Global Macro Monitor

Don’t bank it.  Avoiding a recession is not part of the Fed’s explicit dual mandate. 

The Federal Reserve System has been given a dual mandate—pursuing the economic goals of maximum employment and price stability. – St Louis Fed

Even after today’s 75 bps hike, the real Fed Funds rate (see chart below) remains at about -5 percent.  Note from the chart the economy has never kicked into a recession with a negative real Fed Funds rate.  It’s amusing to watch the market watchers muse over how big a recession the Fed will create. 

Yes, a recession is highly probable, and the timing is difficult, but markets have a yuuuge “failure of imagination.”  There can be, simultaneously, a recession in economic activity, relatively high and sticky inflation, and relatively low unemployment.  

Chairman Powell stated in his presser today about moving real rates to positive levels across the yield curve.

You wanna be at a place where real rates are positive across the entire yield curve – Chairman Powell, 18:50 into the video

This time could be different, it is pretty weird out there, making monetary policy very difficult,  but we run when we hear those four words. 

We don’t think copper has a Ph.D. in economics but possibly is an ABD. 

If you are not buying copper hand-over-fist here, at $3.54 per lbs., you should be. We doubt there is enough copper in the world to electrify the transport sector alone.  

According to Jim Paulsen, chief investment strategist at the Leuthold Group:

“The copper/gold ratio is nearing a new high! Undeterred by yet another stock market decline, confidence nonetheless appears to be gaining ground over fear. Is Dr. Copper picking up on something positive coming soon?”

Copper, an ubiquitous metal with wide-ranging uses from construction involving wiring and plumbing to being a key ingredient in the transition to green energy, is typically purchased when investors feel good about the economy. This is why Paulsen calls the reddish-brown metal “Dr. Copper” for its purported Ph.D in economics due to an “uncanny ability to predict global-economic turning points.”  – Bloomberg

Thew sharp increase in electric-vehicle registrations at the start of 2022 meant that the EV share of the overall market in the U.S. hit a historic 4.6 percent. While places like Norway—where over 86 percent of all new vehicle sales were electric in March—may laugh at that number, EV advocates know that change happens slowly, then all at once, or something like that.

Currently, it’s estimated that around 1 percent of the 250 million cars, SUVs, and light-duty trucks on American roads are electric. However, while it’s difficult to estimate future sales, an analysis by IHS Markit projects that 25–30 percent of new car sales could be electric by 2030 and then 40–45 percent by 2035. Using the rates for those projections, Reuters estimates that by 2050 more than half of the vehicles on U.S. roads could be EVs. – Car & Driver

Don’t be fooled; the 10-year yield is the chart and market indicator to monitor. 

The Fed is no longer around to support notes and bonds, the ex-post real yield on the 10-year is still below -3.0 percent, and the spike in yields acts as a double hammer to stocks. 

First, through the economic effect of higher borrowing costs, and second, through the valuation effect as a higher interest rate to discount profits lowers stock valuations. 

The U.S. 10-year yield is the most important price in the world and has been highly distorted for many years.  It has been stunning to watch the markets focus on nominal yields rather than real yields, as they fail to realize how the coupon and TIPs market has been managed for many years.  A classic case of recency and confirmation bias. 

Stay tuned. 

You decide. 

The ratio of total US stock market valuation to GDP has been named “The Buffett Indicator” because Warren Buffett – the legendary CEO of Berkshire Hathaway (BRK.A)(BRK.B) – once called it “the best single measure of where valuations stand at any given moment.”

Essentially what it represents is the value of expected future economic activity discounted back to the present compared to the total value of current economic activity. In this sense, it is strikingly similar to the price to earnings ratio that is commonly used to value individual stocks. – Seeking Alpha

Break out the Tie Dy.

In the past six months, inflation has far exceeded December 2021 expectations. In many countries, actual rates have doubled projections. European countries are particularly affected. For example, inflation in Lithuania is running at 15.5 percent annually, nearly five times the rate expected. Poland is at 11 percent and the United Kingdom at 9 percent, both well above projections. At 3 percent, Switzerland is an outlier. Asia is seeing a less severe change: Indian inflation is about 7 percent, only a bit above projections; and South Korea is at 5 percent. In China and Japan, inflation remains muted. – McKinsey & Company

Don’t Bank Peak Inflation

Korean Chip Exports

Cry For Argentina

Japan Running Trade Deficits, WTF?

China Growth Turning Up

Sterling Getting Pounded

Working Age Men Lag Return To Labor Market

World Economy Back To Pre-COVID Levels

Is There Enough Copper To Electrify The Transport Sector?

Drought In Treasury Market Liquidity 

A bankable technology of the future.  All things must change in the coming hard reset.