Fifteen thousand dollars for a divorce? LOL!

Off to sunny, but cool, Newport Beach, Calif., and the U.S. economy has yet to get the recession memo. Connecting in the Dallas airport, there was scarcely room to walk. Complaining about lines everywhere, the gentleman waiting next to me at the gate said, “It was a choice between food and beer. I opted for the beer.” At a meeting in Irvine, the astute advisor thinks this bull will carry on. “It’s all about liquidity, and central banks considered last fall’s U.K. pension near-collapse a wake-up call.” Prices of homes continue to rise here, all cash offers. If you bid on contingency, “you’re a leper.” Liquidity was a key factor in ’70s inflation. Three surges in M2 growth that decade prompted three subsequent surges in inflation, elevating economist Milton Friedman and his monetarist view that low and stable money growth would beget lower and more stable prices. It’s a correlation that’s not discussed much today even though skyrocketing M2 growth in ’20 was followed by inflation’s spike in ’21. Now that M2 growth has slowed dramatically and is actually contracting, inflation has moderated somewhat, too. This and improving near-term fundamental data have the “soft landing” thesis gaining traction. Google searches on the subject are at a 15-year high, matching May 2008 levels—just months before the deepest recession in 80 years. Uh-oh. Deutsche Bank reminds us it’s not until year 2 of a hiking cycle that real economic pain starts to be felt.

Has a decade of lower for longer made Wall Street immune to higher for longer? Since 1962, the 10-year Treasury yield exceeded CPI 83% of the time; before 2008, it was true 91% of the time (tough odds). With the latest CPI at 6.4%, this morning’s PCE surprising to the upside (more below) and the 10-year just shy of 4%, is it unreasonable to think yields can move higher and stay elevated? From Strategas Research’s perspective, “rates look explosive.” Sticky prices have J.P. Morgan CEO Jamie Dimon thinking a 6% terminal rate may be necessary (adding to a slowly growing drumbeat). Typically, the best period of the cycle for high-beta stocks, which shot out of the gate this year, is at the beginning of an economic recovery, when rates tend to be low and PMIs begin to inflect higher. Those conditions are opposite from the case today. While Tuesday’s sell-off marked the weakest technical signal since last October, momentum and breadth generally have been supportive. Tech giants have moved off downtrends, and the percentage of S&P 500 issues above their respective 200-day moving averages earlier this month surpassed 70%, the highest level in more than a year. Moreover, first half-seasonality in pre-election years tends to be the strongest of the 4-year presidential cycle, though this is likely related to year 3 fiscal largesse. True, call options and popular sentiment gauges such as AAII and CNN Fear & Greed have turned bullish, a contrarian negative. But this comes amid very high cash balances, with Bank of America investor surveys showing U.S. equity allocations near 2-decade lows.

No worries at my Women’s Investment presentation at a restaurant in posh Newport Coast, a place “to be seen,” and once a favorite spot for the late Kobe Bryant, who lived nearby. My slide noting that women must be prepared for a divorce, which can cost $15,000, drew a burst of laughter from the jovial group. “That’s the cost of the lawyers’ initial meeting,” chimed in a man who attended. Americans still have plenty of money! Aggregate excess savings started the year at $1.4 trillion (down from the Covid peak of $2.3 trillion in late ’21), and history suggests households are more prone to spend their windfall than hoard it. Indeed, the savings rate plunged from a pandemic, and Covid stimulus-fed peak of almost 24% in March ’21 to 2.4% last September, before settling under 5% in recent months (it was 4.7% in January). With incomes and borrowing rising and job growth robust, lots of fuel for spending (more below). Historically, consumers don’t stop on a dime until and unless unemployment starts rapidly climbing. May take higher for longer to get there. Did you think we are going to get away having printed over $9 trillion with a garden variety bear market? Soft landing? Not bloody likely, IMO.

Positives

• Don’t bet against the American shopper Consumer spending jumped 1.8% in January, the biggest increase since last March, beating expectations and rebounding sharply from December’s 0.1% dip. The increases were broad-based, led by car and truck sales and spending on food services. Personal income rose a more modest 0.6%, but that was off an upwardly revised 0.9% for December, and disposable income jumped 2%.
• Didn’t get the recession memo New home sales surged 7.2% in January, the same as an upwardly revised December. Initial PMIs for both manufacturing and services February activity also surprised, with the latter jumping back into expansion. Also, final Michigan consumer sentiment rose to a 13-month high.
• Actually, no recession “over there” Far from entering a recession in the year after Russia invaded Ukraine, the eurozone is showing how responsive economies can be to changes in the cost of living (gas prices) and an inexpensive euro. The eurozone services PMI blew through consensus in January, marking its strongest expansion since last June. Services account for roughly 70% of EU GDP and 9% of employment. EU manufacturing production also rose for the first time since last May.

Negatives

• Very disappointing PCE readings The headline, core and core services ex-shelter (essentially wages and the Fed’s favorite metric) numbers essentially rose a much higher-than-expected 7% annualized in January. Perhaps 50 basis points will be the next move.
• Liquidity head fake A weaker dollar has made it appear as if global central banks are raising their balances again, an outcome that doesn’t fit the reality as it’s simply a currency translation issue. Indeed, Credit Suisse notes that, in addition to M2’s contraction in the U.S., monetary reserves also are shrinking in Europe, China and Japan. Declining liquidity typically is bad for equities.
• They always expect a “soft landing” They did so in the ’70s, ’80s, ’90s, ’00s, ’10s and now ’23. The term was coined in 1973 by Lafayette College professor Herman Liebling, a top Treasury forecaster when he predicted a soft landing in the mid-’70s. That turned out to be horribly wrong, as the ’73-’75 recession saw unemployment peak at a 9% and GDP decline 3.2%.

What else

Teslas everywhere I look In California, which has adopted EVs more aggressively than any other state, EVs now represent almost 16% of new vehicle sales. Add plug-in hybrids and the number rises to 18% (vs. a 6% average nationally). With EV adoption encouraged by high fuel costs, tax incentives and a ban on all gas-fueled cars starting in 2035, California’s net taxable gas sales have been falling since 2018. Globally, cumulative EV sales have crossed $1 trillion, vs. a total annual auto market worth $2.5 trillion.

Fossil fuel nation U.S. crude oil field production hit 12.3 million barrels a day this month, nearly a 3-year high and just shy of a record. The U.S. is even more energy independent when it comes to natural gas, exporting 317 trillion cubic feet more than it imports.

Think my boss would entertain this? A study of 3,000 British businesses that let employees work 4 days but get paid for 5 as part of a government-backed trial found participants, both companies and their workers, supposedly loved the results. Seems production and productivity both improved, with extra leisure acting as a kind of bonus, making for happier and more productive workers.

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