The Morning Call---Mastering 'how high for how long' will be a lot more difficult stopping the advance of inflation

 

The Morning Call

 

12/14/22

 

The Market

         

    Technical

 

            Tuesday in the charts.

            https://www.zerohedge.com/markets/soft-cpi-sparks-chaos-ahead-fomc-bonds-bitcoin-bullion-bid-stocks-skid

 

Note: the S&P spiked at the open on the CPI print.  It then blew through its 200 DMA and touched the upper boundary of its short term downtrend; but gave most of it back.  Before drawing too firm a technical opinion, we need to get through the FOMC meeting and its closing narrative.  That said, yesterday’s pin action can hardly be termed positive.

 

    Fundamental

 

       Headlines

 

              The Economy

 

                        US

 

Weekly mortgage applications rose 3.2% while purchase applications were up 4.0%.

 

                        International

 

                          September EU industrial production fell 2.0% versus projections of -1.5%.

 

October Japanese machinery orders were up 5.4% versus estimates of +2.6%; October industrial production fell 3.2% versus -2.6%; Q4 large company capex spending was up 19.2% versus +23.0%; the small manufacturers index was -2 versus -6; the large nonmanufacturers index was 19 versus 17.

 

November UK CPI was up 0.4% versus expectations of +0.6%; core CPI was +0.3% versus +0.5%.

 

                        Other

 

            The Fed

 

Yesterday’s CPI number likely marks the end of the ‘peak inflation’ debate.  That we know that the worst level inflation has been reached is clearly a plus.  But given the Fed’s aggressive rate hiking, there was strong reason to believe that would occur likely sooner than later.  Unfortunately, that was the easy part.  Now the Fed has to face the ‘how high for how long’ decision which will be a lot more difficult.  I linked to an article yesterday that there was a growing consensus that the Fed would negotiate a ‘soft landing’. i.e., bring inflation back to the 2% level with only a mild recession.  History says that is the epitome of wishful thinking.  And the Fed’s recent handling of ‘transitory’ inflation only reinforces the point.  My bottom line being that the economy/stock market is not out of the woods and patience is not out of style.  Here is more discussion:

 

              The debate over how high for how long.

              https://www.wsj.com/articles/powell-federal-reserve-interest-rates-inflation-11670859520?mod=economy_lead_pos1

 

              Part two.

              https://www.capitalspectator.com/how-long-and-how-far-will-the-fed-lift-interest-rates/

 

              Goldman’s reaction.

              https://www.zerohedge.com/markets/goldman-says-no-longer-clear-if-fed-will-hike-50bps-february-doves-counter-after-tomorrow

 

                          Lance Roberts reaction.

              https://www.zerohedge.com/markets/fed-broke-something-part-2-bonds-best-2023-powell-pivots

 

              Winter is coming.

              https://www.zerohedge.com/markets/foghorn-blowing-few-heed-its-warning

 

            Fiscal Policy

 

This is the abstract from a paper by Greg Mankiw entitled ‘Government debt and capital accumulation in an era of low interest rates’.  The conclusion fits right in with that of the Rogoff and Reinhart study showing that high national debt slows economic growth:

 

ABSTRACT This essay discusses the reasons for and implications of the decline in real interest rates around the world over the past several decades. It suggests that the decline in interest rates is largely explicable from trends in saving, growth, and markups. In this environment, greater government debt is likely not problematic from a budgetary standpoint. But a Ponzi-like scheme of perpetual debt rollover might fail, and such a failure would make a bad state of the world even worse. In addition, even if a perpetual debt rollover succeeds, the increased debt could still crowd out capital, reducing labor productivity, real wages, and consumption.  The entire study is here:

https://www.brookings.edu/wp-content/uploads/2022/03/16265-BPEA-Sp22_Mankiw_WEB.pdf

 

            Recession

 

              Recession probability up to 1 in 6.

              https://politicalcalculations.blogspot.com/2022/12/recession-probability-ratchets-up-to.html#.Y5jGw3bMKUk

 

    Bottom line

           

            The latest from Morgan Stanley.

            https://www.zerohedge.com/markets/ignore-cpi-and-fomc-why-michael-wilson-sees-bloodbath-ahead-rerun-2008

 

            Avoiding envy.

            https://alhambrapartners.com/2022/12/12/weekly-market-pulse-envy/

 

    News on Stocks in Our Portfolios

 

 

 

What I am reading today

 

           

 

 

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The Morning Call--Now we have confirmation of peak inflation

 

The Morning Call

 

12/13/22

 

The Market

         

    Technical

 

            Monday in the charts.

            https://www.zerohedge.com/markets/stocks-panic-bid-ahead-cpi-bitcoin-bonds-bullion-dumped

 

Note: the S&P bounced nicely off of its 100 DMA.  Resistance exists at its 200 DMA (~4035)---a level that it has been unable to breach since April.  How it handles this DMA should tell us a lot about the underlying strength of the Market.  If you are thinking about buying stocks, I wouldn’t do anything until that issue is resolved.

 

            Time to buy gold?

            https://allstarcharts.com/things-are-getting-real/

 

    Fundamental

 

       Headlines

 

              The Economy

 

                        US

 

Month to date retail chain store sales grew slightly faster than in the prior week.

 

The November small business optimism index came in at 91.9 versus forecasts of 90.4.

                       

November CPI was up 0.1% versus expectations of +0.3%; core CPI was +0.2% versus +0.3%.

                          https://www.zerohedge.com/personal-finance/headline-cpi-cools-more-expected-real-wages-continued-tumble

 

                        International

 

October YoY UK average earnings were up 6.1% versus estimates of +6.2%; the November unemployment rate of 3.7%, in line.

 

November German CPI declined 0.5%, in line.

 

The December EU economic sentiment index was reported at -23.6 versus predictions of -25.7; the December German economic sentiment index was -23.3 versus -26.4.

 

                        Other

 

            The Fed

 

              The argument for a quick ‘pivot’.

              https://www.cato.org/blog/why-fed-further-inverting-yield-curve-4

 

              The interest rate paths of the US and EU are about to diverge.

              https://www.wsj.com/articles/interest-rate-paths-for-u-s-europe-set-to-diverge-11670645497?mod=economy_lead_pos1

 

Investors are increasingly confident that the Fed will pull off a ‘soft landing’.  And it might.  But it will be the first time in history that it has ever done so.  So, to bet on a ‘soft landing’ defies the odds.  Which is not to say that it won’t happen.  But even if it does, what kind of earnings growth should one expect with (1) a national debt that far exceeds GDP and (2) a Fed balance sheet that sooner or later has to be downsized?  And what kind of multiple do you put on that likely sub-par growth?

              https://www.wsj.com/articles/investors-grow-more-confident-fed-will-pull-off-a-soft-landing-11670704543?mod=hp_lead_pos7

                         

                          This author disagrees with the ‘soft landing’ scenario.

              https://www.zerohedge.com/markets/your-second-last-chance-get-it-wrong-2022

 

     Bottom line

 

            For the bulls.

            https://www.advisorperspectives.com/commentaries/2022/12/12/what-history-tells-us-about-buying-in-a-recession

 

            Counterpoint.

            https://www.advisorperspectives.com/commentaries/2022/12/12/the-bull-case-has-two-problems

 

            The outlook for bonds is improving.

            https://www.nytimes.com/2022/12/09/business/bond-market-economy-investing.html

 

    News on Stocks in Our Portfolios

 

Oracle press release (NYSE:ORCL): Q2 Non-GAAP EPS of $1.21 beats by $0.04.

Revenue of $12.28B (+18.5% Y/Y) beats by $260M.

 

Oracle (NYSE:ORCL) declares $0.32/share quarterly dividend, in line with previous.

 

What I am reading today

 

           

 

 

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Monday (evening) Morning Chartology---My internet has been out all day

 

The Morning Call

 

12/12/22

 

 

The Market

         

    Technical

 

The S&P fought with its 100 DMA all week.  The good news is that remains above it; the bad news is that it does so just barely.  The pin action suggests that I more attention to support rather than resistance levels; the former being (1) the 100 DMA [~3930]  and (2) the 38.2% Fibonacci retracement level [3817].

 

Stay patient.

 

 

 

 

 

The long bond had another good week, resetting its 100 DMA from resistance to support and voiding its very short term downtrend.  That strengthens its upward momentum and sets it up for an assault on its 200 DMA.  That said, last week’s data argues against much further upside,i.e., upbeat economic numbers and a PPI that came in above expectations.

 

 

 

Talk about hugging a trend line. GLD spent the week advancing at the same rate as the uptrend off the lower boundary of its long term uptrend.  I view that as a plus.  In addition, it is a short hair away from a challenge of its 200 DMA---a reset of which would really alter gold’s momentum and as I noted last week leave little resistance until it hits the upper boundary of its intermediate term uptrend.

 

Little new: The bad news is that UUP (1) voided its very short term up trend and (2) reset its 100 DMA from support to resistance.  The good news is that it remains (1) above its 200 DMA [and holding above it as it did last week is a bonus], (2) within short, intermediate and long term uptrends and has  (3) made three huge gap down opens which need to be filled.  So, while the strong upward momentum in the dollar has clearly been broken, I don’t think that it is clear that it has made a trend reversal.

 

The dollar and stock prices.

https://allstarcharts.com/i-dont-know-i-really-dont/

 

 

 

            Friday in the charts.

            https://www.zerohedge.com/markets/bonds-stocks-black-gold-battered-week

 

            Sentiment remains bearish.

            https://www.bespokepremium.com/think-big-blog/sentiment-staves-off-lower-readings/C

 

Though some technicals are bullish.

https://www.yardeniquicktakes.com/technicals-remain-bullish/

 

    Fundamental

 

       Headlines

 

              The Economy

                         

                        Review last week

 

Last week the US stats were positive as were the primary indicators (two up, one negative).  The good news is that the economy continues to grow.  The bad news is that the aforementioned negative indicator was PPI which suggests a ‘tighter for longer’ Fed.  So, it still appears that the rest of the world is ahead of the US both in terms of inflation peaking and an economic slowdown.  Nonetheless, I continue to believe that inflation has indeed seen its high in the US---though clearly this latest PPI number calls that opinion into question.  

 

The counter argument.

https://scottgrannis.blogspot.com/2022/12/ppi-inflation-plunges.html

 

And a strong inflation number goes hand in hand with the lack of evidence that the US economy is slowing---the continuing upbeat data flow gives testament to that. 

 

However, this analyst sees signs of deceleration.

https://econbrowser.com/archives/2022/12/deceleration-through-12-3

 

All  of which begs the question, why is the Fed pursuing its current ‘fine tuning’ bulls**t narrative (instead of going balls to the wall in its inflation fight).  The answer, of course, is that monetary tightening precedes its impact on the economy by twelve to eighteen months; and hence, the Fed is worried about staying too tight for too long---its statements to the contrary notwithstanding. 

 

A recent survey of economists shows that they believe what the Fed says.

https://www.bloomberg.com/news/articles/2022-12-09/fed-s-peak-rates-for-longer-seen-dashing-hopes-for-2023-cuts?srnd=premium&sref=loFkkPMQ

 

And this indicator points to a 100% probability of a recession.

https://markets.businessinsider.com/news/stocks/powell-recession-warning-indicator-yield-curve-fed-rate-hike-datatrek-2022-12

 

On the other hand, the Fed never seemed to worry about staying too loose for too long which is a big part of the reason that we are in the mess we are in right now.

 

And as Jeffrey Snider points out, these guys aren’t sure how to measure monetary policy.

https://www.realclearmarkets.com/articles/2022/12/09/new_urgency_in_the_marketplace_lacks_meaning_to_monetary_officials_869290.html

 

The sad answer to this dilemma is that there is no easy way out, no positive outcome that ‘fine tuning’ monetary policy can accomplish.  The economy is too deep in the doo doo for all to end well.  Years of fiscal profligacy have left us with a debt to GDP ratio far in excess of the boundary marked by Rogoff and Reinhart as the level at which the servicing of too much debt negatively impacts the growth rate of the economy.  And years of irresponsible monetary expansion have led to the misallocation of resources and the mispricing of risk. 

 

Correcting those self-inflicted wounds won’t be determined by whether the Fed Funds rate is lifted by 50 or 75 basis points.  It will take years of fiscal and monetary restraint to do so.  And that would mean less fiscal stimulus and  interest rates staying higher for longer than many now expect. 

 

The question is, does our ruling class have the courage to do that?  As it currently exists, I believe that the answer is a resounding NO.  That means more years of below average economic growth and more of same ‘fine tuning’ bulls**t from the Fed, i.e.., staying too loose for too long then remaining too tight for too long.’  

 

                                                     Or taking the coward’s way out and raise the target from 2% to 4%.

                          https://www.zerohedge.com/markets/39-trillion-reasons-why-fed-will-raise-its-inflation-target

 

                        US

           

                        International

 

October UK GDP grew 0.5% versus expectations of +0.4%; the October trade balance was L-1.78 billion versus L-3.2 billion; October industrial production was flat, in line.

 

November YoY Japanese machine tool orders fell 7.8% versus estimates of +1.5%.

 

 

                        Other

               

                                  2023 housing forecast.

                          https://calculatedrisk.substack.com/p/2023-housing-forecasts

 

                                  Leading index for commercial real estate rises in November.

                          https://www.calculatedriskblog.com/2022/12/leading-index-for-commercial-real.html

               

                                  Q3 household net worth declines.

                          https://www.calculatedriskblog.com/2022/12/feds-flow-of-funds-household-net-worth.html

               

                The Fed

 

              Problems in the EU banking system.

              https://www.zerohedge.com/economics/eurozone-target2-economic-imbalances-soar-money-cant-be-paid-back

 

                  Is the Fed trying to kill the ‘Fed put’.

              https://www.zerohedge.com/markets/what-does-feds-jerome-powell-have-his-sleeve

 

      Bottom line

 

            The latest from BofA (must read).

            https://www.zerohedge.com/markets/hartnett-last-hike

 

            Lessons from the ‘nifty fifty’.

            https://www.advisorperspectives.com/commentaries/2022/12/09/lessons-from-the-nifty-fifty

 

            Top money managers see global stocks rising in 2023.

            https://www.bloomberg.com/news/articles/2022-12-09/world-s-money-managers-see-double-digit-stock-gains-in-2023?srnd=premium&sref=loFkkPMQ

 

    News on Stocks in Our Portfolios

 

 

What I am reading today

 

            US scientists make breakthrough in nuclear fusion.

            https://www.zerohedge.com/energy/net-energy-gain-us-scientists-makes-breakthrough-nuclear-fusion

 

            Scientists propose new faster means of interstellar space travel.

            https://www.vice.com/en/article/7k8ava/scientists-propose-new-faster-method-of-space-travel

 

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The Morning Call--The failure of our ruling class

 

The Morning Call

 

12/9/22

 

The Market

         

    Technical

 

            Thursday in the charts.

            https://www.zerohedge.com/markets/crude-crushed-jobs-data-signals-imminent-us-recession

 

            The latest from Goldman’s trading desk.

            https://www.zerohedge.com/markets/and-now-squeeze-goldman-prime-finds-surge-hedge-fund-shorting-past-7-days

 

            Watch the NASDAQ.

            https://www.zerohedge.com/the-market-ear/pulse-pillar-market

 

            Stop losses.

            https://allstarcharts.com/stop-loss-stupid/

 

            The dollar appears to have stopped going down.

            https://www.zerohedge.com/the-market-ear/dollar-neutral-base-case

 

    Fundamental

 

       Headlines

 

              The Economy

 

                        US

 

                          Weekly initial jobless claims totaled 230,000, in line.

                          https://www.advisorperspectives.com/dshort/updates/2022/12/08/weekly-unemployment-claims-up-4k-as-forecast

 

                        International

 

Q3 Japanese GDP declined 0.2% versus forecasts of -0.3%; private consumption was up 0.1% versus +0.3%; capital expenditures rose 1.5%, in line.

 

November Chinese CPI was -0.2%, in line; November YoY PPI was -1.3% versus -1.4%.

 

                        Other

 

                          More optimism from Scott Grannis.

                          https://scottgrannis.blogspot.com/2022/12/about-that-yield-curve-inversion.html

 

                          Dethroning the dollar will be much harder than many suppose.

                          https://www.nakedcapitalism.com/2022/12/dethroning-the-dollar-why-the-alternatives-are-not-ready-for-prime-time.html

 

                          Results of December macroeconomists survey.

                          https://econbrowser.com/archives/2022/12/igm-ft-december-survey-of-macroeconomists-fed-policy-and-impending-recession

 

                          November rail carloads down slightly.

                          https://www.calculatedriskblog.com/2022/12/aar-november-rail-carloads-down.html

 

            Inflation

 

              The inflation trend chartbook.

              https://www.capitalspectator.com/introducing-the-us-inflation-trend-chartbook/#more-19269

 

              Don’t expect big declines in rents.

              https://www.zerohedge.com/personal-finance/ignore-pundits-dont-expect-big-declines-price-rent

 

            Recession

 

              A housing recession has already started.

              https://thehill.com/policy/finance/housing/3764226-economists-a-us-housing-recession-has-already-arrived/

 

            Fiscal Policy

 

              Another failure of the ruling class.

              https://www.realclearmarkets.com/articles/2022/12/08/the_future_of_prosperity_the_new_can-do_868933.html

 

I post a lot of articles critical of the Fed and the federal government---and that criticism is well deserved, in my opinion.  That said, I have long maintained that the measures taken following the 2008/2009 financial crisis strengthened our financial system, lowering the odds of another.  This article spells it out.

https://www.bloomberg.com/news/articles/2022-12-08/us-federal-reserve-s-inflation-fight-spurs-crypto-tech-housing-market-drops?srnd=premium&sref=loFkkPMQ

 

    Bottom line

 

            Emerging debt is sliding into distress.

            https://www.bloomberg.com/news/features/2022-12-08/emerging-economies-have-a-high-default-risk-in-2023?srnd=premium&sref=loFkkPMQ

 

    News on Stocks in Our Portfolios

 

Altria (NYSE:MO) declares $0.94/share quarterly dividend, in line with previous.

 

What I am reading today

 

            On the need for CDC reform.

            https://marginalrevolution.com/marginalrevolution/2022/12/from-the-comments-on-cdc-reform.html

 

            Only in America; land of the free absurd.

            https://www.zerohedge.com/political/transgender-activists-attack-feminists-protesting-men-womens-prisons

 

 

 

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