Is The Bottom Almost Here?

[Gregmal]

I mean has the raise rates/inflation argument really devolved into “the job market is the reason we can’t produce 2x4s, Ford Explorers, and PVC pipes”?

[changegonnacome]

22 minutes ago, Gregmal said:

The biggest amalgamation of differentiating variables here IMO is claiming that wage growth and jobs is the reason for supply and demand imbalance. It’s not.

 

I dont think anybody is saying this is soley the case........as I've said many times before whats hard for people and in some ways unique about where we are in the US is that we have a supply shock/commodity shock driving lets call it 50% of the inflation numbers I TOTALLY agree with you here.............. but where we differ is there is also old style monetary inflation happening at the SAME time because too much money was printed and dispersed across the economy via stimulus, cash out refis, SBA loans etc etc. Lets call this inflation 50% of the big number...........either way........diagnosing how we got here is off little use in a way..........inflation expectations embedding at 5 or 6% is no bueno.

 

Think about what your saying in way......lets say GM/Ford/Tesla got their global supply chains 'fixed', chip shortage gone and they could really ramp production to meet demand.....this would be great in your world, the problem is inflation wouldn't magically 'go away'......see how are GM/Ford/Tesla gonna ramp employees/production in a 3.5% unemployment economy where for every person looking for a job, there are two openings? One answer is maintain pandemic car pricing & raise their new position wages aggressively and displace a worker somewhere else in the economy....who then has to be filled at higher wages......but remember there is two positions open for everyone looking for a job........a wage price spiral ensues.....stable, modestly growing prices, because we've had them for two plus decades, are one of the most under-appreciated economic characteristics of an advanced society/economy.

Edited July 26, 2022 by changegonnacome

[Gregmal]

Yea I mean I don’t totally know. I think I have kind of stumbled on the right track and many of the indicators seem to validate this, but I don’t really have super high conviction either way so spitballing back and forth different scenarios and questions is all there is to do until something bigger clarifies.

 

Jobs are ultimately the holy grail for every president and regime. I think if most of the other stuff dissipates and you get enough donors cranky with their portfolio quotes that unless something is insanely burdensome, they back off with the rate stuff to a certain degree. 3-4% IMO won’t kill anything and we are maybe halfway there. Beyond that would be suicide. 

[mcliu]

9 minutes ago, Gregmal said:

I mean has the raise rates/inflation argument really devolved into “the job market is the reason we can’t produce 2x4s, Ford Explorers, and PVC pipes”?

I don't think it's because we can't produce but rather that production has been flat but money supply has increased by 50%.

The price fluctuation we saw in certain commodities like lumber is probably a reflection of rapid changes in demand due to lockdowns and not so much overall price levels.

 

Since the US is largely a service-oriented country, availability of labour and wage growth is probably the largest driver of inflation.

I think due to the excessive COVID money printing, the Fed needs to demonstrate credibility that they will defend the value of the US$ and financial system.

The Russia war and subsequent sanctions & asset seizures is also testing the faith of USD holdings by creditors like China/Saudi.

A loss of faith in currency will make inflation worse, especially for countries with large imports (even more so with large deficits), which is what we might see in Europe as the Euro plummets.

[matthew2129]

1 hour ago, changegonnacome said:

your really advocating for a wage-price spiral in disguise.

 

Yet what you describe is the exact opposite of a wage-price spiral:

 

1 hour ago, changegonnacome said:

so prices are rising at a higher interval rate & faster than wages can keep up with.... therefore purchasing power is decreasing in the consumer across time in the low/middle income groups i.e. most Americans!.

 

Which one is it? Everyone loves to cite the risk of a "wage-price spiral" b/c they heard it happened in the 70s and ignore the fact that the majority of sudden and steep rises in inflation over the last hundred years were followed by equally sudden disinflation (and sometimes even outright deflation). 

[changegonnacome]

32 minutes ago, mcliu said:

I don't think it's because we can't produce but rather that production has been flat but money supply has increased by 50%.

 

Hate those M2 charts with a passion...........please dont use them - the crypto people use them the whole time to fit their Zimbawe debasement narrative.....the money supply wasnt increased by 50% in the space of a couple of months.....the M2 figure going up and to the right looks unbelievable because it is.......the FED for the purposes of liquidity for banks/depositors allowed the reclassification of savings accounts as checking accounts in 2020 i.e more than  six withdrawls from a savings/money market account per month......what your seeing in that chart is savings account (money that existed already) get pulled from M1 into the M2 accounting figure as a result of that reclassification.

 

Its one of my most hated charts on the internet.....spread the word that its TOTAL bullshit.....albeit I'm in agreement that we printed/borrowed too much money.

 

9 minutes ago, matthew2129 said:

Yet what you describe is the exact opposite of a wage-price spiral:

 

Think your confused - my point here was that Greg's solution, in a way, is for the lower incomes folks to go take full on advantage of the jobs market.....which if they were succesfull en-masse in doing so would be a wage price spiral situation ala 70's. This is not my position the opposite in fact but one I cheekily applied to someone else's framework for how things could/should play out if 'he' was 'them'

 

So again dont get confused with me saying that I think this will happen. So you'll see the bit you quoted from me isn't incompatible: "so prices are rising at a higher interval rate & faster than wages can keep up with.... therefore purchasing power is decreasing in the consumer across time in the low/middle income groups i.e. most Americans!."

 

22 minutes ago, matthew2129 said:

Which one is it? Everyone loves to cite the risk of a "wage-price spiral" b/c they heard it happened in the 70s and ignore the fact that the majority of sudden and steep rises in inflation over the last hundred years were followed by equally sudden disinflation (and sometimes even outright deflation). 

 

At the end of the day collective bargaining/union participation has been eroded to a huge extent in the US today vs. 70's.......the ability for labor collectively or individually to negotiate wages upwards is severely curtailed, especially at the low end. I think you get to your point about "sudden disinflation/outright deflation" eventually alright.... but what you'll have is unbelievable levels of suffering meated out to the lower classes in the scenario above I described i.e destruction of real purchasing power slowly, social/political instability...you thought Trump was an outside candidate... in 2024/2028 god knows what creature could emerge from a bitches brew I've described above.

 

Whereas the alternative avenue is open for Powell - a modest rise in unemployment, a mild recession, price stability restored etc etc VERSUS an inflationary bust/years of stagflation/wage price spiral alternatives.

 

I think though you've made an excellent point re: historical traditional disinflation end point.....my expectation would be the economy cracks in a big way all by itself if left alone right now...lets say the FED went on a three year vacation starting in mid-2021......as the lower-median workers ability to command goods and services above and beyond basic shelter/heat/food evaporates to nothing. Like I said I would consider that road akin to torturing your fellow man when you had a way to potentially solve the problem but it cost YOU some heat so you didnt (i.e. Powell chickens out from raising rates into the first sign of a weakening economy and put ends up in the worst of all worlds (stagflation).

[FCharlie]

13 minutes ago, changegonnacome said:

 

Hate those M2 charts with a passion...........please dont use them - the crypto people use them the whole time to fit their Zimbawe debasement narrative.....the money supply wasnt increased by 50% in the space of a couple of months.....the M2 figure going up and to the right looks unbelievable because it is.......the FED for the purposes of liquidity for banks/depositors allowed the reclassification of savings accounts as checking accounts in 2020 i.e more than  six withdrawls from a savings/money market account per month......what your seeing in that chart is savings account (money that existed already) get pulled from M1 into the M2 accounting figure as a result of that reclassification.

 

Its one of my most hated charts on the internet.....spread the word that its TOTAL bullshit.....albeit I'm in agreement that we printed/borrowed too much money.

 

 

 

The chart above was showing M2. I believe what you are referencing with regards to savings accounts was on the M1 chart. M1 "tripled" in May of 2020 due to the reclassification you mention and a lot of people wrongly used that M1 chart to predict hyperinflation. M2 is indeed up almost 50% since 2020.

 

 

[changegonnacome]

Yes your right @FCharlie on the charts thingy I saw that M1 way too many times I'm now triggered by an M chart  .........but M2 is about 30% above trend is a better way to look at it from all the digging I've done....the 50% thingy is great headline but it belies the reality (this is versus the 6% annualized M2 growth that existed before COVID and where we would have been if it had just continued to today with M2 expansion)...there also lots of wonky central bank/ treasury money supply nuance going on in that figure too that it would be great if @wabuffo might explain for us?  I'd be curious for him to cut through the M1/M2 chart noise and give a sense of what his assessment was of the scale/scope of helicopter money printed and dropped into the US through all the various government interventions (& maybe just individual market participants i.e. banks & borrowers..... for example cash out refis became very large part of all the additional money floating around).

[Ulti]

https://www.cnbc.com/video/2022/07/26/pain-from-inflation-is-more-broad-based-than-recession-says-former-fdic-chair-sheila-bair.html

Spot on on QT

[wabuffo]

there also lots of wonky central bank/ treasury money supply nuance going on in that figure too that it would be great if @wabuffo might explain for us?  

 

I tend to ignore M2.  I think you can too.   There is one school of economic thought that bank deposits are the most important form of money.   Since banks create deposits when they create a loan, this school of thought thinks that banks acts as agents of the Federal Reserve and thus are licensed to "print money" through their lending.   IOW - total bank lending = total bank deposits.    And that appears to be largely true.  If one goes to the Fed's H8 report which lists the total assets & liabilities of the US banking system, you'll see that total bank credit = $17.2t while total bank deposits = $18t. 

 

But my counter-culture view is that this form of deposit creation is not money creation because it is not creating net financial assets in the private sector.   Basically if a $100 loan is created which in turn creates a $100 deposit - the private sector has no new net equity, in aggregate (just more leverage).

 

My point of view, FWIW - is that the only form of money creation is when the US Treasury deficit spends.  Here are four examples of commonly perceived forms of "money creation" -- Treasury spending, Treasury bond issuance, Bank lending, and Fed doing QE.   Notice that only the first payment flow (US Treasury spending) actually creates net equity for the private sector (bank + individual/business).

 

 

My view is that what counts is the size of the US Treasury's deficit as a % of GDP.   The US ran a $3t deficit in 2020 & a $2.7t deficit in 2021.  So far in 2022, the deficit thru July month-to-date has shrunk to just $390b (much of that in Jan-March, we've run a surplus since April).

 

The issue is that the US needs to supply enough money via its deficits not just for the US domestic economy's growth, but for the rest of the world's need for US dollars & US dollar assets (which the rest of the world gathers by net exporting to the US via the trade deficit).  So, IMHO, that means the US has to run an annual deficit of ~6% of US GDP ( or ~1.5% of world GDP).  

 

With the US starting to run a surplus or too-small deficit, we are starting to unleash a mild deflationary shock since April 2022.  This has manifested itself in the strength of the USD and its compressing effects on gold, oil, commodities, forex, equities and, lately, long-term US Treasury yields.   We'll see if that continues (which will depend on whether the US Treasury deficit continues to stay small or begins to widen again).

 

FWIW.

Bill

 

Edited July 26, 2022 by wabuffo

[changegonnacome]

32 minutes ago, wabuffo said:

I tend to ignore M2.  I think you can too. 

 

Thanks for this - suspected it was too simplistic

 

33 minutes ago, wabuffo said:

My point of view, FWIW - is that the only form of money creation is when the US Treasury deficit spends.  Here are four examples of commonly perceived forms of "money creation" -- Treasury spending, Treasury bond issuance, Bank lending, and Fed doing QE.   Notice that only the first payment flow (US Treasury spending) actually creates net equity for the private sector (bank + individual/business).

 

Sympathetic to that view although i do still retain a piece of my old economic doctrine/dogma that the banks are the transmission mechanism & ultimate 'printers' of new money by scale/scope.........but the double entry accounting of your deficit spend model feels more correct.........in the sense that everybody else in the system is somewhat operating in a closed loop & money is just a settlement layer where transactions goods/services/assets get 'net out'......deficit spending as you point out then is the only incremental money being beamed in from outside the system.

 

Do you have a view on the scale of deficit spend in 2020/2021 relative to the actual economic shortfall of the the COVID/lockdowns? Clearly we over did it or did we?....do you have rough math in your head......did we do twice as much as was needed / three times?

 

Finally do you have your own personal feeling on whats driving the inflation numbers and to what extent its supply chains, US aggregate productive capacity being reduced due to great resignation/boomers/fall off in immigration in addition to deficit spending/money printing (or classic Friedman inflation)? Trillion dollar questions I know

[wabuffo]

Do you have a view on the scale of deficit spend in 2020/2021 relative to the actual economic shortfall of the the COVID/lockdowns? Clearly we over did it or did we?....do you have rough math in your head......did we do twice as much as was needed / three times?

 

Like I said I think we need 6% of GDP per year.   I think if you do the math for 2020-2021-2022, its quite possible that the surplus of 2022 (and maybe 2023) is coming close to covering the 6% per year needed for 2020-2023.   So in my opinion, any monetary reasons for inflation will have completely subsided by the end of this year, early next year.

 

Finally do you have your own personal feeling on whats driving the inflation numbers and to what extent its supply chains, US aggregate productive capacity being reduced due to great resignation/boomers/fall off in immigration in addition to deficit spending/money printing (or classic Friedman inflation)? Trillion dollar questions I know

 

I still believe two-thirds of the inflation we are seeing is the supply issues related to shutting down the global economy & wrecking all kinds of supply chains.  I think this is what is still left in the forward looking (not CPI) inflation outlook.

 

FWIW,

Bill

[Guest]

Bill,

 

What's the history of deficits and surpluses from 2000-2003 and from 2007-2009? Does that match with the drawdowns witnessed? I know you've said in the past that there was a surplus in 2000 which led to the recession. What I'm curious if there was a deficit near the bottom of bear market or any surpluses in 2007 era. 

Edited July 26, 2022 by stahleyp

[bizaro86]

18 hours ago, changegonnacome said:

 

The great jobs market is a symptom of too much money chasing too few goods and services = inflation. Early inflation cycles work out fine - Walmart hikes prices & hikes wages.....everybody wins.....the problem is that wages never keep up with monetary inflation.....inflation happens every day in tiny little ways across the economy, wages reset much less often ,yearly or if someone leaves a job for another (attrition levels of less than 15% even in shitty jobs is quite common).........so prices are rising at a higher interval rate & faster than wages can keep up with.......... therefore purchasing power is decreasing in the consumer across time in the low/middle income groups i.e. most Americans!...........corporates try to push price again to preserve THEIR margin but they cant (the consumer is weakening in the face of a loss of purchasing power).....etc etc

 

 

I think what Powell would say is that the number of job openings should be brought broadly in line with the number of people seeking employment such that we have stable prices across the economy.

 

If you think about what your advocating for as an alternative Greg....which is a bunch of low/middle income workers to get your industriousness and really get out there and hustle their employer for pay increases or hyperactively change jobs every 12 weeks for a higher salary the next shop over.....................your really advocating for a wage-price spiral in disguise.

 

The share of the economy that has gone to regular wage earners has been declining for years though.

 

It's entirely possible that if labour gets a bigger share someone else gets a smaller share (corporate profits and investors like us seems the most likely loser).

 

[changegonnacome]

1 hour ago, bizaro86 said:

It's entirely possible that if labour gets a bigger share someone else gets a smaller share (corporate profits and investors like us seems the most likely loser).

 

100% - my basic thesis is that corporate profit margins peaked in 2021/early 22.....2021 will be seen as a goldilocks period for SPY valuations.....record profits, record profits margins, above trend multiples.....ultra low interest rates meaning NPV of those earnings was super high....were living through the unwind of that now.....multiples have come in, in response to raising rates in H1 22 maybe more to go there (the P).....and my thesis is profits/margins are going to get whacked next (the E)........in your P/E

Edited July 26, 2022 by changegonnacome

[wabuffo]

What's the history of deficits and surpluses from 2000-2003 and from 2007-2009? Does that match with the drawdowns witnessed? I know you've said in the past that there was a surplus in 2000 which led to the recession. What I'm curious if there was a deficit near the bottom of bear market or any surpluses in 2007 era. 

 

I'm not sure I understand your question here - can you rephrase and simplify it?  Thanks.

 

Bill

[Guest]

1 hour ago, wabuffo said:

What's the history of deficits and surpluses from 2000-2003 and from 2007-2009? Does that match with the drawdowns witnessed? I know you've said in the past that there was a surplus in 2000 which led to the recession. What I'm curious if there was a deficit near the bottom of bear market or any surpluses in 2007 era. 

 

I'm not sure I understand your question here - can you rephrase and simplify it?  Thanks.

 

Bill

 

Yes, sorry. I try to post in the middle of nap time for a 3 month old!

 

So what I'm trying to understand is how the surplus and deficits related to the market from a long term perspective (ie relationship to those changes and underlying market performance).

 

In the past I believe you said you stated a surplus caused the 2000 bear market. When did surplus become a deficit? Any relation to that and the bottom of the market in 2002?

 

If that doesn't make sense let me know...she's crying again!

Edited July 26, 2022 by stahleyp

[wabuffo]

In the past I believe you said you stated a surplus caused the 2000 bear market. When did surplus become a deficit? Any relation to that and the bottom of the market in 2002?

 

Yeah - surplus lasted from 1998-2001.  By 2002, the recession created by the surplus flipped the budget back over to deficit.   Market bottomed in October, 2002.   By 2003, the US Treasury was back into full deficit mode and equity markets had one of their best years ever in 2003.

 

Bill

[mattee2264]

2 hours ago, changegonnacome said:

 

100% - my basic thesis is that corporate profit margins peaked in 2021/early 22.....2021 will be seen as a goldilocks period for SPY valuations.....record profits, record profits margins, above trend multiples.....ultra low interest rates meaning NPV of those earnings was super high....were living through the unwind of that now.....multiples have come in, in response to raising rates in H1 22 maybe more to go there (the P).....and my thesis is profits/margins are going to get whacked next (the E)........in your P/E

 

 

 Problem with this is that if earnings do fall then inflation probably will as well and therefore rate expectations will moderate providing a partial offset. At the moment we seem to have priced in a mild recession and inflation that is not transitory but will eventually moderate as the economy cools down and supply chain issues resolve. 

 

So I think to get a much deeper decline in markets you would really need to see either a rather severe recession (which seems unlikely and if it did materialize would probably be used to justify a Fed pivot) and/or the Fed being very aggressive on rate hikes and QT contrary to the general consensus that after a few more hikes they will be done or some kind of black swan. 

 

 

 

[Kupotea]

2 hours ago, mattee2264 said:

 

 

 Problem with this is that if earnings do fall then inflation probably will as well and therefore rate expectations will moderate providing a partial offset. At the moment we seem to have priced in a mild recession and inflation that is not transitory but will eventually moderate as the economy cools down and supply chain issues resolve. 

 

So I think to get a much deeper decline in markets you would really need to see either a rather severe recession (which seems unlikely and if it did materialize would probably be used to justify a Fed pivot) and/or the Fed being very aggressive on rate hikes and QT contrary to the general consensus that after a few more hikes they will be done or some kind of black swan. 

 

 

 

Can you give more of your insight into what you feel the market has already priced in? The way I see it, the market has shrunk multiples in response to higher rates but is still a ways away from pricing in a reduction in earnings. Even if it is just a mild recession.

[changegonnacome]

1 hour ago, Kupotea said:

Can you give more of your insight into what you feel the market has already priced in? The way I see it, the market has shrunk multiples in response to higher rates but is still a ways away from pricing in a reduction in earnings. Even if it is just a mild recession.

 

Your 100% correct - Bridgewater has done some work recently showing that the current market decline is basically ALL multiple contraction in response to higher discount rates( & to be clear the curve is currently pricing only a few more rate hikes). According to Bridgewater there is almost ZERO change in earnings expectations reflected in market pricing.

 

So whats the takeaway? Effectively current market prices are predicting that most rarest of birds - a soft landing & a FED that gets it 100% right while bringing inflation back to 2%. I think the market is underestimating (1) how high the FED will raise rates (i.e. their backbone in the face of a weakening economy) (2) earnings progression into the back half of 2022 think earnings have held up better than I've expected....but the consumer is starting to weaken running down balance sheets/moving to credit/backing off housing etc. (3) Policy errors - either FED chickening out or going too far and something breaking.

 

Expecting a soft landing in the face of an inflationary-rate hike cycle is the triumph of hope over experience. It's possible but not probable.

[LC]

Employment seems to be holding up well which I think is why most people are not expecting too much of an earnings decline:

https://www.bls.gov/news.release/pdf/empsit.pdf

 

[changegonnacome]

1 minute ago, LC said:

Employment seems to be holding up well which I think is why most people are not expecting too much of an earnings decline:

https://www.bls.gov/news.release/pdf/empsit.pdf

 

 

Yep - but the Fed's dirty little secret of course, never muttered, is that they know to fix inflation that a deterioration in employment is required. Employment holding up, in my mind, is a clear sign that will need to continue to tighten till it fundamentally deteriorates. 

 

People seem to forget the Fed funds rate is 1.58% as of today......Core PCE inflation is ~5%........the price of money in real terms is negative 3%......this is still a highly accommodative Fed. There is more to go, maybe the Fed & Inflation meet somewhere in the middle later this year. I hope so, but dont so.

[Gregmal]

7 minutes ago, LC said:

Employment seems to be holding up well which I think is why most people are not expecting too much of an earnings decline:

https://www.bls.gov/news.release/pdf/empsit.pdf

 

People are making a really, REALLY big deal about what will ultimately be a mouse fart technical recession and then back to normal. How many will be hanging on every word and expression outta Powell at 2 today? Violent market moves for the next few days or weeks! Hilarious. I’m hitting some balls and then taking the kids to the water park. 

[changegonnacome]

29 minutes ago, Gregmal said:

technical recession and then back to normal.

 

You know my position - a technical recession does not get us back to 'normal'....unless you consider normal inflation running at ~4%+ & 60% of workers in your economy loosing purchasing power in real terms.

 

The FED as I say does not consider the above normal and thats what matters.