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The consumer continues to astound. To spend, to consume, to buy more and more stuff at a time when savings are being run down and confidence is supposedly fast approaching the bottom of bottle of very neat liquor. From Lowe’s to Abercrombie through to Best Buy, American Eagle and Burlington Coats the message is the same. The tills are ringing hot. The jobs market is tight, wages are going up – albeit not in step with the cost of a Thanksgiving dinner – and consumer spending is on track to holler 4% higher in Q4. The thump-thump out of retail is going to put some serious heat into the quarterly GDP number, hence the Atlanta FEDs model gapping up. Perhaps it’s a sign of post-COVID exuberance, as the first holiday season free of masks and hand gel, lays the ground for a temporary what-the-hell spending spree. Fears that it’s a final flurry are fanned by the fact that much of the spending is being loaded on to credit cards; cards that charge rates that are shooting north of an eye-popping 16%. Delinquencies are likely to rise come the chill of a 2023 when low-end consumers who have maxed out, start to feel the nip-nip of a corporate recession. That said analysts point to a near $1.2 trillion pile of personal savings, so whilst they are being drawn down, there is plenty left on account. Watch auto loans, where delinquency rates are starting to tick higher; so too the share prices of the likes of Affirm Holdings and Sezzle. Consumer payment businesses that will be first to see signs of the hangover post a big festive binge. A recession may be incoming, but it appears the consumer has not yet picked up the mail.

It’s the time of year for the much anticipated slew of sell-side strategists ‘year-ahead’ pieces, whereby the turning of the calendar year fires up a commercial opportunity to opine on what may or may not happen next year. That markets are a constant evolving melee of mood and real time data and company earnings and all sorts of other stuff, makes it all a bit random, but never mind. Those forecasts though, are just that, forecasts, best guesses; and whilst many have models and spreadsheets to back them up, few consistently nail it. That said, calling what happens to inflation through 2023 is important for many, and whilst there is Central Bank driven view that inflation will fall rapidly, work done by some analysts suggests that while this may be true, it may also be wildly optimistic. The Spanish-American philosopher, George Santayana, once wrote “Those who can not remember the past are condemned to repeat it” in warning to those who think the inflation genie is a benign and biddable foe. History, warn the authors, tells us that it can take far, far longer to return to normal levels than many realise. Indeed, grazing the near two hundred instances of policy hikes of more than 1% – in developed markets that is – the average lag until a 1% decrease in inflation filtered through was between two and four years. And this time round the genie has de-globalisation, steamy geopolitics, ageing workers and an uber expensive energy transition cheering it on. More worrying still, in instances of when inflation breaches 8%, it powers higher 70% if the time. Getting inflation back to ‘target’ so says history, may take a lot longer than many currently expect.

Lots of focus this week, in the UK at least less so, perhaps, in the canteen at Twitter, on the Government’s fourth big budgetary shemozzle as it desperately tries to regain the trust of the kind strangers who keep the whole show on the road. The muted market reaction to yesterday’s steely speech by Jeremy Hunt suggests time has been bought, and a semblance of stability has returned. For now. Stepping back, the tale of the tape YTD can be summed up by performance of the lesser known ‘NGRU levered big oil ETN’ which has returned a none too shabby +286%; relative that is to the also, not-for-vicars-and-nuns, ‘BULZ levered FAANG’ product which has slumped -89%. And there it is, a secular shift into inflation assets as the boom time thump-thump of excess wanes. The consequences of an egregious decade-long misallocation of capital meanwhile, has started to shake out the charlatans. The new CEO of FTX, one John Ray III, who tidied up Enron, spoke this week of his shock at the lack of any sort of corporate controls and complete no show of any reliable financial information. He is, one would imagine, a man who is quite hard to shock. FTX is, likely, just the start of it. Also of note is the inversion of the yield curve in the US, where the closely watched 2s10s is the most upside down since February 1982 giving those of a bearish leaning more than enough to scare the supper party guests over ripe brie and port. With pending home sales -30%, lumber -70%, freight rates -75%, amongst others, a recession does indeed seem to be coming. That said, LEIs have ticked up and the Atlanta FED’s much tweeted GDP Now series is calling for Q4 GDP to come in with a 4-handle, suggesting the huge inflow into equity markets this week is a taster of what’s to come; and speaks of some pent up appetite to chase performance into year end. Mince pies all round.

Throaty cheers may well echo down the corridors of the Eccles building as news of another round of job cuts in the tech space hit the wires, such is the apparent resolve of the Federal Reserve to curb this year’s bout of inflation that seemingly popped out of nowhere. Unless of course the run of sticky prints is less about demand, which might well be curbed by rising unemployment; and more about supply, on account of – amongst other issues – years and years of underinvestment in key industrial commodities. Time will tell. News, though, of widespread job losses in the once booming tech space is either a sign of companies right-sizing the workforce after the Head of Talent got over the skis on pandemic related distortions to the top line, or a sign that the 2000 tech-wreck is back for another showing. Should such recent trends persist though, there is going to be a real issue with employee morale. With a change in wind, a turn in the tide – choose a metaphor – the market is slowly reappraising a world of structurally higher, well, everything. It was interesting to read this week, then, about a neat ‘expose’ on how many executives of mega-cap tech have used their prodigious cash generation of the ZIRP era. The author notes that there are many things management can do with year end profits, but the one that makes shareholders go all warm and fuzzy, is news of a buyback. News that the share count will be shrinking. Fewer shares, larger slices of the profit pie in future years. So goes the thinking. It was, then, a surprise to read that some of those buybacks that were greeted with investors doffing boaters into the air, have been used to monetise stock-based compensation. In one instance, the whole lot. Leaving absolutely no benefit from the buyback to actual shareholders. For employees, share based compensation is a big attraction, and so watching the implosion of prices YTD, has left a hollow feeling and a lot of doodling, and staring into space. More so when nobody really knows how much further there is still left to tank. Talent needs to be incentivised and if not, can walk out the door, as quickly as it walks in. Pushed, or otherwise. As for those buybacks, management might want to steel the chops for shareholders to go full on ‘Jerry Maguire’ at them come the next quarterly catch up.

The violence of the moves across asset prices post the ever-so-slightly-softer CPI print last week, reeked of a squeeze; a classic bear market rally as nostrils flared and the shiny faces on CNBC talked up the famously misguided narrative of the ‘Santa Claus rally’. That the data may be in for a few months respite, might fan the coals, but there remains a lingering fear that delayed effect of the super-sized rate hikes are going to cobble corporate earnings. Forecasts, whilst pared, remain too high. The impact comes with an eighteen month delay. For a real-time glimpse into an economy that is weathering a Muhammed Ali-sized one-two on the cost of living, listen to what companies are saying. Wendy’s head chef, one Todd Penegor, spoke of a strapped consumer, a consumer eating more meals at home, glassy eyed in front of Wheel of Fortune. Through the lens of Upstart, a company that uses AI to provide affordable credit to those that need it, the message is much the same. To make ends meet, many households are raiding the college fund. The personal savings rate has down-ticked to a level “not seen since the great financial crisis”. To make matters worse, CFO Sanjay Datta went on explain that consumers have slapped it all on the credit card. He then blinked several times. Such stark warnings on the current financial mojo of suburban America are brutally laid bare in the readings of consumer sentiment. Whilst the implosion of the crypto world has caught the headlines, the University of Michigan’s consumer sentiment gauge just printed a sub-55 month. During economic expansions the average reading is 88; during recessions its about 70. So a sub-55 reading sort of explains where the consumer is at, more so in the context that it has been below 60 for seven consecutive months. Seven. The prior record was four months. Any Santa-led rally is for renting, for this bear the lows are not yet in.

Watch what they do, not what they say. Central Banks have been on a hawkish footing all year, out jawboning the market as is there way but, as a collective, actions speak louder than words. Reports filtering through in various circles about what has been going on with gold bullion is, perhaps, of ever growing significance. Whilst the price of gold – in dollars – has been disappointing given the macro backdrop, it appears physical bullion is being drained from the vaults. And drained at an alarming rate. The paper price has long been victim to manipulation by murky hands, but the physical is what ought to be watched. As fiat currencies smoulder, many with an eye on the barbarous relic’s historical go-to store of value, have been buying. Premiums paid over the paper price are at rarely-seen-before levels. Speak to any physical dealer, the story is the same. To find out where all the gold is going, turn to the World Gold Council, who recently whispered to those close enough to hear that, globally, Central Banks bought nigh on 400 tonnes of gold in Q3. The tonnage won’t mean much without context, but that is a record. The money men in Turkey, Uzbekistan, Qatar and India have been piling into gold. China and Russia aren’t so keen to publicly announce their buying, but it’s not hard to assume they have had their fill. Year to date Central Banks have bought more gold than in any year since 1967. And it’s all going East. Mainstream Western media have recently zeroed in on the failure of gold to shine this year, as huge retail outflows slammed ETFs and share prices lower, but all the time the Central Banks of the East have been buying. Should that Western demand pick up as storm clouds continue to gather, there might not be enough to go round. Not at current prices. Gold and Silver smashed through major upside resistance this week, breaking multi-month down trends. Watch this space.

As headlines bulge with news of mid-term elections, high-tiding politicians trading climate focused soundbites across the sun loungers of Sharm El Sheikh, META layoffs and the blink-and-you-miss-it implosion of another crypto currency, the USD is starting to puff. To start, perhaps, a long overdue list lower. After a near parabolic rise YTD as the Federal Reserve went hard after inflation by unleashing the fastest hiking cycle in recent memory, the lights are starting to flicker. Lots of things matter across financial assets, but few things matter more than where the mighty greenback goes from here. The greenback and maybe QT, the historic slow-slow unwind of gargantuan Central Bank balance sheets that is supposed to pick up into the fast approaching global recession. Many suspect that the Central Banks will never get to lighten the load much, that the hissing will turn to a pop and then a very loud bang will make the mandarins hold an emergency weekend meeting and announce some sort of plan that will basically involve more monetary magic. So far, it is reported, the Fed has pared the ledger by $240-odd billion which is about 3%. So not very much. The rampant dollar meanwhile is hammering overseas earnings for those that have them, and hammering those overseas that are being forced to dump their US Treasuries to save their own backsides. With interest payments on the debt going up, and tax receipts going down as the economy slows, there appears to be a massive hole in Uncle Sam’s books. Who then, is going to fund the knee-knocking trillion+ deficit when once reliable overseas buyers have now all turned sellers as they fight to stave off a currency collapse at home courtesy of a bulled up dollar? Answers on a postcard.

House prices are falling. That house prices have spent the past few decades going up, latterly as Central Banks ladled out the ZIRP punch bowl, should not be forgotten. For now, though, they are falling. Every housing cycle ultimately comes down to mortgage rates; and mortgage rates have just exploded higher leaving those coming to the end of boom-time deals, a little sweaty in the lower back. Housing matters as it’s a leading indicator of the broader economy and what has happened to housing, will likely happen to pretty much everything else next year. There are, as ever, plenty of moving parts namely where the Federal Funds Rate will eventually settle. Friday saw a couple of Regional Fed Presidents out talking about the need to go a bit steadier on the recent full throttle ‘up-and-at-em’ approach to raising rates. All the front-loading done so far needs time to bed in. That said, Thomas Barkin whispered a higher end point might still be necessary. In short, they don’t know. Either way, mortgage rates tend to continue to drift higher well beyond the peak in any rate hikes so one can assume, from current prickly levels, they are going higher. Analysts talk openly that today’s mortgage rates already point to a very low reading in the key homebuilder sentiment survey, the NAHB Index – an index that has fallen more YTD than in any year since its inception in 1985 – and it could go lower still. Dress it all up with a pretty pink bow and the conclusion is that the coming recession could well be ‘epic’. A recession is largely consensual, the depth is not. Saddle up tight. And buy some gold.

With the newswires as grim as they are there is a risk of a widespread shortage of fun. Laughter. Mischief. That general joie that comes with pink gin and gypsy swing. That said, there are shortages. There are shortages everywhere. From oil to critical ‘green’ metals like cobalt and lithium, through to copper and iron. Almost every commodity going appears to be heading into a long-term structural deficit. Short term, prices gyrate up and down, driven by the mood and chitter-chatter on the depth of the incoming recession, but long-term there is less drilling, less digging, less prospecting; and those mines that are in operation are getting less and less out of the fast depleting earth’s crust than they did in the past. Grades are falling. Costs, too, from wages to diesel, are rising. Take a Chevron. A goliath in the business of keeping Global Inc in full scale operation. Those in the know, know, but those who don’t graze year-end accounts might not know that back in 2013 Chevron produced about 3m barrels of oil per day. They also splurged about $40bn in capex. Last year they also produced about 3m boe/day, but were spending about $8bn in capex. In a little under a decade production has flatflined. Capex meanwhile is down a whopping 80%. Swap Chevron for the name of any other major commodity player and the trend is much the same. Production flat to down, capex down a lot more. Reserves, meanwhile, can only last so long. And all this at a time when banks are no longer returning calls, regulatory winds howl, and any remaining large scale deposits are to be found further and further off the main road. Management teams of leading commodity companies frequently talk of new mines taking ten to fifteen years to ramp up to production. Tick tock, tick tock. The shortages, it is fast becoming apparent, are not going away any time soon. Short term price moves be damned.

As markets continue to be in thrall to the posturing and barbed rhetoric of Central Bankers, investors hop from foot to foot wondering what it all means for asset prices into what is shaping up to be a particularly sticky 2023. This week more hikes. Up and up we go. Ostensibly the in-it-to-the-end Federal Reserve are on the tail of inflation, raising the heat on borrowing costs in an attempt to get the data in line and the core measures back down to spuriously set target levels. And yet, it has been suggested that in their efforts to squash decade high prints the moves will, in some instances, pour further fuel on the current inferno. Whilst higher borrowing costs are likely to temper demand for many things, some things they do not. For some demand is, what the textbooks call, inelastic. Examples cited include farming, a sector in the US that currently sits on nearly half a trillion dollars of debt. Rates go up, so too interest payments. Like higher seed or fertiliser costs, those interest costs will simply get shipped on down the line. Otherwise farmers will down tools, stare into the distance and food will not get grown. Utilities too, pass it on. And healthcare. Higher rates for many companies mean a higher cost of business. Which for the insurers, means higher premiums down the line. Prices, up and up. On and on it goes. And all this aside from the interest payments on the $92.5 trillion of private and public debt, reaching an eye-popping $3.4 trillion. $3.4 trillion just on interest. Read it again. Say it out loud. Tell it to your dog and watch what it does to his ears. It’s not unreasonable to assume then, that higher interest rates may not be doing a whole lot of good when the system is groaning with so much debt. Something is going to break. It’s just a matter of time.