Spring lambs to the slaughter
Executive Summary
Nature’s first green is gold, Her hardest hue to hold. Her early leaf’s a flower; But only so an hour. Then leaf subsides to leaf. So Eden sank to grief, So dawn goes down to day.
Nothing gold can stay. – Robert Frost
I’ve seen the future….it is murder – The Future, Leonard Cohen
We have compiled a wide range of 3rd party opinions this month, including MBMG’s old (in the sense of long-standing) friend Gerry Brady of Boom Finance and Economics, who recently came up with this pearl about Elon Musk: Big wave riders are always wondering if the next big wave is going to be the one they don’t survive. That is why they do it, by the way. Musk can take this gamble and still wind up as a Billionaire even if the whole pack of cards does collapse. Investors in Tesla may suffer a different outcome, depending upon their average entry price.
Following last month’s extremely lengthy and extremely dense pieces, which sadly continued a recent move even further away from brevity, this month’s outlook mercifully contains much shorter takes on a number of issues. Unfortunately, this is quite a large number of issues, including Tesla’s collapsing share price, Baltimore’s collapsing bridges, econometric perceptions of collapsing inflation, and weaker liquidity—all at a time of peak Mag 7, peak Musk, peak exposure to risk assets, peak layoffs, peak bankruptcies, and peak insider selling.
It feels as though something has to give, not just the length of our editorials. Why have recent monthly outlooks tended to be so long and dense? We defer to the wisdom of a seventeenth-century French mathematician and philosopher: "I have made this longer than usual because I have not had time to make it shorter." - Blaise Pascal
Hopefully, we have now arrested that particular alarming trend—pricking what might be described as a bubble in MBMG bloviation. Many other global bubbles remain intact.
April 2024 Outlook
Look out ahead:
“Data is finally emerging that supports my year-long crusade to raise awareness of flawed employment data, rising credit card charge-offs, increasing non-mortgage personal interest outlays, and the decreasing disposable income of median households. These insights suggest underlying vulnerabilities in the economy that may not be fully reflected in surface-level metrics.” - Michael Green -
This echoes concerns that we have previously raised and continue to share.
Taking [too much] stock
“U.S. households have allocated 35% of their financial assets to equities, topping the 33% share logged at the dot.com bubble peak and the 25% seen in 2013, when the S&P first managed to push back above its pre-2008 high-water mark.” - Jim Grant - Grant's Interest Rate Observer
“The ratio of insider sellers to buyers in the lynchpin technology sector stands at roughly 13:1 in the quarter to date, a ratio topped only twice in the past decade and comparing to less than 5:1 throughout 2022 as the market endured its post-Covid downshift.” – Verity report, cited in Financial Times
To us, these are just two of many indications of the excess investment in risk assets (especially, as we have recently mentioned, the so-called Magnificent Seven, and in particular, Nvidia). Other worrying signs include bankruptcies & layoffs (especially in leading indicators such as transportation, technology, retail, media, and finance) reaching the highest levels since the GFC, while job openings look weaker, although data remain highly volatile.
Liquid hunch
A big focus for the year will be on the timing of the Fed’s exit from quantitative tightening (QT). It sounds from Fed speakers as if this could be announced at its next meeting. This could be a positive story for markets because QT was assumed to be a factor that would weigh on investor demand by reducing liquidity that might otherwise find its way into equity and bond markets. In fact, equity markets have performed admirably while quantitative tightening has been going on, and liquidity watchers put this down to the reduced use of the Federal Reserve’s repo facility.
Repo means repurchase agreement, allowing an asset owner to raise short-term liquidity by selling an asset, such as a government bond, to another investor whilst agreeing to buy it back at a future date and price. In this way, it turns assets into liquid cash. Reverse repo, as you might expect, is the opposite; specifically, it involves a central bank such as the Federal Reserve selling securities into the financial system but agreeing to buy them back later. For the duration of the agreement, the Fed will have taken the proceeds out of circulation.
Markets were strong last week as the Fed reiterated its three-cut guidance, but they have been strong in previous weeks even when that has seemed in doubt. This loose liquidity environment has been one of the explanations, and as the Fed experiments with the winding down of QT and less liquidity is released from the reverse repurchase facility, there will likely be some wobbles in the market.
A particular sector to watch will be the U.S. regional banking sector because any shortfall in liquidity is likely to be reflected in declining bank reserves and a return of solvency worries due to the bond assets these banks hold, which currently stand at a loss.”
We have focused on liquidity flows as a positive driver for the last 1-2 years, especially last year’s steepest ever bail-out, and have for some time been concerned about the adverse potential of liquidity drying up.
Y-UK?
The final (major) central bank reporting last week was the Bank of England (BoE). Again, there was no surprise about its decision to leave interest rates unchanged, but what did stand out was the change in voting, where two hawks had previously voted to raise interest rates but this time aligned with the majority to keep them on hold. Unlike in other regions, inflation has been declining slightly faster than expected in the UK.
Much of this relates to the delayed impact of the utility bills cap, which meant that inflation seemed slower to take off, before being sharper, and lingering longer, after which it is now declining faster once more.
Indeed, inflation is expected to drop to, or even below, the BoE’s target in the next couple of months as high monthly increases from a year ago drop out of the latest figures. But it is not expected to last, and despite the downside surprise to UK inflation last week, when looking beneath the surface, those indicators of persistent inflationary pressure remain. The median price increase, having been stable but still marginally too high for the last few months, lurched upward this month. Some of this lingering inflationary pressure is good news.
It reflects the resilience of the UK economy and the fact that the UK seems to be emerging from a cyclical downtrend, as reflected in the PMIs. In addition, the housing sector is improving both in terms of demand and construction activity.
However, some persistent inflationary pressure is down to a lack of productive capacity, partly explained by a high rate of economic inactivity, driven by an increase in long-term sickness.
No doubt this will be one of the key dividing lines for policy going into the next election – UK Hawks Take Flight, Brewin Dolphin
In theory, there is no difference between theory and practice
“There's practically no inflation in the system…what is the conclusion either in theory or practice that could ever lead you to an inflationary view when you have a 140 basis point gap between the supply side of the economy and the demand side of the economy? In fact, when we run these numbers through our model, it's telling us we're going to finish this year with inflation close to 1% from three today. Inflation is not a level, okay? Inflation is a rate of change…it's not about the level. The level of pricing is extremely high, no doubt about it, but inflation ultimately is not a level concept it's a rate of change, and the rate of change is subsiding now.” – The Part-Time Economy Illusion: Debunking the Job Market Hype David Rosenberg
We sympathize with what David is saying in theory, but in practice, prices are at elevated levels, following the inflationary episode of recent years. We believe these elevated prices will ultimately create various negative feedback loops—one of which is inherently disinflationary because high prices constrain future consumption due to the impact on available purchasing power (which is why credit creation and government spending remain key drivers going forward). Another feedback loop, however, is that higher inputs can continue to influence (i.e., drive higher) output prices for any goods or services with high demand or "relatively inelastic" consumption patterns. In a perfect world, these countervailing forces might balance each other, leading to a managed, soft landing. In practice, that happens exceptionally rarely, if at all.
Don't miss our next episode, where we'll explore the upcoming topic, such as 'the future of electric vehicles', 'the evolving impact of central bank policies', or 'new trends in global markets'. Stay tuned to dive deeper into these crucial subjects and gain insights that can help you navigate the changing landscape.