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June 27, 2023 We had some strong economic data this morning.
For the month of May, durable goods and housing data were all very strong.
And consumer confidence for this month (of June) had a big bounce back, after trending lower for much of the first half of the year.
 What could fuel a technical breakout in this confidence index (i.e. restoring confidence in the economic outlook)?
>The removal of the risk of a banking crisis.
>The removal of the risk of a U.S. government debt default.
>The removal of the Fed's constant threats to destroy jobs and suppress wages.
Check, check, and check.
What else could underpin a surge in confidence?
Maybe a tsunami of yet to be deployed fiscal stimulus. And that would be even more powerful if it were to coincide with the beginning of a new industrial (digital) revolution, accompanied by productivity gains comparable to the invention of electricity (in the words of OpenAI's co-founder).
Check, and check.
With this in mind, as we've discussed here in my daily notes, we need a period of boom-time growth. We need it to inflate away the unsustainable debt load. And we need it to return GDP to long-term trend (i.e. to close the post-GFC gap, between the blue line and the orange line).
I think we have the ingredients for it.
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June 26, 2023 On Friday we get May core PCE. This is the Fed's favored inflation gauge.
As you can see in the chart below, the Fed Funds rate is ABOVE the inflation rate (core PCE), and it has been since March.
 As we've discussed here in my daily notes, this is historically where the Fed has taken rates to get inflation under control (i.e. above the rate of inflation).
So this dynamic of a positive real interest rate, for the past three months, should be putting downward pressure on inflation.
As for sentiment during the month of May, the debt ceiling drama had it plunging back toward the levels of the Global Financial Crisis, and the 2011 debt ceiling standoff …
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June 23, 2023 As we end the week, let's talk more about generative AI.
We've talked in recent weeks about Nvidia, (now) the most important company in the world.
Nvidia is powering the computing side of generative AI.
The other, very important side is data.
The large language models like ChatGPT will make everyone a computer programmer. With simple, plain-English text prompts, the models will ultimately do the work of hundreds of coders — perhaps months of work, in seconds. But the output is only as good as the prompt it's given, and the data it is trained on.
With that, in the era of generative AI, companies that are data-rich are in a position of strength. These companies will have the data to train their own models. They will enhance their decision making, identify opportunities to create new products and improve customer experiences. And those with rich and unique data, will have an opportunity to monetize that data – to become a new revenue source.
And as we've discussed, the speed of change in this "industrial revolution" could be unlike those of the past. It's moving fast.
And it seems pretty clear that the productivity gains will be huge. As an example (from an OpenAI case study), CarMax used ChatGPT to summarize 100,000 customer reviews to include on their website, for every make, model and year. They say it would have taken their editorial team 11 years to complete the job.
So, who are the kings of data?
Meet the new kings, same as the old: Google, Amazon, Facebook, Apple, Microsoft.
When the government turns a blind eye to antitrust law, the moat only becomes wider and wider.
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June 22, 2023 The Bank of England surprised with a bigger, 50 basis point, hike this morning.
The 10-year UK bond yield responded to this larger than expected hike by moving lower, not higher.
This takes the benchmark short-term rate in the UK to 5%, which is (maybe not so coincidentally) about where rates for the world's most important central banks are converging (with one exception, Japan).
So, the major central banks of the world have been able to successfully exit zero interest rates (and QE) with an historically fast normalization of rates, all in the face of one of the most complicated global financial, economic and political environments in history — and without losing control of the bond markets.
How? It's a "managed" normalization. As we've discussed often in my daily notes, in the post-GFC era of no-rules central banking, they are in the practice of "fixing and manipulating." And as long as it's done in cooperation with their global central bank counterparts, there are no penalties (not to the currency, not to the bond market, not to equity markets, not to foreign investment).
And, in cooperation, they buffer the effects of tightening by keeping the liquidity pumping from a part of the world that has the most severe structural deflation problem, and the biggest government debt load in the world: Japan.
PS: If you know someone that might li
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June 21, 2023 Jerome Powell is back on Capitol Hill.
It was just a week ago that the Fed ended a series of ten consecutive rate hikes. Though for good measure, to keep any exuberance in check, the Fed projected a couple more (hikes) by year end.
He reiterated as much today. But the markets don't seem to care.
Why?
As we discussed last week, as long as the 10-year yield (the anchor market interest rate) is out of the danger zone (in the 3s), then financial and economic stability seem to be preserved.
It's a similar situation in Europe and the UK.
And as we also discussed last week, this phenomenon of "inverted yield curves" can clearly be attributed to bond market manipulation by central banks.
That said, the Bank of England will hike rates again tomorrow.
They are dealing with the highest inflation of G7 countries. And they are dealing with the highest 10-year government bond yield — which is creeping dangerously toward the levels of last September.
Importantly, in September, the BOE had to step-in to rescue failing pension funds, which was directly unraveling the UK government bond market, which would have quickly become a financial crisis.
The moral of the story: the central banks will continue to plug the holes, where needed, with the full support of their global central banking counterparts.
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June 20, 2023 We had strong housing numbers this morning. Housing starts jumped, though off of the lows of the past year. The decline (to those lows) was driven by the Fed’s historic interest rate hikes, which (related) caused the quickest doubling of mortgage rates on record. With that formula, following the post-covid boom in housing prices, the housing market has been a subject of “bubble talk.” Let’s take a look. First, here’s a look at building permits.
And here’s a look at housing starts. In May this was running at the hottest rate in seven years …
Now, from these two charts you can see the direct impact of rising interest rates on home building. We can also see, on the left side of the charts, what a housing bubble (and burst) looks like. If we look back at that 2006 period, home builders were building at about a 40% hotter pace, with about 10% less population. That real estate bubble was primarily driven by credit agencies AAA stamping high risk/high yielding mortgage portfolios (a mix of fraud and incompetence on the part of the ratings agencies). With a AAA rating and a high yield, massive pension funds had no choice, if not an obligation to plow money into those investments. And with that insatiable demand, mortgage brokers and bankers were incentivized to keep sourcing them and packaging them. This post-covid housing environment was much different/ much less vulnerable to rate hikes. You can see in the graphic below, the risk profile is very different, which aligns with the current environment of high creditworthiness (low debt service) and stringent lending standards (post-financial crisis).
We discussed these housing market comparisons by in my December 14th note in 2021, as we were a few months away from the Fed’s rate liftoff. With that, I said … “What looks likely, in the face of a rate tightening cycle, is that real estate prices just stay persistently high, and even continue higher — driven by multi-decade high economic (nominal) growth, massive new money supply floating around, and a very tight labor market. And at higher rates, it will just cost more to live.” This aligns with what we’ve discussed throughout on the inflation topic: “rate-of-change” in prices will slow, but the level of prices is here to stay. And it’s by design: inflate asset prices and inflate away the value of debt. |
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June 16, 2023 Yesterday we talked about the era of explicit central bank market manipulation.
They crossed the line in the sand, during the throes of the Global Financial Crisis, and unsurprisingly, they haven't looked back.
The Fed has now "normalized" interest rates, taking the Fed Funds rate to 5%-5.25%. And yet the 10-year yield is just 3.7%.
The UK has taken rates from 0.10% to 4.5%, still undershooting a hot 8.7% inflation rate, and yet the yield on the 10-year UK government bond is just 4.4%.
The European Central Bank has taken rates from negative 50 basis points to 3.5%, while inflation is running over 6%. And yet the German 10-year yield is under 2.5%.
Are these very tame government borrowing rates, the product of a "smart" bond market pricing in a (high) probability of recession?
Or are these very tame government borrowing rates, the product of governments intervening to fix market interest rates at a level they can afford, and thereby avoiding ballooning interest costs, a global credit crunch and sovereign debt defaults?
It's the latter (i.e. manipulation). And they've made little effort to hide it.
Early in the "rate normalization" phase, both the Bank of England (BOE) and the European Central Bank (ECB) had to rescue their respective government bond markets.
The ECB had to step in and promise to be the buyer of last resort in the big fiscally vulnerable constituents of the euro zone (namely, Italy and Spain). In the same month, they ended QE and restarted it (by a new name), by guaranteeing to keep the bond markets stable.
Then the Bank of England was forced to step in, after a doubling of UK government bond yields, in a little more than a month. A self-reinforcing debt spiral was underway.
As for the Fed, the Kryptonite of 4%+ 10-year U.S. government bond yields coincided with 1) the collapse of the biggest crypto exchange, and then 2) the banking system shock.
Both have resolved in a return of the world's benchmark interest back to the comfort zone (of 3%-4%).
 As we discussed yesterday, coordination with the Bank of Japan (who continues to print money and buy assets) is good way to keep this important global interest rate (the U.S. 10-year yield) out of the danger zone.
Not only does keeping this anchor rate in check go a long way toward keeping global sovereign debt markets solvent, but it keeps consumer rates (most of which are derived from the 10-year yield) affordable (promoting economic activity).
So, as we discussed yesterday, many continue to point to inverted yield curves as signals of a looming recession. But that ignores the central bank manipulation, which is promoting the opposite – stability and economic activity.
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| June 15, 2023
As we discussed yesterday, the Fed ended a series of ten consecutive rate hikes yesterday. They took interest rates from zero to 5% over fourteen months. And yet the 10-year yield remains in the 3s. This describes the dreaded “inverted yield curve” that most have pointed to as the reason to expect looming recession. But it’s important to remember, we are in a world of explicit market manipulation. The world’s central banks crossed the line in the sand at the depths of the Global Financial Crisis, and unsurprisingly, haven’t turned back. Their finger prints are all over markets, when it matters. They’ve outright manipulated bond markets along the way, with no apologies. With that, given the clear evidence of trouble that arises when the benchmark U.S. 10-year yield has crossed the 4% threshold, in this recent tightening cycle, it’s reasonable to think that the major central banks in the world might want to coordinate to keep a lid on the 10-year yield. Who would be the logical buyer of Treasuries (therefore applying downward pressure on yields)? For that answer, let’s revisit an excerpt from my April 28th note oflast year, just after the Fed started its rate hiking campaign. How do you prevent a global economic shock that may (likely) come from reversing the mass liquidity deluge of the past two years (if not 14 years, post Global Financial Crisis)? You keep the liquidity pumping from a part of the world that has a long-term structural deflation problem, and that has the biggest government debt load in the world (exception, only Venezuela). The Bank of Japan, in this position, can be buyers of foreign government debt (namely the U.S.) to keep our market rates in check (keeps the world relatively stable), which gives the Fed breathing room on the rate hiking path. And Japan’s benefit? The world gives Japan the greenlight to devalue the yen, inflate away debt and increase export competitiveness (through a weaker currency). They hit the reset button on an unsustainable, debt-laden economy.” With the above in mind, which country has bucked the trend of the global rate hiking cycle? Japan. Despite experiencing four decade high inflation, they have continued to print yen, and buy assets (domestic and global). And you can see the devaluation in the yen since the Fed started hiking last year. And you can see the devaluation in the yen since the Fed started hiking last year.
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