Month: September 2022

N.Y. Fed’s Survey of Consumer Expectations (SCE)

• Median expected monthly overall spending growth over the next twelve months declined from 5.4 percent in April to 4.4 percent in August. The decrease was broad-based across age, education, and income groups.
• The median expected growth in non-essential spending also declined, from 2.5 percent in April to 1.8 percent in August, its lowest reading since December 2020.

If we assume that most non-essential spending, for most people, are durable goods, CPI-Durables was up 7.8% in August. Among non-essential services, airfares were up 33.4% and recreation services 4.2%.

But Goldman Sachs is not too concerned about the American consumer. Their train-of-thought:

• Because consumer spending accounts for 68% of total GDP, maintaining a below-potential growth pace likely requires that consumption growth also remains soft.

• Nominal wage growth will likely remain fairly high—we forecast an annualized pace of 4¼% between now and end-2023—because the labor market remains severely imbalanced. At the same time, we expect that headline PCE inflation will moderate to a 2.7% annualized pace over this horizon, implying very positive real wage growth.

• Real income growth has historically been the main driver of real spending growth, and we see several reasons—including positive real wage growth, continued job gains, cost of living adjustments to government transfer programs, and a normalization in the effective tax rate—why real income growth will likely be fairly strong through the end of next year. After incorporating these factors into our real income growth forecast, we expect roughly 3½% real income growth in 2023 on a Q4/Q4 basis, with positive real income growth for all income quintiles.

It looks like GS first establishes its forecast for headline inflation (2.7% vs 7.8% now), then estimates nominal income growth, then subtracts its forecast inflation to derive real income growth of 3.5%, which should sustain spending growth at a level last seen in 2005 when headline inflation accelerated from 1.7% to 4.7% in 19 months.

The analysis concludes with this:

Strong real income growth suggests upside risk to real consumption growth next year, and raises the possibility that the Fed will need to hike more than we are currently expecting to keep GDP growth below potential. This is one reason why we could imagine the hiking cycle extending into 2023.

Interestingly, the analysis never raises the possibility that the initial inflation forecast may prove too low, in which case real income and spending growth would prove too high.

Looks like this analysis is trapped in a chicken-and-egg loop. But make no mistake, slower growth (demand) is a pre-requisite for slowflation.

BTW, when has the U.S. experienced a 5% drop in inflation within 16 months in the last 70 years?

• In 2008-09.
• In 1980-81.
• In 1974-75

I lived them all, and it was no fun!

U.S. Home Builder Index Falls in September

The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo declined 6.1% during September (-39.5% y/y) to 46, remaining the lowest level since May 2020. The index is down 48.9% from its November 2020 high of 90. A reading of 48 had been expected in the INFORMA Global Markets survey.

All three HMI components continued to decline this month. The index of present sales conditions fell 5.3% (-34.1% y/y) to 54, the eighth decline in nine months. It followed two months of double-digit decline. The level was 43.8% below the record-high of 96 in November 2020. The index of expected sales over the next six months weakened 2.1% (-43.2% y/y) to 46, down for the fifth consecutive month. It stood at the lowest level since May 2020. The index measuring traffic of prospective buyers weakened 3.1% (-49.2% y/y) to 31, the sixth consecutive monthly decline this year.

Movement amongst the regional index readings was mixed this month. The index for the West weakened 19.0% (-57.5% y/y) to 34, the lowest level since April 2020. It was the fifth straight month of double-digit decline. In the South, the index weakened 5.5% (-35.0% y/y), off for the fifth straight month. The index for the Midwest held steady (-39.1% y/y) at 42 in September after falling sharply in both of the prior two months. The index for the Northeast also held steady (-28.4% y/y) at 48.0, its lowest level since June 2020. The regional series begin in December 2004.

Bloomberg’s Joe Weisenthal yesterday:

Michael McDonough, chief economist for financial products at Bloomberg, has helped publish charts that show how much a typical new homebuyer, who gets a 30-year fixed mortgage, with a 20% downpayment can expect to make in monthly payments.

The writing is in the chart.

• Another jumbo rate hike—this time from the Riksbank, which surprised with 100 basis points, suggesting Jerome Powell & Co. might raise by that magnitude tomorrow. The Fed announcement kicks off more than a dozen central bank decisions between Wednesday and Thursday, including from the UK, Japan and Brazil. (Bloomberg)

Ford Warns Parts Shortages, Higher Costs Expected to Affect Earnings The car maker predicts it would have about 40,000 to 45,000 unfinished vehicles in inventory at the end of the quarter, a number that is higher than expected.

Ford Motor Co. F 1.43%▲ on Monday warned third-quarter earnings would be affected by about $1 billion in higher-than-anticipated supplier costs and parts shortages that have led to unfinished vehicles it couldn’t sell during the period.

The Dearborn, Mich., auto maker reaffirmed its year-end guidance for 2022, projecting adjusted operating results for the third quarter would fall between $1.4 billion and $1.7 billion.

Ford said it expects to have about 40,000 to 45,000 vehicles in inventory at the end of the quarter that are awaiting parts and can’t be delivered to dealerships—a figure that is higher than expected. Those vehicles, many of them higher-margin trucks and SUVs, are expected to be completed and sold in the fourth quarter, the company said.

Additionally, based on recent negotiations with suppliers, Ford said it is paying more for parts and materials to account for the effects of inflation. The higher payments added about $1 billion in unexpected costs in the third quarter, the company said. Ford said in July it was facing inflationary pressures that would affect a range of costs, totaling about $3 billion for the year.

Ford has previously guided to adjusted earnings before interest and taxes of between $11.5 billion and $12.5 billion for full year 2022. (…)

Ford has raised sticker prices on some popular models, such as the electric Mustang Mach-E SUV and F-150 Lightning truck.

Ford’s earnings have been helped by buyers willing to pay record prices for new vehicles because of limited car and truck availability. In the second quarter, the auto maker’s net income rose nearly 19% over the same-year period.

Energy and Mining Are Making the Stock Market Look Too Good Investors should beware of their favorite valuation tools

Soaring profits at oil companies and miners are making earnings look better than the reality of the rest of the stock market, and distorting Wall Street’s favorite valuation tool, the ratio of price to forecast earnings.

Strip out the energy sector and the expected rise in earnings for the S&P 500 this year drops from 8% to just over 1%, according to data from Refinitiv’s IBES. Strip out miners and other commodity players, too, and earnings for the rest of the market are now expected to fall this year.

The same goes for valuations: The S&P 500 is priced at 18 times this year’s expected earnings—hardly a bargain but at least cheaper than the 22 times that prevailed at the start of the year. Take out energy and commodities stocks, though, and the valuation jumps back up to 20 times this year’s EPS, according to Citigroup data—suggesting even less hope for those searching for cheap American stocks. (…)

The energy sector trades at just 8 times expected earnings for the next 12 months, and Marathon Oil at just six times. (…)

The ever useful Ed Yardeni has the chart:

As I wrote yesterday:

Some S&P 500 data at Friday’s close FYI:

• median P/E: 18.7 x trailing EPS
• the 6 largest stocks by weight (21.4% of the index) have an average P/E of 50.2
• those 6 companies are expected to report EPS up 10.0% on average in Q3. Ex TSLA: -1.2%
• 37% of the companies have a P/E below 15.0
• 16% are below 10x
• 28% of companies had declining EPS YoY in Q2. 39% currently expected in Q3.
• 18% of companies saw EPS drop more than 10% in Q2. 24% currently expected in Q3.

FYI:

Orders scarce for Citrix LBO debt sale in sign of weak credit market

• The shakeout in digital currencies has whittled the cohort’s aggregate valuation to $930 billion by Coinmarketcap.com’s count, compared to $2.87 trillion just ten months ago. (Almost Daily Grant’s)

Somebody, somewhere, must big hurting big time!

EU Seeks New Powers Over Supply Chains During Emergencies Proposal from Brussels could compel companies to share information and give priority to certain orders

(…) Officials said the instrument is intended in part to improve tracking of potential supply-chain issues before a crisis unfolds. Measures that could require companies to share information or give priority to orders would only come into effect during a so-called emergency phase, they said, where shortages of certain items could have ripple effects throughout the broader European economy. (…)

Critics of the EU proposal said the plan gives too much power to Brussels and could interfere with companies’ existing contracts. Germany’s trade group for the mechanical engineering industry, the VDMA, said last week that telling companies which orders they should give priority to during an emergency risks damaging those companies’ competitiveness. (…)

The commission said it would take into account cases where giving priority to an order might create liabilities for a company whose contracts are governed by the laws of a country outside the EU. It said companies would have an opportunity to explain to the commission why they can’t comply with a request to give priority to certain orders. (…)

The proposal calls for the commission to set up an advisory group that could provide advice during normal times on measures to prevent or deal with a potential future supply disruption. In a so-called vigilance mode, where officials believe there is a threat of a major disruption to the supply of goods or services that are strategically important, the commission could ask member states to stockpile certain goods. (…)

Biden’s Vow to Defend Taiwan Makes US Policy Shift Explicit

Three times as president, Joe Biden has said the US would defend Taiwan if China invades the island, and each time his staff argued he wasn’t changing longstanding US policy to keep Beijing guessing about US intentions. His fourth time makes that much harder to do.

In comments to “60 Minutes” on Sunday, Biden left no doubt where he stood, saying the US would commit military forces in the event of an “unprecedented attack” by China. Pressed if that would involve US men and women — unlike in Ukraine, where Biden has ruled out sending American forces — he said “yes.”

A spokeswoman again insisted that policy toward the island hadn’t changed. But with the US stance toward China hardening more broadly, it was difficult to see Biden’s comments as anything other than a refutation of decades of so-called “strategic ambiguity” in which the US declined to make its intentions clear. (…)

Even more jarring was that Biden went further. He said decisions about independence are up to Taiwan. Historically, US policy has been not to support Taiwanese independence.

Knowing they have US military backing, Taiwan’s leaders could move closer to independence — an explicit red line for Beijing to invade. Countries in the region will likely bridle, wary of the possibility of a war on their doorstep. And US allies like Japan or South Korea will almost certainly be made more uneasy knowing that US bases on their soil would be involved in any conflict — a fact that risks pulling them into a war as well.

“Such comments will do more to feed Beijing’s sense of urgency than they will bolster deterrence,”  said Jessica Chen Weiss, professor of China and Asia-Pacific Studies at Cornell University. (…)

Either way, China views the White House statements and congressional action like Nancy Pelosi’s trip to Taiwan — the first by a US house speaker in 25 years — as a shift in the status quo that requires a stronger response from Beijing. Over the past few months, Chinese officials have accused the US of incremental “salami-slicing tactics” to cross Beijing’s red line over Taiwan and vowed to take action as necessary.

Chinese Foreign Minister Wang Yi told former US Secretary of State Henry Kissinger in a meeting Monday in New York that issues related to Taiwan should be properly managed, according to a statement on the ministry’s website.

“Better lose a thousand troops than an inch of land,” Wang said in the meeting, using an old Chinese saying.

Taiwan has avoided any moves toward formal independence that could provoke a Chinese invasion, with President Tsai Ing-wen saying last month the island wants to maintain the status quo in the strait. She has previously said Taiwan doesn’t need to declare independence, because the island is already a de facto state. (…)

Last week, the Senate Foreign Relations Committee voted to approve legislation that would pledge more support for Taiwan. And a succession of US lawmakers have taken advantage of the attention to visit Taiwan, infuriating Beijing. (…)

There’s growing consensus among White House officials that Chinese President Xi Jinping’s views on Taiwan will only harden after the 20th Party Congress this year and that he could be more willing to forcibly unify the island with the mainland, people familiar with the internal deliberations said. While the administration has privately stressed that Taiwan is not part of the bilateral relationship with Beijing, officials in Washington know that China has a different opinion on the matter. (…)

Republican Senator Mitt Romney, meanwhile, noted the White House walked back Biden’s comment yet again.

“I think that’s the right posture — strategic ambiguity — and I think we’re wise not to be provocative,” he said. (…)

Henry Kissinger in his latest book, Leadership, published in April 2022:

Removing urgency from the issue that had long thwarted negotiations between the two countries at the [1972 Nixon-Mao] summit made possible a statement expressing what has remained the governing principle of US–China relations for the fifty years since: ‘The United States acknowledges that all Chinese on either side of the Taiwan Strait maintain there is but one China and that Taiwan is a part of China. The United States Government does not challenge that position.’

Following a formal proposal by Nixon at the summit, this language was added to what is now called the Shanghai Communiqué, which was issued at the end of his visit.

Neither Nixon nor I invented this language; instead, we drew it from a statement drafted during the Eisenhower administration in preparation for negotiations with Beijing that never happened. The statement had the virtue of accurately rendering the stated objectives of both Taipei and Beijing. Abandoning US support of a ‘Two China’ solution, the communiqué remained equivocal regarding which China would accomplish the postulated wishes of the Chinese people.

After a few days, Zhou accepted our formulation. Its ambiguity freed both sides to conduct a policy of strategic cooperation that would tip the international equilibrium away from the Soviet Union. The statement implied that Taiwan would be treated as autonomous for the foreseeable future. Both sides would affirm the One China principle, while the US would stop short of offering statements or actions implying a Two China outcome, and neither side would seek to impose its preference.

The US insistence on a peaceful solution was explicitly stated in the American section of the communiqué. Two additional communiqués agreed during the Carter and Reagan administrations expanded upon these understandings. Together, they have remained the basis of relations across the Taiwan Strait. Were either side to challenge them, the risks of military confrontation would mount significantly.

• The US-China War Over Taiwan May Already Be Lost President Joe Biden says the US would defend the island, but its military isn’t ready.
• Ukraine War Shows the US Military Isn’t Ready for War With China Providing Kyiv with weapons has depleted the Pentagon’s munitions alarmingly, and defending Taiwan would be far more costly.

BEYOND MEET!

Beyond Meat COO Doug Ramsey was arrested over the weekend on allegations he bit a man’s nose during an altercation after a college football game in Arkansas. He was released Sunday on an $11,085 bond, court records show. (Bloomberg)

The Global Race to Hike Rates Tilts Economies Toward Recession The Fed looks willing to tip the US into a slump if that’s what’s needed to beat inflation. Other central banks are ready to make the same gamble

(…) About 90 central banks have raised interest rates this year, and half of them have hiked by at least 75 basis points in one shot. Many did so more than once (…).

The result is the broadest tightening of monetary policy for 15 years — a decisive departure from the cheap-money era ushered in by the 2008 financial crisis, which many economists and investors had come to view as the new normal. The current quarter will see the biggest rate hikes by major central banks since 1980, according to JPMorgan Chase & Co., and it won’t stop there. (…)

As they slam on the brakes, policymakers are starting to lace their language with gloom in a public acknowledgement that the higher they raise rates to quell inflation, the bigger the risk they harm growth and employment. (…)

Analysts at BlackRock Inc. reckon that bringing inflation back to the Fed’s 2% goal would mean a deep recession and 3 million more unemployed, and hitting the ECB’s target would require an even bigger contraction. (…)

But their overriding focus now is to avoid repeating the mistake of the 1970s, when their predecessors prematurely loosened credit in response to slowing economies without first getting inflation under control. (…)

Dartmouth College professor David Blanchflower, a former BOE policymaker, accuses US central bankers of “groupthink” and charges that they’re on a path to hammer a weakening economy to combat inflation that’s already dissipating. (…)

Central banks all over the world are pushing in the same direction, and that heightens the danger, says Maurice Obstfeld, a former chief economist at the International Monetary Fund.

“They risk reinforcing each other’s policy impacts,” says Obstfeld, who’s now a senior fellow at the Peterson Institute for International Economics. They’re also effectively engaging in competitive appreciation of their currencies and, in the process, exporting inflation abroad, he says. (…)

Adam Tooze piles on and also explains the global race:

The tightening of monetary policy is compounded by a similar shift in fiscal policy. This attracts far less headline space than interest rates, but it too is unprecedented. The share of countries that are tightening their fiscal stance is greater today than it was during the global austerity drive after 2010, or in the heyday of the Washington consensus in the 1990s. (…)

Source: World Bank

The dramatic surge in interest rates around the world is mutually conditioning. Notionally, in a world of relatively flexible exchange rates, countries ought to have a degree of freedom in relation to US policy. But this underestimates the force of the global dollar cycle. Once the Fed starts hiking, others have little option but to follow suit or face severe currency devaluation, which, by raising import prices, will stoke further inflation. And though we think of the world economy as being one of flexible exchange rates, in fact, many currencies, from the Bahamas to Hong Kong, are pegged more or less explicitly to the dollar. As Shang-Jin Wei, former chief economist at the Asian Development Bank points out:

For the 66 smaller economies that peg their currencies to the US dollar – especially those without significant capital controls, like Hong Kong, Panama, and Saudi Arabia – local interest rates tend to rise automatically whenever the US raises its interest rate, even when higher rates are harmful to their economic prospects.

Though there is interdependence of central bank decision-making, what we have not seen so far is any effort at explicit coordination. The lack of coordination is a problem because if interest rate decisions are taken in isolation from each other this may well lead to an excessive tightening. As Shang-Jin Wei explains:

an interest-rate hike by any major central bank has the effect of exporting inflation to other countries, forcing other central banks to raise interest rates more than they otherwise would have done. For example, when the Fed raises its interest rate, if the BOE and the ECB do not respond, the pound and the euro would depreciate against the US dollar, leading to higher import prices and adding to the already high inflation. If the BOE and ECB respond by further raising their interest rates, they export a bit of extra inflation back to the United States and to other economies. The result is an interest-rate spiral that is more damaging to world output and employment than these countries may wish to see collectively.

As former IMF chief economist Maurice Obstfeld explains in a post for the Peterson Institute once we allow for interaction between economies, the effect ought to be to moderate interest rate increases rather than to amplify them. Obstfeld’s arguments runs by way of slack in goods markets and not exchange rates. A central bank that raises interest rates hopes to slow its economy down and raise the level of slack. In a globalized world that has effects not just at home.

The proliferation of global value chains and global trade integration, reflecting a big increase in the share of international trade due to intermediate products, makes it plausible that foreign slack could lower import prices with knock-on effects for inflation. If so, inflation could depend more on foreign and less on domestic slack, attenuating the Phillips relationship between domestic inflation and purely domestic slack. If we accept the hypothesis that global slack matters for domestic inflation, then in current circumstances, it suggests that each central bank should be less rather than more zealous in raising interest rates. The reason is that central banks abroad, through their own inflation-fighting efforts, are also helping to dampen inflation at home. If central banks do not take into account that spillover in calibrating their own needs for higher interest rates, they will each overdo monetary tightening.

The sharp reaction in oil prices already suggests the power of this effect. As energy markets digest the growing probability of a global recession and oil prices plunge, that will have an immediate effect on imported inflation in many economies around the world. With falling global energy prices, central banks have less need to take radical action to stop the inflation. (…)

It is encouraging against this backdrop that there are notable exceptions to the contractionary tend. The Bank of Japan is holding the line on yield curve control and allowing the yen to depreciate against the dollar. In light of Japan’s decades long struggle with deflation, the BoJ is happy to accept the inflationary pressure that the devaluation generates.

The Peoples Bank of China is also bucking the trend. Indeed, last week it actually cut rates. But that just goes to show how serious are the worries about China’s economy. It faces not only a dramatic slowdown in growth. The PBoC is also deeply concerned about financial stability. The deliberate bursting of the property bubble threatens to bring the whole house down.

In 2015 the last time the Chinese economy was in serious trouble, the Fed deferred the interest rate hike planned for September 2015 until 2016. Even if talk of a deal between the Fed and the PBoC – the so-called “Shanghai Accord” – exaggerates the degree of cooperation, the Fed was quite explicit in arguing that it did not need to tighten in September 2015 because the deterioration in global financial market conditions triggered by the crisis in China was doing the work of tightening for it.

What are the options today? As MauriIn Obstfeld remarks:

In principle, central banks could avoid excessive monetary tightening without explicit coordination simply by accurate forecasting of each other’s policy moves and their global effects (The 2015 scenario, AT). Just stating this computational problem, however, illustrates how difficult it might be compared with proactive direct consultation, which at the very least would provide more transparent guidance. Moreover, joint action by central banks coupled with clear public communication could usefully moderate inflationary expectations globally. Central banks have coordinated to good effect during financial crises that raised deflationary threats, but the current inflationary conjuncture equally merits such an approach. … Now is the time for monetary policymakers to put their heads up and look around. They should take into account how the forceful actions of other central banks are likely to reduce the global inflationary forces they jointly face. … If central banks collectively pursue a gentler tightening path, however, at the same time communicating their coordinated intentions clearly to the public, they will avoid excessive sacrifices of output and employment beyond what is needed to bring inflation down.

After all the speculative talk about possible alternatives to the US currency with which 2022 began, we now face a serious test of how the actually existing dollar system works. Explicit coordination in interest rate setting is perhaps a tall order. But, if an uncoordinated surge in interest rates, driven by the Fed’s determination to control US inflation leads to a global recession, it will raise real questions about the system’s functionality. (…)

The fact of the matter is that this inflation spike is unlike others which were mainly demand driven. This one is mainly supply driven, requiring a larger decline in demand than before, which may require much more tightening than before. We are in “unknown unknowns” territory.

FREIGHT DEFLATION

Cass Inferred Freight Rates fell 4.4% m/m (-3.2% SA) in August. Lower fuel prices were a factor in the decline, but with looser truckload market conditions, further deceleration is very likely. With the tight supply/demand balance in U.S. trucking markets easing considerably this year, industry rates are topping out and set to slow sharply in the months to come. While shippers aren’t seeing any real savings yet, such relief is now highly probable for 2023, which is welcome news for the broader inflation picture.

During the active hurricane seasons of both 2020 and 2021 (June 1- November 30), the ACT Research composite of DAT spot rates, ex-fuel, rose 8% and 4%, respectively, into Labor Day. This year, spot rates fell about 6%, ex-fuel, amid the calmest hurricane season since 2013. (…) The shipment rebound is, so far, not enough to outweigh the 4%-5% growth rates in the driver and Class 8 tractor populations presently.

Moreover, the looser market balance we see in U.S. freight markets is consistent with the easing happening in global ocean spot markets, where rates were 56% below year-ago levels in early September.

U.S. Return-to-Office Rates Hit a Pandemic High Office use on average was 47.5% of early 2020 levels for workers in the office recently over five business days in 10 major metro areas.

Tycoon Running a Quarter of China’s Copper Trade Is on the Ropes He Jinbi’s empire is suffering a liquidity crisis, and the ripple effects may go global.

(…) the company handles a million tons a year — a quarter of China’s refined copper imports — making it the largest player in the most important global trade route for the metal, and a major trader on the London Metal Exchange.

(…) He admitted publicly last month that Maike had asked for help to resolve liquidity issues. (…) Some Chinese domestic traders have suspended new deals, while one of the company’s longest-standing lenders, ICBC Standard Bank Plc, was concerned enough that it moved some copper out of China that had been backing its lending to Maike. (…)

In recent weeks, Maike began experiencing difficulties paying for its copper purchases, and several international companies — including BHP Group and Chile’s Codelco — paused sales to Maike and diverted cargoes. (…)

But its trading activity has largely ground to a halt as other traders grow increasingly nervous about dealing with the company. And, in the wake of Maike’s troubles, some of the biggest banks in the sector are pulling back from financing metals in China more generally. (…)

China’s weak property market is more and more contagious…

China Steps Up Robotics Efforts as Workforce Shrinks China installed almost as many robots in its factories last year as the rest of the world, accelerating a rush to automate and consolidate its manufacturing dominance.

Shipments of industrial robots to China in 2021 rose 45% compared with the previous year to more than 243,000, according to new data viewed by The Wall Street Journal from the International Federation of Robotics, a robotics industry trade group.

China accounted for just under half of all installations of heavy-duty industrial robots last year, reinforcing the nation’s status as the No. 1 market for robot manufacturers worldwide. The IFR data shows China installed nearly twice as many new robots as did factories throughout the Americas and Europe. (…)

The world’s second-largest economy lags behind the U.S. and manufacturing powerhouses such as Japan, Germany and South Korea in the prevalence of robots on production lines. (…)

China is still the world’s factory floor, accounting for 29% of global manufacturing, according to U.N. data. (…)

The IFR data shows industrial-robot installations worldwide rose 27% in 2021 from 2020, to 486,800. Growth in shipments in 2020 was little changed compared with the previous year, as the pandemic dented investment.

The U.S. and other parts of the Americas added 49,400 robots in 2021, up 27% for the year, and installations in Europe rebounded 15% to 78,000. (…)

EARNINGS WATCH

Factset tells us that

In terms of estimate revisions for companies in the S&P 500, analysts have lowered earnings estimates for Q3 2022 by a larger margin compared to recent quarters and the 5-year average. On a per-share basis, estimated earnings for the third quarter have decreased by 5.5% since June 30. This is the largest decline in the quarterly EPS estimate for a quarter since Q2 2020. This decrease is also larger than the 5-year average of -2.3%.

That was before FedEx pre-announced and cancelled guidance last Thursday afternoon. FedEX CEO was as clear as Mr. Powell was at Jackson Hole:

The chief executive also said that the loss in volume is wide-reaching, and that the company has seen weekly declines since around its investor day in June.

“We’re seeing that volume decline in every segment around the world, and so you know, we’ve just started our second quarter,” he said. “The weekly numbers are not looking so good, so we just assume at this point that the economic conditions are not really good.”

“We are a reflection of everybody else’s business, especially the high-value economy in the world,” he later added.

Some pundits said FedEx is the canary in the coal mine. It is rather the elephant in the china shop (next charts done with Morningstar/CPMS data and software):

• The S&P 500 is primarily a “goods” index and FedEx delivers goods from and to everybody, everywhere. If the past relationship endures, we can expect S&P 500 EPS to decline below $190 (the red dot is Friday’s EPS consensus for FDX). Trailing EPS are now $220.45 and the 12-month forecast is $232.35. A typical recession sets EPS back ~15% ($187).

• Ned Davis’ global recession indicator is at a never-missed extreme level:

(Ned Davis via CMG Wealth)

• FDX P/E looked washed out last week at 7.8x trailing. But the denominator was too high. P/E has bounced to 10.3x after the 21% drubbing on Friday but the EPS consensus has yet to completely adjust. Same with the S&P 500 P/E, based on history.

• Price to Book: there are similarities with 1999-2000, no?

• Never look at P/Bk without also looking at ROE (return on book). Can S&P ROE stay up there while FDX’s drops ~7%?

Another question is can S&P 500 companies maintain such a high (insane) 22% ROE? The largest jumps in ROE since 2019 were in IT, Consumer Discretionary and Energy. Clearly pandemic and war related. Stein’s law: “If something cannot go on forever, it will stop.”

The current S&P 500 index book value is $986. Between 15% and 18% ROE = $150 – $177 EPS. A 7% decline in ROE = 15%.

Some S&P 500 data at Friday’s close FYI:

• median P/E: 18.7 x trailing EPS
• the 6 largest stocks by weight (21.4% of the index) have an average P/E of 50.2
• those 6 companies are expected to report EPS up 10.0% on average in Q3. Ex TSLA: -1.2%
• 37% of the companies have a P/E below 15.0
• 16% are below 10x
• 28% of companies had declining EPS YoY in Q2. 39% currently expected in Q3.
• 18% of companies saw EPS drop more than 10% in Q2. 24% currently expected in Q3.

@GameofTrades

@RealAlpineMacro

We might be set for big surprises:

(Goldman via The Market Ear)

Ed Yardeni has this chart on forward P/E by caps. Gravity is not size-dependent…

• And this one showing relative P/Es:

• Staring at these next 3 charts is quite interesting. Could prove rewarding, too. (Trendlines are mine). Note the log charts; so relative slopes = relative growth.

• Now go back to the relative P/E chart. Here’s one of the Russell 2000 index which, it’s important to know, includes several losing companies’ stocks, unlike the S&P 600. The R2000 is thus higher than it seems.

Not recommendations. Only FYI.

Xi and Modi ‘not standing with Putin’ over war in Ukraine, analysts say Modi told Putin that “today’s era is not an era of war”. The Russian leader told his counterpart: “We will do our best to stop this as soon as possible,” citing “concerns that you constantly express”. That came after Putin acknowledged Xi’s “concerns” about the war in public remarks at the event.

On “60 Minutes last night:

• Pelley: “[W]ould U.S. forces defend the island?”
• Biden: “Yes, if in fact there was an unprecedented attack.”
• Pelley: “So unlike Ukraine — to be clear, sir — U.S. forces, U.S. men and women would defend Taiwan in the event of a Chinese invasion?”
• Biden: “Yes.”

Ukraine War Shows the US Military Isn’t Ready for War With China Providing Kyiv with weapons has depleted the Pentagon’s munitions alarmingly, and defending Taiwan would be far more costly.

(…) The number of major US military contractors has fallen dramatically since the end of the Cold War, making it far harder for the Pentagon to scale up production quickly in a crisis.

There isn’t much spare capacity in this system, or in US manufacturing more broadly: America lacks even the basic building blocks, such as adequate machine tools and a trained labor force, that it would need for wartime mobilization. As Mark Cancian of the Center for Strategic and International Studies writes: “America’s defense industrial base is designed for peacetime efficiency, not mass wartime production, because maintaining unused capacity for mobilization is expensive.”

As a result, the US could find itself in a terrible position after just a few months — even just a few weeks — of fighting. It might struggle to replace the precision-guided, long-range munitions that would be crucial to striking Chinese ships in the waters around Taiwan without having to venture into the teeth of China’s anti-ship missiles and air-defense systems. The loss of large numbers of ships or planes might make it difficult to win a protracted war in the Western Pacific; even if Washington did prevail, those losses might leave the military crippled for years. (…)

Expanding production capacity is not a simple matter, especially when supply chains are snarled and key components are in short supply, in part because of the Covid pandemic. Yet at some level, the issue is ultimately one of money. (…)

Although Congress, for its part, has been willing to bump those budgets, inflation is eating away at the Defense Department’s buying power. And because the Biden administration has emphasized R&D and future capabilities in its early budgets, the loser has typically been procurement — buying capabilities that exist today. If the US waits any longer to get serious about rearming for a conflict that its own officials warn is coming, it will have waited far too long. (…)

• Pentagon Pushes Defense Companies to Limit Use of Chinese Supplies Finding China-made alloys in F-35 jets put U.S. officials on alert as they seek to limit vulnerabilities.

(…) The Pentagon has identified China’s rapidly expanding military as its main threat driving policy and, by extension, the Pentagon’s own spending. China’s defense budget has climbed 72% between 2012 and 2021, according to the Stockholm International Peace Research Institute.

That growth is helping to drive increased U.S. spending on high-end weaponry including long-range missiles and nuclear submarines, and Defense Department leaders have said the U.S. is losing its long-held technological advantage in key areas such as satellites and missiles. U.S. defense companies also expect additional military spending in the coming years, in part because of the arms shipped from Western countries to help Ukraine fight Russia’s invasion.

Relying on China for circuit boards or Russia for titanium makes no sense if sanctions or conflict cut off supplies, Pentagon leaders have said. The recent heightening of tensions over Taiwan has added to the unease. (…)

Pentagon officials said the Covid-19 pandemic exposed how fragile supply chains have become, even for high-end weapons, and the extent to which China remains the source for materials and components, including computer chips and rare-earth minerals used to make magnets and the chemicals used in explosives. (…)

Domestic U.S. production of many materials has declined, undercut by cheaper production overseas. The number of Chinese companies in the Pentagon’s supplier base rose more than fivefold to 655 between 2012 and 2019, according to a survey by consultant Govini, a unit of Poplicus Inc. (…)