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Weekly Market Pulse: Windshield Investing

The economic slowdown we’ve been writing about for months officially arrived last Friday in the form of a particularly weak employment report. The number…

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This article was originally published by Alhambra Investment Market Research

The economic slowdown we’ve been writing about for months officially arrived last Friday in the form of a particularly weak employment report. The number of new jobs created last month – or at least the WAG the BLS makes at such things on a monthly basis – was a mere 235,000 or roughly a cool half million less than expected by economists who insist on trying to guess this random number on a monthly basis. There was hand wringing and pearl clutching all over the financial media as economic gurus tried to figure out what it all meant. Is the recovery over? Is this as good as it gets? Will this affect the time table for the Fed’s tapering of QE? Will this affect the spending and taxing bill the current administration is trying to push through Congress? Oh, whatever does it all mean????

The first thing you need to know about last Friday’s employment report is that it was for August, the month that seems to always get revised a lot because after all these years the BLS still has trouble figuring out how many teachers went back to work when. I remember an August employment report way back in the early part of the last decade (2011) that showed zero jobs created when expectations had been for over 100k. Stocks sold off hard, down 2.5% on the day as fears about the recovery spread:

August brought no increase in the number of jobs in the United States, a signal that the economy has stalled and that inaction by policy makers carries substantial risk.

The government report on hiring, released on Friday, prompted another round in a relentless diminution of economic expectations. The unemployment rate, at 9.1 percent, did not change last month, and the White House said it was expected to stay that high through at least 2012.

New York Times, 9/2/2011

Bonds rallied big that day, the yield on the 10 year Treasury falling 15 basis points to 1.99%. The dollar also rose on what was termed “safe haven” demand and continued to rally for the next month by almost 7%. These moves peaked after about a month before starting to reverse and by the end of October bond yields were higher than they were before the report and the dollar was back where it started. Stocks fell a bit more, down about 6.6% at the nadir but by the end of October were nearly 7% higher than they were before that lousy employment report. Even more interesting is that after numerous revisions the original 0 jobs reported turned out to actually be a positive 126k. All that market movement over a number that turned out to be utterly wrong. And that my friends is why I don’t pay a lot of attention to employment reports. 

I think it got lost in the shuffle but it should be noted that if last week’s report was accurate – a mighty big if considering the previous paragraph – the US economy did still add 235,000 jobs in August. The economic recovery is still intact even if at a reduced rate of change. Again, we have been talking about a slowdown in the rate of improvement since the spring when bond yields peaked and turned lower. If you remember, there was a lot of confusion back then as people couldn’t figure out why bond yields were falling when the economic data was so strong. A plethora of explanations were offered, mostly technical ones having to do with Treasury issuance and QE. Our explanation was the simplest, the Occam’s Razor explanation – growth expectations were being scaled back. We didn’t know anything about the Delta variant or anything else; we just took the bond market at its word. It isn’t always right in the short term – all markets overshoot – but bond markets, like all markets, look ahead. And when it comes to the economic health of the nation, bonds seem to autocorrect a lot quicker than other markets. There is a good reason we spend so much time thinking and writing about bonds.

And so, as is often the case, the market reaction to last week’s employment report was a lot more interesting than the report itself. In fact, there were several reports prior to Friday’s official employment report that further enhanced the case for a more substantial slowdown. Pending home sales fell which shouldn’t be that surprising given that home prices were reported to be up nearly 20% year over year. Supply/demand explanations are often pooh poohed by economists as overly simplistic – more math is always preferable to an economist – but sometimes, simple works just fine. The Dallas Fed business activity index fell from 27 to 9, US imports fell and the ADP report foreshadowed the BLS report on Wednesday with a less than expected gain of 374k jobs. And through all the weak reports, bonds traded in a narrow range and the 10 year Treasury yield finished the week higher than it started. The economic weakness in the current data was already priced into the bond market over the last few months.

There is a lot of data in the economic indicators but usually not a lot of new information. There are certainly long term trends we track that inform our view of the economy (see here) but those are trends that play out over a very long period of time. And in truth, we can’t even say for sure whether some of these long term trends are negative or positive. Whether a labor force participation rate of 67% (2000) or 63% (2016-2020) or 61.7% (now) is ideal is a question I can’t answer. It seems obvious that a lower number is bad but what do we mean by bad? If our only concern is maximizing near term output then certainly lower is worse. But could a lower rate be better from a long term, societal standpoint? Could having a parent home more often, not participating in the formal economy, create better conditions for economic growth in the future? I think it might but I don’t know for sure, I can’t quantify it and we won’t know the answer for years, maybe decades. It’s interesting but not particularly useful for investing today.

A lot of the market moves last week actually seemed to point more to the end of this slowdown rather than a continuation. It looks more and more to me that bond yields made a bottom in July and are starting to anticipate the end of the Delta variant that is the most popular explanation for the slowdown. The weakest parts of the employment report were in the service sector such as retail trade and restaurants and bars, which aligns with Delta as the cause. As Delta fades, those areas of the economy will be expected to pick up. The dollar was also down last week (which everyone should have expected since I declared it to be in a short term uptrend the previous week), so there doesn’t appear to be any big fear out there about the global economy. And even with all the bad news coming out of China, emerging markets managed to have a good week. EM stocks were up nearly 3% and currencies were up too but less. That is not what we would expect from a market where a US led economic slowdown is still on the horizon.

The employment report in August 2011 was released in the midst of a debate about the need for more stimulus for the economy. It was 2 years after the end of the recession, weekly jobless claims were still in the 400s but had stalled after falling steadily in 2010. The unemployment rate had been stuck around 9% since early in the year. Bond yields peaked in March at about 3.4% and had fallen to around 2.2% by the end of August (before that employment report was released). In short, things didn’t look very good in late 2011 and they would get worse in 2012. Bond yields continued to fall until July of 2012 and credit spreads didn’t peak until October. And I can tell you we were on recession watch at the time because that’s where markets seemed to be pointing. But even markets aren’t always right and there was no recession of 2012. Or 2013 or 2014 or 2015 or 2016 or 2017 or 2018 or 2019. During the course of an economic cycle, the economy will slow and reaccelerate numerous times. It is during the slowdowns that we are most vulnerable to recession (obviously) and stock market corrections which is why we react to them in our portfolios but most of them are just slowdowns that soon pass. I think it might be wise to remember 2011 and realize that today’s conditions are, in many ways, better than back then. 

Markets are always forward looking. The drop in bond yields that started back in March anticipated the slowdown we’re in right now. Millions of people making independent judgments changed markets to reflect a more accurate view of the future than any Wall Street analyst or economist. Investors who analyze today’s economic data to determine how markets will move in the future are driving by looking in the rear view mirror. The better method is to watch markets today to determine how the economy will change in the future. Markets are not perfect but they provide a truer picture of the economic future than any crystal ball. The markets are the windshield of the economy, providing a glimpse of the future to those who face forward.

The economic environment for now remains the same but if bond yields keep rising and the dollar keeps falling, I’ll have to make another change. But for now, the economy is still slowing and the dollar is still fairly firm. The 10 year yield is 19 basis points off the lows of July but I don’t see a clear trend yet except to say that yields have stopped falling for now. As for the dollar it is around 92 now, down from 93.5 but still well above the 89.2 low set in January and the 89.5 levels seen in May. What’s required now is patience until new trends emerge. I never said the windshield was always clear. 


There was some pretty good data released last week too. The Chicago PMI was a little less than expected but at 66.8 remains high by historical standards. Construction spending was higher, exports rose and the ISM reports were better than expected.

One last note on the employment report. Average hourly wages were up 4.3% year over year which sounds pretty good – until you realize CPI was up 5.3%. There seems to be a collective loss of memory in Congress and at the Fed in that they seem to think that inflation can somehow improve the lot of the working middle class or poor. Nothing, and I mean absolutely nothing, could be further from the truth. Inflation is a pernicious, regressive tax and is ultimately destructive of the growth it is meant to engender. I thought we learned that in the 60s and 70s but apparently not. Jerome Powell is pretty awful but the apparent alternative (Lael Brainard) may be worse. Better the devil you know I guess but monetary policy isn’t about to improve.


Not a lot of data in this holiday shortened week. The JOLTS report should be interesting but the labor market is a long way from normal. There are job openings and more than enough unemployed to fill them but they aren’t being filled for some reason. More accurately probably several reasons but we’ll eliminate one soon as the Federal unemployment benefits enhancements end.



Stocks were higher last week with the larger gains in foreign markets. That was probably helped a bit by the weaker dollar but not much has changed on that front. The dollar index is still stuck in the same range it has been in since 2016.

The biggest winner of the week was Japan which seems a bit odd with their current COVID difficulties. But they are also about to get a change in government and there is rarely a more optimistic time than right before a country gets a new leader. It takes time before the inevitable let down sets in. I have been a long term investor in Japan since just before Abe was elected the first time and the story remains the same. Japan is an attractive investment because of corporate restructuring and in spite of the macroeconomic environment. And even after a 250% gain since 2012, stocks there are still cheap.

Large cap growth is now ahead of large cap value for the YTD but value is still leading in smaller stocks. I am still overweight value and don’t feel any urgency to change. The valuation difference has become too great to ignore and the gap will close eventually. 

Financials had a tough week but if yields keep rising that will probably change. Defensive sectors had a good week but continuation depends on the economy continuing to weaken. 

There’s a lot of noise in the high frequency economic data. Most of it is subject to large revisions that won’t be known for months or even years. It is not useful for investors except to confirm information the market has already provided. Bonds told us months ago that the economy was going to slow. Now it has but markets are already anticipating the next change in the economy. And so should you.


Joe Calhoun



Global Debt Expected to Surpass $300 TRILLION and GDP Growth Slows

Thanks to the all-encompassing “Helicopter Money” that is Modern Monetary Theory, global debt has soared to yet another record-high in
The post Global…

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Thanks to the all-encompassing “Helicopter Money” that is Modern Monetary Theory, global debt has soared to yet another record-high in the second quarter, as governments and consumers piled on the deficits.

According to data published by the Institute of International Finance (IIF), global debt— which accounts for government, bank, corporate, and household debt— hit an outstanding $296 trillion in the second quarter, up by $4.8 trillion since the first three months of the year, and more than $36 trillion since the beginning of the pandemic.

But the debt pile doesn’t stop there! with the unprecedented pace of borrowing, the IIF is now expecting global debt to soar past $300 trillion— which is likely a no-brainer because as per the famous realization by Cady Heron, the limit does not exist! Undoubtedly, thanks to MMT, not only will we surpass $300 trillion, but will also skyrocket past $400 trillion, catapult past $500 trillion, etc., until— well, infinity!

Among the countries reporting the highest levels of debt is China at the top of the list, with debt levels jumping by $3.5 trillion from the first quarter to a total of nearly $92 trillion between April and June. On the other hand, the US surprisingly noted a debt deceleration, with a total of approximately $490 billion— the slowest since the onset of the pandemic.

Also on the bright side, the IIF said that the debt-to-GDP ratio slumped for the first time since the Covid-19 crisis. The institute found that 51 of the 61 countries observed have seen their debt-to-GDP ratio fall in the second quarter, as economic activity has been on a strong rebound since the beginning of the year. This caused overall debt as a share of GDP to decline from a record-high of 362% to around 353% in the second quarter.

But, all good things must eventually come to an end, because according to hot-off-the-press projections published by Fitch Ratings, global GDP is set to grow by only 6% in 2021, down from a previous June forecast of 6.3%. “Supply constraints are limiting the pace of recovery,” the report explained, adding that,a greater share of demand growth is being reflected in price increases and US inflation forecasts have been revised up again.”

As such, Fitch downgraded its 2021 forecast for China from 8.4% to 8.1% growth, and trimmed growth expectations for the US economy from 6.8% to 6.2%. The Eurozone, on the other hand, had its growth forecast for the current year boosted to 5.2%, up from 5% in June.

Information for this briefing was found via the IIF and Fitch Ratings. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

The post Global Debt Expected to Surpass $300 TRILLION and GDP Growth Slows appeared first on the deep dive.

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“Team Transitory” Suffers Blow As Used Car Prices Resume Surge

"Team Transitory" Suffers Blow As Used Car Prices Resume Surge

In the past month, a feud has broken out between the so-called "team transitory",…

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"Team Transitory" Suffers Blow As Used Car Prices Resume Surge

In the past month, a feud has broken out between the so-called "team transitory", comprising mostly of pro-Fed, pro-Biden commentators, who urge the public to ignore the "transitory" hyperinflation that by now is painfully obvious to everyone (see today's UMich report for the gruesome details), and not to blame either the Fed or the administration for the collapse in the dollar's purchasing power. Then there are the realists who see a much more ominous trend in deglobalization - you know, the same trend that allowed inflation to decline along with interest rates since the early 1980s - and warn that even when the currently supply chain logjam ends some time in 2022, inflation will still be far higher than in the past few decades.

The latest CPI print was viewed as a victory for "team transitory" because some of the prices that had spiked during the pandemic eased, led by used cars, whose prices this year soared amid supply chain disruptions and a rebounding economy has been a major contributor to the jump in U.S. inflation.

This was enough for TT to declare victory and proclaim that it's all downhill from there.

There is just one problem: real-time data is now showing that used car prices are once again on the rise after the summer slippage, confirming what we said moments after the CPI report was published this week.

The Manheim U.S. Used Vehicle Value Index, a measure of wholesale used cars, increased 3.6% in the first 15 days of September compared with the same period last month, and is again back near all time highs. That's the first month-over-month rise in the index since May; in total the index has risen by more than 50% since the COVID lows in early 2020. 

The index jumped 24.9% from the same period a year ago through the middle of the month, indicating that not only has the drop in used car prices ended but that higher prices are coming, and with them more humiliation for team transitory, as the spike in the Mannheim index assures a sharp jump in the CPI print either next month or in November.

"The latest trends in the key indicators suggest wholesale used vehicle values will likely see further gains in the days ahead,” according to the Manheim report.

"Wholesale used vehicle prices rose rather significantly in the first half of September compared to the first half of August," Michelle Krebs, an executive analyst at Cox Automotive, told Bloomberg"Dealers appear to be stocking up on used vehicles, which have seen supply stabilize somewhat, to have something to sell because new vehicle inventory remains low."

Elevated used car prices have primarily been due to snarled supply chains and a shortage of materials (such as semiconductors) for new car production, which pushed dealer inventories to all time lows...

... and forced consumers to buy on the secondary market.

“The main pressure continues to come from new car supply shortages. With the increase of delta variant, many manufacturers have significantly cut their production,” said Brian Benstock, general manager and vice president of Paragon Honda and Acura, a dealership in Woodside, Queens, in New York City. “A story about used cars cannot leave out the story about new cars.”

Incidentally new car prices are now also surging, and will likely continue to rise as carmakers have said production of new vehicles this fall will continue to be constrained by a chip shortage and the spread of Covid-19 in Southeast Asia. IHS Markit slashed its vehicle production forecast for this year by 6.2%, or 5.02 million vehicles, the biggest decrease to the outlook since the chip shortage emerged. In the latest sign of fallout, on Thursday, General Motors said Thursday it is cutting production at six North American assembly plants.

Finally, even ignoring used car prices, a more ominous increase is emerging in such core inflation as shelter costs and Owner Equivalent Rent.  Commenting on whether core inflation slowed or sped up in August, Bank of America economists said that the traditional measure of core CPI inflation rose just 0.1% mom in August, below the consensus (0.3%), BofA said the following:

  • The weakness was due to a bigger than expected reversal of the reopening spikes in a number of components.
  • Stripping the most volatile components of the CPI leaves a modest upward trend in “true” core inflation.

As BofA concludes, when it asks rhetorically "Is it time to break out the champagne" for team transitory, the bank responds "We don’t think so."

Tyler Durden Sun, 09/19/2021 - 11:00
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Actually, It All Makes Sense

Actually, It All Makes Sense

Back in June, we explained that the reason behind the market’s shocking response to the Fed’s hawkish policy…

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Actually, It All Makes Sense

Back in June, we explained that the reason behind the market's shocking response to the Fed's hawkish policy announcement when yields plunged instead of spiking higher, had little to do with what the Fed would actually do (as every Fed action is now in direct response to the market, which the FOMC is compelled to prop up no matter the cost) and everything to do with the market's read of r-star, and we quoted DB's head of FX strategy George Saravelos who said that everything that is going on "boils down to a very pessimistic market view on r*" or in other words, the same argument we made 6 years ago when we predicted - correctly - that the Fed's hiking cycle would end in tears (as it did first in November 2018 when the Fed capitulated on its hiking strategy after stocks plunged, and then again in Sept 2019 when the Repo crisis forced the Fed to resume QE).

The bottom line, for those who missed our lengthy take on this complex topic is that the equilibrium growth rate in the US, or r* (or r-star), was far far lower than where most economists thought it was. In fact, as the sensitivity table below which we first constructed in 2015 showed, the equilibrium US growth rate was right around 0%. This means that each and every attempt by the Fed to tighten financial condition will end in disaster, the only question is how long it would take before this happens.

Today, we won't recap the profound implications from Powell's huge policy error which we laid out previously (we suggest readers familiarize themselves with our recent work on the topic published in "Powell Just Made A Huge Error: What The Market's Shocking Response Means For The Fed's Endgame"), but we will touch on a recent blog by Deutsche Bank's Saravelos - who unlike most of his peers on Wal Street, has a clear and correct read on what is currently going on in the market - and to help clients comprehend what's actually going on, he has penned a simple framework to understand current market behavior. As Saravelos puts it, "there is no “puzzle” in the way global bond markets are behaving and it is entirely possible for yields to fall as inflation pressures rise."

As Saravelos explains, the starting point is that over the last six months the global economy has been experiencing a negative supply shock due to COVID. This can be most clearly seen in the incredibly sharp run-up in inflation surprises against the equally incredible sharp run-down in growth surprises.

In simple Econ 101 terms, we are  experiencing a leftward shift in the global economy’s supply curve. A negative supply shock (permanent or not) does two things: it lowers growth and increases inflation.

This is exactly what markets have been doing: inflation expectations are close to the year’s highs, but real rates (the closest market equivalent to a measure of real growth) are at the year’s lows.

The moves in the two variables are therefore entirely consistent with the incoming data.

Now what is most notable is that real yields have dropped more than inflation expectations have risen. The combined effect has been to lower nominal yields.

As Saravelos puts it, "there is nothing surprising about this, because there is nothing automatic about which effect dominates" and it ultimately depends on consumer sensitivity to rising prices, or in wonkish terms the slope of the demand curve: the greater the demand destruction from price rises, the bigger the negative effect on growth relative to inflation pushing yields down and vice versa. So, what the market is effectively doing, is pricing in substantial demand destruction from the supply shock.

Is this the correct thing to be pricing? Perhaps it is, we have been highlighting this unfolding demand destruction since May, and consumer confidence in the US is collapsing.

What about central bank reaction functions? There is an automatic belief in the market that higher inflation should mean more hawkish central banks. But as the DB strategist notes, "this belief rests on 30 years of demand shock management, where inflation has always and everywhere been positively correlated to growth." And as an interesting aside, according to Saravelos, Larry Summers was right about inflation risks this year but wrong about the cause: lower supply has dominated over stronger demand. A supply shock similar to the one we are currently experiencing means the central bank response is not obvious, and as a result "raising rates will only make the growth shock worse." By implication, tapering - which is tightening no matter what you read to the contrary - will similarly be a policy mistake and compound the economic slowdown, leading to an even more powerful easing reaction in the coming quarters.

Which brings us to central banks' characterization of the current inflation shock as transitory; as DB explains, it is another way of saying that they currently prefer to accommodate rather than respond to the supply shock. In terms of capital markets, ss long as the Fed looks through the shock, risk appetite will likely stay resilient, the dollar weak and volatility low. However, the moment the Fed does respond, all bets are off.

Bottom line, current market pricing is fully in line with a supply side shock with very strong demand destruction effects. A low r*, as we have been arguing since 2015 and again since June, is likely to prevail post-COVID only flattens consumer demand curves further. Saravelos concludes that "he continues to believe that it is the behavior of the consumer, including the desired level of precautionary savings as well as the response to the unfolding supply shock that is the most important macro variable for the market this year and beyond." As such, the latest UMich survey which showed that Americans are panicking over soaring inflation, and whose buying intentions have plunged to the lowest levels on record...

... is extremely alarming.




Tyler Durden Sat, 09/18/2021 - 17:00
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