In yesterday's strategy session, Nick and I discussed the prospects for the recent trend in stocks (bullish) to, in reflexive fashion, serve to actually avert the recession we're anticipating this year.
The theory of reflexivity postulates that the stock market is in fact, more often than not, not a predictor of economic expansions and contractions, but rather a significant element amid their causes... I.e., rising stock prices incite animal spirits that incite economic activities that incite yet higher stock prices in what becomes a positive feedback loop... While, conversely, falling stock prices quash animal spirits, which incite a pulling in among consumers, which leads to lower corporate profits, layoffs and, ultimately, recession.
The former is a plausible scenario right here that we should in no way entirely dismiss... Problem this go-round is, of course, the Fed.
I.e., if indeed rising stock prices serve to keep consumers engaged, well, then the economic slowdown necessary to take inflation to a level policymakers can live with simply doesn't occur... Which, at the end of the day, means that a rising equity market right here is, frankly, in direct conflict with the Fed's objective.
If that's the case, then the bulls will be receiving an unwelcome message in the not too distant future... Allow me to once again feature the latest from Neil Kashkari:
“I’ve spent enough time around Wall Street to know that they are culturally, institutionally, optimistic,” Minneapolis Fed President Neel Kashkari told the New York Times. “They are going to lose the game of chicken, I can tell you that.”"
On a related note, as we've previously stated herein, China reopening is a not-small reason why we think 2023's recession will be historically mild (and supports our bullish non-US equity narrative)... However, in the meantime -- per economist Peter Boockvar below -- it also poses a challenge for the Fed:
"I’m very optimistic about what a full China reopening will have for growth in the 2nd half of 2023 but that growth might be more focused on the Asian region, parts of Europe and South America since that is where most of the Chinese business is. It will also throw a wrench in the Fed’s plan for lower inflation I believe."
Stocks are so-far liking this morning's weak producer prices and retail sales prints... While I'm definitely not complaining, the former, in particular, is welcome with regard to inflation pressures, both, however, support the recession narrative... hmm...Ironically, as I type, news crossing the wire says Microsoft is cutting 10,000 jobs...
Europe's green nearly across the board so far this morning as well, with 18 of the 19 bourses we follow trading up as I type.
US stocks are mostly green to start the session: Dow up 5 points (0.01%), SP500 up 0.20%, SP500 Equal Weight up 0.28%, Nasdaq 100 up 0.50%, Nasdaq Comp up 0.49%, Russell 2000 up 0.30%.
The VIX sits at 19.16, down 1.03%.
Oil futures are up 2.10%, gold's up 0.66%, silver's up 1.32%, copper futures are up 2.71% and the ag complex (DBA) is up 0.28%.
The 10-year treasury is up (yield down) and the dollar is down 0.64%.
Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 31 -- led by treasury bonds, Albemarle, base metals futures, metals miners and MP Materials -- are in the green so far this morning. The losers are utilities stocks, Disney, AT&T, consumer staples and financial stocks.
"...if you own a house and the government creates a lot of money and credit, there might be many eager buyers who would push the price of your house up. But it’s still the same house; your actual wealth hasn’t increased, just your calculated wealth. It’s the same with any other investment asset you own that goes up in price when the government creates money—stocks, bonds, etc. The amount of calculated wealth goes up but the amount of actual wealth hasn’t gone up because you own the exact same thing you did before it was considered to be worth more."
--Dalio, Ray. Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail