Thursday, November 9, 2023

Morning Note: The Joneses, Fleeting Breather(s), and the Tricky Part

Diane Swonk is a very good, thoughtful, objective economist... This morning's message is all her:

"One lesson I learned early in my career was that consumers will resist, with everything in their power, reductions in their standard of living. Later I learned that it was not just the amount people accumulated that mattered, but the pace at which they accumulated stuff that became so entrenched. A version of keeping up with the Joneses played out en masse.

We hit a collective wall with the subprime crisis, when enough people actually had to count on the rate of appreciation in their homes to keep servicing the debt that they had accumulated. Home values collapsed and access to credit evaporated. That left us wallowing in the aftermath of the global financial crisis with less ability to borrow and earn a living.

The pandemic accelerated the healing of household balance sheets via fiscal and monetary stimulus. Debt was shifted from household to government balance sheets. Consumers spent and inflation flared. Now the cost of debt is compounding more rapidly on both household and government balance sheets.

The breather we got from locking mortgage rates in low is fleeting. Higher rates will eventually slow growth. A surge in corporate debt taken on during pandemic is also critical. Much is poised to reset in 2024.

This is as employment has slowed AND became more concentrated in less interest rate sensitive sectors - over 90% of payroll gains since July were in three sectors - leisure and hospitality, healthcare and government, largely education.

That makes employment more susceptible to external shocks. We already saw that with strikes and a slowdown in employment in October. Unemployed also moved up. Earlier over the summer, the increase in unemployment was more due to a rise in the ranks of those looking for work than a surge in layoffs.

As strikes wore on, the spillover effects on those who were laid off or had to take part time work to compensate for wages lost to work stoppages increased. The rise in unemployment in October was exacerbated by those spillover effects - strikers are not included as unemployed.

Why do we care? Employment, savings and access to debt are all slowing. The tricky part for the Fed is to allow that squeeze to occur without accidentally pushing the economy fully through the ice into the waters below. Hence, the pause by the Fed in Nov as it waits and sees what the earlier rout in the Treasury bond market means for the broader economy.

The irony is that the more Treasury bonds rally and rates fall, the higher the risks the Fed has to reassess how much it needs to do to cool inflation. Does it need to hold rates higher for even longer, or worse, raise again? One gets the sense they would like to be done but much depends on the course of the economy, notably consumer spending from here. Over the summer, the US consumer became an Atlas, holding up the global economy.

The story of Atlas is not one of strength alone but endurance - the two are related but not the same. Endurance is about overcoming the challenges ahead not just reflecting on how far we have come. The journey on inflation is not yet over. That requires endurance on multiple fronts.

One foot in front of the other, eyes on the horizon, focus on crossing the finish line on inflation without too many dropping out before the end of the race."

Asian stocks rose overnight, with 10 of the 16 markets we track closing higher.

Same for Europe so far this morning, with 15 of the 19 bourses we follow trading up as I type.

US equity averages are flat to start the session: Dow down 23 points (0.07%), SP500 down 0.01%, SP500 Equal Weight up 0.14%, Nasdaq 100 down 0.04%, Nasdaq Comp up 0.01%, Russell 2000 up 0.24%.

As for Friday’s session, US equities were mixed: Dow up 0.1%, SP500 up 0.1%, SP500 Equal Weight down 0.23%, Nasdaq 100 up 0.1%, Nasdaq Comp up 0.1%, Russell 2000 down 1.1%.

This morning the VIX sits at 14.51.

Oil futures are up 1.23%, nat gas futures are down 1.55%, gold's up 0.37%, silver's up 0.66%, copper futures are up 0.50% and the ag complex (DBA) is up 0.04%.

The 10-year treasury is down (yield up) and the dollar is down 0.15%.

Among our 32 core positions (excluding options hedges, cash and money market funds), 25 -- led by Dutch Bros, REMX (rare earth miners), URNM (uranium miners), EWZ (Brazil equities) and SLV (silver) -- are in the green so far this morning... The losers are being led lower by LTPZ (long-term TIPs), SPTL (long-term treasuries), XLV (healthcare stocks), Johnson & Johnson and XLP (consumer staples stocks).

You have brains in your head. You have feet in your shoes. You can steer yourself any direction you choose. --Dr Seuss

Have a great day!

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