It's a house of smoking mirrors...its a microcosm of all of the shitshow dynamics we are living thru...
In the developed world since the Great Moderation, macroeconomic policy can be boiled down to one simple rule – prop up asset prices. In the Anglo-Saxon world, the rule is even simpler – prop up house prices. Never forget this...So much misinformation...so many agenda's...So many competing incentives...You can bet when the FURUs come on TV they have already placed there bets to front-run all!
** Companies have announced $173.5 billion worth of planned buybacks so far this year, just over double last year's pace, according to data from EPFR TrimTabs as of Monday. In 2022, buyback announcements reached a record $1.22 trillion, according to EPFR TrimTabs. Shhhhhhh....
Great work...Last Bear! and to be clear...I am not complaining, I have/will place my bet, I just dont believe anyone individual or any other Political-Tribal-Belief BS!
Propping up asset prices has been an explicit policy goal for some time. They have achieved the goal of keeping asset prices high, but with a highly unequal distribution of outcomes as we await the "trickle down". There doesn't seem to be any desire to change this strategy.
INFLATION: This same time last year, inflation numbers were peaking, meaning the change in price from the same month of the previous year was significant. Even if inflation numbers in terms of % are lower when compared to this peak last year, the impact is not linear, its an increase on top of an increase! I know that reports are simply showing a trend in the correct (lower than last year) direction, but I believe the impact is underestimated. In other words, what are people so happy about, not only have we not stabilized, but we continue to climb!
FED CONCERNS: You claim that the fed cares more about stability than inflation, I am wondering if you considered the extremes or that inflation can also mean instability in society (due to affordability). I am referring to historical events of hyperinflation leading to currency failure. Being the reserve currency definitely helps manage this, but I do believe that this risk is more significant than the one of depression/stability.
I believe that the concept of MMT can only work if we aggressively reverse the borrowing during times of growth. Unfortunately the nature of human greed will make these efforts virtually impossible.
In footnote #2, you make reference to potential data distortions due to seasonal adjustments. How is it that increasing bank credit enormously 3 years ago leads to numbers being potentially artificially too low today? A simple example could help a curious cat :)
And a further reflection is that, if your hypothesis is true and the March 2020 credit numbers have ripple effects that extend to today, then the same should hold true for April 2020 figures. 2 continuous months of decline in bank credit issuance can reinforce a narrative, which would of course impact markets.
So back in March 2020, there was a huge spike in loans on bank balance sheets because corporations drew on their revolvers. But this also is now included in the historical data for seasonal adjustments. If there *isn't* large credit creation in late March in subsequent years, then the seasonal adjustment factor will push down the "adjusted" loan balance, because it is expecting a big jump.
It's kind of like a "base effect" phenomenon.
Like if Christmas didn't happen one year, unadjusted retail sales would probably be flat between November and December. But seasonally adjusted we would see a huge decline, because the seasonal adjustment "corrects" for the Christmas bump that didn't show up.
New ‘Higher for Longer’ messaging pattern from Daly, Waller, Dimon, Fink and Rubenstein.
Dimon ‘warning’ of the potential for 6% Fed funds rate, with 5&10 years over 5%.
Also note that that finance/CRE people are now privately nervous about being laid off. This is probably shaping the popular economic commentary to some degree?
Lots of ‘its ok today, so it’s ‘probably going to be ok tomorrow’ narratives.
If you’re employed in banking, finance or real estate, your public narrative is increasingly becoming personal.
Yes, there have definitely been a number of recent messages suggesting higher (including after this article was published), and the market has stiffened up, but so isn't pricing more than 1 hike, and still expects the Fed to cut faster than the dot-plot implies.
Yes, agreed. The market isn’t pricing ‘higher for longer,’ which may be what Dimon et al are trying to get in front of in their recent ‘messaging’?
Patrick Saner head of macro at SwissRe notes on twitter this morning:
“Credit spreads do not currently price a recession”
“In fact, even when conditioning only on non-recession periods, B-rated corporate bond spreads are at their median level vs. their history since 1987.”
“Either way, credit spreads haven’t historically been a consistent leading indicator of the business cycle.”
“The exception are CCC spreads which are most growth sensitive - but even there spreads are tighter now than they were at the start of the year.”
“Bank loans were flat from early 2020 to mid-2021, by the time CPI inflation already exceeded 5%.”
If QE withdrew UST from duration taker addict like pension funds for corporates to issue duration like crazy incentivized by low rate ever accompanied by hedged-against-duration-basis-arbitrageur type of duration givers, low interest rate may have played.
The Fed is warehousing some UST/MBS duration risk, but the universe of UST and MBS held by the public has still grown since 2020. So the private sector still holds more duration risk than pre-pandemic, even if the Fed has taken alot of the new risk.
I think they should pause at the next meeting. The yield curve is inverted as steeply as it's been maybe ever (depending on which spread you look at), inflation has been heading downward the last six months, and there's a lot of financial fragility. The point should not be to prop up financial markets, but to avoid a deep recession. The mythical soft landing is just that, has never happened, but a moderate downturn is better than a crash. It may be too late already, but continuing to ratchet up rates until they see the whites of the recession's eyes, as they usually do, is not necessary. They can continue to do modest QT and inflation will likely drift down. They can indicate a readiness to make further increases down the road as needed, but it's not needed right now.
As I reference here, I agree that pause is very possible for May. I don't know how much I see a "deep" recession (at least not immediately) especially if we have already reached the terminal rate, if only for the fact that consumer came out of the pandemic with a great balance sheet and flush with cash. But you never know - this time is different for all kinds of real reasons, and so must be humble with predictions
To amplify on why they not only might but should pause: They essentially never cut the target immediately (or even for months) after an increase. Pausing in May gives them the option of going either direction in subsequent meetings. If they increase in May, it's likely they would not cut before September, as their behavior since the 80s is to pause for several meetings before reversing course. (God forbid they would ever admit a mistake.) By the time they start cutting, a recession may be already baked in the cake (as in 2001 and 2007).
Well written article. Thanks for sharing. I especially appreciate your conclusion regarding the relative importance of QT. The Fed must end QT before YCC can begin. We all know YCC is coming, but we don't know when... How bad does the crisis need to be to kickstart YCC?
Thanks! I think there are various forms of YCC - ranging from soft (QE and forward guidance) to rigid (a la JGBs). I dove into this topic in a recent post that you may enjoy!
For some reason I think people have this hesitation to simply acknowledge the plain facts about money growth because it is so loaded in other questions about politics, equality, etc.
But in my view, it is probably the single biggest factor to help understand today's economy. We have to detach all that emotional baggage in order to property analyze what has happened.
with recent headline inflation numbers, my suspicion is their grip is slipping. I just don't think they can hold for that long, especially since every central bankers tendency, except maybe Knot, is to be a dove
There is a pretty decent range historically, spanning from over a year to just a couple months. I think the economy is not in a dire position today, and maybe they will be able to hold until the end of the year. Agree on the tendency.
Thank you for your is insightful article. I am curious if you have started putting money back in the market yet? Do you personally favor individual stocks or the indexes? If you jane not started what would make you change your mind? I sense you are feeling better about the market then you did several mo the ago. Enjoy the weekend
Enjoying short term yields while they last. Indexes unless you have the time and skill to be a stockpicker, which most don't.
I think valuations are still high given contracting margins and the significant potential for an earnings recession. But I also think a shift in monetary policy to a more relaxed position could be good for stocks, at least in the near term.
It's a house of smoking mirrors...its a microcosm of all of the shitshow dynamics we are living thru...
In the developed world since the Great Moderation, macroeconomic policy can be boiled down to one simple rule – prop up asset prices. In the Anglo-Saxon world, the rule is even simpler – prop up house prices. Never forget this...So much misinformation...so many agenda's...So many competing incentives...You can bet when the FURUs come on TV they have already placed there bets to front-run all!
** Companies have announced $173.5 billion worth of planned buybacks so far this year, just over double last year's pace, according to data from EPFR TrimTabs as of Monday. In 2022, buyback announcements reached a record $1.22 trillion, according to EPFR TrimTabs. Shhhhhhh....
Great work...Last Bear! and to be clear...I am not complaining, I have/will place my bet, I just dont believe anyone individual or any other Political-Tribal-Belief BS!
Propping up asset prices has been an explicit policy goal for some time. They have achieved the goal of keeping asset prices high, but with a highly unequal distribution of outcomes as we await the "trickle down". There doesn't seem to be any desire to change this strategy.
YesSir....I would call them the CHIEF-Volatility-Dampener now...its either the Fed Put or the Fed Call...pure comedy! Its a shell shuffling game...
Buybacks typically max at major market tops.
Fantastic read, as always.
INFLATION: This same time last year, inflation numbers were peaking, meaning the change in price from the same month of the previous year was significant. Even if inflation numbers in terms of % are lower when compared to this peak last year, the impact is not linear, its an increase on top of an increase! I know that reports are simply showing a trend in the correct (lower than last year) direction, but I believe the impact is underestimated. In other words, what are people so happy about, not only have we not stabilized, but we continue to climb!
FED CONCERNS: You claim that the fed cares more about stability than inflation, I am wondering if you considered the extremes or that inflation can also mean instability in society (due to affordability). I am referring to historical events of hyperinflation leading to currency failure. Being the reserve currency definitely helps manage this, but I do believe that this risk is more significant than the one of depression/stability.
I believe that the concept of MMT can only work if we aggressively reverse the borrowing during times of growth. Unfortunately the nature of human greed will make these efforts virtually impossible.
How we can see the market odds/expectation of a rate hike? What charts are people looking at to determine that? thx
Hey bear, thanks for the great article.
In footnote #2, you make reference to potential data distortions due to seasonal adjustments. How is it that increasing bank credit enormously 3 years ago leads to numbers being potentially artificially too low today? A simple example could help a curious cat :)
And a further reflection is that, if your hypothesis is true and the March 2020 credit numbers have ripple effects that extend to today, then the same should hold true for April 2020 figures. 2 continuous months of decline in bank credit issuance can reinforce a narrative, which would of course impact markets.
So back in March 2020, there was a huge spike in loans on bank balance sheets because corporations drew on their revolvers. But this also is now included in the historical data for seasonal adjustments. If there *isn't* large credit creation in late March in subsequent years, then the seasonal adjustment factor will push down the "adjusted" loan balance, because it is expecting a big jump.
It's kind of like a "base effect" phenomenon.
Like if Christmas didn't happen one year, unadjusted retail sales would probably be flat between November and December. But seasonally adjusted we would see a huge decline, because the seasonal adjustment "corrects" for the Christmas bump that didn't show up.
Hey, understood. I had it completely backwards. This is a huge help, appreciate the explanation, thanks :)
New ‘Higher for Longer’ messaging pattern from Daly, Waller, Dimon, Fink and Rubenstein.
Dimon ‘warning’ of the potential for 6% Fed funds rate, with 5&10 years over 5%.
Also note that that finance/CRE people are now privately nervous about being laid off. This is probably shaping the popular economic commentary to some degree?
Lots of ‘its ok today, so it’s ‘probably going to be ok tomorrow’ narratives.
If you’re employed in banking, finance or real estate, your public narrative is increasingly becoming personal.
Yes, there have definitely been a number of recent messages suggesting higher (including after this article was published), and the market has stiffened up, but so isn't pricing more than 1 hike, and still expects the Fed to cut faster than the dot-plot implies.
It will be interesting to see what happens.
Yes, agreed. The market isn’t pricing ‘higher for longer,’ which may be what Dimon et al are trying to get in front of in their recent ‘messaging’?
Patrick Saner head of macro at SwissRe notes on twitter this morning:
“Credit spreads do not currently price a recession”
“In fact, even when conditioning only on non-recession periods, B-rated corporate bond spreads are at their median level vs. their history since 1987.”
“Either way, credit spreads haven’t historically been a consistent leading indicator of the business cycle.”
“The exception are CCC spreads which are most growth sensitive - but even there spreads are tighter now than they were at the start of the year.”
“Bank loans were flat from early 2020 to mid-2021, by the time CPI inflation already exceeded 5%.”
If QE withdrew UST from duration taker addict like pension funds for corporates to issue duration like crazy incentivized by low rate ever accompanied by hedged-against-duration-basis-arbitrageur type of duration givers, low interest rate may have played.
The Fed is warehousing some UST/MBS duration risk, but the universe of UST and MBS held by the public has still grown since 2020. So the private sector still holds more duration risk than pre-pandemic, even if the Fed has taken alot of the new risk.
Love the commentary, especially the balance between solid thoughts and humility.
Glad you appreciated it. Humility is a must in this environment
I think they should pause at the next meeting. The yield curve is inverted as steeply as it's been maybe ever (depending on which spread you look at), inflation has been heading downward the last six months, and there's a lot of financial fragility. The point should not be to prop up financial markets, but to avoid a deep recession. The mythical soft landing is just that, has never happened, but a moderate downturn is better than a crash. It may be too late already, but continuing to ratchet up rates until they see the whites of the recession's eyes, as they usually do, is not necessary. They can continue to do modest QT and inflation will likely drift down. They can indicate a readiness to make further increases down the road as needed, but it's not needed right now.
As I reference here, I agree that pause is very possible for May. I don't know how much I see a "deep" recession (at least not immediately) especially if we have already reached the terminal rate, if only for the fact that consumer came out of the pandemic with a great balance sheet and flush with cash. But you never know - this time is different for all kinds of real reasons, and so must be humble with predictions
To amplify on why they not only might but should pause: They essentially never cut the target immediately (or even for months) after an increase. Pausing in May gives them the option of going either direction in subsequent meetings. If they increase in May, it's likely they would not cut before September, as their behavior since the 80s is to pause for several meetings before reversing course. (God forbid they would ever admit a mistake.) By the time they start cutting, a recession may be already baked in the cake (as in 2001 and 2007).
Well written article. Thanks for sharing. I especially appreciate your conclusion regarding the relative importance of QT. The Fed must end QT before YCC can begin. We all know YCC is coming, but we don't know when... How bad does the crisis need to be to kickstart YCC?
Thanks! I think there are various forms of YCC - ranging from soft (QE and forward guidance) to rigid (a la JGBs). I dove into this topic in a recent post that you may enjoy!
https://thelastbearstanding.substack.com/p/forward-guidance
Thank you for putting this together TLBS! Decaffeinated coffe was ok for todays post. Keep it up!
Thanks Alex - hard to believe its already been a year and 50 posts! thanks for sticking around and the constant encouragement.
It’s always a pleasure to read from people more intelligent than myself! Thanks TLBS, for many many posts more!
A surprisingly extraordinary sentence, thanks for writing it.
"Perhaps because of differing political and economic perspectives or because of some implied moral undertones, we struggle to state the plain fact."
For some reason I think people have this hesitation to simply acknowledge the plain facts about money growth because it is so loaded in other questions about politics, equality, etc.
But in my view, it is probably the single biggest factor to help understand today's economy. We have to detach all that emotional baggage in order to property analyze what has happened.
Great post!
Thanks Nick! glad you enjoyed.
with recent headline inflation numbers, my suspicion is their grip is slipping. I just don't think they can hold for that long, especially since every central bankers tendency, except maybe Knot, is to be a dove
There is a pretty decent range historically, spanning from over a year to just a couple months. I think the economy is not in a dire position today, and maybe they will be able to hold until the end of the year. Agree on the tendency.
Thank you for your is insightful article. I am curious if you have started putting money back in the market yet? Do you personally favor individual stocks or the indexes? If you jane not started what would make you change your mind? I sense you are feeling better about the market then you did several mo the ago. Enjoy the weekend
Enjoying short term yields while they last. Indexes unless you have the time and skill to be a stockpicker, which most don't.
I think valuations are still high given contracting margins and the significant potential for an earnings recession. But I also think a shift in monetary policy to a more relaxed position could be good for stocks, at least in the near term.
Thanks for reading!