“The test of first-rate intelligence is the ability to hold two opposing ideas in the mind at the same time, while maintaining the ability to function,” wrote F. Scott Fitzgerald. What one most often encounters on financial television seems to be the reverse – a simplistic analysis that leads to a seemingly inevitable (and usually bullish) conclusion.
We are particularly struck by the discussions on “the consumer”, suggesting a homogeneous body of Americans sharing the same means and preferences in their spending. The notion of inequality is implicitly rejected in this lazy distillation of a disparate population.
From the perspective of anyone traveling during the Easter and Passover holidays, the economy is booming, with barely an empty airplane seat. While
(ticker: DAL) last week reported a loss, due to weakness early in the first quarter due to the Omicron outbreak, it was weaker than expected as sales surged at the end of the quarter. And the airline’s chairman said there had been no return to higher fares resulting from soaring fuel prices.
But for some consumers, fuel costs severely restrict discretionary spending. While total sales in dollars are up, sales are down in real terms, after adjusting for inflation. It appears that many consumers, especially low-income households, are increasing their use of credit cards as they struggle to pay at the supermarket and at the gas pump.
Meanwhile, some real-time indicators, such as trucking activity, point to a marked slowdown in sales and a saving in inventory of big-ticket items, such as furniture and electronics. This is evidenced in the lagging performance of some cyclical stock sectors, relative to defensive groups.
So, are we booming or busting? It is surely a test of higher intelligences. Or a cause of severe cognitive dissonance.
According to a Bank of America Research Institute report, spending on bank debit and credit cards increased by 11% in March year-over-year level and up 15% year-on-year through April 8. consumers.
Compared to pre-pandemic levels, card spending by this group increased by 33.3%. The report also notes that hourly earnings show the highest earnings among low-income groups. In fact, they have at least $1,500 more in checking and savings accounts than they did at the start of 2019, suggesting they aren’t being taken advantage of.
In contrast, Stephanie Pomboy sees the April 7 report of a record $41.8 billion increase consumer credit for February, which topped the previous $38.5 billion mark set just three months earlier, as a sign that consumers are “now resorting to desperate measures” to keep up with inflation, she wrote in a missive from MacroMavens.
As for March retail sales figures released Thursday, which showed an overall increase of 0.5%, she points out that the total would have fallen by 0.3% without gasoline sales. “And that’s before you factor in inflation. In other words, people didn’t just cut spending other than to fill the tank. They also discounted the units they purchased,” she adds in another client note.
Paying more to get less sounds familiar to anyone around the 1970s: stagflation.
The negative effect of higher prices on unit sales can be gleaned from trucking and inventory data tallied by Piper Sandler’s macroeconomic research unit, headed by Nancy Lazar. Trucking activity has plunged 50% in the past 10 weeks on retail unit sales and already excessive inventory, according to a research note. It’s the reversal of the trucking surge at the height of the pandemic, when retailers struggled to keep up with inflated demand from government stimulus. The pronounced underperformance of truck inventories recently reflects the effects of slowing sales and bloated warehouses, the report adds.
Indeed, the relative performance of a range of economically sensitive stocks indicates an outright recession, adds David Rosenberg, founder and eponym of Rosenberg Research. Plot the sum of
banks, home builders, furniture companies, retailers, auto parts companies, and transportation, divided by the sum of S&P consumer staples, utilities, and health care, the line goes from top left to bottom right, down 24% from the peak of almost a year ago. This ratio of cyclical to defensive stocks also reversed in 1998-2001, 2004-08 and 2018-20, before the last three recessions.
What is missing in the recession scenario is the shortage of money, needed to squeeze inflation out of the economy. St. Louis Fed Chairman James Bullard said in an interview with the Financial Times last week that it’s “fantastic” to think inflation will recede without interest rates high enough to constrain the economy. economy. Or as Komal Sri-Kumar, Chairman of Sri-Kumar Global Strategies, observed here last month, following the release of the Fed’s latest projections, which call for relatively moderate rate hikes bringing inflation down. without increasing unemployment or dampening growth: “They might as well tie them a bridge to sell”.
According to Fed Chairman and Vice Chairman Jerome Powell and Lael Brainard, financial conditions have already tightened considerably, even though the central bank has only raised its federal funds target range by 25 basis points (a quarter of a percentage point) and has yet to begin to reduce its balance sheet by $8.9 trillion. (His Treasury and agency are backed by mortgages securities holdings increased by $4.6 billion in the week ending Wednesday.)
Financial conditions indeed remain very accommodative, according to John Ryding and Conrad DeQuadros, respectively chief and senior economic adviser at Brean Capital. the Chicago Fed National Financial Conditions Index, a weekly gauge of conditions in the money, debt and equity markets, as well as traditional and “shadow” banking systems, shows continued accommodation. This suggests that markets do not see the stringent conditions needed to reduce inflation from its current “extremely high levels”, they write in a client note.
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The problem with central banks is that they can’t print oil for heating or wheat for food or big tankers to transport oil, observes Zoltan Pozsar, a widely followed interest rate strategist at Credit Suisse, pointedly. in a research note. This limits their ability to provide price stability and ultimately their credibility, he concludes.
In the short term, the Fed and other central banks can do nothing but reduce aggregate demand to the reduced post-pandemic supply in order to rein in inflation. The problem is that this moderation comes late, even as growth shows signs of flagging. And that’s enough to cause cognitive dissonance in most normal investing minds.
Write to Randall W. Forsyth at [email protected]