📢Economic Growth, Stocks' Return, and Global Debasement - The Long-Term Evidence 📢

Who has grown the fastest in the past 20 years, who has delivered the best returns, and is there a relation?

The answers might surprise you 👇👇 First, there is little relation between economic growth and stocks' return, even over 20 years

GDP growth explains just 15% of stocks' returns

Stocks' returns are driven by margins, dividends, and changes in multiples

Broadly speaking, the BRICS create GDP, the US delivers capital gains, and Europe produces neither

THE GOOD, THE BAD, THE UGLY - INFLATION 🧵

I have warned that inflation was secular since April 2020 and that the 2% target was dead

43 months after the last sub-2% CPI print, inflation is stuck at a plateau of 3-4%. Here is what matters

First, the Good - Shelter

Shelter CPI dropped to 2.7% annualized, from 6.4% in August

The gap between the BLS' measure of shelter costs and market-based indices is narrowing

... but the costs to maintain a building remain above 2%, esp. as insurance premia will rise

The average restaurant service worker earns $16 an hour.

He must WORK 35 MINUTES TO BUY A BIG MAC AND A GALLON OF GAS

With the CA bill raising the fast food minimum wage to $20/ hour, that would be 27 mn, the least in history Please spare me knee-jerk political comments

📢📢 I am NOT saying that fast food workers are overpaid
📢📢I am NOT saying that Gen-Z and service workers are living their best lives in 2024

I think McDonald's workers should be able to afford Big Macs and fill their tanks.

Since 1980, the ratio of household net worth to the US median wage has increased by 370%.

This is the single most important chart for finance, economics, and politics. This chart summarizes the 700 pages of Piketty's Capital in the 21st Century

If "r" (the return on capital) exceeds "g" (economic growth), inequalities increase over time, and workers lose wealth against capitalists

WHY THE FED WILL SPOOK MARKETS TOMORROW👇👇

The Fed has effectively 3 mandates: inflation, employment, and asset prices.

For a few glorious months, it achieved all three.

But the inflation mandate has become orthogonal with rising asset prices. In the 2010s, the wealth effect channel was clogged -when Bernanke needed it

QE, ZIRP, and forward guidance boosted asset prices, with no effect on growth

Indebted households repaired their balance sheets, and soaring asset prices benefitted the very wealthy, whose MPC is close to zero.

See the orange dots on the scatter below. No relation between household net worth and future inflation.

The Fed's preferred inflation measure, core PCE, rose at an annualized 5.1% last month, its highest growth in a year

Just a month ago, the futures market priced SEVEN cuts in 2024! And yet, the rebound of inflation was predictable

Extracts from my report "Life Finds a Way" 👇

In the deflationist view, inflation is the CPI, and what gets measured is what matters.

In the narrow world of the owners’ equivalent rent, the retained earnings method, and hedonic adjustments, inflation was a one-time accident caused by COVID and supply chain disruptions.

THE FED HAS NOT WON THE BATTLE AGAINST INFLATION - 🧵

Powell will likely claim victory against inflation today: core CPI ex. shelter ran at 1.6% in the past 6 months, and may fall further in Jan

Yet, the consensus for the immaculate disinflation rests on a flawed premise Shelter should be disinflationary in 2024, right?

The idea is that the CPI rents & OER lag actual prices by 12-16 months and should cool off as the impact of 2022 housing downturn passes through

But which downturn? The Zillow rent Index never fell on YoY basis

wAGES, THE GIG ECONOMY, AND INFLATION - Short 🧵

The Fed and many economists under-appreciate the secular rise of the gig economy.

This caused them to miss inflationary pressures in 2021, when high demand for Ubers and Airbnbs led to big fare increases and windfall gig income However, most gig economy prices are consolidating

-the average price of an Uber ride has dropped by $1 since June 2022
- the Airbnb bubble is bursting in TX, CO, and ID
- payments to influencers and creators have dropped

Very helpful for the Fed's fight against inflation.

THE TRAMPOLINE LANDING - a short thread 👇👇

The Atlanta Fed GDPNow forecasts growth of 4.1% this quarter.

Why did growth accelerate when almost all economists forecasted a recession in H2 2023?

(ht @OJRenick ) #1 COLA AND INCOME TAX BRACKET INCREASE

On Oct 13**, COLAs and income tax brackets were raised by 8.7% and 7.1%, respectively.

This added $259 bn to households' income, starting in Jan 2023

**notice the date, which coincides with the start of this bull market 🤔🤔

THE INFLATION MIRACLE WILL NOT LAST - a 🧵for smart people

Inflation fell to 4.8% YoY in June and 0.2% MoM in June, 10 bp below expectations.

Core CPI was also better than expected.

Is this the end of the great inflation scare? First, we need to understand why inflation dropped

The energy CPI fell by 16.5%, which shave 1.1 pct off the CPI

Since oil prices collapsed in H2 2022, base effects will turn into a headwind

At constant prices, energy should start having a positive impact on inflation in Sep

MARGIN 🔥TAKE👇

The median price increase by S&P 500 companies in Q1 was 8.2% on flat volume

Companies have been willing & able to hike prices

2010s was all about gaining market share, esp for tech

Post-COVID, companies have raised prices and margins at the expense of volume This behavior can be explained by an oligopolistic pricing model with variable elasticity

Consumers do not notice small price hikes, or cannot swith due to imperfect competition

COVID excess savings and frustrations also reduced price sensitivity

Companies get away with it!

IS COMMERCAL REAL ESTATE A SYSTEMIC RISK FOR US BANKS?

Let's start with the vacancy rate of 18%, about the same as during the GFC peak

Mostly driven by small overbuilt markets (Houston, Phoenix, Atlanta)

LA, SF, DC, NYC not bad, coming off very high occupancy rates pre-COVID Turning to rents, nationawide average is $28 /sq ft, 30% more than during the GFC.

Huge disparity between NY ($60) and Atlanta ($20).

Data is as of Q4 2022.

Surely tech layoffs increased vacancies in Q1 and rents will be renegotiated lower this year but rents are OK so far

INFLATION AND THE BEAUTIFUL DELEVERAGING - a short 🧵

Since 2019, the US government cumulated deficits of $7.4 trillion, or 35% of 2019 GDP

Yet, the US true government-debt-to-GDP rose by just 4.7%.

Why is that? Time for some important public debt concepts Besides the budget balance, two factors drive public-debt-to-GDP ratios

- Seignorage: the amount of government debt bought by central banks, effectively a liability of the public sector on itself

- Nominal GDP: the denominator of the debt/GDP ratio

HOW $META INVESTORS LOST $75 BN 👇👇

A short thread on horribly-timed buybacks and insane stock-option packages

Meta repurchased 318 m shares since 2018 at an average price of $236.

At the end of last quarter, this amounted to a loss of $38 billion. In addition, Meta issued $37 billion in stock-based compensation – effectively using buybacks to transfer the cost of its fabulous stock-option packages to shareholders.

All in, Meta’s buyback+ SBC incinerated $75 bn of shareholder wealth, or 30% of its current capitalization.

INFLATION THREAD 👇

In April 2020, I published "A Crazy but Logical Call for Inflation" - my best report ever if I may say so myself

In April 2021, I was on the @TheMarketHuddle to discuss "my inflation obsession"


Today, core CPI made a new high at 6.6% First, inflation was ignored... then it was called transitory... it was just base effects ... then it was blamed on lumber ... then car prices ... then supply chain disruptions ... then airfare tickets ... then Russia.

Why does the market keep getting surprised every month?

SOME THOUGHTS ON TODAY'S CPI

I have been an inflationista for more than 2 years :

"My inflation obsession" was diagnosed on the @TheMarketHuddle podcast with @kevinmuir and @PatrickCeresna



Today's CPI shocked the market - it should not have (1/n) Shelter (32% of the index, up 0.7% MoM) was the big contributor to the August surprise.

That was expected - rents are still rising and OER is lagging

Good news is new home starts are rising and house prices are rolling over, but that will show in the CPI in 12 months

The big "peak inflation" relief rally was caused by the fact that MoM CPI was flat in July versus a 1.3% rise in June

But ALL THAT IT TELLS YOU IS THAT ENERGY PRICES DROPPED in July: the change in energy MoM inflation has explained 89% of the change in MoM CPI since 2002

🧵👇 This is a common problem for portfolio managers. A high-variance asset will cause most of the fund's volatility, even if it has a low weight (BTW that is the case for risk-parity)

Energy is just 9% of the CPI, but its monthly vol is TEN TIMES GREATER THAN THAT OF THE CPI

I had been telling clients to brace for a big upside surprise on the nonfarm payroll number, and today's report certainly delivered.

Here are some important observations on the state of the labor market, productivity, and inflation from my August 2 report

Short 🧵below 👇👇 The Fed mistakenly waited for the labor market to fully normalize after COVID. They bought the Kashkari argument of "running the economy hot" before any tightening.

Yet participation did not recover and 7 million workers are missing compared to the pre-COVID trend

Friendly reminder to all the bottom fishers that this is the end of the quarter when target date-funds and fixed allocation investors must rebalance into stocks

Since 2016 stocks returned 80.6% p.a in the last week of quarters when they were down on the quarter

Short 🧵 Yeah, I know, I just annualized returns observed 5 weeks, and I have taken a stats class

Important sample size caveat here, but

1 - these weird end-of-quarter rallies keep happening. I have been writing about the TDF whale for 2 years and the effect has not weakened

Why Is it So Hard to Get Anything Done in 2022?

A short 🧵 about the wealth effect, sticky inflation, and the drunk banker economy This "Household Net Worth as a % of Income" chart is often shown as a proof that the Fed cannot hike rates above 2.5% before triggering a recession.

There are a few issues with it - first, it does not represent household's wealth, but all the sectors that the Fed does not track

MEASURING AND TRADING LIQUIDITY - A short thread 👇👇

My liquidity indicator uses growth in the Fed's balance sheet, bank credit, the TGA, HH's demand for cash, and the cost of commodities

It works great - all market gains were realized when liquidity was increasing

(1/4) The indicator also works for HY spreads

The spread on the Bloomberg Barclays High Yield Corporate Bond Index widened by 7 bp in the six months following net negative liquidity injections, while it compressed by 10 bp following net positive liquidity injections.

(2/4)