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One Month After “Cash Is Trash”, Bridgewater Now Sees Stocks Crashing As Much As 20% More

One Month After "Cash Is Trash", Bridgewater Now Sees Stocks Crashing As Much As 20% More

Back in late November, when billionaire Bridgewater founder Dennis Gartman Ray Dalio issued his latest broken record prognostication that cash continues

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One Month After "Cash Is Trash", Bridgewater Now Sees Stocks Crashing As Much As 20% More

Back in late November, when billionaire Bridgewater founder Dennis Gartman Ray Dalio issued his latest broken record prognostication that cash continues to be trash, telling CNBC that "cash is not a safe investment"...

... we reminded our readers that "Every single time dalio says "cash is trash" markets crash"

Just over a month later, this was (partially) confirmed when the Nasdaq and S&P entered a correction, and the Russell and most Asian markets tumbled into a bear market, down 20% from recent highs.

But instead of taking the L and quietly moving on - and no longer trying to predict the future when it clearly has no idea what will happen (or even what is going on right now) Bridgewater - which once was the feared giant of hedge funds and has since devolved into a bit of a comic sideshow - decided to take an already deep hole and make it much deeper when the firm's co-CIO, Greg Jensen, predicted that stocks will drop as much as 20% more before the Fed bails out the market.

That’d put the S&P 500 below 3,500, or close to where it was before the Covid-19 pandemic began two years ago. The benchmark U.S. index closed Wednesday at 4,350.

The question of what the strike price of the Powell Fed Put (or, as some now speculate, Call) is, has obsessed Wall Street now that stocks have tumbled: after all an entire generation of "traders" has no idea how to trade a market without explicit Fed support. Of course, in retrospect it would have been much more useful to have this discussion a month ago before everything crashed (a discussion we held in mid-December as stocks were trading around 4800 in "As Markets Swing Wildly Seeking The Fed Put, Morgan Stanley Has Some Bad News").

So not even two months after Dalio's latest "cash is trash" effusion, Jensen "explained" that the Fed has little reason to halt the violent selloff that has savaged the most speculative stocks and spurred equity volatility to a 12-month high. On repeating tired and tried talking point, the co-CIO argues that with inflation in the U.S. is running at the hottest in four decades, labor is scarce and companies are building inventories because of supply-chain threats, the Fed will keep hiking (which it does so is anyone's guess: after all, as we noted earlier and as even Powell recognizes, its actions have no impact on supply-driven inflation).

“Some decline in asset prices is not a bad thing from the Fed’s perspective, so they’re going to let it happen,” Jensen, 47, told Bloomberg in a Zoom interview. “At these levels, it would take a much bigger move to get the ‘Fed put’ into the money. They’re a long way from that.”

And so, the experts at the fund whose learned boss urged everyone to dump cash in November, are out with even more ludicrous predictions, and Jensen now says that it would take a drop of 15% to 20% more from here to alarm the central bank, and even that would depend on how fast the bottom falls out from under the market. So far, Jensen said, the decline over the past few weeks has been “mostly healthy” because it has “deflated some of the bubbles,” such as cryptocurrencies (incidentally, back in November, Dalio was also pitching cryptos, so... there's also that).

Of course, judging by Bridgewater's dismal track record in recent years, the increasingly frentic - and incorrect - forecasts are hardly new. They do however suggest that the $150 billion asset manager is starting at even more losses. As Bloomberg notes, "Jensen represents the house view at the world’s biggest hedge fund, with about $150 billion in assets. And in Bridgewater’s analysis, much of what has been happening lately is simply math: Asset prices were elevated by injections of “excess liquidity.” Now that policy makers are withdrawing that monetary stimulus, “there aren’t enough buyers to make up the difference,” Jensen said."

The result is what he calls a “liquidity hole” affecting both stocks and bonds.

Well yeah... of course: a five year old can tell you that - it's called the market discounting some $2.5 trillion in liquidity drainage.

However the actual question is how soon with everything break as the Fed sets off on this massive tightening experiment. Our bet: a few more rate hikes, a few months of QT and it will all be mercifully over as the Fed Put vigilantes make it clear that "this aggression will not stand" and after a brutal correction, the Fed will capitulate again, as it always does.

But that does not stop Jensen from plowing on with what is some of the most naive, rudimentary analysis we have seen from a person of this caliber. And instead of thinking ahead, Jensen extrapolates current conditions indefinitely - as if $90 oil is sustainable in this economy, and as if the US won't slump into a recession at this rate now that Biden's stimmies are all gone - and told Bloomberg that anyone who expects the Fed to blink, as it did after the last pre-pandemic selloff in late 2018, is misreading the economy: "Things were different then. Inflation was below the Fed’s 2% target and big companies were buying back shares instead of adding capacity, stockpiling supplies and raising wages."

Jensen wasn't all wrong, however: he did correctly pinpoint the genesis of the Fed's relentless bubble-blowing skills:

“Since the 1980s, problems have always been solved by easing. That was true fiscally and monetarily, and the countries that eased more did better than the countries that eased less,” he said. “We’re at a turning point now and things will be much different.”

Echoing what we said months ago (when we alone amid an army of incompetent economists and sellside analysts said inflation was not transitory but was here to stay) Jensen said that for the first time since Paul Volcker’s Fed of the early 1980s, inflation has accelerated so fast it’s become a political issue and Biden may well be calling Powell daily to do something about the current climate which is devastating for Biden's polls and democrats in general.

Powell, speaking to reporters after the Fed’s meeting on Wednesday, acknowledged the central bank may have to jack up borrowing costs faster than the market anticipated to stop prices from spiraling higher. Of course, all of that will change once the US economy contracts and/or enters a recession, an outcome which we anticipate can become reality in just a few months.

But not Jensen, who made the deep hole even deeper and said the 10-year Treasury yield has to reach 3.5% or even 4% - up from less than 1.9% today - before private investors are ready to absorb all the government debt that the Fed has been monetizing.

In that scenario, with Treasury prices set to decline further, bonds fail as a hedge against stocks and the traditional 60/40 balanced portfolio is useless as a diversification tool. Jensen said a 1970s-style “stagflation” playbook is more appropriate - echoing what we said months ago when we were mocked for this view - and investors need to increase their commodity holdings (such as pushing Exxon since 2020), trade out of U.S. stocks in favor of international equities and use breakevens to combat inflation.

“Expecting the environment to feel like it did over the past couple of decades is a big mistake,” he said,

And incidentally, Bridgewater is wrong again because no matter how bad stagflation gets, if it means sacrificing the markets, the Fed will pick throwing retail under the bus any time: the last thing Powell will dare to do is undo decades of "wealth effect" creation just to offset inflation which everyone knows will reverse in very short course on its own due to the three D: demographics, debt and disruption.

Incidentally, those wondering where the market will truly bottom should look to the latest note out of Morgan Stanley's Michael Wilson who has been spot on in his bearishness so far: he sees a fair value for the S&P around 4,000 today and then sliding more unless the collapse in PMIs is contained, which it will be as the alternative is a recession.

Tyler Durden Thu, 01/27/2022 - 11:10

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Economics

What Do Consumers Think Will Happen to Inflation?

This post provides an update on two earlier blog posts (here and here) in which we discuss how consumers’ views about future inflation have evolved in…

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This post provides an update on two earlier blog posts (here and here) in which we discuss how consumers’ views about future inflation have evolved in a continually changing economic environment. Using data from the New York Fed’s Survey of Consumer Expectations (SCE), we show that while short-term inflation expectations have continued to trend upward, medium-term inflation expectations appear to have reached a plateau over the past few months, and longer-term inflation expectations have remained remarkably stable. Not surprisingly given recent movements in consumer prices, we find that most respondents agree that inflation will remain high over the next year. In contrast, and somewhat surprisingly, there is a divergence in consumers’ medium-term inflation expectations, in the sense that we observe a simultaneous increase in both the share of respondents who expect high inflation and the share of respondents who expect low inflation (and even deflation) three years from now. Finally, we show that individual consumers have become more uncertain about what inflation will be in the near future. However, in contrast to the pre-pandemic period, they tend to express less uncertainty about inflation further in the future.

The SCE is a monthly, internet-based survey produced by the Federal Reserve Bank of New York since June 2013. It is a twelve-month rotating panel (respondents are asked to take the survey for twelve consecutive months) of roughly 1,300 nationally representative U.S. household heads. Since the inception of the SCE, we have been eliciting consumers’ inflation expectations at the short- and medium-term horizons on a monthly basis. The short-term horizon corresponds to the year-ahead (with the survey question phrased as “over the next 12 months”), while the medium-term horizon corresponds to the three-year-ahead one-year rate of inflation (“0ver the 12-month period between M+24 and M+36,” where M is the month in which the respondent takes the survey). So, for instance, a respondent taking the survey in April 2022 is asked about inflation “over the 12-month period between April 2024 and April 2025.” Recently, we have on occasion elicited longer-term inflation expectations, by asking respondents to report their expected five-year-ahead one-year rate of inflation (“over the 12-month period between M+48 and M+60”). For each horizon, SCE respondents are asked to report their density forecasts by stating the percent chance that the rate of inflation will fall within pre-specified bins. These density forecasts are used to calculate the two measures that we focus on in this blog: the individual inflation expectation (the mean of a respondent’s density forecast), and the individual inflation uncertainty (measured as the interquartile range of a respondent’s density forecast).

The Median Consumer Expects Inflation to Fade over the Next Few Years

SCE respondents think the current high inflation environment will not fade over the next twelve months, but that it will taper off in the next three years and not persist beyond that. The chart below shows the monthly median individual inflation expectation at each horizon since January 2020. As can be seen here, inflation expectations in January 2020 were similar to the average readings during 2018-19 and are therefore representative of the period directly before the COVID-19 pandemic. Short- and medium-term inflation expectations increased slightly and at a similar pace during the first year of the COVID-19 pandemic. In the spring of 2021, as readings of actual inflation started to surge, short-term and, to a lesser extent, medium-term inflation expectations started to increase at a faster rate, reaching levels not seen previously in the nearly ten years since the inception of the SCE. Note that, unlike one-year-ahead inflation expectations which are still on an increasing trajectory, three-year-ahead inflation expectations have leveled off in recent months and even started decreasing slightly after reaching a peak of 4.2 percent in September and October 2021. Looking now at the few data points we have for the longer horizon, five-year-ahead inflation expectations have been remarkably stable in recent months and substantially lower than short- and medium-term inflation expectations.

Inflation Expectations at the Longer Horizon Are Stable and Much Lower

Source: Survey of Consumer Expectations.

Consumers’ Medium-Term Inflation Expectations Have Become More Divergent

At the onset of the COVID-19 pandemic, respondents disagreed about what impact the pandemic would have on short-term inflation, but most of them now believe inflation will be high over the next year. The chart below shows the distribution of individual inflation expectations across respondents in a given month. The left panel shows the share of respondents with low inflation expectations in a given month (that is, with an individual inflation expectation below 0 percent, which corresponds to deflation). The right panel shows the share of respondents with high inflation expectations (that is, with an individual inflation expectation above 4 percent). Starting with the short-term horizon, the chart shows that at the onset of the COVID-19 pandemic in the spring of 2020, there was a sharp increase in the share of respondents who expected deflation (left panel) and, simultaneously, an increase in the share of respondents who expected high inflation (right panel). Hence, consumers’ short-term inflation expectations became more divergent at the onset of the pandemic, with some consumers expecting COVID-19 to be an inflationary supply shock over the subsequent twelve months, and other consumers expecting COVID-19 to be a large deflationary demand shock. Starting in the second half of 2020, the share of respondents with low short-term expectations declined, while the share of the respondents with high short-term expectations continued to increase, consistent with the overall increase in short-term inflation expectations discussed in the previous paragraph.

The divergence in inflation beliefs we observed for short-term expectations at the onset of the pandemic has shifted to medium-term expectations during the past eight months. The chart below shows little change in the share of respondents with extreme (high or low) medium-term inflation beliefs at the onset of the pandemic. This suggests that consumers initially thought the pandemic would not have a strong persistent effect on inflation. After the fall of 2020, the share of respondents who expect high inflation in the medium-term started to increase steadily (see right panel). However, the rate of increase over the past year was slower than at the short-term horizon. Furthermore, after reaching a plateau last fall, the share of respondents who expect high inflation has declined slightly in the past few months. Perhaps more surprisingly, the left panel of the chart below shows that the share of respondents who expect deflation in the medium-term started to increase sharply in the fall of last year, moving from about 10 percent in August 2020 to nearly 20 percent in March and April 2022.

Although we caution against drawing strong conclusions from only a few data points, it seems that the distribution of longer-term inflation expectations has shifted to the left (toward lower inflation outcomes) in recent months. The chart below indicates that the recent increase in the share of respondents with low inflation expectations is similar at the medium- and longer-term horizons. In contrast, the share of respondents who expect high inflation five years from now is substantially lower than at the short- and medium-term horizons and it has remained mostly stable over the past eight months.

The Distribution of Longer-Term Inflation Expectations Has Shifted toward Lower Inflation Outcomes

Source: Survey of Consumer Expectations.
Note: An inflation expectation below 0 percent (as in the left panel) corresponds to deflation.

Individual Consumers Have Become More Uncertain about Future Inflation

Finally, we find that consumers have become more uncertain about future inflation, especially at shorter horizons. The final chart shows the median of individual inflation uncertainty across respondents in a given month. As can be seen in this staff study, inflation uncertainty exhibited two main patterns prior to the pandemic. First, inflation uncertainty at both the short- and medium-term horizons had been declining slowly and steadily since the start of the SCE in 2013. Second, SCE respondents almost always expressed more uncertainty for three-year-ahead inflation than for one-year-ahead inflation, perhaps reflecting the fact that predicting inflation further into the future tends to be more difficult. The chart below shows a complete reversal of these two trends after the World Health Organization declared COVID-19 to be a pandemic in March 2020: inflation uncertainty at both horizons has since increased steadily to record levels, and short-term inflation uncertainty has generally been higher than medium-term inflation uncertainty. The few observations we have for longer-term inflation uncertainty seem to confirm these trends. Indeed, five-year-ahead inflation uncertainty has increased over the past eight months, but has remained substantially lower than at the one- and three-year horizons.

Inflation Uncertainty Is Lower at a Longer-Term Horizon

Chart: Inflation Uncertainty Is Lower at a Longer-Term Horizon
Source: Survey of Consumer Expectations (SCE).
Note: The SCE measures disagreement across respondents as the difference between the 75th and 25th percentile of inflation expectations.

To conclude, the results presented in this blog post provide fresh evidence that consumers still do not expect the current spell of high inflation to persist long into the future. While median one-year-ahead inflation expectations have continued to rise over the past six months, three-year-ahead expectations have declined slightly, and five-year-ahead inflation expectations have remained remarkably stable and at a level well below recent inflation readings. However, there is now a divergence in consumers’ medium-term inflation expectations: a larger share of consumers expects high inflation three years from now, while simultaneously a growing share of consumers expects low inflation and even deflation. Finally, we have shown that consumers have become increasingly uncertain about future inflation, especially at shorter horizons. We are now conducting new research aimed at better understanding the factors driving these changes in consumer beliefs.

Olivier Armantier is head of Consumer Behavior Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

Fatima Boumahdi is a senior research analyst in the Bank’s Research and Statistics Group.

Gizem Kosar is a research economist in Consumer Behavior Studies in the Bank’s Research and Statistics Group.

Jason Somerville is a research economist in Consumer Behavior Studies in the Bank’s Research and Statistics Group.

Giorgio Topa is an economic research advisor in Labor and Product Market Studies in the Bank’s Research and Statistics Group

Wilbert van der Klaauw is an economic research advisor on Household and Public Policy in the Bank’s Research and Statistics Group.

John C. Williams is the president and chief executive officer of the Bank. 


Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

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Spread & Containment

US Allows 2 Million Baby Formula Cans In From UK, Lets Abbott Release 300,000 Specialty Cans

US Allows 2 Million Baby Formula Cans In From UK, Lets Abbott Release 300,000 Specialty Cans

Authored by Mimi Nguyen Ly via The Epoch Times…

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US Allows 2 Million Baby Formula Cans In From UK, Lets Abbott Release 300,000 Specialty Cans

Authored by Mimi Nguyen Ly via The Epoch Times (emphasis ours),

The U.S. Food and Drug Administration (FDA) announced on Tuesday it will allow about 2 million cans of baby formula from the United Kingdom into the country, and allow Abbott Laboratories to release about 300,000 cans of specialty formula, to help ease the ongoing nationwide shortage.

“We continue to do everything in our power as part of the all-of-government efforts to ensure there’s adequate infant formula available wherever and whenever parents and caregivers need it,” FDA Commissioner Robert Califf said in a statement. “Our recent steps will help further bolster supply of infant formula, including through the import of safe and nutritious products from overseas based on our increased flexibilities announced last week.

Importantly, we anticipate additional infant formula products may be safely and quickly imported into the U.S. in the near-term based on ongoing discussions with manufacturers and suppliers worldwide.”

Shelves are empty of baby formula at a store in Chelsea, Massachusetts, on May 20, 2022. (Joseph PreziosoAFP via Getty Images)

The FDA announced it is “exercising enforcement discretion” to allow the importation of the 2 million cans from UK-based company Kendal Nutricare. The cans, which are under the company’s Kendamil brand, have no safety or nutrition concerns after an evaluation, and are expected to land on U.S. store shelves starting in June, the FDA said.

Kendal Nutricare currently has over 40,000 cans in stock for immediate dispatch, the agency said, adding that the U.S. Department of Health and Human Services is discussing options to get those cans into the country as soon as possible.

The FDA also announced it is letting Abbott release some 300,000 cans of its EleCare amino acid-based formula for babies and infants who urgently need it to survive, on a case-by-case basis.

The cans of specialty formula were previously produced at Abbott’s facility in Sturgis, Michigan, where other baby formula products that were recalled by Abbott on Feb. 17 were produced.

These products will undergo enhanced microbiological testing before release. Although some EleCare product was included in Abbott Nutrition’s infant formula recall, these EleCare products that will be released were in different lots, have never been released and have been maintained in storage under control by Abbott Nutrition,” the FDA noted.

“Given the critical need of this product for some individuals, the FDA encourages parents and caregivers to consult with their health care providers to weigh the potential risk of bacterial infection with this product,” it added. “Parents and caregivers seeking access to these products should contact Abbott directly to request that a product be made available to them by calling 1-800-881-0876.”

The ongoing baby formula shortage in the United States was recently exacerbated after Abbott Laboratories, the biggest U.S. supplier of powder baby formula, in February recalled some products, including those under the brand Similac, and temporarily shuttered its manufacturing facility in Sturgis, Michigan, which was producing up to one-quarter of the country’s baby formula.

The recall came after reports of bacterial infections among four infants, two of whom died. The FDA, which launched an investigation into the matter following consumer complaints, cannot conclude whether the cases of infants that fell sick were directly related to the Abbott facility until its investigation is concluded, Califf previously said.

Production at the Sturgis facility is set to restart on June 4, Abbott said in a statement. The company said it would prioritize making EleCare and supplying it on or about June 20. It also the formula would be provided to children in need for free.

Prior to the Abbott recall, the baby formula shortage among multiple manufacturers was brought on by supply chain pressures linked to COVID-19 pandemic lockdowns.

Also on Tuesday, the Federal Trade Commission launched an inquiry into the ongoing shortage of baby formula in the country, calling for public input on the matter.

The Biden administration has sought to relieve the shortage by importing emergency supplies from Europe via Defense Department-contracted commercial aircraft under “Operation Fly Formula.” The first lots of formula arrived in Indianapolis, Indiana, from Germany on Sunday.

President Joe Biden has also invoked the Cold War-era Defense Production Act to help manufacturers obtain ingredients to produce more formula.

Tyler Durden Thu, 05/26/2022 - 07:20

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Economics

US Economy Still On Track For Moderate Rebound In Q2

Despite rising headwinds for the global economy, US output remains set to rebound in the second quarter, based on recent estimates from several sources….

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Despite rising headwinds for the global economy, US output remains set to rebound in the second quarter, based on recent estimates from several sources.

Economic growth is expected to recover with a 2.6% increase in GDP (seasonally adjusted annual rate) for the April-through-June period via the median of several Q2 nowcasts compiled by CapitalSpectator.com. The growth rate is unchanged from the previous estimate published last week and marks a robust bounce from the 1.4% contraction reported for Q1.

The projected Q2 rebound aligns with a new forecast released yesterday by the nonpartisan Congressional Budget Office, which paints a relatively upbeat outlook for the US economy. “In CBO’s projections, the current economic expansion continues, and economic output grows rapidly over the next year. Consumer spending increases, driven by strong gains in spending on services.”

Despite the apparent resilience for the US economy, headwinds are building for global economic activity, warned the head of the World Bank on Wednesday. Speaking at a US business conference, David Malpass says it difficult to “see how we avoid a recession.” He cites several factors, including rising prices for food and fertilizer due to Russia’s invasion of Ukraine and a series of coronavirus lockdowns in China.

In fact, China’s leaders are increasingly worried about the country’s outlook and convened an emergency meeting yesterday to address decelerating growth. The goal, state media reports, is to promote new measures to stabilize the economy.

For the US, recent economic data suggests that recession risk for the immediate future is still low. Nonetheless, some economists are forecasting rising odds of a downturn for 2023.

“A recession is pretty likely” next year, former Federal Reserve vice chair Alan Blinder tells CNBC. “I don’t mean 89% probability, but maybe 50 to 60% probability,” he said, although any downturn will be mild, he advises.

Gus Faucher, chief economist at PNC Financial Services Group, also thinks the US will sidestep a recession this year, but the risks rise for 2023. “The likelihood of recession this year is pretty low,” he predicts, but “it gets dicier in 2023 and 2024.”


How is recession risk evolving? Monitor the outlook with a subscription to:
The US Business Cycle Risk Report


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