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

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…

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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.”

S&P 500 earnings vs estimates

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.

No Landing, “No Landing” Scenario At Odds With Fed’s Goals vs GDP

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.

S&P 500 earnings vs estimates vs Fed funds

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.

GAAP earnings vs GDP growth

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.

S&P 500 earnings vs estimates vs money supply growth

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.

S&P 500 earnings vs estimates vs inflation.

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.

The post Consensus View Of “No Recession.” Could It Be Wrong? appeared first on RIA.

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Survey Shows Declining Concerns Among Americans About COVID-19

Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat"…

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Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat" to the health of the US population - a sharp decline from a high of 67% in July 2020.

(SARMDY/Shutterstock)

What's more, the Pew Research Center survey conducted from Feb. 7 to Feb. 11 showed that just 10% of Americans are concerned that they will  catch the disease and require hospitalization.

"This data represents a low ebb of public concern about the virus that reached its height in the summer and fall of 2020, when as many as two-thirds of Americans viewed COVID-19 as a major threat to public health," reads the report, which was published March 7.

According to the survey, half of the participants understand the significance of researchers and healthcare providers in understanding and treating long COVID - however 27% of participants consider this issue less important, while 22% of Americans are unaware of long COVID.

What's more, while Democrats were far more worried than Republicans in the past, that gap has narrowed significantly.

"In the pandemic’s first year, Democrats were routinely about 40 points more likely than Republicans to view the coronavirus as a major threat to the health of the U.S. population. This gap has waned as overall levels of concern have fallen," reads the report.

More via the Epoch Times;

The survey found that three in ten Democrats under 50 have received an updated COVID-19 vaccine, compared with 66 percent of Democrats ages 65 and older.

Moreover, 66 percent of Democrats ages 65 and older have received the updated COVID-19 vaccine, while only 24 percent of Republicans ages 65 and older have done so.

“This 42-point partisan gap is much wider now than at other points since the start of the outbreak. For instance, in August 2021, 93 percent of older Democrats and 78 percent of older Republicans said they had received all the shots needed to be fully vaccinated (a 15-point gap),” it noted.

COVID-19 No Longer an Emergency

The U.S. Centers for Disease Control and Prevention (CDC) recently issued its updated recommendations for the virus, which no longer require people to stay home for five days after testing positive for COVID-19.

The updated guidance recommends that people who contracted a respiratory virus stay home, and they can resume normal activities when their symptoms improve overall and their fever subsides for 24 hours without medication.

“We still must use the commonsense solutions we know work to protect ourselves and others from serious illness from respiratory viruses, this includes vaccination, treatment, and staying home when we get sick,” CDC director Dr. Mandy Cohen said in a statement.

The CDC said that while the virus remains a threat, it is now less likely to cause severe illness because of widespread immunity and improved tools to prevent and treat the disease.

Importantly, states and countries that have already adjusted recommended isolation times have not seen increased hospitalizations or deaths related to COVID-19,” it stated.

The federal government suspended its free at-home COVID-19 test program on March 8, according to a website set up by the government, following a decrease in COVID-19-related hospitalizations.

According to the CDC, hospitalization rates for COVID-19 and influenza diseases remain “elevated” but are decreasing in some parts of the United States.

Tyler Durden Sun, 03/10/2024 - 22:45

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Rand Paul Teases Senate GOP Leader Run – Musk Says “I Would Support”

Rand Paul Teases Senate GOP Leader Run – Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump…

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Rand Paul Teases Senate GOP Leader Run - Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump into the race to become the next Senate GOP leader, and Elon Musk was quick to support the idea. Republicans must find a successor for periodically malfunctioning Mitch McConnell, who recently announced he'll step down in November, though intending to keep his Senate seat until his term ends in January 2027, when he'd be within weeks of turning 86. 

So far, the announced field consists of two quintessential establishment types: John Cornyn of Texas and John Thune of South Dakota. While John Barrasso's name had been thrown around as one of "The Three Johns" considered top contenders, the Wyoming senator on Tuesday said he'll instead seek the number two slot as party whip. 

Paul used X to tease his potential bid for the position which -- if the GOP takes back the upper chamber in November -- could graduate from Minority Leader to Majority Leader. He started by telling his 5.1 million followers he'd had lots of people asking him about his interest in running...

...then followed up with a poll in which he predictably annihilated Cornyn and Thune, taking a 96% share as of Friday night, with the other two below 2% each. 

Elon Musk was quick to back the idea of Paul as GOP leader, while daring Cornyn and Thune to follow Paul's lead by throwing their names out for consideration by the Twitter-verse X-verse. 

Paul has been a stalwart opponent of security-state mass surveillance, foreign interventionism -- to include shoveling billions of dollars into the proxy war in Ukraine -- and out-of-control spending in general. He demonstrated the latter passion on the Senate floor this week as he ridiculed the latest kick-the-can spending package:   

In February, Paul used Senate rules to force his colleagues into a grueling Super Bowl weekend of votes, as he worked to derail a $95 billion foreign aid bill. "I think we should stay here as long as it takes,” said Paul. “If it takes a week or a month, I’ll force them to stay here to discuss why they think the border of Ukraine is more important than the US border.”

Don't expect a Majority Leader Paul to ditch the filibuster -- he's been a hardy user of the legislative delay tactic. In 2013, he spoke for 13 hours to fight the nomination of John Brennan as CIA director. In 2015, he orated for 10-and-a-half-hours to oppose extension of the Patriot Act

Rand Paul amid his 10 1/2 hour filibuster in 2015

Among the general public, Paul is probably best known as Capitol Hill's chief tormentor of Dr. Anthony Fauci, who was director of the National Institute of Allergy and Infectious Disease during the Covid-19 pandemic. Paul says the evidence indicates the virus emerged from China's Wuhan Institute of Virology. He's accused Fauci and other members of the US government public health apparatus of evading questions about their funding of the Chinese lab's "gain of function" research, which takes natural viruses and morphs them into something more dangerous. Paul has pointedly said that Fauci committed perjury in congressional hearings and that he belongs in jail "without question."   

Musk is neither the only nor the first noteworthy figure to back Paul for party leader. Just hours after McConnell announced his upcoming step-down from leadership, independent 2024 presidential candidate Robert F. Kennedy, Jr voiced his support: 

In a testament to the extent to which the establishment recoils at the libertarian-minded Paul, mainstream media outlets -- which have been quick to report on other developments in the majority leader race -- pretended not to notice that Paul had signaled his interest in the job. More than 24 hours after Paul's test-the-waters tweet-fest began, not a single major outlet had brought it to the attention of their audience. 

That may be his strongest endorsement yet. 

Tyler Durden Sun, 03/10/2024 - 20:25

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The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While “Waiting” For Deporation, Asylum

The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While "Waiting" For Deporation, Asylum

Over the past several…

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The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While "Waiting" For Deporation, Asylum

Over the past several months we've pointed out that there has  been zero job creation for native-born workers since the summer of 2018...

... and that since Joe Biden was sworn into office, most of the post-pandemic job gains the administration continuously brags about have gone foreign-born (read immigrants, mostly illegal ones) workers.

And while the left might find this data almost as verboten as FBI crime statistics - as it directly supports the so-called "great replacement theory" we're not supposed to discuss - it also coincides with record numbers of illegal crossings into the United States under Biden.

In short, the Biden administration opened the floodgates, 10 million illegal immigrants poured into the country, and most of the post-pandemic "jobs recovery" went to foreign-born workers, of which illegal immigrants represent the largest chunk.

Asylum seekers from Venezuela await work permits on June 28, 2023 (via the Chicago Tribune)

'But Tyler, illegal immigrants can't possibly work in the United States whilst awaiting their asylum hearings,' one might hear from the peanut gallery. On the contrary: ever since Biden reversed a key aspect of Trump's labor policies, all illegal immigrants - even those awaiting deportation proceedings - have been given carte blanche to work while awaiting said proceedings for up to five years...

... something which even Elon Musk was shocked to learn.

Which leads us to another question: recall that the primary concern for the Biden admin for much of 2022 and 2023 was soaring prices, i.e., relentless inflation in general, and rising wages in particular, which in turn prompted even Goldman to admit two years ago that the diabolical wage-price spiral had been unleashed in the US (diabolical, because nothing absent a major economic shock, read recession or depression, can short-circuit it once it is in place).

Well, there is one other thing that can break the wage-price spiral loop: a flood of ultra-cheap illegal immigrant workers. But don't take our word for it: here is Fed Chair Jerome Powell himself during his February 60 Minutes interview:

PELLEY: Why was immigration important?

POWELL: Because, you know, immigrants come in, and they tend to work at a rate that is at or above that for non-immigrants. Immigrants who come to the country tend to be in the workforce at a slightly higher level than native Americans do. But that's largely because of the age difference. They tend to skew younger.

PELLEY: Why is immigration so important to the economy?

POWELL: Well, first of all, immigration policy is not the Fed's job. The immigration policy of the United States is really important and really much under discussion right now, and that's none of our business. We don't set immigration policy. We don't comment on it.

I will say, over time, though, the U.S. economy has benefited from immigration. And, frankly, just in the last, year a big part of the story of the labor market coming back into better balance is immigration returning to levels that were more typical of the pre-pandemic era.

PELLEY: The country needed the workers.

POWELL: It did. And so, that's what's been happening.

Translation: Immigrants work hard, and Americans are lazy. But much more importantly, since illegal immigrants will work for any pay, and since Biden's Department of Homeland Security, via its Citizenship and Immigration Services Agency, has made it so illegal immigrants can work in the US perfectly legally for up to 5 years (if not more), one can argue that the flood of illegals through the southern border has been the primary reason why inflation - or rather mostly wage inflation, that all too critical component of the wage-price spiral  - has moderated in in the past year, when the US labor market suddenly found itself flooded with millions of perfectly eligible workers, who just also happen to be illegal immigrants and thus have zero wage bargaining options.

None of this is to suggest that the relentless flood of immigrants into the US is not also driven by voting and census concerns - something Elon Musk has been pounding the table on in recent weeks, and has gone so far to call it "the biggest corruption of American democracy in the 21st century", but in retrospect, one can also argue that the only modest success the Biden admin has had in the past year - namely bringing inflation down from a torrid 9% annual rate to "only" 3% - has also been due to the millions of illegals he's imported into the country.

We would be remiss if we didn't also note that this so often carries catastrophic short-term consequences for the social fabric of the country (the Laken Riley fiasco being only the latest example), not to mention the far more dire long-term consequences for the future of the US - chief among them the trillions of dollars in debt the US will need to incur to pay for all those new illegal immigrants Democrat voters and low-paid workers. This is on top of the labor revolution that will kick in once AI leads to mass layoffs among high-paying, white-collar jobs, after which all those newly laid off native-born workers hoping to trade down to lower paying (if available) jobs will discover that hardened criminals from Honduras or Guatemala have already taken them, all thanks to Joe Biden.

Tyler Durden Sun, 03/10/2024 - 19:15

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