Powell on Deck
Doug Nolan
Q4 GDP growth was reported at a stronger-than-expected 2.9% pace, down marginally from Q3’s 3.2% - but solid nonetheless.
The Atlanta Fed’s “GDPNow” model’s (“running estimate of real GDP growth based on available economic data for the current measured quarter”) first calculation of Q1 GDP came in this afternoon at 0.7%.
The short squeeze-induced markets rally, resurgent speculation, and significant loosening of financial conditions somewhat postpone the unavoidable Credit Cycle downturn.
Market analysts today misinterpret loose conditions and the fundamental backdrop, believing a so-called “soft landing” is the most likely scenario.
When I contemplate both the unprecedented scope and duration of Bubble excesses, the odds of avoiding a hard landing appear remote.
Case in point:
January 27 – Bloomberg (Claire Ballentine):
“During the pandemic, a surge in used car prices forced buyers to take out bigger loans for their vehicles.
The monthly payments seemed doable in an era of stimulus checks, a tight labor market and surging stocks, but that’s changed for many people as inflation eats into their budgets and the job market cools.
Now, more Americans are falling behind on their car payments than during the financial crisis.
In December, the percentage of subprime auto borrowers who were at least 60 days late on their bills rose to 5.67%, up from a seven-year low of 2.58% in April 2021, according to Fitch...
That compares to 5.04% in January 2009, the peak during the Great Recession.”
It's important to note that the unemployment rate was 7.8% in January 2009, up from a 5.0% rate one year earlier, and on its way to the October 2009 cycle peak of 10.0%.
That auto delinquencies surged from 2.58% (April 2021) to December’s 5.67%, as the unemployment rate dropped from 6.1% to last month’s 50-year low 3.5%, portends an arduous Credit cycle downturn ahead.
The above Bloomberg article noted several issues behind the rise in auto delinquencies.
For one, the Covid stimulus spike in used car prices created higher loan balances and monthly payments.
Loans often come with low “teaser rates,” while some borrowers opt for the initial lower payments on adjustable-rate auto loans.
Many borrowers now face much higher monthly payments, just as savings have been hammered by surging housing, food and general consumer price inflation.
Auto insurance premiums have jumped.
Inflating automobile prices was only one facet of what I call “monetary disorder”, a key consequence of imprudent monetary and fiscal stimulus.
Price spikes undermined system stability, while stoking speculative excess across a wide range of asset markets, including crypto, equities, corporate Credit, and residential and commercial real estate.
There has been significant crypto fallout, less for equities.
Importantly, ongoing loose financial conditions are extending the cycle and delaying the day of reckoning for corporate Credit and real estate.
Next Wednesday’s FOMC meeting is pivotal.
Especially following recent comments from Fed officials, markets are confidently pricing in a slackening to a 25 bps rate increase.
With the conspicuous loosening of financial conditions, markets are prepared for a more hawkish leaning Powell press conference.
Markets price in a 4.90% expected (near) peak Fed funds rate at the May 3rd FOMC meeting, dismissing committee members’ calls for a 5% plus “terminal rate.”
Markets discount a Fed pivot and the policy rate down to 4.47% by year end.
Chair Powell missed an opportunity to throw some hawkish cold water on market speculation during his Stockholm speech on the 10th.
His task has become only more daunting.
Speculative markets have become increasingly detached from the Fed’s inflation-fighting narrative.
Powell’s hawkish inflation dictum is now well-worn.
If Powell is at this point compelled for more than push back lip service against the markets’ loosening of conditions, it will take something akin to his November 1st hawkish beat down.
I just think his discomfort with the resulting 3.5% market downdraft galvanized a disciplined “balanced Powell.”
And markets are happy to daydream of Balanced Powell and Sweet Goldilocks walking hand-in-hand along an idyllic garden pathway on a delightful spring afternoon.
Powell needs to break the markets’ spell.
Truth be told, markets have expropriated the Fed’s tightening cycle.
And it’s unclear whether the Chair or his committee fully appreciates this reality - or the ramifications.
Market control of financial conditions guarantees wild “risk on” / “risk off” instability.
Prevailing “risk on” looseness seems to ensure ongoing strong lending and Credit growth, sustenance for price inflation.
Moreover, the longer highly speculative markets run unchecked, the greater the risk of severe “risk off” market illiquidity, dislocation and crisis.
Do Fed officials these days follow resurgent “meme stocks,” crypto and general market speculative impulses, and think, “Oh no, not again!”
Are they monitoring the year’s blistering start for corporate debt issuance?
Do they appreciate that their inflation fight (more open-handed than clinched fists) today hangs in the balance?
It’s been almost three decades (1994) since the last real tightening cycle.
Add an additional decade for when the Fed was engaged in an intense inflation fight.
Money was tight back then.
Painful monetary tightness was required.
Money today remains loose, much too loose to quash inflationary dynamics that have, after festering for years, metastasized throughout the system.
And over decades, a massive and sophisticated financial structure evolved that essentially creates system-wide easy Credit Availability, virtually in every nook and cranny.
A strong argument can be made that Credit has on a system-wide basis never been as easy to attain as it is today – from subprime auto and Credit cards to home mortgages to high-risk small business loans.
January 24 – Wall Street Journal (Dion Rabouin):
“A surge in hiring by American small businesses could run afoul of the Federal Reserve’s efforts to cool inflation.
Small companies have been responsible for all of the net job growth in the U.S. since the onset of the Covid-19 pandemic and account for almost four out of five available job openings…
Since February 2020, small establishments—locations with fewer than 250 employees—have hired 3.67 million more people than have been laid off or who quit.
Larger establishments—those with 250 employees or more—have cut a net 800,000 jobs during that time…
Small businesses accounted for 78% of the U.S. job listings in November, the latest month for which data are available, and 91% of the postpandemic increase in job openings…”
It seems clear that small businesses would not remain on such an extraordinary hiring spree if they were concerned by tightening lending standards and waning Credit availability.
And as the source of marginal demand for workers in an intensely hot labor market, Credit conditions must tighten within small business for the Fed’s tightening cycle to successfully contain inflation.
Volcker had to punish folks to change behavior – lots of folks: borrowers, lenders, investors and speculators alike.
In the grand scheme of things, the Powell Fed’s inflation fight has so far been largely pain-free.
The challenge for the Fed is that the Credit cycle is turning; the economy is poised to slow.
Powell and Fed officials are likely to watch things play out, believing that time is on their side.
With rate policy “normalized,” the system is now gravitating back to the previous low inflation equilibrium.
No punishment necessary.
And this is along the same lines as late-cycle mistakes made repeatedly by central bankers - at home and abroad - over recent decades.
They were willing to tolerate late-cycle excess because of fears of heightened financial and economic vulnerability.
While justifiable, accommodating late-cycle excesses in hopes of avoiding bursting Bubbles and hard-landings ensures a further buildup of systemic risk.
Heading into Wednesday's FOMC meeting, let’s set the backdrop.
Tesla was up 33% this week, lagging Lucid’s 65% surge, but ahead of Rivian’s 22.2%.
For the week, Gamestop jumped 16.4%, Foot Locker 16.8%, and AirBNB 14.5%.
In the S&P500, Western Digital gained 16.9%, Seagate 16.3%, Warner Brothers Discovery 14.5%, and Nvidia 14.2%.
The Goldman Sachs Most Short Index jumped another 5.8% this week, increasing January gains to 20.6%.
Notable popular shorts year-to-date gainers include Tesla (44.4%), Lucid (88.4%), Warner Brothers Discovery (57.3%), Carvana (63.9%), Wayfair (93.8%), Beyond Meat (50.4%), Lending Tree (79.7%), World Acceptance (56.4%), Carnival (36.7%), Expedia (32.6%), United Airlines (29.3%) and American Airlines (29.2%).
In the Dow, Disney has jumped 26.1%, and Salesforce has gained 24%.
Year-to-date gains by sector include the Philadelphia Semiconductor Index (SOX) 16.3%, Nasdaq Industrials 12.9%, Nasdaq Computer 12.1%, NYSE TMT 11.6%, Philadelphia Gold & Silver Index 11.5%, Nasdaq100 11.2%, KBW Bank Index 11.1%, Nasdaq Composite 11.0%, Philadelphia Oil Services Index 10.9%, and the NYSE Arca Computer Technology Index 10.5%.
The “average stock” Value Line Arithmetic Index enjoys a 9.45% y-t-d gain.
We can surely agree that stock market speculation has returned with a vengeance.
And things aren’t looking too shabby in bondland either.
The iShares Treasury Bond ETF (TLT) has returned 7.18% so far this month, with the iShares Corporate Investment Grade ETF (LQD) up 4.81%, and the iShares High Yield ETF (HYG) gaining 3.44%.
And how are financial conditions looking globally?
Major equities indices are up 9.6% in France, 8.8% in German, 10.1% in Spain, 10.5% in Italy, 12.3% in Ireland, 10.8% in Czech Republic, 14.7% in Hong Kong, 11.1% in South Korea, 8.1% in China (CSI300), 6.5% in Australia, 6.9% in Canada, and 13% in Mexico.
Yields are down 60 bps y-t-d in Italy, 45 bps in Portugal, 49 bps in Australia, 41 bps in Canada, 129 bps in Hungary, 107 bps in Poland, 50 bps in South Africa, and 82 bps in Colombia.
I’ll call it an “echo” speculative Bubble.
And let’s Credit the Bank of England’s emergency operations, along with notably waning hawkish resolve from the Federal Reserve, Bank of Japan, ECB and the global central bank community generally.
And it puts Jay Powell in a tough spot.
I think he knows what he needs to do.
He must put the Jeffrey Gundlach types in their place.
Markets need to listen to the Fed.
And if you fight the Fed while the Fed’s trying to fight inflation, you’re apt to lose.
But that’s Volcker, and not one Fed Chair since Volcker.
It’s such a different era now.
The Fed doesn’t dole out punishment.
They just play Mr. Nice Guy to the markets and extend monetary rewards.
It is probably a little too soon for the Fed to recognize that the markets are messing with its inflation fight.
It’s not yet obvious Powell has to strike back hard.
But does he emphasize that tight labor markets remain a major inflation issue?
Does he deemphasize the possibility of a pause, noting labor and loosened financial conditions?
And does he raise the possibility of the Fed funds rate rising meaningfully above 5% this year unless conditions tighten?
This is going to be interesting.
Balanced Powell would see his hawkish elements dismissed by speculative markets.
Financial markets, after all, are in the throes of a powerful cross-asset squeeze dynamic.
And when there’s a big squeeze, little else seems to matter.
The pain trade is lower yields and higher, more speculative, stock prices.
At this point, I doubt Powell would be comfortable with markets rallying on his press conference comments.
He’ll want to be heard.
Markets would prefer not to listen.
0 comments:
Publicar un comentario