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Weekly Market Pulse: Maybe It Was Transitory After All

The inflation report last week was met with a big sigh of relief by investors. Stocks and bonds rallied as the Fed’s Whip Inflation Now project seems to…



The inflation report last week was met with a big sigh of relief by investors. Stocks and bonds rallied as the Fed’s Whip Inflation Now project seems to be finally bearing some fruit. In reality, inflation peaked months ago but the Fed hadn’t really caught on yet – they’re a little slow – and the market has been fearing that they would go too far and cause a recession. But surely, the market seemed to say, the moderation is so obvious now that even Jerome Powell can see that he’s done enough.

That being the case, the natural thing to do was buy stocks and investors did just that last week. The S&P 500 was up 2.7% on the week, continuing a rally that started in mid-October and has seen it rally 14.5% from its intraday low on October 13th. It isn’t just the S&P 500 up either. Small cap stocks are up 15.6%, mid cap 18.8% and REITs 20% since October 13th. European stocks have done even better beating the US by a wide margin, up 41.7%. The more diversified international value index we hold (EFV) is up 30.3% from its low. International value was down less at the low (-22.3% vs -25.9%) and is now down just 4.3% year over year vs 12.9% for the S&P 500.

Forgive me for being the party pooper but I think this might be just a tad overdone. The inflation report was pretty good last week, continuing the moderation that started in July of last year. I’d hardly give credit to the Fed though. About the only thing I can directly credit to their interest rate hikes is the whopping 2.4% drop in national housing prices. Did the Fed have anything to do with the drop in used car prices which are down every month since last June and 8.8% year over year? How about the 9.4% drop in gas prices last month? Or the 3% drop in airfares? How about the 1.8% drop in bacon prices (thank the Lord!)? To be fair, they didn’t have much to do with the 2% rise in egg prices either. It is certainly true that inflation has cooled considerably since last year. The CPI is up a total of 0.9% over the last 6 months and if that keeps up, I’d say mission accomplished. But, relative price changes like these happen all the time and have nothing to do with real inflation, which is about the value of the dollar. Inflation is higher during times of dollar weakness. And the dollar has most certainly not been weak recently.

If you look over a longer time frame, you can see that last year we rose into the upper band of a wide trading range that has persisted since the late 1980s.

There are three zones within which the dollar has traded over the last 35 years or so. When the dollar is in the middle band, from roughly 90 to 105, the economy is fairly stable, nominal and real. When the dollar is in the upper or lower bands, the economy is vulnerable to crisis. The period from 2000 through 2002, the end of the last strong dollar period, corresponds to the unwinding of the dot com bubble and the various corporate scandals such as Enron. The S&P 500 was down all three years.

The period that starts in 2006 – 2009, when the dollar passes into the lower zone, is well known and requires no description. The period from 2009 to 2015, a weak dollar period, is one where we seemed to be always on the edge of another crisis. The Eurozone crisis – Draghi’s “whatever it takes” to preserve the Euro – was in this period and the US economy nearly fell into recession.

The period from mid-2015 to 2022 was another fairly calm period, COVID notwithstanding. You might notice though that we’ve just spent a good portion of 2022 in the upper red zone. Isn’t it interesting that this period echoes the previous uber strong dollar period from 2000 to 2002?

While we remember that earlier period as the unwinding of the dot com era, the dot com stocks were really just a side show. The real story then was the unwinding of the tech bubble, the one that existed in companies with actual revenue and earnings. We just spent the last year unwinding a bubble in crypto that looks an awful lot like the dot com stocks – no revenue or earnings or plan – and a bubble in profitable tech companies. You think that’s a coincidence? I don’t.

The inflation we’ve experienced over the last year was real – prices really did rise – but it was not one driven by a weak dollar. It was driven by the pandemic distortions caused by massive government intervention in the economy that affected both demand and supply to a degree never seen before in modern times. In a sense we had a supply and a demand shock simultaneously, although I’d put more emphasis on the demand side. Now, as the interventions fade – and yes they will fade over time – so will the effect. I would not expect prices to fall back to the previous level but the inflation rate should moderate – for now. With the dollar now back in the stability zone, the direction of inflation will likely depend on whether it can stay there.

The fact is that rate hikes have not had much to do with the economic slowdown and indeed hasn’t managed to slow things all that much at all on a nominal basis. It certainly hasn’t affected bank lending. With the QE bonanza coming to an end, banks seem to have gotten back to their roots of actually lending money. Total bank credit is up nearly $1 trillion in the last year and the lending is across multiple sectors. Real estate lending is up 11.3% ($540 billion) over the last year. And no, that hasn’t slowed recently with the slowdown in residential; the year over year rate of change is still accelerating. C&I loans are up 14.6% over the last year although that one may have peaked. Consumer loans are up 11% year over year. The year over year change in total bank credit is correlated with the year over year change in NGDP and CPI so the fact that its rate of change has moderated some recently would seem to be good news, as the drop seems to have mostly come out of inflation.

The slowdown in goods spending over the last year has been modest (-0.7% real) but entirely expected and offset by a rise in services spending (+3.5% real). You might remember me talking about that over a year ago; it wasn’t that hard to figure out. A big part of the recent slowdown appears to be nothing more than an inventory correction on the goods side of the economy. We knew there was a lot of over-ordering of goods during the pandemic as supply chains became strained and everyone saw the resulting inventory mess at Walmart, Target and a few other retailers.  Walmart appears to have solved their inventory issues, other retailers are getting there and inventory to sales ratios were already rolling over in October when we got our last full look at inventories. But if preliminary inventory numbers are any indication the correction is likely already nearing its end. By the way, this inventory correction is likely the source of the recent weakness in the ISM reports. The bullwhip effect we heard so much about last year so far looks more like a riding crop.

Having said all that, I would not get too comfortable with the economy right now. There is a modest slowing underway and it seems like everyone is bracing for things to get worse. Preparing for a recession could prove a self-fulfilling prophecy. Banks are starting to set aside reserves for future loan losses and it’s hard to envision bank lending continuing to expand at the current pace in that environment. Of course, a drop in the rate of change isn’t necessarily a bad thing if it moderates at say 5% growth. That’s where those healthy household and corporate balance sheets might come in handy. A tightening of lending standards, which we’ve already started to see, might not lead to much of a reduction in actual lending. In fact, it might be a healthy development.


The 10 year Treasury yield fell about 6 basis points last week; the CPI report was priced in. The short term trend is still down and the intermediate term trend is still up. With a plethora of economic data next week, we may get a clue about whether the intermediate uptrend will hold. Inflation expectations continue to moderate. 5 year and 10 year breakeven inflation rates are 2.18% and 2.2% respectively. The 5 year, 5 year forward (5 year expectations starting 5 year from now) breakeven is 2.16%. Last week’s CPI report did show inflation moderating but the market is exhibiting a high degree of confidence that future inflation will fall pretty dramatically from where it is today. Keep in mind that December’s extreme cold weather and the disruptions it caused are likely to affect the data.

The short term trend of the dollar is still down as well. The intermediate term uptrend is hanging by a thread. If the data for December comes in weak – and I wouldn’t be surprised by that at all – then it may finally break down. Still, I wouldn’t expect a dramatic downdraft. Speculators have turned pretty bullish on the Euro and are as long as they’ve been since the summer of ’20. Specs are still short the Yen, C$, A$ and Pound so there may be some more dollar downside but the Euro is the biggest weight in the index. If we move lower next week, I’d expect 100 to be good support.


It was everything up last week with commodities leading the way on the back of a big rise in crude oil (+8.3%) and copper (+7.8%). Crude looks like it has put in a bottom but that probably depends on the economic outlook. On that front, it is worth noting that Brent and WTI are both now in contango; demand appears to have weakened in the near term. It was easier to dismiss when it was just WTI but the Brent/crude spread has narrowed considerably so this is looking more like a demand problem despite last week’s rally. The contango is not deep so it won’t take much optimism to flip it to backwardation but for now, I’d be wary of the rally in crude.

The copper market has also flipped to contango over the last month, also an indication of weak near term demand. That seems odd with all the hoopla around China’s reopening especially with inventories low and a production shortfall expected this year. This bears watching closely as these are not the only markets that are showing weak demand. Again, though, the contango is small and is consistent with the recent economic data which has been weaker but not too weak.

It was also a week of more speculative activity with small cap and growth stocks outperforming strongly. The CPI report last week firmed up the consensus around rate hikes (February is now 94% chance of 25 basis points and the bet is that it will be the last one) and a soft landing is rapidly becoming the consensus. I’m reluctant to make that bet, at least for now. The economic trend is still toward weaker and until that changes I think you have to assume the trend will continue. The uptick in the University of Michigan consumer sentiment reading last week was encouraging but the near term data seems likely to continue to show weakness.

International markets also outperformed last week on a weaker dollar with Latin America and Japan leading the way. Latin America was up despite continued political drama with Peru and Brazil both seeing demonstrations against the current administrations. Japan was mostly a Yen story with the currency up 3.3% on the week. That could get interesting this week as the BOJ’s 10 year JGB peg is again being challenged.

The bet on a better economy shows up in the sector report too as Consumer Defensive was down the most for the week. Consumer cyclicals showed the biggest upside along with materials and real estate. Even technology joined the rally as semiconductors were up over 6%.




Economic Indicators

Corporate bonds were quite strong last week and credit spreads continued to narrow. High yield spreads peaked in July at nearly 6% and have now fallen all the way back to 4.29%. That is still above the lows near 3% set late last year but not worrisome. The market is obviously not very concerned about any potential economic downturn.

The Treasury yield curve is starting to normalize in the long end. The 30 year/10 year spread is now positive and the 10 year/5 year spread is down to just 10 basis points. The very short end of the curve continues to see 1 month bill yields rise while the 2 year continues to trade sideways as it has since late September. A re-steepening of the long end doesn’t mean much in the short term but if we start to see short term rates fall rapidly that is an indication the market is anticipating imminent rate cuts and would obviously not be a good sign. But we aren’t there yet so we remain cautious but not overly concerned just yet.

The Fed has spent the last year trying to convince the market that it would do whatever it takes to bring down inflation. Their preferred method of doing so has involved a pace of rate hikes like we’ve never seen. And inflation, as measured by the CPI, has come down. But correlation is not causation and the Fed’s rate hikes do not seem to be having much of an effect on credit markets where they presumably should.

We’ve had a period of good news on the inflation front lately and the markets like that. But continued high nominal growth means the path to an acceptable CPI rate of change is unlikely to be a straight line. The dollar has only just come down from the danger zone and a rebound from here seems likely, at least short term. We may well avoid recession this year but that doesn’t mean it’s all clear for stocks and bonds. And there are still fairly good odds on a recession. Stay cautious…for now.

Joe Calhoun

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How much more financial pressure can Australian mortgagees take?

Talk to anyone on the street these days and the conversation will inevitably turn to how inflation is increasing their cost of living in some form or another….



Talk to anyone on the street these days and the conversation will inevitably turn to how inflation is increasing their cost of living in some form or another. Inflation has risen steadily since the beginning of 2022 despite the determined efforts of Reserve Bank of Australia (RBA) to bring it back towards its target range of 2-3 per cent.

In less than 1 year and 11 interest rate rises later, official interest rates have risen from 0.10 per cent to 3.85 per cent but inflation remains stubbornly high at 7 per cent. Interest rates have never risen this fast before nor from such a historically low level either.

As previously outlined in an earlier blog entry on Commonwealth Bank (ASX:CBA), the big four banks of Australia have just under 80 per cent of the residential property mortgage loan market. In “normal” economic times of rising interest rates, banks should be natural beneficiaries of these conditions. However, these are not normal times.

The business model of banks has generally stayed the same for centuries, i.e. borrow money from one source at a low interest rate and lend it to a customer at a higher rate. Today, the Australian banks generally get their funding from wholesale and retail sources. However, the banks were offered a one-off funding source from the RBA called the Term Funding Facility (TFF) during the COVID-19 period to support the economy. This started in April 2020, priced at an unprecedented low fixed rate of 0.10 per cent for 3 years with the last drawdown accepted in June 2021 for a total of $188 billion. Fast forward to today and the first drawdowns from this temporary facility have already started to roll-off which means that these fund sources need to be replaced with one of considerably more expensive sources, namely wholesale funding or retail deposits. As a result of this change in funding, bank CEOs have unanimously declared that net interest margins, and hence its effect on bank earnings, have peaked for this cycle despite speculation that interest rates may still rise later in the year.

Prior to the start of the roll-off of TFF drawdowns, the entire Australian banking industry engaged in cutthroat competition for new and refinancing mortgage loans in a bid to maintain or grow market share. In the aftermath of the bank reporting season, two of the big four banks have stated they are no longer pursuing market share at any price, with CBA and National Australia Bank (ASX:NAB) announcing they will scrap their refinancing cashback offers after 1 June and 30 June respectively.

Turning our attention back to the average Australian, the big bank mortgage customers have been remarkably resilient. The Australian dream of owning the house you live in is still alive for now, with owners willing to endure significant lifestyle changes in a bid to keep up with mortgage payments. The big banks have reflected this phenomenon with a reduction in individual loan provisions and only a modest increase in collective loan provisions.

Time will tell how much more financial pressure Australian mortgagees can take, especially with the RBA still undecided on the future trajectory of interest rates. What has been agreed on by the big banks, is that things are not going to get easier. At least not in the short-term.

The Montgomery Funds own shares in the Commonwealth Bank of Australia and National Australia Bank. This article was prepared 29 May 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.

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U.S. Breakeven Inflation Comments

I just refreshed my favourite U.S. breakeven inflation chart (above), and I was surprised by how placid pricing has been. This article gives a few observations regarding the implications of TIPS pricing.Background note: the breakeven inflation rate is …



I just refreshed my favourite U.S. breakeven inflation chart (above), and I was surprised by how placid pricing has been. This article gives a few observations regarding the implications of TIPS pricing.

Background note: the breakeven inflation rate is the inflation rate that results in an inflation-linked bond — TIPS in the U.S. market — having the same total return as a conventional bond. If we assume that there are no risk premia, then it can be interpreted as “what the market is pricing in for inflation.” I have a free online primer here, as well as a book on the subject.

(As an aside, I often run into people who argue that “breakeven inflation has nothing to do with inflation/inflation forecasts.” I discuss this topic in greater depth in my book, but the premise that inflation breakevens have nothing to do with inflation only makes sense from a very short term trading perspective — long-term valuation is based on the breakeven rate versus realised inflation.)

The top panel shows the 10-year breakeven inflation rate. Although it scooted upwards after the pandemic, it is below where is was pre-Financial Crisis, and roughly in line with the immediate post-crisis period. (Breakevens fell at the end of the 2010s due to persistent misses of the inflation target to the downside.) Despite all the barrels of virtual ink being dumped on the topic of inflation, there is pretty much no inflation risk premium in pricing.

The bottom panel shows forward breakeven inflation: the 5-year rate starting 5 years in the future. (The 10-year breakeven inflation rate is (roughly) the average of the 5-year spot rate — not shown — and that forward rate.) It is actually lower than its “usual” level pre-2014, and did not really budge after recovering from its post-recession dip. (My uninformed guess is that the forward rate was depressed because inflation bulls bid up the front breakevens — because they were the most affected by an inflation shock — while inflation bears would have focussed more on long-dated breakevens, with the forward being mechanically depressed as a result.)

Since I am not offering investment advice, all I can observe is the following.

  • Since it looks like one would need a magnifying glass to find an inflation risk premium, TIPS do seem like a “non-expensive” inflation hedge. (I use “non-expensive” since they do not look cheap.) Might be less painful than short duration positions (if one were inclined to do that).

  • Breakeven volatility is way more boring than I would have expected based on the recent movements in inflation. The undershoot during the recession was not too surprising given negative oil prices and expectations of another lost decade, but the response to the inflation spike was restrained.

  • The “message for the economy” is that market pricing suggests that either inflation reverts on its own, or the Fed is expected to break something bigger than a few hapless regional banks if inflation does not in fact revert.

Otherwise, I am preparing for a video panel on MMT at the Canadian Economics Association 2023 Conference on Tuesday. (One needs to pay the conference fee to see the panel.) I have also been puttering around with my inflation book. I have a couple draft sections that I might put up in the coming days/weeks.

Email subscription: Go to 

(c) Brian Romanchuk 2023

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“What’s More Tragic Is Capitalism”: BLM Faces Bankruptcy As Founder Cullors Is Cut By Warner Bros

"What’s More Tragic Is Capitalism": BLM Faces Bankruptcy As Founder Cullors Is Cut By Warner Bros

Authored by Jonathan Turley,

Two years…



"What's More Tragic Is Capitalism": BLM Faces Bankruptcy As Founder Cullors Is Cut By Warner Bros

Authored by Jonathan Turley,

Two years ago, I wrote columns about companies pouring money into Black Lives Matter to establish their bona fides as “antiracist” corporations. The money continued to flow despite serious questions raised about BLM’s management and accounting. Democratic prosecutors like New York Attorney General Letitia James showed little interest in these allegations even as James sought to disband the National Rifle Association (NRA) over similar allegations. At the same time, Black Lives Matter co-founder Patrisse Cullors cashed in with companies like Warner Bros. eager to give her massive contracts to signal their own reformed status. It now appears that BLM is facing bankruptcy after burning through tens of millions and Warner Bros. cut ties with Cullors after the contract produced no — zero — new programming.

Some states belatedly investigated BLM as founders like Cullors seemed to scatter to the winds.

Gone are tens of millions of dollars, including millions spent on luxury mansions and windfalls for close associates of BLM leaders.

The usual suspects gathered around the activists like former Clinton campaign general counsel Marc Elias, who later removed himself from his “key role” as the scandals grew.

When questions were raised about the lack of accounting and questionable spending, BLM attacked critics as “white supremacists.”

Warner Bros. was one of the companies eager to grab its own piece of Cullors to signal its own anti-racist virtues.  It gave Cullors a lucrative contract to guide the company in the creation of both scripted and non-scripted content, focusing on reparations and other forms of social justice. It launched a publicity campaign for everyone to know that it established a “wide-ranging content partnership” with Cullors who would now help guide the massive corporation’s new programming. Calling Cullors “one of the most influential thought leaders in American public life,” Warner Bros. announced that she was going to create a wide array of new programming, including “but not limited to live-action scripted drama and comedy series; longform/event series; unscripted docuseries; animated programming for co-viewing among kids, young adults and families; and original digital content.”

Some are now wondering if Warner Bros. ever intended for this contract to produce anything other than a public relations pitch or whether Cullors took the money and ran without producing even a trailer for an actual product. Indeed, both explanations may be true.

Paying money to Cullors was likely viewed as a type of insurance to protect the company from accusations of racial insensitive. After all, the company was giving creative powers to a person who had no prior experience or demonstrated talent in the area. Yet, Cullors would be developing programming for one of the largest media and entertainment companies in the world.

One can hardly blame Cullors despite criticizism by some on the left for going on a buying spree of luxury properties.

After all, Cullors was previously open about her lack of interest in working with “capitalist” elements. Nevertheless, BLM was run like a Trotskyite study group as the media and corporations poured in support and revenue.

It was glaringly ironic to see companies like Warner Bros. falling over each other to grab their own front person as the group continued boycotts of white-owned businesses. Indeed, if you did not want to be on the wrong end of one of those boycotts, you needed to get Cullors on your payroll.

Much has now changed as companies like Bud Light have been rocked by boycotts over what some view as heavy handed virtue signaling campaigns.

It was quite a change for Cullors and her BLM co-founder, who previously proclaimed “[we] are trained Marxists. We are super versed on, sort of, ideological theories.” She denounced capitalism as worse than COVID-19. Yet, companies like Lululemon rushed to find their own “social justice warrior” while selling leggings for $120 apiece.

When some began to raise questions about Cullors buying luxury homes, Facebook and Twitter censored them.

With increasing concerns over the loss of millions, Cullors eventually stepped down as executive director of the Black Lives Matter Global Network Foundation, as others resigned.  At the same time, the New York Post was revealing that BLM Global Network transferred $6.3 million to Cullors’ spouse, Janaya Khan, and other Canadian activists to purchase a mansion in Toronto in 2021.

According to The Washington Examiner, BLM PAC and a Los Angeles-based jail reform group paid Cullors $20,000 a month. It also spent nearly $26,000 on meetings at a luxury Malibu beach resort in 2019. Reform LA Jails, chaired by Cullors, received $1.4 million, of which $205,000 went to the consulting firm owned by Cullors and her spouse, according to New York magazine.

Once again, while figures like James have spent huge amounts of money and effort to disband the NRA over such accounting and spending controversies, there has been only limited efforts directed against BLM in New York and most states.

Cullors once declared that “while the COVID-19 illness is tragic, what’s more tragic is capitalism.” These companies seem to be trying to prove her point. Yet, at least for Cullors, Warner Bros. fulfilled its slogan that this is all “The stuff that dreams are made of.”

Tyler Durden Sun, 05/28/2023 - 16:00

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