Episode description

Consumers are getting squeezed, cash levels are growing short, credit card usage is way up at a time when the average APR is 21%, and we now know that globally consumers, and not manufacturing, are carrying the economy.

The global economy seems to be cruising on one engine as it relies on services for momentum. Meanwhile, we’re in an industrial & manufacturing recession as factories slow production.

We’re seeing contraction across major economies in the latest #’s with the US index hitting its low for the year so far. And the euro-area has reached its lowest level in more than three years.

As consumers have shifted their focus to services, the goods side of the economy now finds itself with excess inventories. And interestingly this is happening while we’re seeing purchasing power decline in many world economies.

Add in big interest-rate hikes by the Fed and the ECB in a very short timeframe and consider what that has done to make capital raising and spending much more expensive. We’ve talked about this in content and on podcasts many times. The cost of capital has gone up significantly in the short period of time and this WILL have ramifications. Just as a pandemic put the brakes on the global economy by the decision-making of large central governments, so too will the magnitude of change in the cost of capital hit global markets. These things have lag time.

8 stocks are responsible for 90% of the return this year while everything else is flat to negative. And a subset of those have run up to pretty extended levels of valuation. I was in the industry during the sunup of the tech boom and Y2K. Back then every portfolio manager owned Cisco, and every happy hour had people talking about owning it in their Scottrade account.

Liquidity goes up, asset prices go up. Liquidity comes out, asset prices deflate. But, but we also had that bank run thing in March, remember? And the mini-bailout of those banks. So, another liquidity pop into markets.

We’re seeing that cool off, and more money being drained from the system, albeit money flows are still higher than they were pre-pandemic. 

By now you may have heard that becuae the debt celing was raised, and because money from the Treasury was used to backstop bank failures, Treasury Secretary Yellen will be refilling the TGA, or Treasury General Account, and that has an effect of pulling more liquidity from markets. Add to this that there will be significant Treasury Bill (or T-Bill) issuance in the coming months, and at yields that we haven’t seen in a generation. 

With much uncertainty in the global economy and markets, the idea of getting yield at an essentially risk-free-rate has a strong appeal.

Meanwhile central banks are still signaling that they will keep raising rates in an attempt to to control inflation. This is further exacerbating the inverted yield curve. You can find more discussion of that in previous podcasts. 

US two-year yields are over 1% above the 10-year Bond rates as of today. 

The S&P 500 has experienced a down week, and it is possible that the economic gravity is setting in. S&P Global US manufacturing PMI dropped to 46.3 in June, well below the 50 mark that signifies the dividing line between expansion and contraction.

But, the consensus now is that the US will dodge a recession this year. 

We probably align a bit more with Bloomberg’s Chief U.S. Economist, Anna Wong, who “Amid the most rapid Fed hiking cycle in four decades, Bloomberg Economics has long forecast a recession in the 2nd half of 2023. With the economy exhibiting a bit more momentum at mid-year than anticipated, we now think a downturn is more likely to begin later in the 2nd half than earlier.”

China also continues to show economic contraction, which is a major force upon demand for raw good and natural resources. According to the probabilities we follow, the GDP growth rate of China is going to be cut by half.

The question now is, how much will the consumer keep things afloat via services spending.