Happy St. Patrick’s (Maweyn Succat) Day!

Blast From The Past (BFTP).

Originally Posted On 

Happy St. Patrick’s (Maweyn Succat) Day!

St. Patrick, Ireland, St. Patrick’s Day. Simple, right? The man wasn’t even Irish! He was actually born in Britain around the turn of the 4th century. At 16 years old, Irish raiders captured him in the midst of an attack on his family’s estate. The raiders then took him to Ireland and held him captive for six years. After escaping, he went back to England for religious training and was sent back to Ireland many years later as a missionary. St. Patrick was actually born Maewyn Succat, according to legend; he changed his name to Patricius, or Patrick, which derives from the Latin term for “father figure,” when he became a priest.  – Time

The Irish Comeback

Ireland has come a long way since this post, which was just after the European debt crisis.  The government just placed €1.03 billion of 10-year bonds in mid-February at a stunning yield of 0.85 percent.  The auction had a bid-to-cover of 2.24.

Yeah, got it, distorted due to ECB asset-buying program.  But still well below the Euro periphery bond yields.

Irealand

Though the Irish economy is slowing and there is much uncertainty around Brexit, still it’s been one helluva comeback,  and the Irish are a resilient bunch, now positioning themselves with U.S. and Canadian companies as the “only English-speaking common-law country in the whole of the European Union.”

Me “finks [sic]” part of the success was thumbing their nose and ignoring the advice and dictates of the Eurocrats in Brussels.

Plus, Ireland still has Bono and U2, Andrea and the rest of the Corrs, and the many, if not all the great people of Ireland, we love so much,  including my late grandmother and her side of the family.   That is the upside of being an American.  We are all mutts and can claim to be citizens of many cultures.  Don’t think POUTS has got the memo quite yet.

Rory

How great would be to see an Irishman win the PGA’s coveted Players Championship on St. Paddy’s Day?   Rory tees it up in today’s final round one back.

Getting long Rory as I write.  Pour me one in Dublin and Hollywood, CD in the wee hours tomorrow to celebrate!   You heard it here first.  Unleash the Leprechauns!

Rory

Source:  Golf Digest

Happy St. Patrick’s (Maweyn Succat) Day!

Originally Posted on 

In case you’re wondering,  Maweyn Succat was St. Patrick’s real name and he wasn’t even Irish!.   Click here for some great background and history of St. Patrick’s Day.

Go Paddy, Rory, Graeme, and Darren!

Happy St. Patrick’s Day!  Not too many green beers, folks!

By the way, there has been one huge bond rally in Ireland over the past year.

Posted in Bonds, General Interest, Picture of the Day, PIIGS | Tagged , , , , , , | 1 Comment

The Macro Factors Driving The Covid Economy In Two Charts

Here’s a couple of interesting and surprising charts, which explain what has been driving the COVID economy and why the U.S. economy is set up for monster growth over the next few quarters.

When the economy fully reopens, we suspect a consumer feeding frenzy in many of the services that have been closed or operating at a limited capacity.   We also expect these firms and businesses that have survived will have mucho pricing power given the massive stimulus that has been put into the economy and the forced savings thrust on those whose incomes have not been affected.

Moreover,  capacity in the service sector has been significantly reduced with many businesses forced to close (see chart below).

Personal Income (PI)

Personal income,  which consists mainly of wages and salaries, rental and investment income, and government transfer payments, such as the latest COVID stimulus payments, is growing at its fastest pace in nearly 40 years.   Some context, however, the 12 plus percent PI growth in the early 1980s took place with CPI inflation running at 10-15 percent year-on-year.

Wages and salaries have not been the driver of PI over the past year but the massive increase in transfer payments.  And “transfer payments” is really a misnomer as much of it has been monetized by the Fed’s digital printing press.

Clearly, this situation is not sustainable and it is uncertain what the economy will look like in the second half of 2022.

Shift In Personal Expenditures 

The following chart illustrates the unexpected shift in consumer expenditures from services, which made up around 70 percent of personal expenditures before the pandemic.  The reallocation of spending to durable goods is contributing to the supply chain difficulties and shortages in industries, such as semiconductors and global shipping.

Many firms, such as the auto industry, settled in for a typical recession after the economic lights were turned off last February, reduced inventories of materials and supplies , and were caught with their pants down when the demand came storming back a few months later.

Inflation:  Temporary or Permanent Acceleration?

Nobody really knows but if the market determines the monetization of transfer payments becomes a more permanent reality,  inflationary expectations will likely take off and the economy will experience a major regime shift from lowflation/disinflation to…..?

Posted in Disinflaton, Inflation/Deflation | Tagged , , | 18 Comments

Why This QE Is Different In One Chart

Robin Hood traders don’t bother reading.

The latest round of central bank balance sheet expansion, which will reaccelerate soon as Biden’s COVID bill is passed, needs some context.

By the way, we did some rough approximations late last night and found the Fed has taken down about 35 percent of the new issuance of Treasury notes and bonds since the end of 1Q20.  As the US Gs deficit exploded again, the Fed had to effectively monetize a big part to keep the Treasury adequately funded without a huge spike in interest rates.

Today’s ugly 7-year Treasury note auction may be a signal that percentage may rise unless rates are allowed to move much higher to entice buyers.

QEs of Christmas Past

Many believed that the last QEs should have led to inflation because the “money supply” would explode.  Too much money in the system leads to dishording the excess money balances and eventually finds itself in the market for goods and services.

First, the problem is defining money. Economists can’t even agree on what constitutes money.  We are hearing echoes of the debate over Bitcoin as a viable alternative currency.

Endogenous Money

There is also “endogenous money”  created by the financial system through the expansion of credit.   During QEs past, endogenous money was either shrinking or barely growing due to an impaired financial system and a banking sector in the process of healing from the Great Financial Crisis (GFC).

Endogenous money is an economy’s supply of money that is determined endogenously—that is, as a result of the interactions of other economic variables, rather than exogenously (autonomously) by an external authority such as a central bank. – Wikipedia

The Fed’s digital printing press was essentially offsetting the collapse in endogenous money as sort of a zero-sum game.  Much of Fed’s money often referred to as “high powered” money as it can be converted into a multiple of endogenous money was locked up at the FED as banks earned interest on the excess reserves.

The interest rate on excess reserves held at the Fed is now 10 bps.

Lot’s of high-powered money now in the system earning 10 bps.

Current Environment

The Fed deserves some kudos for not letting the financial system collapse during the early days of COVID but the risk of much higher inflation is now at hand.   There is just too much money created by the Fed and the credit markets chasing too few assets, goods, services, and, yes,  semiconductors.

Can the Fed continue to rescue the stock market in this environment?  Have they cornered themselves in?

We don’t know, nor does anyone else but a lot of people have put on mucho risk betting they will.

Stay tuned.

Posted in Monetary Policy | Tagged | 2 Comments

Global Fixed-Income Market

US Fixed Income Markets vs. Rest of World
The U.S. fixed income markets are the largest in the world, comprising 40.0% of the $114 trillion securities outstanding across the globe, or $46 trillion (as of 2Q20). This is 2.0x the next largest market, the EU. U.S. market share has averaged 38.6% over the last 10 years, troughing at 36.3% in 2011 and peaking at 40.9% in 2015. – sifma

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The Global Semiconductor Shortage

As the coronavirus crisis reshapes supply and demand, chip companies are scrambling. And if there’s an industry that can’t simply ramp up production in a hurry, or ask clients to do without their product for a while, or shift around parts of their manufacturing rapidly, it’s the chip industry.

Here’s a look at how chips became the “oil of the digital age” – and the geopolitical complications surrounding their supply. – DW News

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Republicans Attack Dogs

Couldn’t decide on the title of this post: Republicans Attack Dogs or Republican Attack Dogs?   Went with the former to mock the SOS from the GOP.  Same MO different President.

But now, the meanies at conservative media giant Newsmax have refused to throw man’s best friend a bone, attacking President Joe Biden’s dog, Champ, in a Friday segment. Host Greg Kelly felt the need to lift his leg and woof on the dog’s appearance, saying that Champ “looks a little rough,” and “needs a bath, a comb, and some loving care,” adding that he looks like he’s “from the junkyard.” – Deadline

Joe Cool is way too cool to take the bait and has bigger issues to worry about.

Does Mess With Fala

Not President Roosevelt however.  When Republicans messed with Fala, not only did FDR reel them in, he turned them into political dog chow.   No wonder #32 was elected to four consecutive terms.

Dogs Always Have The Last Laugh

The Party of Lincoln, which has morphed into the Party of QAnon, Ted Cruz, Matt Gaetz, and Jim Jordan should be careful who they are pissing on, lest they be…ya’ know…and it is coming.

A Man And His Dog

We leave you with this moving photo of a man and his dog, which really touched us at the time it was taken.

Dedicated to the one I love. 

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Ready For 4 Percent CPI By Mid-Year?

Starting to hear lots of talk about inflation these days, something we have been seeing in the pipeline for the past six months.

Input price inflation accelerated to a near-decade high in January. Costs increased to the greatest extent since April 2011, reflecting stronger rises in both the manufacturing and service sectors. This was partly passed on to clients in the form of higher charges, the main factor underlying the steepest rise in output prices for 27 months. – JPMo Global PMI, January

 

We’ve crunched a boatload of numbers over the past few days.  Sit back and enjoy.

What Deflation?

Since 1957, 888 monthly observations of the Consumer Price Index, there have only been 106 monthly negative prints and only 12 negative monthly prints on Core CPI (excluding food and energy).    Monthly year-on-year inflation has only printed 40 times on the main CPI and Core CPI has never printed a negative year-on-year number.

You read that right, never.

 

Three Consecutive Negative Monthly Prints Are Rare

Three consecutive negative monthly CPI prints are rare, only 15 times for main CPI and just once for Core, which happened just recently after the COVID shock.

The Coming Base Effect

The following FRED chart of the Consumer Price Index illustrates how it bottomed last May after the COVID shock, which is going to set up for some very high year-on-year CPI inflation prints by mid-year.  In part, because of the lower base but also the surprisingly quick snapback in the price index after the government temporarily shut off the lights and the Fed turned on the printing press.


We have constructed in the following chart a couple paths for CPI inflation in 2021, one based on an average 0.3 percent monthly rate, which takes the year-on-year inflation rate to 4.1 percent by May, which is sustained and translates to a core CPI of 3.5 percent.  Given what we currently see in the PMIs, including major problems in the global supply chain, and the excess stimulus already in the system, a 0.3 percent monthly CPI may be too stingy.

A Different Kind Of Economic Shock 

We also think very few understand the current economic situation and that this crisis is unlike those in the recent past.  The labor force and employment problems are not so much the result of too little demand but a forced reduction in supply due to the COVID restrictions.  More than 70 percent of the 10 million jobs that have been lost and have not been recovered are in three sectors: 1) leisure and hospitality; 2)  education and health services, and 3) government.

Once COVID begins to fade – it has already started – and the economy opens fully, pent-up demand, especially for leisure and hospitality will be huge, and with capacity already reduced in this area, hiring will rebound sharply and so will prices.

Why Are Average Hourly Earnings (AHE) Spiking? 

While crunching the numbers, we also found an interesting anomaly with AHE, which is now running at multi-year highs.  We have warned many times on this site about going deeper with the macro data and the problems of averaging.


Though we have not engaged in much second-order thinking or analysis on this issue — you don’t pay us enough to do so — we are pretty certain the spike in earnings is the result that most of the job losses have been in the lower-paying service sector, such as leisure and hospitality.   If, for example, all the sub .250 hitters on the Yankees are given their walking papers, the team batting average naturally goes up.  The same goes for the macro.

We are also kind of amazed that those soaking up the sun at the genius bar on bubble vision are not using the “spike in AHE” as a rationale to justify the market’s irrational and outrageous valuations.  Maybe they will or already have?

Market Impact

Personally,  I have given up on the market, which has become almost farcical, well, not even almost.  One would think that if inflation is rising the Fed’s hands will be tied and there is a risk they may panic, or the bond market will panic first, which could send risk markets into a tailspin.   But that’s too rational.

We also know that we mortal humans tend to think linearly but markets, the economy, and society move forward on a nonlinear trajectory.  In other words, it impossible to predict the future, especially when it comes to timing.

Nevertheless, we still hold to the instruments and signals that have guided us in the past and continue to heed the words of one of our heroes,

In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could. – Rudiger Dornbusch

Sweet Carol K.  

Finally, I am thankful to my partner at GMM,  Carol K., who has taught me “you have got to ride the gravy train as long as it lasts.”    I guess you can tell who is making the money at the Global Macro Monitor.   Keep fighting, CK.

Appendix 

O.M.G!

Carpet bombing the economy with stimulus and liquidity is a huge mistake and will end in a river of tears, in my opinion.   Surgical strikes to help the sectors most in need, please.

Inflation is always and everywhere a monetary phenomenon. – Milton Friedman 

Posted in Employment, Equities, Inflation/Deflation | Tagged , , , | 21 Comments

Hedge Fund Shorts Get Crushed

Posted in Equities | Tagged , | 2 Comments

NorCal Women Rising [To Power]

Sen. Patrick Leahy (D-Vt.), who is set to preside over the impeachment trial of former President Trump, was taken to the hospital Tuesday, his office said in a statement. 

Leahy, 80, “was not feeling well” in his Capitol office and examined by the attending physician, said David Carle, a spokesperson for the Vermont senator.  – The Hill

Suppose Senator Leahy has to relinquish his duties or retire for health reasons (we certainly hope not). In that case, Senator Diane Feinstein of California (San Francisco) will become president pro tempore of the Senate, third in line to presidential succession.

Think about that, the first three government officials in the line of succession to the presidency will be women from San Franciso, as will be the fifth in line.

Four for five is incredible and only a matter of time before the QAnon shamans see pink elephants in the clouds and conspiracies in the line of succession.

Stay tuned.

 

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Is Peak COVID In?

We think so.  The daily new case curves are turning down and though the death curve will lag for a few weeks, it will also start to turn down soon.

Thank, God, we can see the light at the end of the tunnel.

Back to normal?  Far from it.

In recent days, coronavirus cases have been dropping steadily across the United States, with hospitalizations falling in concert. But health officials are growing increasingly concerned that quickly circulating variants of the virus could cause new surges of cases faster than the country is managing to distribute Covid-19 vaccines.

…“We’re definitely on a downward slope, but I’m worried that the new variants will throw us a curveball in late February or March,” said Caitlin M. Rivers, an epidemiologist at the Johns Hopkins Bloomberg School of Public Health.

Nationwide, new coronavirus cases have fallen 21 percent in the last two weeks, according to a New York Times database, and some experts have suggested this could mark the start of a shifting course after nearly four months of ever-worsening case totals. – NY Times

 

 

Posted in Coronavirus | Tagged | 5 Comments