Home

Slipping out on the wires this week, to apparent little fanfare, was the Redbook retail sales data which depicted an alarming image of a go-slow consumer. In the context of US GDP, this matters. The consumer, once flush with pandemic savings and a lust for life, is starting to feel the pinch. This would echo what many consumer facing companies muttered about as they mooched through their recent quarterly updates. Take Monro Inc – an automotive repair chain – who said that customers no longer cared so much about a tyre that looked good, they wanted one cheap, with entry level tyres making up a bigger proportion of sales. And it’s not just down the garage. Foot Locker rattled the cage with a near 10% decline in same-store sales. Guidance got smoked. Sales trends had slowed ‘significantly‘ said management, with eyebrows on sticks. The suggestion is that inflation is suffocating spending. Yes, the inflation print this week showed a slowing trend, but prices are still going up. Gas, food, rents – they’re all elevated. Accumulated inflation bites. Dollar Tree discussed the stress it’s placing on wide-eyed customers who simply have fewer spare dollars around, and those same dollars don’t buy as much as they once did. And it’s the lower-end wage earner that feels it the most. Big Lots – purveyor of furniture and home décor out of Columbus, Ohio – printed a buttock clenching 18% chop in sales. Earnings per share went negative, and negative in size. The market cap got smoked to $150m. Back in 2021 it was not-too-shoddy $2bn, a time when the company thought it wise to buy back $600m of stock. Oh boy. ‘Buyback regret’ is unlikely to be confined to those slumped on a sofa in Ohio. With all the inflation that is now bedded in, the consumer increasingly appears washed out, unable to live like they once did. Expect the go-slow consumer to get a few more headlines through the coming months. Tipping point has been reached.

With crude oil pummelled to 52-week lows, catcalls ring the ears. Smashed. Bullish sentiment as thin as a carpet in a 1970s bungalow. There’s a recession incoming. The paper market says it, the physical confirms it. Barrels abound. Albeit a physical market that’s hard to read, with tankers furtively bobbing in exotic seas and rumours of this and that doing the rounds. That the Strategic Petroleum reserve in the United States has been drained and stands at the lowest level since 1983 is something for those long the crude complex to hold on to, as they rock quietly in the corner. It appears the recession narrative, resilient Russian production and weak price action have made investors cock-eyed, complacent even, disinterested in long-term fundamentals which speak of a market that is right on the wire. Tight. Super tight. The only source of non-OPEC supply growth – the US shales – is moving from a production plateau to outright decline. Some corners of the investment community even whisper that the mighty Permian basin is on the cusp of decline, a notion mooted by a Wall Street Journal article exposing the fall in well productivity as the Tier 1 inventory got aggressively rinsed over recent years. The decline in productivity is not a surprise, it has been expected, it’s what happens in oil fields; the shock is that is has happened so soon and Permian producers are now being forced to drill lower quality rock for the first time. Productivity is only set to get worse. The shale boom – argue beleaguered bulls – is well and truly over, but the boom has masked the declining trends in conventional production at a time when inventories are being run down. AI might grip the imagination of retail investors who – as per Vanda Research – have been pumping in $1.5bn per day into US stocks, but it’s energy that matters. This week the National Grid in the UK asked the operator to plug back in a coal plant to meet the expected surge in demand on account of the ‘hotter than Spain and Miami!’ weather the UK has been lolling in. Coal. For electricity. In 2023. The coming shortage in energy markets this decade, will be one for the ages.

Given all the bank runs and fur and intervention from wet-lipped policy makers who appear to be playing a high stakes game of whack-a-mole as the tide goes out on the ZIRP era, it’s astonishing to see many equity markets, YTD, are up. And some, like the NASDAQ, up big. The CAC too, despite the all the rioting. Or perhaps, because of all the rioting, given the effect on the local joie de vie of a spirited spat with the moisturised chins of the so called ‘elites’. Prend ca! Hmm. That said, ignoring the fixation with inflation prints and noisy, near-term data, there continues to be a whiff of impending recession. Coupled, perhaps, with an incipient loss of confidence in the whole financial system given the ongoing stampede of deposits out of mean-fisted banks, and into juicy 5% yielding money market funds. Banking is, as ever, nothing but a confidence trick, and once the cat’s out, per Credit Suisse, it’s GAME OVER. Cracks in the system can be papered over, the can kicked down the road, but emergency measures don’t solve the problem: a wild, decade long misallocation of capital. Given the exposure of many regional banks to commercial real estate and other nasties, the next act in the whole sorry drama could have those watching a proper BOO! So too those investors who liked the return prospects in a low rate environment, but didn’t grill the risk officer too hard about what might entail if they wanted their money back in short order. Delinquencies on commercial property loans – as reported by the FED – remain near record lows but are starting to squeak higher. And almost $1.5 trillion of sticky CRE debt is supposedly set to mature by the end of next year, according to the beards at the Mortgage Bankers Association. For those over their skis in such business, it has the makings of a long, sweaty Summer. Gold, meanwhile, is quietly consolidating above $2000. Out of sight, out of mind.

Bank runs don’t tend to happen in bull markets. Nor large banks clubbing together to prop up small banks. Or Central Banks guaranteeing the whole country’s deposits, or the President going up on television to tell the nation to take a deep breath and calm down. Confidence is a fragile state, and when the muck hit the fan at Silicon Valley Bank at the end of last week, it shattered. Cue all manner of garish headlines, hot rumour and the inevitable back stopping of Europe’s too-big-too-fail and regulatory naughty-naughty lender, Credit Suisse. Some week. Despite the spitting from the pan, the ECB ramped up rates by 50bps, leaving the Federal Reserve a marker on how to stare down the current crisis. Whilst the bank running appears to have abated – for now – the longer term issue is that loan officers are going to be tightening up the straps, paring targets and rejigging the incentives of those out making loans. Less quantity, more quality. This will impact all manner of businesses and is a negative for broader economic growth. US small businesses, after all, create two thirds of all jobs. They will react accordingly. Lower risk appetite all round. The silver lining, perhaps, is that will likely help bring down inflation. So too, it would seem, a more general slowdown in activity. Prints from the Empire Manufacturing Survey spoke of a chill whipping through yards of many businesses. Indeed, the FED’s own recession model is now flashing red, with a side serving of klaxon, sitting at its highest reading since 1980. Worse than in 2001, 2008, etc. With Moody’s downgrading the whole US banking sector to negative it is not the usual environment for hiking rates into. Hence the staggering re-pricing of market expectations which now points to rate cuts before year-end. At least they did at the time of writing. Given the wild swings in share prices it remains a fast and loose environment, and no one really knows where it’ll all end. Manipulate the price of money for as long as Central Banks did, and there are going to be a lot of misallocated skeletons stuffed in the cupboard. Silvergate, FTX, Silicon Valley Bank, Signature Bank, LDI, etc. On and on they roll. Given what has fallen out so far there must be some sleepless nights for those who went big in the private markets or commercial real estate where pricing is a lot less visible, and a lot slower to react. The capital calls are coming. Elsewhere, the UK government was the latest to go big on nuclear energy; committing to more of it, and reclassifying it as green. So there you go.

In a week bookended by the customary fixation with the Fed Chair’s tone and tie choice in front of a wide-eyed Senate Banking Committee, and a whistle-through-the-teeth collapse in some mid-tier US banks; the UK enjoyed a polar blast, delighting schoolchildren and regional news presenters in box-fresh RAB jackets alike. With the country shivering under a grave yellow ‘weather warning’, the National Grid quietly plugged the coal fired power lead back in. Hmm. The UK, like Germany, has made massive investment in wind power over the past two decades, which works a treat in high-summer, but it’s starkly apparent that when the rubber hits the road, when it is needed most, supply can go AWOL. The re-working of the energy stack is a proper challenge, more so with news this week that at a big-ticket industry gathering of oil executives, the chat was all about the stagnation of US shale. Fields are mature. Depletion rates are higher than expected. ‘The world is going back to a world we had in the 70s and 80s’ croaked Ryan Lance, CEO of ConcoPhilips in a ruddy faced roundtable. US shale growth has been the swing producer in recent years. With production set to fall, it leaves OPEC to pick up all the aces. More steamy geopolitics await. Whilst politicians throw net-zero ambitions around like confetti, it’s fast becoming apparent that there is no plan to get there. None. A report this week, said as much. The UK’s Climate Change Committee thumped the table accusing the current government of being ‘asleep at the wheel’. More money is needed. For a government wheezing under a pile of post-GFC and pandemic induced debt, it’s money that might just need another money tree. Taxes have already been sweated. Spending cuts remain politically unpalatable. In 2018 the Netherlands did a study into how it was going to achieve ‘climate-neutral’ status from wind and solar and EVs. It suggested, with a splash of cold water in the face, that there is possibly insufficient global supply of some metals. And this was just for the Netherlands. Population circa 20m. From copper, to nickel and zinc, and rare earth metals, there is not enough. And what about steel. Often overlooked, a report by the clever people at McKinsey set out the ubiquitous and substantial use of steel in every large scale power source. Steel is made from iron ore. Lots and lots of iron ore. Those diesel fired diggers are going to be busy for years yet, and those politicians are setting themselves up for a cold bath. And possibly – as provocative as it sounds – one whopper of a U-turn. Stay warm.

Is that Boris Johnson in a dressing gown in Windsor Great Park shouting at the squirrels? Or Graham Potter with a set of golf clubs? Or the Duke of Sussex, also in a dressing gown, shouting at the squirrels? Or is it a truck load of squeaky-bum time heading the way of Central Bankers as the straight-back-down inflation narrative starts to pop apart at the seams. A lurch higher in the ISM Prices Paid index rattled the cage this week as broader economic data continues to run hot, hot, hot. No wonder 2-year inflation expectations have repriced from 2%, to over 3% in a matter of weeks. “Several more rate hikes are needed” runs the mantra, as FED officials go at it with slack ties and sweaty top lips. Amongst all the fur, there is increasing evidence of a demand problem, as consumers defy the recessionary cat calls and get out and spend. Albeit those at the lower end of the income bracket appear to be spending on credit. It is reported that 36% of US adults now have more credit than savings; and auto loan delinquencies are ticking higher. Hmm. Whilst falling rents will provide dovish balm in the coming quarters, what if other inputs start to put some heat into the CPI prints? And see the upward revisions on labour costs, which the Labour Department quietly admitted they got a bit wrong in Q4. Time will tell, but commodity prices are set to make things a whole lot more complicated. Take natural gas. As the market loosened up off the back of milder weather in Europe and reduced LNG export capacity in the US, the price fell. Crushed, even. Many now chunter the energy crisis is over. And yet, after a decade out in the cold, the gas market has been starved of capital and supply is – some argue – far tighter than widely assumed. Weather is temporary, the role of natural gas in the energy stack is not. Many energy support packages are being wound down, but Pandora’s fluffy pink box has been prised opened and there are tight odds down the Corral that they won’t be the last given winter 2024 will soon loom large. The supply dynamic in the oil market is not so different. Short term there might be a few loose barrels, but if the IEA gets anything consistently wrong, it’s demand resilience. And China, the wild card, is only just getting back to it. Or take copper, where falling ore grades globally, and unrest in South America, are set to collide with massive pent-up demand as politicians go all in on the green agenda. Indeed, for many base metals, inventories are now some 90% below peak levels last seen in 2013. Given the warehouses are all but bare and structural demand – bar a deep, hold-tight global recession – remains ‘good to firm’, courtesy of fast developing EMs led by the likes of India, it seems that that it’s only a matter of time before the squeeze is on for many essential metals. This year or next, the decade of shortages is nigh. And all this in the context of the likes of Stan ‘fat pitch’ Druckenmiller pointing out that once inflation breaches 5% it has never come back down unless the Fed Funds rate has gone above CPI. As in never. An imminent uptick in CPI then, whether a short-term ‘blip’ or not, could well scatter the crows. Unless, of course, this time it really is different. Ho hum.

Eyes grew wide this week as once again the Bank of Japan was forced to wade into the soft play to stop market participants from pushing too hard on the upper band of their self-imposed ceiling. More buying. More manipulation. The Central Bank now owns an epic, and never-seen-before, 56% of the domestic market. And given the apparent appetite of some po-faced investors to test their resolve, are likely to end up owning a whole lot more. Or let the belt out another couple of notches. Whilst it’s generally believed that such moves run against the current vogue for tightening the taps on global monetary policy, one big name in the soft play of Sovereign debt has suggested that Kuroda et al are actually contributing to the big rug pull of liquidity; as the current policy is pushing domestic investors to rapidly sell down their massive pile of foreign assets. Specifically treasuries. This, said the big name, is happening ‘under the surface’. All eyes on the yen, then. As markets generally hissed air this week, there was also a reminder of the woe playing out in housing, where sales and mortgage application data landed with a thud. In short: OFF. A. CLIFF. Buyer demand, crucial in the context of keeping realtors in shiny suits and Paco Rabanne, is the lowest level in 28 years; lower even than the great 2008 brouhaha. The high Kurumba in rates is clearing rinsing the market, and affordability remains stretched. Either post-tax pay packets need to go up – a lot – or house prices need to come down. And just on the consumer, whilst data shows retail spending continues to surprise to the upside coupled with evidence of some wet-lipped buying of stocks; credit card balances are rising, savings have plunged and household debt in Q4 last year had its largest quarter on quarter increase in two decades. Something of a mixed bag then. And get this: such is the reliance on debt that a firm called Wisconsin Cheese, which as you might have guessed sells cheese and assorted goodies in Wisconsin, is apparently offering a buy-now-pay-later scheme for hungry customers. Offering credit for cheese, is not an obvious sign of a boom-boom economy. And they are probably not alone. In the context of last year’s rapid rate hikes only just starting to come through – when the FED is not even done pushing the marbles around – the tide may well be going out on the consumer. Let’s hope the much written about pandemic stash of cash under the mattress means there are plenty of pants on show if it does. Walmart this week lowered guidance. “There’s just a lot we don’t know” rasped top dog Doug McMillon. Indeed there is. Which explains why sell-side strategist’s year end forecasts are about as wide as they have ever been.

As the confetti settled on last week’s blockbuster jobs number, the fizz and pop have given way to some murmurings that the Bureau of Labour statistics are not quite what they seem and that manipulation around ‘seasonal adjustments’ gave the number some glitter that may distort the reality somewhat. Anyway, time will tell, but for now the jobs market remains hot, hot, hot. All eyes, then, on subsequent revisions. Also popping confetti bombs this week, at least in the eyes of shareholders, were the oil majors, serving up record profits and bumper pay-outs, met – as usual – with catcalls and whistles from the mainstream media. BP also took the somewhat bold move, given the current political mood, to pare its ambition in cutting emissions, stepping back from previous eye-catching targets. Targets that, one assumes, were clearly unachievable. Such a move comes on the back of massive losses reported by the major operators involved in sticking up wind turbines. Siemens Gamesa lost near on a whopping $1bn, in the last quarter. Problems abound. Given the variability of direction and speed, the equipment is put under massive pressure, and all too often, something snaps. Failure rates are up, triggering higher warranty provisions. And order books are drying up. The company reported a massive drop in onshore orders, and didn’t receive a single order for offshore turbines. It’s not as if costs are going up either. It’s not just Siemens Gamesa. The renewable energy business of GE lost over $2bn in 2022 and jobs are being slashed. High profile projects, like one off New Hampshire, are being abandoned as the cost of materials and debt climbs ever higher. Duke Energy lost $1,3bn on the sale of its renewable unit, and Dominion took a $1.5bn hit on a solar unit. Hard yards all round. Switching gears it’s noteworthy that Cameco, the gorilla of the uranium space, reported some tidy results this week and signed a record number of contracts  with the CEO talking of “the best fundamentals we have ever seen for nuclear fuel”. There was one whopper with Ukraine’s Energoatom, which was the company’s biggest. Ever. So when you read that Japan is not only restarting and extending its nuclear reactor fleet, but also building new reactors in old shutdown plants with the goal – as part of a green transformation – of boosting nuclear from 4% to 22% of their power mix; you can see how those fundamentals for Cameco et al, are lining up. Energy, and energy security, is likely the defining theme of the coming decade.

Given the glare and focus and all round wet lips this week, the money mandarins didn’t disappoint with words and actions that appeared to suggest the recent turbo charged rate hikes are nearing an end. They’ve got it. Inflation is tamed, or if not tamed, certainly backed into a corner. It’s coming back down to target. There followed a frenzy, as irrational a ‘risk-on’ day as is imagined, with flow data showing that day traders made up 23% of total trading, a figure that was higher even than the wild, meme mania of a go-go 2021. Buy, buy, and buy some more. Indices are now back to where technical traders lean in, squint and coo about important technical levels, Fibonacci retracements and other exotic sounding snippets that suggest the rally is close to running on fumes. Exuberant day traders can only move things so far, and for the fire to burn, the big boys, the ‘smart money’ needs to turn up in size. So far, per Goldman Sachs, the professionals remain on the side-lines, apparently unsure whether to take the tracksuit off; such is the lot of those paid to outperform broader benchmarks. FOMO remains at large, but a rally where some stocks are up 30%+ simply for missing interest payments or delaying bankruptcy filing, is a rally as hollow as they come. With dark clouds forming over the consumer as delinquency rates rise, and a smart rebound in commodity prices likely to juice headline inflation over coming months – see the small uptick in the ISM Prices Paid series – those who have been all in on the YTD rally, may be starting to feel a little itchy when thinking about what Bloomberg will be reporting in six months’ time. Indeed, the lagged effect of the USD, which started to weaken in September, could see goods inflation start to tick higher. Not a problem in itself, but a surprise perhaps given the wider deflationary ‘narrative’. Throw in the purported tight labour market driving wages, and hence services inflation, higher there could a unexpected inflationary BOO! hiding somewhere around the corner. More so if the economic pulse coming out of a fast-normalising China begins to thud. Hmm. As for those Central Bankers, over in Japan, headlines report that the BoJ lost a whopping $68bn in December trying to manipulate the sovereign bond market. $68bn is quite a lot of money in just one month. You get the sense that what happens in Japan over coming months, whether it makes the front pages or not, is worth keeping a very close eye on.

All eyes on the data, is a phrase that is thrown around a fair deal. Trust the data. Numbers purporting to distil the vast goings on in the global economy drive global capital flows by changes of the finest order. A nought point one here, a couple of thousand there, can shift sentiment, firing up bulls and bears alike. One of the most celebrated bits of data that hits the tape, is the monthly jobs report, often cutting short a Friday lunch on occasions of boom-boom excitement. Now, it is widely reported that the jobs market is currently super tight. More jobs going than those who want them. And wages are being chased higher as a result, as fired-up Unions whisper quietly in the ears of workers, that the regime has shifted. Labour, not capital, now holds the aces. Or maybe not. Last week the Bureau of Labour Statistics quietly slipped out a report in the shadow of Microsoft and Tesla’s earnings, that showed the jobs market may not be as strong a widely believed. Indeed, there have been warnings. Last month the esteemed Philadelphia Federal Reserve published a note calling out the BLS, suggesting that the data for Q2 2022 had been overstated. And not overstated by a bit, overstated by magnificently wide-of-the-mark one million jobs. One million. All told a somewhat provocative suggestion given the prevailing narrative of an uber-tight market; and a narrative that the Federal Reserve frequently leans on to justify its super-sized rate hikes. Hmm. So with the ball deep in the back-hand court, the Bureau of Labour shuffled its papers and re-ran the model with all the fresh bits of information that have subsequently come in. For those who got to TABLE A, ‘Three-month private sector gross job gains and losses seasonally adjusted’ of the report, there it was. Cold as day. The Philly Fed was on the money, as it showed that the net gain was not a net gain of one million plus jobs at all, but actually a net loss, and a loss to the tune of almost three hundred thousand jobs. So given what was reported back in June 2022, add up all the whoopsies, and it appears that the unemployment rate last summer was actually almost 1% higher than widely reported. Go figure. Maybe it’s a one off, maybe the BIS just had a bad day but in the context of the Fed’s admission last year that they don’t really understand inflation much at all, it now appears the data they look at may not be that accurate. What a stew. In the meantime, treat any mainstream narratives with care.