Is The Bottom Almost Here?

[mattee2264]

Unemployment apparently now at a 53 year low at 3.4%. 

 

I know that unemployment is usually a lagging indicator but if companies are pessimistic about economic prospects surely you'd have seen some layoffs outside of big tech? 

 

 

 

 

[changegonnacome]

5 hours ago, Gregmal said:

And then Japan or pre COVID USA pops up and says Hi, welcome to the real world. 

 

You seem to be saying that because we had ultra low interest rates in the 2010's and no excess goods and services inflation showed up that the whole wage/spending <-> price inflation theory is debunked???? And what I've explained above re:BLS report is academic baloney and nothing to worry about. I couldn't disagree more and I'll explain why.

 

I'll also expand more than usual if only so that I get my thinking down on paper and consider positioning against this. So forgive the length I'm writing this out for me......as the fella said the post is long, because I didnt have time to make it shorter!

 

If I'm right there is a serious amount of money to made taking the other side of the H2 2022 Fed cutting bet/soft landing bet that dominates positioning and market consensus- so it warrants some expansion as the 'wisdom' of the bond market can't be ignored.

 

Anyway back @Gregmal to your point with USA/Japan/real world ZIR reality killing the wage/spending<>price theory of inflation.......and how the very lack of inflation in 2010's during ZIRP in the USA and Japan puts the very idea in the garbage can.............respectively I don't think you understand where inflation comes from if thats your view point.......it comes from too much money/spending chasing too few goods and services.......it DOES not come from low interest rates or quantitive easing for that matter.

 

So again remember its too much money/spending chasing too few goods and services. It just so happens that wages are the MAIN component of spending/money in any economy.......like I said you poo poo wage-price theory....your effectively saying there is no link between the quantity of money and prices vis-à-vis inflation. Its akin to saying the flat earth guys have a point. It's bonkers.

 

Anyway let me repeat - inflation of the kind were concerned with consumable goods and services inflation in the real economy is not created by low interest rates. Low interest rates DO cause price inflation in cash flowing ASSET PRICES via the discount effect in financial markets/financial economy but not in consumable goods and services transacted in the real economy.

 

OK lets get a little more granular and explain the ZIRP 2010's and why inflation stayed, surprisingly for those that don't understand inflation as many seem not too, low in spite of zero interest rates. Its not a mystery.

 

There are three sources of funds or spending in the REAL economy:

 

(1) Wages

(2) Credit

(3) Government/Treasury

 

The 2010's had ultra low interest rates & quantitive easing.......but interest rates alone are not a source of funds/spending in the economy.....all things being equal lower interest rates do tend ordinarily to lead to more credit creation/demand which eventually DOES become spending. That however is not a given.........in the 2010's credit creation that could have become spending was actually exceptionally muted. Why? Well financial institutions were trying to repair their balance sheets - they weren't interested in making new loans. They were re-building regulatory capital. Consumers, hurting post GFC even if banks were lending (they weren't), had an aversion to credit and were repairing their own balance sheets. Lending standards, via regulation & capital requirements, also became more prudent = lower opportunity to create credit/spending. Low interest rates don't cause inflation. Credit creation that becomes spending causes inflation.

 

Central Bank quantitive easing, I here you say, again quantitive easing does not CREATE spending in the real economy....it is channelled into financial instruments. The Fed buys a bond from a financial market participant, they then take that cash and buy another financial instrument (presumably one further out the risk curve). The Fed does not buy eggs in the real economy or laptops or automobile via QE. Do all the QE you want.......its great for financial instrument valuation/inflation. Which, yes, has a little efficacy via the wealth affect.......however the transmission mechanism from QE to the real economy is rather weak. 

 

Now hopefully that helped you understand that.

 

So go look at the 2010's in the USA/Japan*........its no mystery at all why inflation remained muted even with 0% interest rates & QE..............go look at exactly what I look at right here TODAY and talk about ad nauseum in the BLS data from back then.......and you'll see (1) why there was low ~2% inflation then and (2) why there is and WILL BE inflation moving forward with this BLS data feeding into nominal spending growth that we got today..............see the 2010's was dominated by moribund spending growth and sleepy wage growth....credit creation was subdued in spite of low interest rates and governments in US and Europe implemented the wrong policies of austerity.....put it all in the pot.........and we can see why even getting inflation to the 2% target was difficult!!!!!! Lots of QE, permanently zero bond Fed funds with ECB going negative. Cause the delta between spending (wage/credit/fiscal) growth and output/productivity growth remained tight...that delta was sub-2%....so we got sub ~2%. inflation for a big chunk of time

 

So where are we right now and why this BLS non-farm payrolls/EIC data today and productivity growth data yesterday matter! And why they matter alot.

 

So again three sources of funds/spending in the economy lets think about them right now in contrast to the 2010's and you'll understand the difference:

 

(1) Wages today - wages are accelerating YoY at unusually high levels well above those seen in the 2010's......this is very DIFFERENT scenario......wage growth in 2021 was 4.5%, in 2022 it was 5.1%.......by contract wage growth in the period 2010 - 2105 the numbers were sub-2%.....1.8%....1.9% was the norm...a little later in the Trump roaring years it got to 2.4%!!!

(2) Credit - financial institutions with their balance sheets repaired and over-flowing with regulatory capital & SBA loan....as well as exceptionally low REAL interest rates in 2021/22..........credit in the USA economy was.....maybe not quite now.........absolutely free flowing...back logs for cars (mainly bought with credit) etc. Credit creation is I would imagine slowing now. I need to look into data on this although credit card debt is clearly going through the roof...credit card debt = immediate spending in the economy!! Put simply its a very robust credit creation environment....how many instant approval loans do people on here get offered every day??? They weren't so common in the 2010's....financial institutions are loaded with regulatory capital today......they are single and ready to mingle with borrowers!

(3) Government/Fiscal/Treasury - well we know they went crazy in 2020/21...trillion dollar packages here, there and everywhere........but would you say right now, their coffers full from nominal spending/wage growth taxes, that federal, state & local governments budgets are constrained....they most certainly are not.....Joe Biden is running around the country this week trying to turn the spiget on spending billions on infrastructure.....social security increases of what 8.5% got pushed through late last year. The fiscal authorities are to put it mildly spending like drunken sailors.....contrast that with the 2010's....remember WW3 over TARP...$475bn in the end  

 

Now the other side of the inflation coin - output/productivity:

 

Well productivity was pretty lousy in the 2010's averaging 2%........but that was OK.........cause against that nominal wage growth was muted too as outlined above, add in spending by the household sector (made up of muted wage growth & muted credit demand) and then add in restrained fiscal authorities fighting over BILLION dollar packages.....remember TARP........$475 billion, how quaint!........now its TRILLIONS or it doesn't get on the floor for debate......so short version when you aggregate spending growth against muted productivity growth.......it worked out to muted inflation prints....in some ways disappointingly low inflation.

 

Contrast that to today - you've got WAGE growth which flows through to nominal spending growth on fire with 4.5% & 5.5% prints the last two years.....and you certainly had a credit boom in 2021/H1 2022....credit card debt being the only credit sub-category booming right now......and then you have the fiscal authorities running around with TRILLION dollar fiscal packages burning a whole in their pocket.......CHIPS Act.....ironically named Inflation reduction act............all while PRODUCTIVITY growth wasn't 2% last year like in the 2010's.............it was god damn NEGATIVE!

 

 

I rest my case your honor............if you got to the end of the above congrats, not sure I would have.........I'm writing it more for you than me to double check I'm not crazy.......the market (equities/bonds) are positioned like this BLS data were seeing today and productivity data yesterday is a nothing burger.........if I'm right and I think I am.....they're wrong and there's a very nice opportunity to make some alpha. That's my job for the weekend

 

*Japan mystery using framework above...................shrinking/aging population = decelerating aggregate nominal spending growth (old people also spend less than young people which means double trouble).....so you could, if your not careful, even get outright falls in aggregate nominal spending and hence why the BOJ plays such a big role in that economy........then you've got the flip side of aggregate nominal spending and thats aggregate output/productivity growth.....if just maintain total output, never mind grow it..........while nominal spending doesn't grow but actually falls.........well you've got a disinflation problem.......which conversely is too little spending/money chasing too many goods and services!!!!

Edited February 3, 2023 by changegonnacome

[Spekulatius]

I think the 2010‘s were very different than the situation we have right now. We had several deflationary forces back than - globalization /outsourcing to China etc, Lower energy and commodity prices from (crude went from $90 /brl in 2010 to $50) and labor market slack that lasted until 2018/19.

 

None of these factors exist today, in fact they all reverted. I think it’s unlikely that the 2010 economy repeats, the structural framework is much different now. That doesn’t meant we stay at 6-8% inflation, but the 2% is very hard to reach. I think we will have structural higher inflation now than in the 2010 decade. This requires structural higher interest rates as well.

[maplevalue]

Is it not interesting how the "high inflation is now a secular phenomena" theme emerged precisely after a bout of inflation which was quite clearly caused by shutting down most of the economy while sending out cheques to people to not work.

 

I feel like it's very easy for economists to construct a narrative around high inflation when they can point to the current YoY rate and shout "deglobalization" "demographics" "a new commodity supercycle"...much harder for them to go out and understand the tremendous, and in my opinion underappreciated, efficiency gains from technology happening (for goodness sake Moderna had designed the COVID vaccine by March 2020!). 

 

Inflation is a very very very very difficult thing to understand/forecast. Which is why I am coloured skeptical of the new consensus that has emerged around it.

 

[Gregmal]

The next decade certainly won't look like the last. But I also like things that are asymmetric, off the radar, and have big payoffs. Theres none of that with trying to guess, let alone spending tons of time worrying about, whether inflation is 3.35 or 3.75 or 4.15% going forward. All we need to know, is what we already know, and thats that the clowns who said it would be north of 5% are done and so is all that came with that fear mongering charade. 

Edited February 3, 2023 by Gregmal

[tede02]

4 hours ago, maplevalue said:

Is it not interesting how the "high inflation is now a secular phenomena" theme emerged precisely after a bout of inflation which was quite clearly caused by shutting down most of the economy while sending out cheques to people to not work.

 

I feel like it's very easy for economists to construct a narrative around high inflation when they can point to the current YoY rate and shout "deglobalization" "demographics" "a new commodity supercycle"...much harder for them to go out and understand the tremendous, and in my opinion underappreciated, efficiency gains from technology happening (for goodness sake Moderna had designed the COVID vaccine by March 2020!). 

 

Inflation is a very very very very difficult thing to understand/forecast. Which is why I am coloured skeptical of the new consensus that has emerged around it.

 

 

Narratives are interesting. The financial media makes them up daily to explain market moves when they typically have no idea. 

 

The inflation rate is certainly coming down. But the way everything is priced presently creates a lot of downside risk if it (inflation) sticks around  or we get some jumps in the coming months. The new narrative is the the economy is slowing, inflation is coming down, Fed is going to pause soon. Today was a good reminder that it may not be that predictable. 

[mattee2264]

The next decade probably isn't going to be that great for stock investors.

 

Inflation probably will moderate to around 4-5% but could be quite sticky around those levels requiring an interest rate of around the same level. De-globalization, resource shortages, wage inflation as inflation expectations get built into the economy especially given the Fed is losing its stomach for the inflation fight. 

 

4-5% inflation and 4-5% interest rates (with some variation higher or lower depending on the stage of the cycle) would be fine if we had a healthy growing economy and moderate amounts of debt. But growth has been tepid post GFC struggling to get much above 3%. The roaring 20s narrative people peddled on the basis of an impressive recovery from COVID juiced by massive amounts of stimulus hasn't materialized and it looks more like boom and bust and then a return to tepid growth. Debt levels in the economy are very high and servicing that debt with 4-5% interest rates is going to choke economic growth. Politicians want to cut taxes but are constrained by high levels of government debt and exploding welfare costs as people got used to handouts during the pandemic. Record low unemployment figures disguise the fact that a lot of people simply aren't out there actively seeking growth and the quality of employment is poor with a lot of part time workers struggling to get by in a gig economy. 

 

Multiples have been high in the 21st century averaging above 20. But that was a product of a low interest rate environment and a composition effect as investors favoured growth and quality (bond proxies). With a change in leadership and higher interest rates over time you'd expect more moderate PE multiples which will probably result in the stock market going sideways over the next decade. Unless of course we get a proper reset. 

 

Peak earnings of the cycle were $210. Even if you assume that these are sustainable (doubtful as they were the product of a lot of stimulus, low interest rates, record high profit margins etc) once you put a 15x multiple on that you get a fair value of around 3200. 

 

 

[Jaygo]

Guys if you want to lower inflation go produce something that your neighbor needs. We have higher inflation now because people are lazy as hell and just sit around with their phones or push paper around. The government condones this shit for some reason. The last decade we had low inflation because poor nations were working their asses off for us. That stopped during CoVid. It is starting back up and inflation will drop. 
 

there is a video of a shirtless roughneck covered in drill mud working an oil rig. That bad ass hombre is the solution to inflation not typing on a forum or trading stocks back and forth with each other. 
 

sorry guys but if you are not part of the solution your part of the problem. Myself included. Look around society. Most people do not produce shit. 
 

also low interest rates should reduce inflation in a healthy free economy by allowing for increased production of goods. I’m hungover and am really part of the problem today. Sorry for the cussing . 

[changegonnacome]

18 hours ago, Spekulatius said:

I think the 2010‘s were very different than the situation we have right now. We had several deflationary forces back than - globalization /outsourcing to China etc, Lower energy and commodity prices from (crude went from $90 /brl in 2010 to $50) and labor market slack that lasted until 2018/19.

 

None of these factors exist today, in fact they all reverted. I think it’s unlikely that the 2010 economy repeats, the structural framework is much different now. That doesn’t meant we stay at 6-8% inflation, but the 2% is very hard to reach. I think we will have structural higher inflation now than in the 2010 decade. This requires structural higher interest rates as well.

 

Absolutely - my long post didn't even touch on the larger secular forces at play......it was concerned with the right here, right now of contemporaneous aggregate spending/wages & output dynamics at play in the US and their effect on inflation...........in a very real sense the de-globalization inflationary forces are yet to come.....you can't undo 40yrs of globalization in a couple of years.....so in some respects right now we are still very much the beneficiary of the globalization disinflationary goldilocks period......but its ebbing away by the day. Likewise with energy although we are feeling it now with more to come later - our ESG/nimbyism madness has baked in the cake higher hydrocarbon prices moving forward.

 

The pushback to my own inflation thesis & I hate to agree with Cathie Wood on something but the only thing I see working against this inflationary trend is indeed the advancement of AI which could free up huge swathes of disinflationary human capital if it advances sufficiently......as she sells her ARKK ETF on CNBC she argues its just around the corner and thats where we differ.....but she's not wrong on the core idea......full autonomy alone for example if it were irrefutably "solved" would eliminate the largest single line item occupation of working age males in the USA.......which is the broadly defined DRIVER category.....think how housing shortages might be solved if all the male drivers in America retrained into construction jobs for example....how disinflationary that would be for construction costs......& by extension new housing supply.

[changegonnacome]

Best trade of 2023 is the - "you better believe exactly what Jerome Powell is saying trade". It's now my highest conviction idea.

 

There will be no cuts to Fed funds in Q4 2023 as is priced in......in fact the real direction of travel I think is that terminal rate expectations & reality are going to go marginally higher from here......thats your higher of the higher for longer story.....Powell then also needs to ensure that a pause isn't misinterpreted as a pivot.....not sure what the answer for him on this is smaller more spaced out hikes....10bps vs. 25bps! This market just loves to rally.....30 years of Pavlovian conditioning will do that I guess.

 

Need help COBF on how best to express this in the most levered way possible!!!?

 

In the equity markets where I know best -  its clearly short the long duration and/or interest rate sensitive stuff. Recent retail rally stuff (not huge fan of the asymmetry of shorting and buying puts means you have to get direction and timing exactly right). Pair that with short duration/low PE/rate beneficiary stuff I guess...energy etc.

 

However the purest expression of this I'd imagine is in the bond market.......where I admit I'm a novice.....I bought a bond for the first time in my life recently......... @thepupil your Mr.Bond in my eyes.......interest rate options? on the short end of the curve? What instrument is likely to react the most violently to expectations of cuts later this year getting dashed? 

 

If anybody has any ideas feel free to DM me on it - very interested in exploring this.

[Dinar]

1 hour ago, Jaygo said:

Guys if you want to lower inflation go produce something that your neighbor needs. We have higher inflation now because people are lazy as hell and just sit around with their phones or push paper around. The government condones this shit for some reason. The last decade we had low inflation because poor nations were working their asses off for us. That stopped during CoVid. It is starting back up and inflation will drop. 
 

there is a video of a shirtless roughneck covered in drill mud working an oil rig. That bad ass hombre is the solution to inflation not typing on a forum or trading stocks back and forth with each other. 
 

sorry guys but if you are not part of the solution your part of the problem. Myself included. Look around society. Most people do not produce shit. 
 

also low interest rates should reduce inflation in a healthy free economy by allowing for increased production of goods. I’m hungover and am really part of the problem today. Sorry for the cussing . 

The best way to lower inflation is to increase labor supply.  To do that, you need to create incentives to work.  So, a) gut welfare and social programs; b) cut marginal tax rates - in NYC they approach 60%

[Spekulatius]

The real problem with labor force participation is in the south:

https://fred.stlouisfed.org/release/tables?rid=446&eid=784070

 

Alabama, Arkansas, Kentucky, South Carolina, West Virginia, Mississippi .

All MAGA land.

 

The only Blue state coming close is Maine

[Jaygo]

Yes labour and productivity are the keys to a better life for all, rich and poor. I will never understand the government incentives to limit labour. 
 

income tax seems like the exact opposite incentive, welfare too. These programs need to be drastically changed or everyone will suffer. 

[changegonnacome]

34 minutes ago, Jaygo said:

Yes labour and productivity are the keys to a better life for all, rich and poor. I will never understand the government incentives to limit labour. 

 

Yep you only get to reap what you sow and actually harvest......fiscal transfers, nominal wage increases, creation of debt fueled spending........changes nothing in terms of domestic output.......only the quoted price of that domestic output........to the extent the rest of world accepts dollars of course (and this is the exorbitant privilege of the reserve currency) you can indeed consume more via the creation of more monetary instruments that you send overseas and for which people will send you their output! Its an amazing thing (but with no downsides I wont go into).

 

This phenomena is exactly why goods inflation is coming down so quickly/easily & drastically (supply chain relief/strong dollar) and why Fed knows the problem for inflation moving forward is "non-housing services".....put another way goods/services you consume that don't go in shipping containers from overseas.....I refer to it as simply domestic goods and services.

[Castanza]

Does anyone follow the “de-globalization” trend we keep hearing about? I’m not really convinced we will see meaningful jobs come back to the states. Seems way more likely the factories will just get moved to the next hospitable third world country.

[Jaygo]

I don’t buy de-globe thing. China has become a massive goods producer, why would they throw away all of that industrial capacity. Not to mention employed people don’t cause trouble politically. 
 

some critical items may shift but frankly we will never accept the pollution here that comes with mass heavy industry. 
 

gregmal sowing tshirts, parsad assembling iPhones. Nope not happening any time soon. We may have some bespoke furniture and specialty items that we demand American made but if it’s light enough to ship cheaply it will come from Asia for a long time. 
 

 

[Dinar]

4 hours ago, Spekulatius said:

The real problem with labor force participation is in the south:

https://fred.stlouisfed.org/release/tables?rid=446&eid=784070

 

Alabama, Arkansas, Kentucky, South Carolina, West Virginia, Mississippi .

All MAGA land.

 

The only Blue state coming close is Maine

Spek, I am not sure about the accuracy of the statistics that you cited.    In NY, around 40% of the population if I am not mistaken is on Medicaid.  Seems to me NY has a problem with labor force participation, no?  In California, 33% are on Medicaid, and 55% of births are to women on Medicaid.   Given that someone who works 40 hours per week, will enjoy income north of $40K a year in NY or California, something tells me that quite a few people are not working.  

Also, if my wife is not working and is at home raising our three children, she is not participating in the labor force.  If my wife works and we hire a nanny, then she is participating.  That could easily account for the difference in labor force participation.

Edited February 4, 2023 by Dinar

[Castanza]

2 hours ago, Jaygo said:

I don’t buy de-globe thing. China has become a massive goods producer, why would they throw away all of that industrial capacity. Not to mention employed people don’t cause trouble politically. 
 

some critical items may shift but frankly we will never accept the pollution here that comes with mass heavy industry. 
 

gregmal sowing tshirts, parsad assembling iPhones. Nope not happening any time soon. We may have some bespoke furniture and specialty items that we demand American made but if it’s light enough to ship cheaply it will come from Asia for a long time. 
 

 

Agreed, I used to be a believer that it was happening at a large scale but I don’t buy that anymore. Maybe for luxury goods that can be manufactured and sold at higher costs with better margins? Not sure. It would definitely have to be able to support Union wages etc. 

 

Labor costs have to be balanced in order for the shift to happen imo. Until the lower class in Thailand or Vietnam is on par with Union workers here in the US. I don’t see how it will ever change in any meaningful way. The industrial boom in the US worked sort of because the lack of logistics. Economies were more localized. Once there was reliable abundant long distance shipping at reasonable rates it opened the rat race for the lowest wage work force. 

[Spekulatius]

It should also be noted that even  Japan has recently shown inflation. It went to 4% which is a 25 year high as well. The last spike on inflation was from a consumption tax rise in 2014 (causing a one off effect) , but the nature of the recent rise is different in nature.

 

 

Japan was one economy as deflationary as you can make one up, but not any more.

Edited February 5, 2023 by Spekulatius

[Parsad]

On 2/3/2023 at 1:29 PM, changegonnacome said:

 

You seem to be saying that because we had ultra low interest rates in the 2010's and no excess goods and services inflation showed up that the whole wage/spending <-> price inflation theory is debunked???? And what I've explained above re:BLS report is academic baloney and nothing to worry about. I couldn't disagree more and I'll explain why.

 

I'll also expand more than usual if only so that I get my thinking down on paper and consider positioning against this. So forgive the length I'm writing this out for me......as the fella said the post is long, because I didnt have time to make it shorter!

 

If I'm right there is a serious amount of money to made taking the other side of the H2 2022 Fed cutting bet/soft landing bet that dominates positioning and market consensus- so it warrants some expansion as the 'wisdom' of the bond market can't be ignored.

 

Anyway back @Gregmal to your point with USA/Japan/real world ZIR reality killing the wage/spending<>price theory of inflation.......and how the very lack of inflation in 2010's during ZIRP in the USA and Japan puts the very idea in the garbage can.............respectively I don't think you understand where inflation comes from if thats your view point.......it comes from too much money/spending chasing too few goods and services.......it DOES not come from low interest rates or quantitive easing for that matter.

 

So again remember its too much money/spending chasing too few goods and services. It just so happens that wages are the MAIN component of spending/money in any economy.......like I said you poo poo wage-price theory....your effectively saying there is no link between the quantity of money and prices vis-à-vis inflation. Its akin to saying the flat earth guys have a point. It's bonkers.

 

Anyway let me repeat - inflation of the kind were concerned with consumable goods and services inflation in the real economy is not created by low interest rates. Low interest rates DO cause price inflation in cash flowing ASSET PRICES via the discount effect in financial markets/financial economy but not in consumable goods and services transacted in the real economy.

 

OK lets get a little more granular and explain the ZIRP 2010's and why inflation stayed, surprisingly for those that don't understand inflation as many seem not too, low in spite of zero interest rates. Its not a mystery.

 

There are three sources of funds or spending in the REAL economy:

 

(1) Wages

(2) Credit

(3) Government/Treasury

 

The 2010's had ultra low interest rates & quantitive easing.......but interest rates alone are not a source of funds/spending in the economy.....all things being equal lower interest rates do tend ordinarily to lead to more credit creation/demand which eventually DOES become spending. That however is not a given.........in the 2010's credit creation that could have become spending was actually exceptionally muted. Why? Well financial institutions were trying to repair their balance sheets - they weren't interested in making new loans. They were re-building regulatory capital. Consumers, hurting post GFC even if banks were lending (they weren't), had an aversion to credit and were repairing their own balance sheets. Lending standards, via regulation & capital requirements, also became more prudent = lower opportunity to create credit/spending. Low interest rates don't cause inflation. Credit creation that becomes spending causes inflation.

 

Central Bank quantitive easing, I here you say, again quantitive easing does not CREATE spending in the real economy....it is channelled into financial instruments. The Fed buys a bond from a financial market participant, they then take that cash and buy another financial instrument (presumably one further out the risk curve). The Fed does not buy eggs in the real economy or laptops or automobile via QE. Do all the QE you want.......its great for financial instrument valuation/inflation. Which, yes, has a little efficacy via the wealth affect.......however the transmission mechanism from QE to the real economy is rather weak. 

 

Now hopefully that helped you understand that.

 

So go look at the 2010's in the USA/Japan*........its no mystery at all why inflation remained muted even with 0% interest rates & QE..............go look at exactly what I look at right here TODAY and talk about ad nauseum in the BLS data from back then.......and you'll see (1) why there was low ~2% inflation then and (2) why there is and WILL BE inflation moving forward with this BLS data feeding into nominal spending growth that we got today..............see the 2010's was dominated by moribund spending growth and sleepy wage growth....credit creation was subdued in spite of low interest rates and governments in US and Europe implemented the wrong policies of austerity.....put it all in the pot.........and we can see why even getting inflation to the 2% target was difficult!!!!!! Lots of QE, permanently zero bond Fed funds with ECB going negative. Cause the delta between spending (wage/credit/fiscal) growth and output/productivity growth remained tight...that delta was sub-2%....so we got sub ~2%. inflation for a big chunk of time

 

So where are we right now and why this BLS non-farm payrolls/EIC data today and productivity growth data yesterday matter! And why they matter alot.

 

So again three sources of funds/spending in the economy lets think about them right now in contrast to the 2010's and you'll understand the difference:

 

(1) Wages today - wages are accelerating YoY at unusually high levels well above those seen in the 2010's......this is very DIFFERENT scenario......wage growth in 2021 was 4.5%, in 2022 it was 5.1%.......by contract wage growth in the period 2010 - 2105 the numbers were sub-2%.....1.8%....1.9% was the norm...a little later in the Trump roaring years it got to 2.4%!!!

(2) Credit - financial institutions with their balance sheets repaired and over-flowing with regulatory capital & SBA loan....as well as exceptionally low REAL interest rates in 2021/22..........credit in the USA economy was.....maybe not quite now.........absolutely free flowing...back logs for cars (mainly bought with credit) etc. Credit creation is I would imagine slowing now. I need to look into data on this although credit card debt is clearly going through the roof...credit card debt = immediate spending in the economy!! Put simply its a very robust credit creation environment....how many instant approval loans do people on here get offered every day??? They weren't so common in the 2010's....financial institutions are loaded with regulatory capital today......they are single and ready to mingle with borrowers!

(3) Government/Fiscal/Treasury - well we know they went crazy in 2020/21...trillion dollar packages here, there and everywhere........but would you say right now, their coffers full from nominal spending/wage growth taxes, that federal, state & local governments budgets are constrained....they most certainly are not.....Joe Biden is running around the country this week trying to turn the spiget on spending billions on infrastructure.....social security increases of what 8.5% got pushed through late last year. The fiscal authorities are to put it mildly spending like drunken sailors.....contrast that with the 2010's....remember WW3 over TARP...$475bn in the end  

 

Now the other side of the inflation coin - output/productivity:

 

Well productivity was pretty lousy in the 2010's averaging 2%........but that was OK.........cause against that nominal wage growth was muted too as outlined above, add in spending by the household sector (made up of muted wage growth & muted credit demand) and then add in restrained fiscal authorities fighting over BILLION dollar packages.....remember TARP........$475 billion, how quaint!........now its TRILLIONS or it doesn't get on the floor for debate......so short version when you aggregate spending growth against muted productivity growth.......it worked out to muted inflation prints....in some ways disappointingly low inflation.

 

Contrast that to today - you've got WAGE growth which flows through to nominal spending growth on fire with 4.5% & 5.5% prints the last two years.....and you certainly had a credit boom in 2021/H1 2022....credit card debt being the only credit sub-category booming right now......and then you have the fiscal authorities running around with TRILLION dollar fiscal packages burning a whole in their pocket.......CHIPS Act.....ironically named Inflation reduction act............all while PRODUCTIVITY growth wasn't 2% last year like in the 2010's.............it was god damn NEGATIVE!

 

 

I rest my case your honor............if you got to the end of the above congrats, not sure I would have.........I'm writing it more for you than me to double check I'm not crazy.......the market (equities/bonds) are positioned like this BLS data were seeing today and productivity data yesterday is a nothing burger.........if I'm right and I think I am.....they're wrong and there's a very nice opportunity to make some alpha. That's my job for the weekend

 

*Japan mystery using framework above...................shrinking/aging population = decelerating aggregate nominal spending growth (old people also spend less than young people which means double trouble).....so you could, if your not careful, even get outright falls in aggregate nominal spending and hence why the BOJ plays such a big role in that economy........then you've got the flip side of aggregate nominal spending and thats aggregate output/productivity growth.....if just maintain total output, never mind grow it..........while nominal spending doesn't grow but actually falls.........well you've got a disinflation problem.......which conversely is too little spending/money chasing too many goods and services!!!!

 

WTMI...Way Too Much Information!  Thinking like this would drive me crazy and I would never invest a dime in the markets.  

 

No one...I repeat no one...needs to dissect fiscal and monetary policy like this to make a decent return in the stock market or fixed income instruments.  

 

Change enjoys this stuff!  So if you enjoy it...more power to you.  But for the average investor on here...this is all irrelevant. 

 

Buy cheap, sell dear, ignore the noise!

 

Cheers!

[UK]

https://www.wsj.com/articles/jobs-market-parties-like-its-1969-11675443737

 

Second, the annual revisions included in Friday’s report suggest the economy has more capacity to add workers. December’s count of the noninstitutionalized population aged 16 and higher was revised up by 954,000, and the labor force—people who are either working or looking for work—was revised up by 871,000. Last year the Labor Department revised up its December 2021 population estimate by 973,000 and its labor-force estimate by about 1.5 million. These upward revisions are likely largely the result of increases in immigration, which plummeted in the first year of the pandemic and then came back—the Census Bureau in December reported that net immigration to the U.S. rebounded over the 12 months ended July 1, 2022, to the highest level since 2017. One thing the population gains might mean is that employment can grow more quickly without exhausting the supply of available workers.

 

https://www.census.gov/library/stories/2022/12/net-international-migration-returns-to-pre-pandemic-levels.html#:~:text=Net Migration Between the United,Reaches Highest Level Since 2017&text=The U.S. Census Bureau projects,its lowest levels in decades.

 

[thepupil]

18 hours ago, changegonnacome said:

 

 

However the purest expression of this I'd imagine is in the bond market.......where I admit I'm a novice.....I bought a bond for the first time in my life recently......... @thepupil your Mr.Bond in my eyes.......interest rate options? on the short end of the curve? What instrument is likely to react the most violently to expectations of cuts later this year getting dashed? 

 

If anybody has any ideas feel free to DM me on it - very interested in exploring this.

https://www.cmegroup.com/markets/interest-rates/stirs/eurodollar.html
 

I think what you’re looking for is futures and options on futures related to short term FI. 
 

they are accessible to the everyday Joe on interactive brokers. I have never traded them in a personal or prod context, therefore don’t want to provide any more specifics, but if you want the purest form of short term rate speculation, it’s somewhere in there.

[SharperDingaan]

18 hours ago, Castanza said:

Does anyone follow the “de-globalization” trend we keep hearing about? I’m not really convinced we will see meaningful jobs come back to the states. Seems way more likely the factories will just get moved to the next hospitable third world country.

 

De-globalization today is 'friends-shoring', AWAY from the Asian workshops. Of the more commodity type manufactured goods, maybe 50-60% from Asia ordered 8-10 weeks ahead, and the rest from 'friends'. Of the medical type consumables, maybe 50-60% from 'friends'. Of the weapons, munitions, electronics, etc., maybe 70-80%.

 

'Friends shore' for supply chain resilience, 'off shore' for the bulk lowest quality/cost commodity component of your inventory that turns over roughly every 4-8 months. To escape the commodity trap; either consume the commodity component yourself, or move into higher value manufacturing. China is well known for expanding third-world raw materials production via its 'Belt & Road' initiative, and reaping the benefit as the inflated supply floods the market - collapsing the commodity price. Replace 'minerals' with 'low cost labor', and you get the same result. 

 

You and I are going to pay more for our goods - and not notice. Goods prices will just continue to inflate at the current high rate of inflation, while the actual rate of inflation significantly declines. Packagers just package in smaller quantities, we toss less in the garbage, and social service payments automatically rise with inflation(subject to a 12-15 month delay).

 

ESG is a significant driver (EV batteries). With the greater focus on sustainability via recycling and reuse, it is typically much cheaper to recycle at home than abroad (net of to/from shipping costs). Recycle (in bulk) a product with a lot of scarce resources in it (Lithium in EV batteries), and you break the supplier's (China) monopoly. And .... if friends are largely 'local' (EU) ... you also quickly get the scale to make it viable.

 

SD  

 

Edited February 5, 2023 by SharperDingaan

[dealraker]

Always remember that in 2001 or so Jack Welch retired and went on CNBC (which GE owned) repeately stating GE's 17-18 percent annual earings gains for years and years to come.  Jack was the most respected businessman in the country at the time and most likely he actually believed what he was stating.

 

A few of us had spent years exploring the internals, the actual financial figures GE posted up, and we thought the company was worth zero, that's nothing spelled NOTHING.  We wrote, published, and took the endless punches.

 

It isn't an accident or some deep internal personality disorder that causes me to fabulously enjoy Gregmal's posts here.  I'm not a cultist type either.

 

But the damn economist prediction crap is nothing but worthless babble.  The perfectly obvious screams often.

 

In the early 2000's we had two handsome 35-40 year old men come do an investment seminar in Lexington, the famious little man Jimmy Rogers came.  These guys "summary" was that investors should buy bank stocks, no accident given one worked for First Union the other Wachovia.  Jimmy Rogers chanted commodities.

 

Our investment club quickly bought more bank stocks, First Union and Wachovia.  A couple of us began a long and finally successful "begging" to get the club out, that's OUT, of Kudlow's Ciderella Bank stocks.  Was it not perfectly obvious when every single childless US couple was buying 2nd, 3rd, and 4th homes and investment advise always mentioned "beds and baths"?  

 

All those dudes - all of them - were wrong, wrong, and more wrong...as usual.  Worthless jargon, babbling babble.  Head spinning garbage slinging.  Harry Dent was raging his expertise too during this phenomenal era or predictor worship.

 

Experts parent ego states laying out musts, oughts, and have to's to followers child ego state.   Copy/paste to prove your submission?  Not my thing.

 

 

[rogermunibond]

20 hours ago, Spekulatius said:

The real problem with labor force participation is in the south:

https://fred.stlouisfed.org/release/tables?rid=446&eid=784070

 

Alabama, Arkansas, Kentucky, South Carolina, West Virginia, Mississippi .

All MAGA land.

 

The only Blue state coming close is Maine

Interesting I wonder if that cross correlates with disability claims