(…) Yes, inflation probably will retreat from near four-decade highs, as supply-chain snafus unwind and economic growth slows in response to interest-rate increases by the Federal Reserve. But it may prove stubbornly higher than the 1.5%-to-2% range that American consumers, businesses and investors grew accustomed to before the pandemic spike. (…)
Fed officials have hinted that they see lasting shifts ahead.
Chair Jerome Powell said last month that globalization has slowed down — and that if goes into reverse, “it would be a different world.” Richmond Fed chief Tom Barkin cited the potential for “more medium-term inflationary pressure” that the central bank will have to take into account as it strives to hit its 2% target. (…)
Deglobalization
Before last year’s pandemic-driven surge, US consumer prices for goods (not counting food and energy) were basically unchanged since China entered the World Trade Organization some 20 years earlier. What inflation there was largely came from services, where prices were rising at an annual rate of about 2.7% over the period. (…)
If waning globalization means that goods prices are now set to rise by 1% to 2% a year, as Moody’s Analytics chief economist Mark Zandi expects, then service-price inflation will have to come down if the Fed wants to meet its 2% target.
Import prices ex-oil (YoY)
MoM
Labor
In the period encompassing the collapse of the Soviet bloc and China’s arrival in the WTO, more than three-quarters of a billion low-paid workers joined the labor force of the globalized economy. (…)
China’s labor force has peaked, after expanding by 10% from 2000 to 2020, according to the World Bank. There’s no comparable pool of untapped workers out there. (…)
In part due to Covid-19, population growth last year was the slowest since the nation was founded in 1776. And the ongoing retirement of the baby boom generation, coupled with tighter curbs on immigration, is limiting the number of Americans available for companies to hire -– which could push up wages for those who are. Unit labor costs posted their largest annual increase since 1982 in the first quarter of this year. (…)
This log chart shows the ongoing slowdown in the growth of the U.S. labor force over time and cycles:
BTW: tracking all tech startup layoffs since COVID-19 https://layoffs.fyi/
The New York Times reported that 55 tech companies have announced plans to cut staff or shut down entirely this year, compared to 25 such casualties at this time in 2021. In a similar vein, the number of individuals and groups looking to dump their shares in startups doubled in the first quarter on a sequential basis, reports Phil Haslett, founder of pre-IPO marketplace EquityZen.
Greener world
The BlackRock Investment Institute estimates consumer prices could rise by as much as 4% a decade from now if the transition costs [to net zero policies] are fully passed on to households.
“You’re going to have to retrofit your factories. You’re going to have to swap out your equipment. That’s going to cost you,” said Dana Peterson, chief economist for the Conference Board. “And who’s going to pay for that? The customer.” (…)
The housing bust a dozen years ago drove some smaller home-builders out of business, leading to a shortfall of supply that Zandi estimates is on the order of 1.5 million to 2 million homes –- and which will take years to clear.
“Given the shortages in the housing market, it’s going to be very difficult to get rents down,” Zandi said. “That’s going to be a persistent problem for the Fed.”
One thing that could help the Fed out of its inflation difficulties would be if the US economy can achieve faster productivity growth.
That would allow companies to meet higher costs for labor or materials without having to raise prices to maintain their profits. It’s what happened in the late 1990s as the internet took off, after a series of Fed rate increases kept inflation at bay.
There are some grounds for optimism. Business spending on equipment surged at an annualized pace above 15% last quarter, the fastest in over a year. Manpower’s Prising said he expects companies to forge ahead with a digital transformation turbocharged by the pandemic, which is enabling them to “do more with less” — pretty much the definition of higher productivity. (…)
Well, this may be just the pandemic, but productivity has ben flat in the last 6 quarters while unit labor costs are up 10%.
Here’s a longer term view illustrating the recent change in trend, not unlike the late 1960s:
Economists, including the Fed’s, keep getting surprised by inflation but keep the same objectives, only pushing them forward, like if 2.0-2.5% inflation is a given.
Economists kept expecting US inflation to subside. So far, it hasn’t
Financial markets, heavily dominated by the Federal Reserve, are having seconds thoughts, slowly, gradually…
Slowdown in Canada’s Housing Sector Shows Risk of Higher Rates The Bank of Canada’s efforts to curb inflation threaten to end the country’s real-estate boom, which has been a strong driver of its economy.
(…) Sales in Toronto, Canada’s largest urban area, fell 27% in April from the prior month, and 41.2% from the same period a year ago. Over the past 10 years, home sales across the Toronto area have increased by an average of 8% between March and April, which marks the start of the busy spring house-hunting season, according to data compiled by Realosophy, a Toronto real-estate brokerage.
The average price for a residence in Toronto declined 3.5% in April from March to 1.25 million Canadian dollars, or the equivalent of $961,000. That remains 15% higher than a year ago, although the annual gain for April marks a slowdown from March’s 18.5% advance and February’s 27% jump. The share of Toronto-area homes that sold above the original asking price fell in April to 69%, down from a peak of over 80% as of February.
A similar picture has emerged in Vancouver. Home sales in April fell about 25% from the previous month, and 34% from the same year-ago month. Steve Saretsky, a Vancouver real-estate agent, told clients in a monthly note that house prices, mostly in suburbs, are beginning to slide, and he expects declines to become more pronounced later this year. (…)
Mortgage rates, which lenders set based on long-term bond yields, have surged from roughly 1.5% in the fall to over 4% this month, or a 12-year high. (…)
BTW, sales in the Montreal area also dropped in April, by 17%.
Rising Food Prices Roil Developing World Soaring food prices are triggering shortages and protests across the developing world as disruption from the Ukraine war adds to existing strains on global supplies of grains, meat and other foodstuffs.
Industrial output unexpectedly fell 2.9% in April from a year ago, while retail sales contracted 11.1% in the period, weaker than a projected 6.6% drop. The unemployment rate climbed to 6.1% and the youth jobless rate hit a record [18.2%]. (…)
Monday’s data suggests gross domestic product declined 0.68% in April from a year ago, the first contraction since February 2020, according to estimates from Bloomberg Economics. Growth could weaken to below 2% in the second quarter, according to UBS Group AG, while S&P Global Ratings predicted it could be as low as 0.5%. Citigroup Inc. economists downgraded their full-year growth forecast for 2022 to 4.2% from 5.1%. (…)
The National Bureau of Statistics said the Covid outbreaks had a “big impact” on the economy in April, but the effects are likely to be short-lived. “With progress in Covid controls and policies to stabilize the economy taking effect, the economy is likely to recover gradually,” it said, adding that it doesn’t expect GDP to contract in the second quarter.
Fixed-asset investment remained a bright spot, increasing 6.8% in the first four months of the year, likely supported by the government’s push to expand infrastructure spending. However, the figure didn’t stack up against monthly data showing a plunge in manufacturing and materials used in construction — cement output was down 18.9% in April; production of crude steel and steel products both dropped more than 5%; the production of cars plunged 44%; and total manufacturing output dropped 4.6%.
Electricity generation fell 4.3% in April from a year ago, as power demand from factory floors to steel mills and shopping malls waned amid the virus restrictions. (…)
Investment in property development fell 2.7% in the first four months of the year, while the value of homes sales dropped 32%, the data showed. (…)
From ZeroHedge:
If that wasn’t bad enough, here’s some even uglier data which confirms that the biggest driver of household wealth in China – housing – remains in a state of shock:
- Home sales value -32.2% ytd y/y to 3.32 tln yuan
- Home sales area falls 25.4% ytd y/y to 337m sqm
- Property sales value -29.5% ytd y/y to 3.78 tln yuan
- Property sales area falls 20.9% ytd y/y to 398m sqm
- New property construction falls 26.3% ytd y/y to 397m sqm
China lowered the mortgage rate for first-time homebuyers and announced a phased reopening of shops in Shanghai, taking steps to bolster growth before figures due Monday that will illustrate the economic toll of the country’s strict Covid lockdowns.
The central bank on Sunday cut the lower-bound range of mortgage interest rates to 4.4% from 4.6%, one of China’s most significant nationwide efforts yet to boost the ailing housing market.
Goldman explains:
The effective cut could be bigger than 20bps. According to Beike, the average effective mortgage rate for first-home buyers in major cities was 5.2% as of April (the floor first-home mortgage rate is 30bps/30bps/55bps higher than the 5-year LPR for Shanghai, Shenzhen and Beijing, respectively, for example). Should such nationwide announcement encourage most cities to set first-home mortgage rates closer to the floor, this announcement could imply a mortgage rate cut for first-home buyers as big as 0.8pp (from 5.2% effective rate now, to 4.4%, which is the new floor after this announcement). The actual cut could be smaller than 0.8pp as top-tier cities might see better sentiment in their property market than lower-tier cities and thus set their mortgage rate floor higher than the nationwide floor.
GS also expects cities to relax and “fine-tune” their definition for first-home buyers…
In our view, this also sends a loud and clear signal that policymakers are pushing for property policy easing with concrete measures. In recent years under the guidance of “avoiding using property as short-term stimulus”, policymakers have seldom announced nationwide property policy adjustments and have mostly relied on local policy adjustments. The previous two rounds of nationwide high-profile property policy easing were in 2014 and 2008.
All looks like panic mode as
(…) home sales continued to fall across major cities at the beginning of this month, dropping by a third in 23 major cities in the first week of May compared to the same period last year. That was on top of combined sales by the top 100 developers halving in the first four months of the year.
In April, PBOC officials said that banks in more than 100 cities had already cut mortgage rates by 20 to 60 basis points since March.
EARNINGS WATCH
Nothing much this week except these tables:
458 S&P 500 companies have reported. We are missing 20 consumer centric and 14 IT companies.
BLACK, RED HOLES, ALL AT ONCE
We can now see what, by definition, is invisible! Black holes are now detected through their interaction with other stars thanks to their strong gravity.
Many investors are currently experiencing gravity, seeing with their own eyes what was invisible, even unthinkable, and discovering their own black holes.
- Black holes that put you in deep red
In the past six weeks, $1 trillion in cryptocurrency value has evaporated—yes, trillion. Since there was nothing of economic value driving up crypto prices, only mass delusion, there hasn’t been much to cushion their descent. It’s as if a giant bellows has been blowing hot air into bitcoin and others, and it suddenly stopped working. Fanboys yelling “store of value” and “fiat hedge” can’t seem to explain why bitcoin is falling as inflation rages. (Andy Kessler, WSJ)
BTC
ARKK
BABA
A mid-March swoon in shares of portfolio cornerstone Alibaba Group Holding Ltd. to $73 from $138 in early January left SoftBank “insanely close” to triggering a $6 billion margin loan secured by the position, one insider told the Financial Times (Alibaba shares currently change hands at $88).
Subsequent price moves haven’t exactly been kind, however; the Nasdaq 100 has lost an additional 17% since the end of the fiscal first quarter, pushing the average decline among publicly traded companies within the Vision Fund portfolio to 62% from their IPO prices. The torrents of red ink through March 31 “could pale in comparison to the current implosion in the value of its listed holdings”, Amir Anvarzadeh, Japanese market strategist at Asymmetric Advisors, wrote yesterday. “We suspect SoftBank is having notable capital constraints that could only get worse should this market correction continue.”
SoftBank Group Corp. reported results that could be described as ghastly, featuring a ¥1.71 trillion ($13.2 billion) annual loss over the 12 months through March 31. The Vision Fund, the firm’s in-house venture capital arm, was the culprit, logging a cool ¥3.5 trillion shortfall over that stretch.
SoftBank needs to be “more careful when we invest new money,” Son said during the presentation. (Almost Daily Grant’s)
“More careful” Mr. Son? How about just “careful”?
(…) The S&P 500 is still about 14% above its 200-week moving average, a level that’s previously been a floor during all major bear markets, except for the tech bubble and the global financial crisis. (…)
For all the recent declines — the S&P 500 is down more than 13% from its high on March 29 — stress indicators also aren’t at levels seen during comparable slumps. Fewer than 30% of the benchmark’s members have hit a one-year low, compared with nearly 50% during the growth scare in 2018 and 82% during the global financial crisis in 2008. (…)
Although valuations of technology stocks have fallen sharply — the tech-heavy Nasdaq 100 now trades at about 20-times forward earnings, the lowest since April 2020 — some strategists expect them to remain under pressure from aggressive monetary tightening by central banks. (…)
Ed Yardeni has this 200-day m.a. chart:
IT stocks in the S&P 500 index are at 21.4x forward EPS per Ed Yardeni’s chart:
Yardeni’s Blue Angels implied value puts the sector at median valuation. We’ll soon see how that holds:
Valuation corrections can last a while:
@joefrancis505
My old friend Don Coxe calls this the “triple-waterfall”:
The so-called triple-waterfall crash is fuelled by optimism and faith on the way up, but the selloff, with small rallies, lasts years. “You have to destroy the belief system. There’s no case on record in a triple-waterfall when that asset class came back in a reasonable space of time.” Don wrote that in the late 1990s…
Morgan Stanley’s Mike Wilson:
The bottom line is that this bear market will not be over until either valuations fall to levels (14-15x) that discount the kind of earnings cuts we envision, or earnings estimates get cut. However, with valuations now more attractive, equity markets so oversold and rates potentially stabilizing below 3%, stocks appear to have begun another material bear market rally. After that, we remain confident that lower prices are still ahead. In S&P 500 terms we think that level is close to 3,400, which is where both valuation and technical support lie.
There comes a point where margin calls take over:
Every now and then you see various charts showing the level of margin debt or margin debt as a percentage of market cap etc, but I find — like many data sets — you need to transform it to get the real insights.
This chart shows the rate of change in the level of margin debt outstanding, or as I like to call it margin debt acceleration. The thing to watch for is outsized growth, and subsequent declines…
@topdowncharts
Andy Kessler again:
We need to see capitulation. That’s when those newbie investors who bought crypto and stocks via Robinhood or piled into Cathie Wood’s ARK Innovation exchange-traded fund, ARKK—and “held on for dear life” with “laser eyes” and “diamond hands,” to use some Reddit lingo—finally dump what they own and swear to the almighty Elon Musk never to buy crypto or stocks again. It’s coming. By the way, Robinhood stock is down 85% from its August peak; ARKK is down 74% from its February 2021 peak.
In Wall Street speak, it’s known as the puke. It’s the capitulation of people insistent on selling at any price. When they dump their mutual funds and ETFs and dogecoin at any price, when we see redemptions run amok, that’s when we’ll be near the bottom.
The correct word is “redemption” and Micheal Harnett at BofA is not seeing redemption in some key metrics:
- for every $100 inflows in the past few weeks, we have seen just $4 redemptions vs >$50 prior in prior bear markets.
- outflows thus far are only 0.2% of AUM vs 3-6% at prior lows.
Also happening when the Fed tightens:
@keyeventrisk
Powell has already done a Volcker
The great macro team at DB on their shadow rate and Powell’s actions”…our shadow fed funds rate currently stands near 2.3%, which is 2.8 percentage points higher than its level six months ago. This nearly three percentage point rise in our shadow rate over the past half year, which reflects not only the Fed’s tightening moves but also their balance sheet decisions and guidance about future policy, is the sharpest rise in this metric since the Volcker Fed in 1981“.
The investment bank basically argues that Fed has already gone a long way in positioning policy to the economic outlook. US financial conditions have tightened substantially in recent weeks…(not due to the 75 bps hikes only). (The Market Ear)
Goldman’s Blankfein Says US at ’Very, Very High Risk’ of Recession A recession is “not baked in the cake” and there’s a “narrow path” to avoid it, he said.
(…) Goldman’s economic team, led by Jan Hatzius, now expects U.S. gross domestic product to expand 2.4% this year, down from 2.6%. It reduced its 2023 estimate to 1.6% from 2.2%.
The report called this a “necessary growth slowdown” to help temper wage growth and reduce inflation back down toward the Fed’s 2% target. While the slowdown will push up unemployment, Goldman was optimistic a sharp rise in joblessness can be avoided. (…)
The red line is at 1.6%:
Warren Buffett Spends Big as Stock Market Sells Off Warren Buffett’s Berkshire Hathaway has used the recent markets slump as an opportunity to ramp up spending on stocks.
(…) The Omaha-based company bought 901,768 shares of Occidental Petroleum Corp. OXY 8.21% last week, according to a regulatory filing. The move likely makes Occidental, in which Berkshire began buying shares in late February, one of its 10 biggest holdings.
In the past few months, Berkshire has also boosted its stake in Chevron Corp. CVX 1.92% , placed a merger-arbitrage bet on Activision Blizzard Inc. ATVI 0.47% , bought an 11% stake in HP Inc. HPQ 2.62% and continued adding to its position in Apple Inc., its biggest stockholding.
Investors will get a look at what else Berkshire has been buying—as well as what it has been selling—when it files what is known as Form 13F with the Securities and Exchange Commission on Monday. (…)
Chevron shares are up 43% this year, while Occidental shares have gone up 121%. (…)
Hmmm…careful concluding what Mr. Buffett thinks and does at this time. Buying oil stocks is not seeing value in equities. Draw charts of CVX and OXY against oil prices, you will immediately see how correlated they are. They are bets on oil prices.
My favorite technical analysis firm says that we are still lacking confirmation or renewed demand from value investors needed for a bottom to form.
EDGE AND ODDS!!!
Source: Washington Post
Since the March FOMC, our US FCI has tightened by 80bp. As a result, we have downgraded our US 2022 Q4/Q4 growth forecast by roughly 0.5pp to 1¼% and now believe that the -1pp growth FCI impulse implied by the current level of financial conditions is roughly consistent with the Fed achieving a soft landing. While the March SEP shows 2022 (Q4/Q4) growth well above potential at 2.8%, it predates the recent FCI tightening. (…)
US holds first talks with Russian defence minister since Ukraine war began