Tuesday, May 16, 2023

Morning Note: Trilemma

In our opinion, Bloomberg columnist and Queen's College Cambridge President Mohamad El-Erian made nothing but sense this morning... The following (bolded phrases in particular) should sound very familiar to clients and our regular readers/video watchers:

Emphasis mine... 

"The consumer is holding on better than most people expect, and the global economy around us is weakening... That's what we know, what we don't know is what is the right level for interest rates... And I would go one step further; what is the right inflation rate for this economy?"

"There's this collective view of the Fed, which is we will not cut rates, versus the market view that you will cut rates... Three things; 1. the economic situation is fluid, 2. compositional issues matter, if you look at the services side you get a completely different set of answers than on the goods side, and 3, the Fed has to anchor expectations; we have no view of what the strategic and secular view of the Fed is, and until we get that we're going to get more splintering, not less.

"You cannot crush the economy to get to 2%, because we are living in a world of deficient aggregate supply... And if you try, it will be counterproductive."

"I'm also talking about the inability to bounce back quickly...  So there's a dynamic here: If you try to run an economy at an inflation rate that is too low, given the amount of resource allocation that is going on, then you will crush it... Look, we have three issues standing there: We have a major energy transition that we have to navigate, we have the rewiring of the global economy that's happening -- not only for geopolitical reasons, but for companies looking for more resilience -- and then we have the function of the labor market... You put these three things together, if you try to get to 2% quickly, the costs far exceed the benefits."

 "And we haven't talked about financial stability; your dilemma turns into trilemma."

Stay tuned...

Asian stocks leaned green overnight, with 9 of the 16 markets we track closing higher.

Europe, on the other hand, is mostly red, with 11 of the 19 bourses we follow trading down so far this morning.

US equity averages are lower to start the session: Dow by 256 points (0.77%), SP500 down 0.49%, SP500 Equal Weight down 1.04%, Nasdaq 100 down 0.05%, Nasdaq Comp down 0.30%, Russell 2000 down 1.46%.

As for yesterday's session, US equity averages closed higher: Dow by 0.14%, SP500 up 0.30%, SP500 Equal Weight up 0.57%, Nasdaq 100 up 0.55%, Nasdaq Comp up 0.66%, Russell 2000 up 1.22%.

This morning the VIX sits at 17.85, up 4.26%.

Oil futures are up 0.23%, gold's down 0.55%, silver's down 0.83%, copper futures are down 1.73% and the ag complex (DBA) is up 0.05%.

The 10-year treasury is down (yield up) and the dollar is up 0.13%.

Among our 34 core positions (excluding options hedges, cash and money market funds), only 2 -- XLK (tech stocks) and DBA (ag futures) -- are in the green so far this morning... The losers are being led lower by URNM (uranium miners), OIH (oil services stocks), MP Materials, XLE (energy stocks) and XME (base metals miners).

"It is absolutely wrong to gamble in stocks the way the average man does."  --Jesse Livermore

Have a great day!



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