Thursday, February 15, 2024

Morning Note: Hints of Stagflation, And Some Key Highlights

In our last video commentary I mentioned the term “stagflation” — a stagnating economy amid sticky, or rising, inflation — as a distinct go-forward possibility.

Well, this morning’s data releases certainly don’t conflict with that concern.

As for the economy side of that narrative*:

That's quite the miss: -0.8 month-on-month for headline vs -0.1 expected (plus a -2% revision for December) -- as well as a -0.5% print against +0.2% expectation for core (ex-cars and gas).

As for inflation:

Again, quite the miss: Import price expectations were for a decline of -0.1% month-on-month; what we actually got was a whopping 0.8% increase. As for exports, prices also popped 0.8% m-o-m, vs a -0.2% expectation... On a year-on-year basis, prices did contract, but at a bit slower pace than the previous print.

*Note, a potential factor to consider that may have impacted the retail sales numbers was the messy January weather.

Stay tuned...

Here are some key highlights from our latest messaging herein:


"As we've expressed herein, the market's in a tough spot right here... In the recession scenario, corporate earnings take a hit, and, believe me, stocks are in no way priced for it right here... In a no-recession scenario, yields do not decline -- per the below, according to Jim they rise -- and, alas, stocks are in no way priced for that either, per this morning’s initial reaction to January’s CPI print:"

Last Thursday: 

"...suffice to say that this is the sort of data we look for as indication that the economy is bottoming and that it's time to begin positioning (buying on the cheap) for the start (the healthy/strong phase) of the next cycle.

Problem is, save for the blip (rescued by $trillions of injections) in 2020, there's been no recession to come roaring out of... And, thus, there's little (in the US anyway) to be buying "on the cheap" at this juncture.

And when we explore similar phenomena historically, we discover that it is utterly critical that we recognize the prevailing setup as these better-looking data begin to arise."

Tuesday Feb 6:

" history has proven, time and again, that stock market action -- in either direction -- can defy fundamental logic for extended periods of time.

Ultimately, however, and make no mistake, even in a world where powers-that-be strive mightily to keep asset prices elevated, fundamentals do tend to matter!

Now, all of the above, and the below, said, we have seen some recent improvement in overall economic conditions -- i.e., odds still favor recession going forward, but less-so of late... This is something we're of course paying very close attention to."

Monday Feb 5:

"So, if you're paying attention to the markets, and you have feelings about what you're hearing and seeing, I strongly encourage you to take in our twice per week videos! While, granted, I can get overly technical, I promise, you will always get the main message.

Here's from this weekend's (recorded Friday):
"I don't mean to sound like such a skeptic folks, I just want to articulate what tops look like; tops in the economy, tops in the markets, and so on... Tops are difficult, they are choppy, they can take a long time... Once they give up the ghost they can be quite dramatic to the downside... What do they say? "They take the escalator up and the elevator down." And I'm not promising that there is an elevator down scenario in our near-term future, I'm just saying that the risk remains very high, and there's nothing about today's action that changes that.""

Thursday Feb 1:

"Note, yesterday's price action (strong by the close) in equities accurately anticipated strong earnings results out of Meta and Amazon (not so much from Apple) that carried over into post and pre-market futures trading. However, this morning's shockingly strong jobs number (nearly double the consensus expectation) -- doing quite the upside number on yields and the dollar -- has taken virtually all but a handful of tech stocks (that dominate the S&P and the Nasdaq) into the red as I type (26 minutes after the open).

While the day is still young, literally 79% of the stocks in the S&P, and 76% of those in the Nasdaq are presently in the red.

Now, as we'll explore in this week's economic update, while the monthly jobs number is important, and often market-impacting, make no mistake, it is very much a lagging indicator, as it covers the previous month, plus revisions for the months leading up to it... Weekly jobless claims (higher than expected yesterday), and job openings and quits rates (rolling over), are historically very good leading labor market indicators.

I.e., while December's numbers were indeed impressive (although bearish for markets yearning for Fed cuts), their sustainability is in serious question going forward."

Thursday Feb 1:

"...nothing about the stock market's gyrations disconfirmed our view that bad news -- which could inspire the start of the next rate cutting cycle -- is good news... I.e., any hint that things are indeed slowing was met with buying, while any hint that the economy was resilient was met with selling.

The irony -- that is clearly lost on today's investor, who either hasn't invested through previous cycles, who suffers from amnesia, or who believes that this time will be different -- is that the weaker data they are clearly yearning for is, alas, on the normal glidepath from here to recession.

Now, honestly, we aren't entirely unsympathetic to the "this time is different" possibility... Reason being, the powers that be have set a precedent that justifiably has consumers believing that the government will not only be there to support their income when the next recession hits, but to support their discretionary spending impulses as well... Which might have one expecting only the mildest of recessions should one occur in the coming months... But of course there's this ultimate/obvious conundrum stemming from what inflation would do under such circumstances -- as there are indeed stronger structural forces in play these days!?!

Powell essentially quelling the notion of a March rate cut was the proverbial straw in yesterday's session."


Asian equities were mostly green overnight (China markets shuttered), with all but 3 of markets we track closing higher.

Same for Europe so far this morning, with 16 of the 19 bourses we follow trading up as I type.

US equity averages are mixed to start the session: Dow up 163 points (0.43%), SP500 up 0.15%, SP500 Equal Weight up 0.93%, Nasdaq 100 down 0.30%, Nasdaq Comp down 0.28%, Russell 2000 up 1.36%.

This morning the VIX sits at 14.33.

Oil futures are up 0.51%, nat gas futures are up 1.37%, gold's up 0.59%, silver's up 2.75, copper futures are up 1.30% and the ag complex (DBA) is dup 0.02%.

The 10-year treasury is up (yield down) and the dollar is down 0.42%.

Among our 33 core positions (excluding options hedges, cash and money market funds), 28 -- led by Range Resources, SLV (silver), XLRE (REITs), XME (base metals miners) and XLB (materials stocks) -- are in the green so far this morning... The losers are being led lower by XLK (tech stocks), Dutch Bros, EWM (Malaysian equities), XLC (communication stocks) and URNM (uranium miners).

Be careful out there:

"Closely related to our preference for compelling narratives is the human tendency for self-deception. Since humans are adept at detecting the “tells” that others are lying, the ability to deceive oneself eliminates the tells, and so makes one a better deceiver."

--William Bernstein, The Delusions of Crowds: Why People Go Mad in Groups

Have a great day!

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