CK Chart Funday

1. Crack Spreads At Record High

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  • The traditional relationship between crude and refined products is broken. WTI is anchored around $100-$110 a barrel, suggesting that — in barrel terms — gasoline, diesel and jet-fuel prices shouldn’t be much higher, once you add the average refining margin. 
  • Take jet-fuel: in New York harbor, a key hub, it’s changing hands at the equivalent to $275 per barrel. Diesel isn’t far away, at about $175 a barrel. And gasoline is at about $155 a barrel. 
  • The industry measures refining margins using a rough calculation called the “3-2-1 crack spread”: for every three barrels of WTI crude oil the refinery processes, it makes two barrels of gasoline and one barrel of distillate fuel like diesel and jet-fuel. 
  • From 1985 to 2021, the crack spread averaged about $10.50 a barrel.
  • Last week, however, the margin jumped to a record high of nearly $55. Crack margins for diesel and other petroleum products surged much higher.  – Bloomberg

2. Student Debt

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  • Soaring college costs, higher enrollment, changes to the federal lending system, labor market demand for credentials and paltry wage growth have all contributed to the $1.6 trillion in outstanding federal student debt. This does not include debt originated in the private market.
  • Most student debt is held in large loans, but most borrowers have small loans. 
  • 1 in 5 Americans hold student loans. More than half of those 45 million people with federal student loans have $20,000 or less to pay, with about a third of all borrowers owing less than $10,000. Seven percent of people with federal debt owe more than $100,000
  • Economists at the Federal Reserve say borrowers with the least amount of debt often have difficulty repaying their loans, at times because they did not complete a degree. 
  • Conversely, people with the highest loan balances are often current on their payments likely because of their higher education levels and associated earning power, according to the Federal Reserve.
  • Among the fastest-growing categories of student loan borrowers over the past two decades are Black students and people ages 50 and older. – Washington Post

3. Central Banks:  Global Hawks, China Dove

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4. The Dusenberry Effect:  Is The American Consumer Tapped Out?

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  • U.S. households boosted spending for a fourth straight month in April.
  • The savings rate fell to the lowest in 14 years.
  • “We have finally reached the point where households are dipping into their $4 trillion of excess savings,” said Stephen Stanley, chief economist at Amherst Pierpont.
  • Personal income rose a seasonally adjusted 0.4% last month. Adjusted for inflation, disposable income was flat during the month, showing that wage increases are struggling to keep up.
  • Consumers are taking on more debt to maintain their spending habits. The Fed said earlier this month that total credit  rose a record $52.4 billion in March from April after a revised $37.7 billion gain in February.
  • Our dissertation research was on the “Dusenberry Effect,” where consumers slowly ratchet down their spending habits and are stubborn to maintain their standard of living, even if it means using debt to do so.  –  WSJ & Bloomberg

5. Nvidia’s Valuation Is In A “Mean” Reversion To The Mean

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  • Financial results for Nvidia’s fiscal first quarter ended May 1 came in ahead of expectations, at least in the key business segments of videogames and data centers. Revenue surged 46% year over year to about $8.3 billion and adjusted operating earnings jumped even more, by 55% to a record high of nearly $4 billion.
  • Nvidia’s revenue forecast for the current quarter was about 4% below Wall Street’s targets—a notable miss for a company that has projected above the consensus view for the last nine quarters by an average of 10% each time.
  • The disappointing forecast stems from a projected $500 million hit from lost sales in Russia and Covid-19 lockdowns in China. 
  • The market’s brutal tech correction has cut that multiple in half, and Nvidia’s premium to the PHLX Semiconductor Index is now well below what it has averaged to the peer group over the last four years.  – WSJ

6. More Seniors Unretiring

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  • An estimated 1.5 million retirees have reentered the U.S. labor market over the past year, according to an analysis of Labor Department data by Nick Bunker, an economist at Indeed.
  • Many retirees are being pulled back to jobs by a combination of diminishing covid concerns and more flexible work arrangements at a time when employers are desperate for workers. 
  • Roughly 2.4 million additional Americans retired in the first 18 months of the pandemic than expected, making up the majority of the 4.2 million people who left the labor force between March 2020 and July 2021.
  • The bounce back comes as U.S. employers continue to complain of widespread labor shortages, with twice as many available positions as there are unemployed Americans, according to the Labor Department. – Washington Post

7. Polyester Overtakes Cotton & Requires Petrochemicals To Produce

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  • Modern textiles rely heavily on petrochemical products.
  • Most clothing around the world is made with polyester, the synthetic fiber derived predominantly from petroleum. It has overtaken cotton as the main textile fiber of the 21st century, ending hundreds of years of cotton’s dominance.
  • Fashion accounts for up to 10% of global carbon dioxide output—more than international flights and shipping combined, according to the United Nations Environment Programme.
  • The global market for polyester yarn is expected to grow from $106 billion in 2022 to $174.7 billion by 2032. 
  • Only a fraction of what’s manufactured gets recycled. Eighty-seven percent of the total fiber input used for clothing is ultimately incinerated or sent to a landfill.
  • Yearly polyester fiber production is projected to exceed 92 million tons in the next 10 years–an increase of 47%.
  • Not all polyester is produced from petroleum; it can also be made from natural polymers, like bioplastics, but those alternatives only make up a small fraction of polyester in the fashion industry.
  • It’s been marketed as more sustainable than some natural fibers because the production process doesn’t require as much water or land as growing natural fibers like cotton.
  • In 2015, polyester production for clothing emitted 282 billion tons of carbon dioxide, triple that of cotton.
  • Synthetic textiles like polyester shed tiny pieces of plastic with every wash and wear. These plastic particles, called microplastics, pollute the oceans, freshwater and land and pose a danger to the animals that consume them. – Bloomberg

8. Emerging Market Bonds Suffering Worst Losses In Three Decades

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  • The benchmark index of dollar-denominated EM sovereign bonds, the JPMorgan EMBI Global Diversified, has delivered total returns of around minus 15 per cent so far in 2022.
  • Nearly $36bn has flowed out of emerging market mutual and exchange traded bond funds since the start of the year.
  • China, the world’s biggest emerging market, has faced some of the heaviest selling.
  • The shock to commodity prices caused by the war in Ukraine has added to the strain on many developing countries that rely on imports to meet their needs for food and energy.
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Are Wage Pressures Structural?

We vote both cyclical and structural.

When it rains, it pours.  The COVID and Ukraine shock has ripped the veil from the “Wizard of Oz” economy.   Follow the crypto brick road. 

Deglobalization Cometh

Americans are beginning to experience what a world feels like as its moves toward autarky.  You know, “let’s re-shore the supply chain” and the notion that erecting trade barriers will protect some American workers from foreign competition but punish all with higher inflation.  Almost all structural disinflationary forces that have powered the global economy for the past 25 years are reversing.  

The West Has A Demographic Problem

The following chart illustrates the shrinking share of the U.S. population of prime-age workers — 25 to 54 year-olds — and the spiking senior population.   

We never really internalized the demographic-deflation argument, and we believe just the opposite. 

Fewer productive workers shift the long-term aggregate supply left, which causes higher inflation and slower potential economic growth. 

Japan’s Pensioners Wiped Out After Bubble Burst

We believe Japan is a terrible example, as the savings and pensions of their aging population were obliterated after the country’s asset bubble burst on New Year’s Eve 1989,   

[More than] thirty years on from its all-time high, the Nikkei Stock Average is still languishing about 40% below the peak of 38,915 scaled on Dec. 29, 1989. The Japanese stock market’s uphill climb to regain lost ground is the longest in the history of any major economy.

The bursting of Japan’s wild asset-price bubble left a nation of disillusioned and embittered individual investors. – Nikkei Asia

The Nikkei index still sits 33 percent below its peak of over 32 years ago.

Imagine the demand destruction of a generation of American retirees if the S&P500 was trading at the Nikkei equivalent of 2785 in 2054.   Simply unfathomable!

We are still working on our labor market piece, which we hope to post on Memorial Day, and are not quite ready to submit the above to a peer-reviewed economic journal.   Not yet. 

 Stay tuned. 

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QOTD: Adaptive Expectations

QOTD = Quote of the Day

There’s a tendency for markets to focus on the present and extrapolate it forever – Olivier Blanchard

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Beating Shipping Containers Into Penthouses

They shall beat their swords into plowshares, spears into pruning hooks, [and shipping containers into homes] – Book of Isaiah (paraphrased).

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According to shipping analytics firm Windward, 20% of the world’s roughly 9,000 active container ships are currently sitting in traffic jams outside congested ports. Close to 30% of that backlog alone is in China—double the domestic congestion rate in February—where a virulent Omicron wave is snarling supply lines. – Forbes

 

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The Smoking Crack Spread

Right now, the traditional relationship between crude and refined products is broken. WTI is anchored around $100-$110 a barrel, suggesting that — in barrel terms — gasoline, diesel and jet-fuel prices shouldn’t be much higher, once you add the average refining margin. 

In reality, they are a lot more expensive. Take jet-fuel: in New York harbor, a key hub, it’s changing hands at the equivalent to $275 per barrel. Diesel isn’t far away, at about $175 a barrel. And gasoline is at about $155 a barrel. Those are wholesale prices, before you add taxes and marketing margins. 

…Oil refineries are complex machines, capable of processing multiple streams of crude into dozens of different petroleum products. For simplicity’s sake, the industry measures refining margins using a rough calculation called the “3-2-1 crack spread”: for every three barrels of WTI crude oil the refinery processes, it makes two barrels of gasoline and one barrel of distillate fuel like diesel and jet-fuel. 

From 1985 to 2021, the crack spread averaged about $10.50 a barrel. Even between 2004 and 2008, during the so-called golden age of refining, the crack spread never surpassed $30. It rarely spent more than a few weeks above $20. Last week, however, the margin jumped to a record high of nearly $55. Crack margins for diesel and other petroleum products surged much higher. 

From 1985 to 2021, the crack spread averaged about $10.50 a barrel. Even between 2004 and 2008, during the so-called golden age of refining, the crack spread never surpassed $30. It rarely spent more than a few weeks above $20. Last week, however, the margin jumped to a record high of nearly $55. Crack margins for diesel and other petroleum products surged much higher.  – Bloomberg

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County Median Home Prices

The map [below] allows you to see the median home price for each county. Applying the House Price Index growth from FHFA to the latest housing data from the American Community Survey (ACS), we calculated a median home value for 3,119 counties and county-equivalents in the United States. Home values represent the value of all homes instead of home sales.

Here is the list of the counties with the highest median home values in the 4th quarter of 2021:

  • Nantucket County, MA: $1,370,520
  • New York County, NY: $1,306,210
  • Santa Clara County, CA: $1,253,400
  • San Mateo County, CA: $1,247,070
  • San Francisco County, CA: $1,230,800

Source: NAHB

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Nonlinear Thinking: How Robotic Surgery Works

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Go With The Deep Flow

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The Washington Sausage Factory

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Click here for better resolution of the above graphic.

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Where Is The Neutral Fed Funds Rate?

True Confessions:  We don’t know, and neither does anyone else, including Chairman Powell and the FOMC. 

What Is the Neutral Rate?

The neutral rate is the theoretical federal funds rate at which the stance of Federal Reserve monetary policy is neither accommodative nor restrictive. It is the short-term real interest rate consistent with the economy maintaining full employment with associated price stability.

You won’t find the neutral rate quoted on your computer screen or in the financial section of the newspaper. The neutral rate is an “inferred” rate—that is, it is estimated based on various analyses and observations.  –  Robert Kaplan, Former Fed Official , Oct ’18

Interestingly, Kaplan qualifies the neutral rate as the short-term “real” interest rate.  We assume “real” is consistent with the convention economic definition, nominal minus inflation.  

Chairman Powell recently stated: 

That’s why Powell and other Fed officials have said in recent weeks that they want to raise rates “expeditiously,” to a level that neither boosts nor restrains the economy — what economists refer to as the “neutral” rate. Policymakers consider a neutral rate to be roughly 2.4 percent. But no one is certain what the neutral rate is at any particular time, especially in an economy that is evolving quickly.  – PBS News Hour 

It’s unlikely these “policymakers” consider a “neutral” 2.4 percent Fed Funds as a “real” rate.  If so, assuming inflation falls back to 5 percent in the near term, the real neutral rate as defined by Kaplan would be 7.4 percent, about 650 bps higher.      

If you haven’t noticed yet, folks, there is a lot of obfuscation in the economics profession.

Are We There Yet?

Where is the neutral rate?  Let’s go to the videotape chart.

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History tells us the economy has never entered a post-War recession with a negative real Fed Funds rate.  The April closing real rate was -8.0 percent, and now a bit higher with the FOMC’s recent 50 bps increase in the nominal rate. 

“This time may be different,” but that’s rarely, if ever, bankable. 

The Fed And Mount Whitney

I backpacked up Mount Whitney, a 14,505-foot beast and the highest mountain in the contiguous United States a few times as a kid.  Talk about altitude sickness!  

The markets already have altitude sickness, and the Fed is barely out of base camp!

We don’t believe the volatility spike this year is because markets have suddenly become more efficient, only discounting future rate hikes, for example, as many argue.  It’s much more complicated. 

New World Order? 

The change in monetary regime is a big part of the markets’ nauseousness, but much of the queasiness has more to do with the fact markets don’t know how and what to discount.  We have never been here before and the times they are a-changin’.

Stay frosty, folks.  

The real Fed Funds rate, which is basically the fed funds minus the inflation rate, is…negative. Prior to every recession in the last 50 years, it has been positive. So, we have a long way to go. – Richard Bernstein (4 minutes in)

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