Stocks rose and yields fell slightly as market participants continue to try to make sense of the economic picture. We also have technical recessions in UK and Japan.
Yesterday's economic data looked mixed as Retail Sales fell more than estimated, Philly Fed and Empire Mfg both looked better than expected with strength in new orders and jobless claims seemed to indicate that you still can't get fired (despite seemingly ever company announcing layoffs). Industrial Production fell more than expected, but hard to make sense of how much weather impacted the report and Business Inventories rose in line with estimates.
On the day ahead it's PPI as the headliner with appearances by UofM asking people about gas prices.
Does any of this matter? Apparently there is some AI called SORA that can generate incredible videos from text and people are buying Super Micro Computer, Inc. shares.
In making sense of all of the various data it seems that the interpretation of the strength of the economy may largely hinge on your interpretation of productivity and good old "R-Star". One interpretation might be that the post-pandemic economy is fundamentally more productive than pre-pandemic. That productivity might be driven by things like the rise of WFH which allows some otherwise marginalized workers to contribute (increase labor), perhaps immigration (legal and illegal), and technology. It might also be that people just had to work more productively out of necessity. Rising productivity would generally be disinflationary/deflationary and maybe it is indeed playing that role at the moment, but immediately post pandemic it was met with a wall of money via government spending and bank lending while hitting supply constraints. This could explain the rising real GDP and rising nominal GDP coupled with low employment.
I don't really know if the economy is more productive, but the productivity - interest rate - inflation nexus is a tricky one. What I do think could be possible is that the post-GFC period of low real and nominal growth might turn out to be the anomaly. If true, the unfortunate thing might be that so many of the current crop of investors and managers has only and ever lived and worked in the low rate, slow growth, "secular" stagnation world of the post GFC.
A recent post by Dario Perkins on the TS Lombard blog seems to do a good job walking through a framework to analyze the post COVID world, in it:
6. What does this mean for the global economy in the 2020s?
- The Great Moderation is over. Periodic supply shocks will create additional volatility in inflation, which, in turn, will produce larger short-term gyrations in real GDP.
- Inflation will be somewhat higher, but this will be due mostly to upside volatility. It is hard to say exactly how much average inflation will rise, but an extra 100bps is reasonable. The more important point is about the “prevailing tendency” of inflation: we see a world where it is always threatening to break out to the upside rather than sink to the downside.
- Real GDP growth is likely to be higher, too, thanks to tighter labour markets (faster wage growth), a more expansionary fiscal-monetary mix and more rapid investment (in areas such as AI, decarbonomics, defence and the reconfiguration of global supply chains).
- Productivity probably improves in a higher-pressure economy, where companies are forced to work existing resources harder (rather than rely on cheap borrowing and low wages). We are already seeing signs of this in the US. Over time, technological diffusion, which was remarkably poor in the perma-lukewarm economy of the 2010s, should also accelerate, ending the so-called “productivity puzzle” of the post-GFC era.
XTOD: Worth mentioning that 24 years later, Cisco is still below its 2000 high.
XTOD: Rate cuts are feeling very distant. But hey, if stocks are ripping and the unemployment rate stays low, who’s mad beyond real estate developers?
XTOD: ICYMI: I wrote about our national hanging out crisis. In the last 20 years, averaging face-to-face socializing has declined ~30% among adults and ~50% among teens. We've never been so alone. And it's driving us crazy. https://t.co/hIdXbVPovk
XTOD: Excelling at the small choices that compound over time perpetually leaves you in favorable circumstances.
XTOD: This is absolutely unreal...Abercrombie & Fitch has risen another 15% over the last few weeks and has now ~8x in less than 18 months It's the best performing stock in the S&P 1500 Index, even outperforming Nvidia $NVDA by a huge margin Absolutely no one could have predicted this epic turnaround for a brand that was largely seen as outdated What a story
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