Connect with us

Government

Consensus View Of “No Recession” – Could It Be Wrong?

Consensus View Of "No Recession" – Could It Be Wrong?

Authored by Lance Roberts via RealInvestmentAdvice.com,

Could the consensus view of…

Published

1 week ago

on

Consensus View Of "No Recession" - Could It Be Wrong?

Authored by Lance Roberts via RealInvestmentAdvice.com,

Could the consensus view of a “no recession” scenario be wrong? As portfolio managers, this is the question we ask ourselves daily. Since the lows of last October, the technical backdrop has improved markedly, as discussed last week in “Bear Trap.” To wit:

“Our most critical bullish signals are the short- and intermediate-term Moving Average Convergence Divergence (MACD) indicators. We post this weekly chart in our website’s 401k plan management section. Both sets of weekly MACD indicators have registered buy signals from levels lower than during the financial crisis. The market has also broken above both weekly moving averages and, as noted above, held the long-term bullish trend line.”

While the technical backdrop continues to confirm and reaffirm a bullish trend supporting the “no recession” scenario, there remain substantial risks to that view. Such risks, as was seen with Silicon Valley Financial (SVB) last week, can arise quickly, turning previously bullish sentiment quickly bearish.

What happened with SVB is a result of tighter monetary policy extracting liquidity from the banking system. In an upcoming article, I quoted Thorsten Polleit from The Mises Institute, stating:

“What is happening is that the Fed is pulling central bank money out of the system. It does this in two ways. The first is not reinvesting the payments it receives into its bond portfolio. The second is by resorting to reverse repo operations, in which it offers “eligible counterparties” (those few privileged to do business with the Fed) the ability to park their cash with the Fed overnight and pay them an interest rate close to the federal funds rate.”

As shown, contractions in nominal M2 have coincided with financial and market-related events in the past. Such is because the Fed is draining liquidity out of the financial system, which is a problem for overleveraged banks.

However, while SVB might be an isolated event, of which we are not sure, the driver of higher asset prices remains a consensus view that earnings will bottom in the second quarter of this year and begin to improve into year-end. If such is the case, given that markets lead fundamental changes, the market’s rally since last October is logical.

But that is the key to the markets this year. Is the consensus view right or wrong?

Will Earnings Bottom?

The chart below shows the GAAP estimates (red dotted line) by S&P Global through the end of 2023. Amazingly, they expect earnings to recover to where they were at the bull market’s peak in 2022. Such was when interest rates were zero, and the Federal Reserve provided $120 billion monthly in “quantitative easing.”

However, this view from S&P Global is the same as most Wall Street banks who expect the Fed to “pause” its rate hiking campaign and the economy to avoid a recession. That broad consensus view of a “no landing” scenario has fueled the market’s advance since January but remains at odds with much of the macroeconomic data.

As I discussed in “No Landing Scenario At Odds With Fed’s Goals,”

“Given the recent spate of economic data from the strong jobs report in January, a 0.5% increase in inflation and a solid retail sales report continue to give the Fed no reason to pause anytime soon. The current base case is that the Fed moves another 0.75%, with the terminal rate at 5.25%.”

That type of rhetoric doesn’t suggest a “no landing” scenario, nor does it mean the Fed will be cutting rates soon. Notably, the only reason for rate cuts is a recession or financial event that requires monetary policy to offset rising risks. This is shown in the chart below, where rate reductions occur as a recession sets in.

The problem with that data is that the lag effect of monetary tightening has not been reflected as of yet. Over the next several months, the data will begin to fully reflect the impact of higher interest rates on a debt-laden economy. However, as shown, while the consensus view is that earnings will grow strongly into year-end, higher rates drag on earnings as economic growth slows.

Of course, such is logical, given that earnings are derived from economic activity. As such, there is a decent correlation between economic growth and GAAP earnings.

With the Fed continuing to hike rates, the ability of the economy to start expanding to support earnings growth seems questionable.

However, two other factors also suggest the consensus view is worth questioning.

To Pivot Or Not To Pivot

The problem with the consensus view is that it requires the Fed to revert to monetary accommodation. However, if the consensus view is correct, why would the Fed change policy? As we noted previously:

  1. If the market advance continues and the economy avoids recession, the Fed does not need to reduce rates.

  2. More importantly, there is also no reason for the Fed to stop reducing liquidity via its balance sheet.

  3. Also, a “no-landing” scenario gives Congress no reason to provide fiscal support providing no boost to the money supply.

See the problem with this idea of a “no landing” scenario?

“No landing does not make any sense because it essentially means the economy continues to expand, and it’s part of an ongoing business cycle, and it’s not an event. It’s just ongoing growth. Doesn’t that entail that the Fed will have to raise rates more, and doesn’t that increase the risk of a hard landing?” – Chief Economist Gregory Daco, EY

As I noted, there are two additional problems with the consensus view of a sharp recovery in earnings.

The first is the reversal of the massive stimulus injections into the economy in 2020-2021, which provided for the surge in economic activity and earnings. As shown, money supply growth is reversing, with earnings also slowing. The consensus view expects earnings to buck that correlation in the future.

The second problem is inflation. During the pandemic shutdown, the massive supply of monetary stimulus collided with an economic shutdown leading to surging prices. Due to a lack of supply and a massive contraction in employment, surging prices sent corporate profit margins soaring. However, sustaining record margins will be challenging with inflation falling, the economy at full employment, and wages rising.

While the markets are certainly betting on an optimistic scenario, logic suggests many challenges lie ahead.

There is still a lot of money sloshing around the economy from the repeated rounds of stimulus. Also, from the infrastructure spending bill, and increased social security and welfare benefits. The impact of higher rates on economic activity may get delayed but not eliminated.

As Jerome Powell noted in last week’s Senate Finance Committee testimony:

“Inflation has moderated somewhat since the middle of last year but remains well above the FOMC’s longer-run objective of 2 percent… That said, there is little sign of disinflation thus far in the category of core services, excluding housing, which accounts for more than half of core consumer expenditures.

If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes… The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.

That certainly doesn’t suggest a pivot is coming any time soon. This brings us to the one question every investor must answer.

How does the consensus view come to fruition with higher interest rates, less monetary liquidity, and slower economic growth?

I don’t know the answer. However, I am not liking the odds that the outcome will be as positive as Wall Street expects.

Tyler Durden Fri, 03/17/2023 - 08:55

Read More

Related Topics:
Continue Reading

Government

As We Sell Off Our Strategic Oil Reserves, Ponder This

As We Sell Off Our Strategic Oil Reserves, Ponder This

Authored by Bruce Wilds via Advancing Time blog,

One of Biden’s answers to combating…

Published

15 hours ago

on

March 25, 2023

By

As We Sell Off Our Strategic Oil Reserves, Ponder This

Authored by Bruce Wilds via Advancing Time blog,

One of Biden's answers to combating higher gas prices has been to tap into America's oil reserves. While I was never a fan of the U.S. Strategic Petroleum Reserve (SPR) program, it does have a place in our toolbox of weapons. We can use the reserve to keep the country running if outside oil supplies are cut off. Still, considering how out of touch with reality Washington has become, we can only imagine the insane types of services it would deem essential next time an oil shortage occurs.

Sadly, some of these reserves found their way into the export market and ended up in China. We now have proof that the President's son Hunter had a Chinese Communist Party member as his assistant while dealing with the Chinese. Apparently, he played a role in the shipping of American natural gas to China in 2017. It seems the Biden family was promising business associates that they would be rewarded once Biden became president. Biden's actions could be viewed as those of a traitor or at least disqualify him from being President.

The following information was contained in a letter from House Oversight Committee ranking member James Comer, R-Ky. to Treasury Secretary Janet Yellen dated Sept. 20. 

"The President has not only misled the American public about his past foreign business transactions, but he also failed to disclose that he played a critical role in arranging a business deal to sell American natural resources to the Chinese while planning to run for President.”

Joe Biden, Comer said, was a business partner in the arrangement and had office space to work on the deal, and a firm he managed received millions from his Chinese partners ahead of the anticipated venture. While part of what Comer stated had previously been reported in the news, the letter, cited whistleblower testimonies, as well as emails, a corporate PowerPoint presentation, and a screenshot of encrypted messages. These as well as  bank documents that committee Republicans obtained suggest Biden’s knowledge and involvement in the plan dated back to at least 2017.

The big point here is;

  • The Strategic Petroleum Reserve, which was established in 1975 due to the 1973 oil embargo, is now at its lowest level since December 1983.

In December 1975, with memories of gas lines fresh on the minds of Americans following the 1973 OPEC oil embargo, Congress established the Strategic Petroleum Reserve (SPR). It was designed “to reduce the impact of severe energy supply interruptions.” What are the implications of depleting the SPR and is it still important?

The U.S. government began to fill the reserve and it hit its high point in 2010 at around 726.6 million barrels. Since December 1984, this is the first time the level has been lower than 450 million barrels. Draining the SPR has been a powerful tool for the administration in its effort to tame the price of gasoline. It also signaled a "new era" of intervention on the part of the White House. 

This brings front-and-center questions concerning the motivation of those behind this action. One of the implications of Biden's war on high oil prices is that it has short-circuited the fossil investment/supply development process.  Capital expenditures among the five largest oil and gas companies have fallen as the price of oil has come under fire. The current under-investment in this sector is one of the reasons oil prices are likely to take a big jump in a few years. Production from existing wells is expected to rapidly fall.

The Supply Of Oil Is Far More Constant And Inelastic Than Demand

It is important to remember when it comes to oil, the supply is far more constant and inelastic than the demand. This means that it takes time and investment to bring new wells online while demand can rapidly change. This happened during the pandemic when countries locked down and told their populations and told them to stay at home. This resulted in the price of oil temporarily going negative because there was nowhere to store it.

Draining oil from the strategic reserve is a short-sighted and dangerous choice that will impact America's energy security at times of global uncertainty. In an effort to halt inflationary forces, Biden released a huge amount of crude oil from the SPR to artificially suppress fuel prices ahead of the midterm elections. 

To date, Biden has dumped more SPR on the market than all previous presidents combined reducing the reserves to levels not seen since the early 1980s. In spite of how I feel about the inefficiencies of this program, it does serve a vital role. It is difficult to underestimate the importance of a country's ability to rapidly increase its domestic flow of oil. This defensive action protects its economy and adds to its resilience. 

Biden's actions have put the whole country at risk. Critics of his policy pointed out the Strategic Petroleum Reserve was designed for use in an emergency not as a tool to manipulate elections. Another one of Biden's goals may be to bring about higher oil prices to reduce its use and accelerate the use of high-cost green energy.

Either way, Biden's war on oil has not made America's energy policies more efficient or the country stronger.

Tyler Durden Sat, 03/25/2023 - 18:30

Read More

Continue Reading

Government

The Disinformation-Industrial Complex Vs Domestic Terror

The Disinformation-Industrial Complex Vs Domestic Terror

Authored by Ben Weingarten via RealClearInvestigations.com,

Combating disinformation…

Published

15 hours ago

on

March 25, 2023

By

The Disinformation-Industrial Complex Vs Domestic Terror

Authored by Ben Weingarten via RealClearInvestigations.com,

Combating disinformation has been elevated to a national security imperative under the Biden administration, as codified in its first-of-its-kind National Strategy for Countering Domestic Terrorism, published in June 2021.  

That document calls for confronting long-term contributors to domestic terrorism.

In connection therewith, it cites as a key priority “addressing the extreme polarization, fueled by a crisis of disinformation and misinformation often channeled through social media platforms, which can tear Americans apart and lead some to violence.” 

Media literacy specifically is seen as integral to this effort. The strategy adds that: “the Department of Homeland Security and others are either currently funding and implementing or planning evidence–based digital programming, including enhancing media literacy and critical thinking skills, as a mechanism for strengthening user resilience to disinformation and misinformation online for domestic audiences.” 

Previously, the Senate Intelligence Committee suggested, in its report on “Russian Active Measures Campaigns and Interference in the 2016 Election” that a “public initiative—propelled by Federal funding but led in large part by state and local education institutions—focused on building media literacy from an early age would help build long-term resilience to foreign manipulation of our democracy.” 

In June 2022, Democrat Senator Amy Klobuchar introduced the Digital Citizenship and Media Literacy Act, which – citing the Senate Intelligence Committee’s report – would fund a media literacy grant program for state and local education agencies, among other entities. 

NAMLE and Media Literacy Now, both recipients of State Department largesse, endorsed the bill. 

Acknowledging explicitly the link between this federal counter-disinformation push, and the media literacy education push, Media Literacy Now wrote in its latest annual report that ... 

... the federal government is paying greater attention to the national security consequences of media illiteracy.

The Department of Homeland Security is offering grants to organizations to improve media literacy education in communities across the country. Meanwhile, the Department of Defense is incorporating media literacy into standard troop training, and the State Department is funding media literacy efforts abroad.

These trends are important for advocates to be aware of as potential sources of funding as well as for supporting arguments around integrating media literacy into K-12 classrooms. 

When presented with notable examples of narratives corporate media promoted around Trump-Russia collusion, and COVID-19, to justify this counter-disinformation campaign, Media Literacy Now president Erin McNeill said: “These examples are disappointing.”

The antidote, in her view is, “media literacy education because it helps people not only recognize the bias in their news sources and seek out other sources, but also to demand and support better-quality journalism.” (Emphasis McNeill’s)

Tyler Durden Sat, 03/25/2023 - 17:30

Read More

Continue Reading

Government

Disney World Event Gives Florida Gov. DeSantis the Middle Finger

Walt Disney’s CEO Bob Iger has shown no willingness to back down in the face of the governor’s efforts to campaign against diversity training.

Published

24 hours ago

on

March 25, 2023

By

Walt Disney's CEO Bob Iger has shown no willingness to back down in the face of the governor's efforts to campaign against diversity training.

Florida Gov. Ron DeSantis has made Disney World, one of his state's largest employers, the target of his so-called war on woke. 

At the root of the dispute are former Walt Disney (DIS) - Get Free Report CEO Bob Chapek's remarks opposing the Republican governor's new law, which limits the ability of educators to discuss gender identity and sexual orientation with children.

Labeled the Don't Say Gay bill, the law met with huge pushback from Disney employees, who had criticized Chapek for initially not speaking out against the bill.

That led the then-Disney boss to take a direct stand against the governor's actions, which in turn led DeSantis to strip the company of its special tax status.  

DON'T MISS: Huge Crowds Force Disney World to Make Big Changes

DeSantis has decided to use Disney as the center of his political-theater culture war because it's an easy, and nonmoving, target. The company can't pack up Disney World and move it to New York, Massachusetts, or some other liberal bastion, so it mostly has to take whatever the governor dishes out.

But while DeSantis wants to use Disney as a target, he's mostly playing to the cameras; clearly, he's not actually looking to take down the largest single-site employer in the U.S. Disney World generates tens of thousands of jobs, pays the state a lot of money. and brings in billions of tourism dollars -- many of which are spent outside its gates in the broader Florida economy.

Image source: Shutterstock/TheStreet Illustration

Disney CEO Iger Uses Actions, Not Words

Disney CEO Bob Iger understands that actions speak louder than words and words can come back to haunt you.

The returned Mouse House boss has not called out DeSantis, nor did he fight the governor's takeover of its Reedy Creek Improvement District.

On paper, Disney World appears to have lost its right to self-govern. That's true, but it doesn't mean much because it's not as if the state -- even DeSantis's handpicked cronies who now oversee the former Reedy Creek Improvement District -- intend to actually get in Disney's way. The company prints money for the state.

So, that's why Iger -- who had publicly spoken against the Don't Say Gay bill when he was a private citizen and not Disney CEO, has not called out DeSantis. A speech decrying the governor's actions, pointing out that they “put vulnerable, young LGBTQ people in jeopardy,” as he said before taking the CEO job back, would not help Disney.

Instead, Iger has let his company's actions speak. 

Disney World plans to host a "major conference promoting lesbian, gay, bisexual and transgender rights in the workplace" at the Disney World Resort this September, the Tampa Bay Times reported.

Disney Boldly Challenges DeSantis

Disney World will host the annual Out & Equal Workplace Summit in September.

"The largest LGBTQ+ conference in the world, with more than 5,000 attendees every year. It brings together executives, ERG leaders and members, and HR and DEI professionals and experts -- all working for LGBTQ+ equality," the event's organizer, Out & Equal, said on its website. 

"Over more than 20 years, Summit has grown to become the preferred place to network and share strategies that create inclusive workplaces, where everyone belongs and where LGBTQ+ employees can be out and thrive." 

The Tampa Bay Times called simply hosting the event "a defiant display of the limits of DeSantis’s campaign against diversity training."

Disney World has hosted the event previously and the company has a relationship with Out & Equal going back many years.

Instead of giving a speech and becoming even more of a right-wing-media talking point, Iger showed his employees where Disney stands through his actions. It's a smart choice by a seasoned executive not to become an actor in DeSantis's political theater.

The Florida governor wants to be perceived as battling 'woke" Disney without actually hurting his state's relationship with the company. The newspaper described exactly how that works when it looked at the new government powers the state has taken from the theme park giant.

The subsequent legislation left most of Disney’s special powers in place despite the governor’s attempt to dissolve the district. The conservative members the governor appointed to the board hinted at the first meeting of the new board that they would exercise leverage over Disney, such as prohibiting COVID-19 restrictions at Disney World. But legal experts have said that the new board’s authority has no control over Disney content.

DeSantis wants a culture war, or at least one that'll play out in the media. Iger knows better and has played the situation perfectly.   

 

Read More

Continue Reading

Trending