Outlook: Today brings the usual weekly initial jobless claims, the Philly Fed survey, and existing home sales. So far fresh data is mixed but without any loud warning signs. Yesterday the Atlanta Fed’s GDPNow was revised up to 5.1% from 5.0% last week on the housing starts report adding juice to real gross private domestic investment growth (18.6% from 18.1%). We get another update next Wednesday.

The Atlanta Fed generally overshoots but we like it for its Boy Scout integrity and adherence to data without bias. This seems useful when we are overwhelmed by commentary from big shot gurus, most of them saying beware stagnation/stagflation and outright recession.

The latest was sent to us by a perspicacious Reader. It’s from Lacy Hunt, cited in a newsletter summarizing his article in something named The Hoisington Management Quarterly Review and Outlook Fourth Quarter 2021.

Hunt cites our all-time favorite authors Reinhart and Rogoff who demonstrated ten years ago that “extreme sustained over-indebtedness” reduces growth by a little more than a third. This is based on 26 instances of public debt overhang in 22 advanced economies (debt/GDP over 90% for 5 years or more). The US qualifies, but the US is also the issuer of the reserve currency and as reported yesterday, not at risk of losing it. Still.

More pressingly, Hunt points out that when real rates are negative for a sustained period, as we have now in the US, it’s generally a sign of looming recession. Starting from 1870, the US had had negative real rates only 12 times or 8% of the time. “In the eleven cases prior to 2021, nine of the negative real yield periods coincided with recessions – 1902-03, 1907, 1910, 1912, 1937, 1974-75, and 1980.”

Yikes. Add in the overindebtedness (and demographics), and the outlook for recession is powerful. We like data and we like charts–see the negative yields in the chart. one tiny ray of light–"when money supply contracts (as we expect) with velocity also already negative and getting more so on Fed actions, inflation should moderate and by a lot in 2022.

We agree that inflation should moderate this year due to the money side of things, but worry that monetary policy is powerless against most of the supply chain issues, commodity prices, greedy consumer goods companies, and that weird labor shortage. This only feeds the suspicion that the Fed is busy with its finger in the dyke at Mile Two while upriver a bulldozer is aimed at Mile One.

Somewhere out in the field is the ECB, which saw inflation revised up to 5% today and the response from ECB chief Lagarde a stunner, accord to the FT: “The cycle of economic recovery in the US is ahead of that in Europe. So we have every reason not to act as quickly and ruthlessly as one might imagine with the Fed.” The FT reports a couple of 10 point hikes are getting priced in any way, on the assumption the ECB will have to change its mind at some point this year. The FT article cites a Project Syndicate article earlier this week in which three German economists say “It is becoming increasingly clear that inflation will gain momentum without monetary policy countermeasures”. [But they added:] “Such tightening would create serious problems for highly indebted eurozone members.” Gee, since when did Germany worry about Spain or Italy in the face of violation of its zero-inflation preference?

Bottom line, big picture theories and smaller contributions along policy lines alike point to mass confusion. The economist’s goal of equilibrium is far away. It’s very bothersome that supposed inflation protection like TIPS is negative-yielding. It’s bothersome that rising yields are not tamping down gold. It’s a worry that Pres Biden is setting up the US for another fight with Opec that it is sure to lose. Russia is just bothersome all the time and getting more so nowadays. Outright panic is held at bay but one scenario can’t be ignored--a safe-haven move into dollars.

Technical Notes: We keep seeing short-term technical analysis projected out into longer-term time horizons, and indicators that measure normal price changes being applied under conditions that are obviously, decidedly not normal. This is true of broad indicators like bands and channels as well as arithmetic measures like relative strength/momentum.

Technical analysis works because on the whole, human behavior repeats and forms patterns that can be measured. We assume that what happened before will, roughly, happen again. For example, a rally will fray and end near a measurable top and an overbought condition will reliably lead to a pullback. Indicators work in normal conditions because they are based on normal/average moves.

But that’s not what we have today. The four-hikes story is not normal. It’s a Shock. Indicators based on normalcy will not work for some time until a new normal is established. This is the only sense in which the concept of “new normal” is useful. For example, we are getting a raise in ATR due to the shock. To project that into the future is wrong… better to look at what happens to ATR a month or so after earlier shocks. Even then we can’t be certain old patterns will repeat exactly, because the Shock changes the fundamentals. Critical determinants get re-weighted–PMI’s, inflation. The current crop of traders and analysts lack experience with inflation, unlike us remaining old-timers. They haven’t seen it before and don’t know how to weigh it. This increases volatility, among other effects.

Once a Shock has come along, additional shocks are possible when they were unimaginable before. It’s a bit like re-opening a cut that is healing and pouring in some germs–a full-blown Crisis is possible, or maybe the healing had gone far enough and the wound continues to recover. Shocks in recent memory include Grexit and Brexit, with earlier crises long-forgotten (Long-Term Capital) or seemingly not relevant (Bear Stearns>2008-09). Granted, some aspects of the market have been fixed, sort of and mostly, but that does not preclude new ones we haven’t thought of yet.

For example, consider that China could end up with cascading bond defaults from the property sector that bleeds over to other sectors, like a giant rise in the non-performing loans at state banks (already pretty high). Does this imply a replay of Long-Term Capital–a run on emerging market paper, currencies devaluing all over the place, EM economic growth grinding to a halt–and contagion to developed country banks and other institutions? Probably not. It will be something else, if only because this is China we’re talking about, not Thailand and Argentina and Russia. In the earlier event, banks and fund managers went under. Is it even remotely possible state-owned Chinese banks go under and deliver contagion to the world? The probability is almost zero. Presumably, the big shot leaders at Goldman and elsewhere who are betting on China have a slew of scenarios and emergency plans, but the wider market is clueless.

Tidbit: Wolf Street has a dandy article on the BLS changing its methodology for used cars from the survey version to actual prices per JD Powers. It will raise the price increase from 11.8% to 15.9%, but we won’t get it until May (for April). It will, alas, still use that dumb hedonic adjustment that subtracts the hypothetical cost of all the vast improvements over the years, so that a 2022 Ford 150 pickup is wildly better than the 1990 version, but the BLS wants to remove the cost of that improved quality to keep the product the same. This creates a false dichotomy “between the soaring prices paid by real people and the CPI for new vehicles, which had long periods of [artificial CPI] declines, even as actual vehicle prices surged…” Wolf has his own metric, which we won’t get into. Just be aware that the improvement in this one CPI component will likely be a rise in inflation–and still an undershoot.


This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.

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