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A lot of bad news has been ignored by Wall Street on the assumption that the Fed will ‘pivot” and begin lowering interest rates this year. The market is annualizing three and six-month inflation, which is generating a lower inflation number than by comparing the last twelve months. For example, the Fed’s preferred inflation measure, the “core PCE” still shows annual inflation at 3.2%, while the six-month measure is now at 1.9%. This is leading many market participants to expect a significant amount of easing from the Fed. In fact, the futures market is expecting the Fed cut its short-term interest rates by 1.7% between now and the end of the year. Based on recen...

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The stock market has been pricing in the possibility of the Fed cutting interest rates – a Fed “pivot “, which, presumably, could drive higher stock valuations. However, the bond market is clearly pricing in a serious economic recession ahead. Signs that unemployment has hit bottom, and is now rising, have begun appearing in recent economic data, which, historically (since 1948) spells trouble for stocks, particularly in the first three months of rising unemployment. Here is the most recent chart for US job openings from the St. Louis Fed:


temp-post-image


When businesses cut job openings, layoffs often coincide. Another leading indicator of unemployment, temporary help services, have been d...

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2022 was a year that focused on inflation’s potential impact on financial markets and asset prices. It was twice as bad as the global financial crisis in 2008; nearly $40 trillion in stock and bond value disappeared.


2023 will be a year in which the second-round effects of that inflation and subsequent rate hikes actually materialize.


This will come at a time when central banks around the world are raising interest rates to slow their economies to tame inflation, and shrinking their balance sheets from having over-stimulated economic activity for the past 14 years. The global money printing press stopped in 2022; we should now expect growth and inflation to fall.


To fight inflation, the U...

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The inflation problem is now well-known to everyone, but the larger looming problem is credit and currency risk, as well as a contracting economy. US government debt now stands at $31 trillion, while global debt is at $360 trillion. While these numbers may seem grotesque, they are the result of a global borrowing spree for over a decade with zero interest rates. Now that central banks are aggressively raising rates, how will that debt get serviced?


There was a near collapse in the British bond market last week. The new Prime Minister, Liz Truss, decided to propose sweeping tax cuts for the wealthy at a time when UK debt is soaring, interest rates are rising sharply, there is a treacherous ene...

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The first quarter was impacted by a hawkish Federal Reserve, a war in Ukraine, global supply shocks causing rampant inflation, and global risks intensifying.


The Federal Reserve’s tightening cycle is now fully underway, with the futures market predicting as many as 5 more rate hikes this year following a one-quarter point rake hike on March 15th. The Fed is tightening monetary conditions into a U.S. slowdown, which is quite the contrary of what happened between 2016 and 2018.


Furthermore, the Fed announced an end to their “quantitative easing” program, which means that they will be draining $95 billion of assets from their balance sheet every month starting in May and reachin...

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With the end of fiscal stimulus in 2022 and the Fed transitioning away from an extraordinarily accommodative stance, there is a risk that recent inflationary impulses will be short-lived.

Despite the volatility seen in January, many remain positive on the stock market, citing a robust economy and earnings growth. However, there are a few recent indications which give cause for reflection.

Last week, the New York manufacturing survey slipped into contraction. Consumer sentiment has fallen to its second lowest level in 10 years, with three-quarters of consumers ranking inflation, rather than unemployment, the most serious problem facing the nation. Core retail sales have been unexpectedly trendi...
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The growth outlook for the fourth quarter is opaque, because there is no way to determine when supply chain disruptions will begin to unwind. A reluctant recognition of higher inflation by the Federal Reserve is developing, as supply chain bottlenecks are holding up inflation longer than previously thought. There are currently 72 container ships off the port of Los Angeles which cannot deliver some 550,000 containers coming from Asia. This is due to a lack of investment in US ports over the past 10 years, as well as a shortage of qualified truckers, and may continue into 2022.. Consumers have been warned that Christmas shopping may be severely impaired by empty shelves this year.

Complicating...
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The predominant theme in the second quarter was inflationary pressure in the financial markets, and how this might impact the Federal Reserve’s policy decisions on interest rates. The inflation rate in May was 5% compared with a year earlier. Year-on Year price increases in almost all commodities have been very elevated, evidenced by the copper market (+51%), wheat (up 21%), US median home prices (up 23%), and oil (up over 50% this year).


The Federal Reserve believes that this inflation is transitory, and appears elevated due to the “look-back” effect, i.e., the fact that the basis of comparison was so low last March, April, and May.


In June, the Fed raised its expectations f...

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One year ago, GDP growth was expected to be 4.8%. Instead, it’s now projected for 2020 at -4%, the largest drop in modern history. Simultaneously, world stock markets increased in value from $80 trillion to $100 trillion even as S&P earnings per share dropped by 15% last year.

This strange stock market behavior can be explained by the sheer size of the stimulus thrown at the Covid-19 crisis. Essentially, the Fed threw $4.5 trillion at the $300 billion problem of lost Covid-19 wages. The enormity of this government stimulus overcame any economic downturn, uncertainty, or political tension. Another $1.9 trillion of stimulus was announced last week by president elect Biden. Two other facto...

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Investors wondering why the stock market continues to rise as we face the worst economic conditions since the Great Depression need only look at the Federal Reserve’s balance sheet, which has increased in size by $3 trillion since February.


That represents printed money which the Fed is using to purchase Treasury bonds, mortgage bonds, corporate bonds, and asset backed securities, which brings the total amount of printed money to $7 trillion. In doing so, they have driven bond yields down, which justifies a higher multiple for stocks.
This is currently the only reason for a rising stock market. Markets have become completely divorced from reality, and stocks in particular are ignoring th...

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