The Market Radar


We anticipate monitor and comment on market-moving global economic and geopolitical issues.  No dark side brooding, no wanting the world to end, no political rants.  Traders, investors, policymakers, or market observers can’t afford to ignore us.  In one word, perspicacity.

An educated citizenry is a vital requisite for our survival as a free people– Thomas Jefferson

By seeking and blundering, we learn. – Johann Wolfgang von Goethe

I can calculate the motion of heavenly bodies,
but not the madness of people [markets]. – Isaac Newton

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S&P500 Key Levels

#CKStrong

S&P has some work to do. Today’s low a must hold. Today’s high at 4417.35 most likely taken out in the morning, a January close above the December low at 4495 usually a necessary condition for a positive year. Stay tuned.

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Summers And Krugman Debate Inflation

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This is good. Well worth your time and will determine your financial health.

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Friday’s Retail Sales Were Supply-Chain Positive

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There was a lot of hang wringing over Friday’s retail sales coming in softer than expected.

U.S. retail sales stumbled at the end of 2021, factory output weakened and consumer sentiment deteriorated at the start of the new year, illustrating a loss of traction for the economy that many analysts view as temporary.

Friday’s data deluge showed how lingering shipping challenges, supply and labor constraints, the fastest inflation in decades and the omicron variant are weighing on activity. – Bloomberg

Slowing Sales A Necessary Conditions To Fix Inflation And The Supply Chain

Au contraire, we use the differential of U.S. retail sales versus its pre-COVID trend as a good proxy of what is driving much of the problem in the global supply chains — that is, excess demand. Americans are buying too much stuff generating a massive traffic jam in supply logistics.

Take a look at the chart (last chart) below and see how out of whack retail sales are and how far above they are above its pre-COVID trend, which is, no doubt, inflationary and unsustainable.

We use the differential of current level of retail sales to its pre-COVID trend as a proxy of excess demand in global the economy. No doubt, there are real supply chain issues where factories close, say, due to sick workers from COVID, for example, but these are de minimis when compared to the massive gap between demand and supply, which is gummy up U.S. ports.

Bullwhip Effect

The volatility and unstable point-of-sale demand create havoc on the visibility of producers and upstream suppliers, who must forecast future demand. . Research indicates such high volatility in point-of-sale demand of, say, just five percent will be interpreted by supply chain participants as a change in demand of up to forty percent.

In such an environment, it is not uncommon for suppliers to panic, double and triple order, hoard, or attempt to secure some inputs in the underground market. In other words, hyperinflationary expectations and panic, to some extent, have taken over and swamped the supply chain.

Yes, folks, that is the type of behavior exhibited in hyperinflationary economies. I have lived it first hand.

To Produce Or Not To Produce

Moreover, producers have to decide if the demand they do see is real and sustainable and then determine whether to expand capacity accordingly to meet that excess demand.

Our priors are that producers’ perceptions are that much of the demand has been generated by the stymie money pumped into the economy over the past 19 months and is more or less temporary and the dominant expectation is that sales will eventually revert back to trend. Producers have been burned so many times in the past by misreading the spike in sales that were not sustainable and learned an expens lesson, getting stuffed with excess inventory and capacity.

Friday’s numbers confirmed, at least to us, that the initial stimulus is starting to wear off as the Fed prepares to reverse and begins to remove accommodation. Here’s to hoping they get the timing right.

No Pain-Free Way To Reduce Inflation

There is no pain-free way of ridding an economy of inflation. It’s difficult to measure how much the Fed needs to slam on the brakes, especially as the economy moves back to its natural trajectory without trillions of income support, all while it teeters over a fiscal cliff.

The Fiscal Cliff

Whatever, the case, the next year will be very interesting to watch how the economy and markets react to the Fed’s attempt to unwind its monetary experiment, which is unique and has never been attempted in a modern-day economy.

Finally, I think the pandemic will mark the point when economists stopped referring to supply curves, replacing the term with “supply chains,”which most macro analysts have very limited knowledge . About time.

Stay frosty, folks.

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The Best MLK Weekend Of All-Time

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We are reposting a repost of a post for the holiday and in honor of Dr. King, one of our greatest Americans, a true patriot, and a modern day saint.

Originally Posted on 

During my Lehman days as a bond strategist, the firm’s research group would do a January roadshow in many of America’s major cities to present our ideas to institutional investors.   One particular year, we were in Atlanta at the end of the week and scheduled for another “greatest show on earth” in Chicago the next Tuesday.

A Weekend In The Peachtree Hyatt

Rather than flying home to New York, I decided to stay over in Atlanta and migrate north on Monday evening.   It was MLK weekend and I wanted to attend services at the Ebenezer Baptist Church, where Martin Luther King, Jr. was baptized as a child and gave his first sermon. If my memory is correct, I believe his father also pastored the church.   His mother was shot and killed while she played the organ in that church in 1974.

Dr. King’s tomb is located just outside the side door of the church in the middle of a reflecting pool.

dr. king

Three Memories Of Ebenezer

I recall three of my main takeaways from that Sunday morning.

First,  I was maybe one of ten whites out of 600-700 people sitting in the pews.  Sadly, as Dr. King said almost 60 years ago.

I think it is one of the tragedies of our nation, one of the shameful tragedies, at 11 o’clock on Sunday morning is one of the most segregated hours, if not the most segregated hour in Christian America.  – MLK, Jr  Meet the Press, April 17, 1960

Nevertheless, I felt incredibly welcome and never — not for one nanosecond —  was conscious about such a silly thing as the difference of the color of my skin.  During the greeting time, the Ebenezers made me feel so welcome and a part of their family.

Second, not to contradict Dr. King, but I believe the service started at 9:30 AM and went to almost 1:00 PM!  Maybe it was a special MLK weekend service.  The pastors in the mostly white churches I have attended have trouble keeping the attention of the congregation for more than 20 minutes.

Third, the sermon was entirely different from those I had experienced in middle-class white churches.  Less doctrine, though similar theology, and more real life.  The struggles of raising children in poverty.  Grandparents raising their grandchildren. Troubles with children with drug addiction. The struggles of being black in white America, all of the life struggles which are just as ubiquitous in the white and all communities of color.  No pretense of being sinless and perfect, no holier than thou vibe, no judgment, no condemnation, no guilt, no shaming.  All love, compassion, kindness, and forgiveness.  Just like the real Jesus.

Also, the sharing of the same joys and blessings.  New babies, college graduates, marriages, medical recoveries, and others.

Daddy King” was referred to several times.

It truly echoed the genius and saintliness of Dr. King.

I walked away convinced the Church for the African-American community was much more — that is a considerable part of their life — than what I had experienced in white evangelical America.

Yes, maybe some of us attend more than just Sunday services, but many, such as yours truly, often do so with the dubious motive of seeking the blessings of personal peace and personal prosperity.  The community of the Church, as it for the African-Americans, though not always, is secondary.

The next day, Martin Luther King Jr Day, I spent across the street at the King Center.

More Empathy, Less “Being A Dick

What great memories from that unforgettable MLK weekend.

I grew up lower-middle class in the white suburbs of Los Angeles, attending an all-white high school.  Fortunately, I had a father, who was politically left of the salad fork (out of a rebellion,  I became a conservative in college),  and also spent my first 25 years playing sports, fighting in the baseball trenches with, pulling for, breaking bread, and downing brewskies with my teammates of color; or as I grew to learn colorless.

I am very thankful for those experiences.  It helped me integrate into and see the real greatness of America.

I feel sad for my many brothers and sisters who have not had the same privilege and are stuck still watching black and white television:  unable or unwilling to embrace and enjoy the tremendous diversity of this great country.

Ditto for the similar ignoramuses from other races and ethnic groups.

tv

I can’t imagine eating steak and potatoes every day and every night.

Ignorance And Racism Know No Boundaries

Let me finish by qualifying all of the above.

Racism is such a prominent feature of so many human societies that some evolutionary psychologists have concluded it is “natural” or “innate.”  We don’t know about that but are certain it is not just a “white thing”, a “black thing, or a “brown thing,” etc.

I have shared the story of my brother who was murdered by an undocumented worker, who stated, after stabbing him, “all anglos need to be exterminated.”   This sociopathic asshole killed my brother not because he was brown, or undocumented, but because he was one sick and crazy mother f$@ker.

Now, more than ever it is time to commit to expanding our menu.  Let’s make it a point to understand and enjoy the perspectives and various cultures of all the different races and ethnic groups.

Allegorically, and literally, let’s eat more balaedas, falafel, babaghanoush, borscht, moussaka, and bouilli, among others.  The steak and potatoes will taste sooo much better.

Sorry to end on a note that violates the spirit of Dr. King but I can’t help myself.

Any white man (probably less so for a white woman) who thinks he knows what it is like to be an African-American growing up and living in America, has his head…well…you know where.

head

Bring on the hate mail.

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The Nonfarm Payrolls Report In Four Charts – Part 1

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We have crunched a lot of data from Friday’s nonfarm payrolls report (NFP) and have made some fascinating observations to share with our readers. 

This is the first post in a series in which we go deep into the data to bring you our insights on the condition of  the U.S. labor market. The later posts will get more granular into the employment subsectors (see last table below)

#1 – Total Private Nonfarm Payrolls

We prefer the private sector data, which excludes 22 million government jobs, of which 64 percent are local government payrolls; state governments make up 23 percent. The federal government (x/ military) is 13 percent of total government payrolls. 

Government workers are, in general, shielded from market forces, and the Bureau of Labor Statistics (BLS) does not publish government wage data, at least not in the NFP report. 

The above chart illustrates that private sector payrolls remain 7.4 million or 5.5 percent below their pre-COVID trend. Recall that from February 2020 to April 2020, the private sector lost 21 million jobs when the lights were turned off in most of the world’s economies as the COVID pandemic ravaged the globe.

Government payrolls lost 1 million jobs and didn’t bottom until December 2020, most of which were local government jobs.

Most Unrecovered NFPs Are In Three Sectors

The above data show that 81.5 percent of all unrecovered NFPs are in three sectors: Leisure & Hospitality (L&H); Government (of which, 73 percent are local govenment jobs), and  Education & Health Services (EHS). 

The L&H and EHS sectors alone make up 75 percent of all private sector unrecovered NFPs. 

Readers should make the distinction between the number of NFPs below trend and jobs lost during the initial labor market crash during 2020, which is the context of the data above. 

#2 – Nominal Average Hourly Earnings (AHE)

The chart below surely illustrates, at least to us, wage inflation, which make price increases sustainable, is undoubtedly not transitory.  It appears wage growth is actually accelerating. 

The December AHE is now $2.15 or 8.8 percent above its pre-COVID trend. 

We asked in a post last August,

What is the Fed thinking?

… It’s clear the labor supply curve has shifted left.

Isn’t that evident with 32.2 percent of the unrecovered jobs in the leisure and hospitality sector, yet no workers can be found? Moreover, 62.2 percent of unrecovered jobs are in three sectors: leisure and hospitality, government, and education and healthcare. None for no lack for demand.  – GMM, Aug 21

We warned that the Fed was repeating the same mistake of the mid-1970s, trying to monetize a supply shock with massive and ongoing stimulus.   

We were also early in our inflation call in or Feburary 9th post, Ready For 4 Percent CPI By Mid-Year?

We also posted that it wouldn’t surprise us to see inflation print at 5 percent in 2021, and we were beaten down like red headed stepchild. I can say that because of my reddish hair.. 

#3 Money Illusion

Money illusion is an economic theory positing that people have a tendency to view their wealth and income in nominal dollar terms rather than in real terms. In other words, it is assumed that people do not take into account the level of inflation in an economy, wrongly believing that a dollar is worth the same as it was the prior year.  – Investopedia

We hear a lot of money illusion these days, with the noise and praise that wages are rising rapidly. 

In some sectors, we are happy that wages are rising more than in others.  However, rising wages without a corresponding increase in productivity is the gas that fuels inflation.  This is evident in the following chart, which juxtaposes nominal against real AHE.   

Notice that nominal AHE have been up 37.7 percent since January 2011 versus the 8.8 percent increase in real AHE. 

We have deflated nominal AHE by the CPI index rebased to January 2011.  

#4 Real Average Hourly Earnings

Our real AHE chart is very enlightening.  

First, it illustrates how volatile real wages are compared to nominal. 

Second, the real AHE is only $.32 or 1.5% above its pre-COVID trend.

Finally, if the CPI monthly prints come in at an average of 0.4 percent (4.9 percent annualized) and real AHE stays flat for production and nonsupervisory, the real macro wage will be back to trend by this May.  Both components, nominal and CPI, won’t follow this trajectory, but we use the scenario for illustrious purposes to show how absurd money illusion is. 

If the CPI print on Wednesday comes in hotter than the 0.6 percent increase in December’s AHE, the real macro wage will decline.

Upshot

Most, or 82 percent of the unrecovered NFPs are in three sectors:  L&H,  Government, and EHS. 

Inflation hurts workers. 

Money illusion is rampant.

Wages increases without a corresponding increase in productivity or the inability of producers to pass on rising input costs, which pressures profit margins, is inflationary. 

The following table is an appetizer of our next post, which we hope will be published tomorrow depending on doctors’ orders. 

Notice a pattern, anyone?

Stay frosty, folks.

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Tweet Of The Day: Pity The Penguins

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The first published account of penguins comes from Antonio Pigafetta, who was aboard Ferdinand Magellan’s first circumnavigation of the globe in 1520. They spotted the animals near what was probably Punta Tombo in Argentina. (He called them “strange geese.”) – Mental Floss

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Cheerleading: The Most Dangerous College Sport?

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Who would have thunk it? The most dangerous women’s high school and college sport!

Much of the focus is on cheerleading’s physical toll. It is the most dangerous sport for female college athletes, accounting for 71% of serious injuries, disabilities and fatalities. – The Economist 

Approximately 66% of all catastrophic injuries in either high school or college female athletes occur due to cheerleading accidents. Cheerleading has resulted in one death per year, on average, from 1991 to 2015. – Very Well Fit

George W. Bush: The 43rd President of the United States was not only a member of Delta Kappa Epsilon, Skull and Bones, and the rugby team in college; he was also a cheerleader at Yale University.
Ronald Reagan: Our 40th President was a cheerleader at Eureka College in Illinois as well as a member of the football team and captain of the swim team.
Franklin D. Roosevelt: The 32nd President of the United States, was a cheerleader while at Harvard College in 1900 through 1903. Later he developed acute symptoms of Polio in 1921 at the age of 39.

Source:  Varsity.com

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Are Stocks Having An Efficient Markets Moment?

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The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all information and consistent alpha generation is impossible.  – Investopedia

Carol K., who is slowly emerging from a coma, has taught me many things.  One major lesson is that investing is not about predicting the future but a process.  And if you get it wrong, don’t get angry but adapt to the new market conditions, get on your horse and get back to even and beyond.  

The last two days really feel like stocks are having an efficient markets moment. That is a more hawkish Fed is being priced and markets are now concerned about their lofty valuations. 

We have resurrected GMM’s S&P Key Levels table, which illustrate what we believe are the most signifcant short-term levels to monitor. 

Note the S&P500 bounced off its 50-day at 4672 today, now a big support level.  A key fibo at 4622, and 4495 (-4.28 percent), the December low, is the one level we are watching closely.  To the upside is 4818 and 4796.56, the all-time high and closing high, set just two trading sessions ago 

A Wiley E. Coyote Moment?

Will the current sell-off morph into a Wiley E. Coyote moment and drive stocks over a cliff allowing them to fall to fair value, which, for most, is much lower?  We seriously doubt it until the Fed begins to remove lots of the stimulus and tighten monetary conditions.  Remember ”three steps and a stumble?” 

We will qualify our postion with an “unless a Black Swan event emerges.”  Given all the hype, a crypto crash may not qualify as a Black Swan but certainly a Grey Rhino, which could do some major damage.   

We suspect it will take much more than three steps for the Fed to shatter glass.  

We have no idea where the market is headed tomorrow but shorts should beware.  There is just too much liquidity and wealth in the global economy.  Earnings for Q4 are going to come in very hot. Moreover, stocks seem the place to be with the new inflation regime and extremely low and negative real interest rates.   

It’s extremely difficult to submerge a beach ball and hold it underwater for any significant time.

To go lower on sustained basis, we suspect the Fed will have to drain a lot of liquidity and destroy mucho wealth before they are done. 

Asset Inflation And Price Inflation Are “Cousins”

Volcker recognized that when he was fighting inflation, he was actually fighting two kinds: asset inflation and price inflation. He called them “cousins,” and acknowledged that they had been created by the Fed. – Politico

The following illustrates the model I believe represents the current (and many years past) market environment.  Love that simplicity and parsamony.

As always, we reserve the right to be wrong. 

Stay frosty, folks. 

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Jan 6th – The Day “Good People…Morphed Into Terrorists”

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DAWN BANCROFT, a 59-year-old gym owner from Pennsylvania, travelled to the national capital a year ago this week to hear Donald Trump speak, not to commit terrorism. Yet as she marched up Constitution Avenue, with the former president’s instruction to “fight like hell” ringing in her ears, Ms Bancroft apparently mislaid her moral compass.

Forcing a way through the mob outside the Capitol building, she and her friend Diana came to a shattered window and clambered through it. “We got inside, we did our part,” Ms Bancroft later explained in a video message to her children. “We were looking for Nancy to shoot her in the friggin’ brain. But we didn’t find her.”

After hearing the women plead guilty to a misdemeanour last September, Judge Emmet Sullivan wondered “how good people who never got into trouble with the law morphed into terrorists”. 

… Most made no effort to hide their identities. A Texan estate agent plugged her company while live-streaming the attack; an Ohioan kicked in a window of the Capitol wearing a jacket bearing the name and phone number of his decorating firm. The riot, as the biggest prosecutorial effort in American history has already made clear, was the logical expression of Mr Trump’s big lie, proudly carried out by 2,000 of his devoted supporters. To repudiate the violence, Republicans had no alternative but to repudiate the lie. Having failed to do so, they are instead normalising it. – The Economist

How Close Is The US To Civil War? Closer Than You Think

Wow!  The data say the U.S. no longer qualifies as a democracy.  Check out the video. 

 

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Joseph And The Amazing Technicolor BMW

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Simply amazing.   Who would have thunk it just a few years back?

Thinking linearly in our nonlinear reality, which is getting more nonlinear by the day as we suspect we are at the elbow of the technological curve, can be hazardous to your forecasting.  Prepare to be amazed, a lot more!  

BMW Group wants to let you change the color of your car with the touch of a button.

On Jan. 5, it debuted a concept vehicle called the BMW iX Flow, which uses electrophoretic technology to change colors from black to white or combine black and white in a kaleidoscope of graphics across the surface of its body. The iX Flow is based on the electric iX SUV that BMW debuted in 2021. – Bloomberg

See here for context of the post title,  Joseph and the Amazing Technicolor Dreamcoat.

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