky, but I think Europe's economy will still exist in 2023. Once they get past the energy issue, which i think will mostly be the case in 2023, the worst will be behind it.

[mattee2264]

Tourism helping and also probably a lot of pent up demand as Europe was quite slow with the vaccine roll-out and quite cautious in terms of lifting restrictions. But of course GDP growth adding fuel to inflationary fires so not all good and probably means that central banks will be emboldened to be a bit more aggressive with tightening. 

[Gregmal]

The Ackman tweet is so disgustingly disingenuous, especially from a guy who everyone knows, knows better. Inflation is not anywhere close to 9%. Same way inflation last year was WAYYYY higher than what the CPI was saying. This year its significantly below. Most of the price increases happened last year, with a few more coming into play with Ukraine and China events but largely it already happened. 

 

The other problem, is most people I hear still dont even know what theyre talking about or even the definition of inflation. In the same sentence we are hearing folks say preposterous and conflicting stuff like "Inflation is rampant and prices arent coming down"...LOL WTF. Saying inflation is rampant means that prices are still going up! That is WHAT INFLATION IS! So if last year a gallon of milk went from $3.49 to $4.49. And today its ~$4.49...thats not fucking inflation anymore. So people keep saying we need to stop inflation, which has already occurred, but since they dont even know the definition of it, they're conflating "inflation" with something else, while asking for "deflation"...If something goes up 100% one year and does nothing for 3 years after, these same folks after year 4 will still be talking about how inflation hasn't stopped LOL?

 

Maybe someone should ask Ackman why he thinks inflation will be 9% several years down the line...cuz if he doesnt, why in the world would 9% be "neutral"? 

[Longnose]

6 minutes ago, Gregmal said:

The Ackman tweet is so disgustingly disingenuous, especially from a guy who everyone knows, knows better. Inflation is not anywhere close to 9%. Same way inflation last year was WAYYYY higher than what the CPI was saying. This year its significantly below. Most of the price increases happened last year, with a few more coming into play with Ukraine and China events but largely it already happened. 

 

The other problem, is most people I hear still dont even know what theyre talking about or even the definition of inflation. In the same sentence we are hearing folks say preposterous and conflicting stuff like "Inflation is rampant and prices arent coming down"...LOL WTF. Saying inflation is rampant means that prices are still going up! That is WHAT INFLATION IS! So if last year a gallon of milk went from $3.49 to $4.49. And today its ~$4.49...thats not fucking inflation anymore. So people keep saying we need to stop inflation, which has already occurred, but since they dont even know the definition of it, they're conflating "inflation" with something else, while asking for "deflation"...If something goes up 100% one year and does nothing for 3 years after, these same folks after year 4 will still be talking about how inflation hasn't stopped LOL?

 

Maybe someone should ask Ackman why he thinks inflation will be 9% several years down the line...cuz if he doesnt, why in the world would 9% be "neutral"? 

 

Agreed, I think we've stabilized and most inflation happen last year / early this year. Unless the fed gets wild again or supply chains get worse I think we will continue to see stabilization but likely wont see many prices come down. 

 

 

[changegonnacome]

19 minutes ago, Gregmal said:

The Ackman tweet is so disgustingly disingenuous, especially from a guy who everyone knows, knows better.

 

How so, exactly? He may have interest rate hedges that would go further in the money if rates went higher (as he is advocating for clearly)............but look at his fund those interest rate swaps pale in size & scope to his long book of equities which most definitely WONT benefit on a mark to market basis in the short term if the discount rate goes higher. If your argument is that he would like to see financial chaos so he can swoop in with his dry powder sure maybe but his math checks out.

 

Today I called First Republic Bank.........inflation might not be 9% right this second but lets call it 5% between internet friends......First Republic will give me a fixed rate loan for a sizable amount of money @ 2.95%........how the hell is that not accommodative? Explain that to me. Thats a negative 1.05% real interest rate on borrowed money if inflation persists at 5% during the terms of the loan. They are paying me to take the money. It feels very accommodative to me so much so that I'll be taking them up on the offer and be FUELING inflation by adding my spending into the economy in a couple of weeks time  

Edited July 29, 2022 by changegonnacome

[Gregmal]

21 minutes ago, Longnose said:

 

Agreed, I think we've stabilized and most inflation happen last year / early this year. Unless the fed gets wild again or supply chains get worse I think we will continue to see stabilization but likely wont see many prices come down. 

 

 

That’s basically where I’m at. Higher prices relative to years past are here to stay. But I don’t see them “inflating” at anywhere near 5-9% in perpetuity. 

[Gregmal]

21 minutes ago, changegonnacome said:

 

How so, exactly? He may have interest rate hedges that would go further in the money if rates went higher (as he is advocating for clearly)............but look at his fund those interest rate swaps pale in size & scope to his long book of equities which most definitely WONT benefit on a mark to market basis in the short term if the discount rate goes higher. If your argument is that he would like to see financial chaos so he can swoop in with his dry powder sure maybe but his math checks out.

 

Today I called First Republic Bank.........inflation might not be 9% right this second but lets call it 5% between internet friends......First Republic will give me a fixed rate loan for a sizable amount of money @ 2.95%........how the hell is that not accommodative? Explain that to me. Thats a negative 1.05% real interest rate on borrowed money if inflation persists at 5% during the terms of the loan. They are paying me to take the money. It feels very accommodative to me so much so that I'll be taking them up on the offer and be FUELING inflation by adding my spending into the economy in a couple of weeks time  

Honestly I don’t know other than stupid cheap lending rates have been present around the globe for decades. The thing post GFC though was that banks weren’t lending. Now they are which is typically healthy for an economy. So again we come back to…if people want to take that extra liquidity and create a run on plastic spoons…it will be up to the supply chain to see if they can handle it. Of course it varies by item but most stuff can withstand demand gyrations. 
 

My argument on Ackman is that we all know inflation is not 9% so why is he using that number? We ve all seen it peak. Nobody can really point to anything that’s still “inflating”. So why is he pushing this so aggressively? If nothing else, signs seem to be pointing in a positive direction.

 

Saying the Fed could have done something last year is dumb. Once the Governments chose their path on COVID this was inevitable and no Fed action could stop it. Like COVID, the only solution is bite the bullet and let time resolve it. In February and March 2020 everyone on the board was saying “supply chain will be fucked”. It was beyond obvious. Then it happens and we call it inflation! No. It’s stupidity. Answer? Open back up and let shit revert. 6 months, maybe 12 cures it. 

Edited July 29, 2022 by Gregmal