DRUNKENOMICS

20/10/2022

Well that was quick...

U.K. Prime Minister Liz Truss resigned following a failed tax-cutting budget that rocked financial markets and which led to a revolt within her own Conservative Party.

23/09/2022

A story in 0.75 parts

11/09/2022

Happy birthday to our rum drinking, rugby playing, always-bragging-just-saying, chess playing, more gracious host. Look how Drunkenomical he is

29/07/2022

"If it looks like a duck, walks like a duck, and quacks like a duck, then it just may be a duck."



https://www.cnbc.com/2022/07/28/yellen-says-the-economy-is-not-in-a-recession-despite-gdp-slump.html

Treasury Secretary Janet Yellen said Thursday the U.S. economy is in a state of transition, not recession, despite two consecutive quarters of negative growth.

18/05/2022

Last quarter (Q1 2022), GDP growth expectations were projected to be 1.8% but actually came in at a staggering -1.4%. In the current quarter (Q2 2022), GDP expectations are still set at a positive 2.3%; even in a rising interest rate environment, a capitulating stock market, weakening consumer confidence/sentiment, weakening labor market, and lingering supply chain issues.

The Fed now, is probably clinging onto the hope that this quarter’s GDP expectations can be met due to the weak print from the preceding quarter; but what happens if GDP growth declines in two consecutive quarters? Well, that used to be what the National Bureau of Economic Research (NBER) classified as a recession. Nowadays, a recession “officially” occurs pretty much whenever NBER says it does.

Be that as it may, NBER still gets very scientific before declaring a recession. Some characteristics they need to see before pressing the panic button are a decline in real income, employment, retail sales, and industrial production. An economy facing these conditions is then usually forced to endure a periodical contraction in aggregate spending along with a decay in investor/lending sentiment. So with fewer people spending, lending, and investing, this should drive us into a deflationary period, right?

Normally, yes; one of the main causes of deflation is slow (or negative) economic growth. But these are abnormal times. Even in the midst of what is seemingly a recession, the most recent inflation print still came in at a scorching 8.3%; which brings us to the word economists use to describe a recession-inflation environment: stagflation.

This puts the Fed in a bind. On one hand, if the Fed proceeds with their monetary tightening, it tightens the clamp on spending, employment, investing, and further aggravates the global supply chain. On the other hand, they could pursue expansionary policy, which will drive up the existing surplus in money supply and thus, cause more inflation. On the plus (or minus) side, it will still take around 12-18 months for monetary policy effects to be felt in the actual economy. However, this only invites me to wonder where the Fed was 12-18 months ago.

For the last nine months or so, Wall Street and beyond has continuously cried that the Fed has lost credibility; which ironically claims the Fed actually had any credibility to begin with.

So cheers or whatever,

14/05/2022

Bottoms up. If not in the markets, then at least in the pub. Also, still hungover from the drunkenomics reunion last week.

20/04/2022

Oil hit -$40 on this day, two years ago. Still waiting on whiskey to reach those price levels.

12/04/2022

The Street has officially cried recession; at least part of The Street has. According to survey done by The Wall Street Journal, 28% of economists are predicting a recession in the next 12 months. In the same survey performed just a month ago, the results came in at only 10%. Additionally, Bank of America and Deutsche Bank have projected a recession in 2023; and economists at Goldman Sachs say there’s a 38% chance of a recession in the next 24 months.

In even more discomforting news, their recession cries are not unwarranted. From a solely technical standpoint, the first catalyst for decreased economic growth happened on the 14th of March, when the S&P stock market index fell into a Death Cross (pictured below). Death Crosses occur when the 50-day moving average of a stock, index, ETF, or commodity, etc. crosses below the 200-day moving average. Many technical experts use this indicator to identify weakness or an imminent bearish trend in the underlying. For instance, the last 40 times we’ve seen this death cross on the SPX, the S&P experienced a drawdown all but 3 times (1933, 1980, & 1999) with the average downturn of 12.57%.

The second technical indicator happened on the first of April, when the U.S. 2-year treasury yields inverted with the U.S. 10-year treasury yields. Like anything else, treasury yields are driven by supply and demand; and like all other bonds, yields go up when the price of the underlying bond goes down. In other words, investor demand for the U.S. 10-year has far exceeded the demand for the U.S. 2-year, so much so that it drove the yield for the 2-year above the yield for the 10-year. Since the 1960’s the 2/10 year inversion has accurately signaled a recession in the next 6-18 months…except for the times in which the Federal Reserve stepped in and defused it.

Speaking of the Federal Reserve, they also have $9 trillion balance sheet to unwind; which brings us to the non-technical recession catalyst. Starting in May, the Fed will likely approve the $95 billion a month ($60b in treasuries; $35b in MBS’s) plan to reduce their balance sheet. This means selling their fixed income securities back to the parties they bought it from, resulting in a reduction of money supply. Additionally, the projected rate hikes throughout the year will also theoretically depress the money supply and velocity; although the flip side is that it encourages borrowers to take on loans now before the cost to borrow gets even more expensive.

Either way, the hawkish tone that the Fed has committed to is very contractionary; which now begs the question: all this to combat inflation? They guess so…

Cheers,

P.S. other recession catalysts that were left out: geopolitical tensions, supply chain bottlenecks, heavy corporate debt loads, etc.

P.P.S. not financial advice, I’ve had a few drams

05/04/2022

Me listening to all this talk about a recession coming in 2023-2024

19/03/2022

First the LIBOR, now the LME

https://www.bloomberg.com/news/articles/2022-03-19/nickel-squeeze-threatens-london-s-place-at-heart-of-metals-trade

The crisis in nickel is raising questions about the LME’s structure, ownership and status in metal markets.

16/03/2022

Wow the spread between the US 2 & 10 year treasuries looks like a sh*tcoin upon the fed decision coming out

24/02/2022

Putin has officially declared war on Ukraine

Explosions heard in several Ukrainian cities, including Kyiv and Kharkiv.

Oil tops $100 per barrel.

Dow futures down over 800 points.

Whiskey still tastes good though. 🥃

11/02/2022

If you’ve been paying attention to the markets in last 25 months, you probably noticed that the U.S. 10-year Treasury yield has developed an inverse relationship with the Nasdaq Composite (pictured below). However, if I were to pull the chart back to 1996, you would see that the two of them had sustained a pretty direct relationship for almost 20 years.

To understand the significance of this, we need to first examine what the Nasdaq Composite really means. As opposed to the Nasdaq 100, the Nasdaq Composite is an index containing over 3000 of the world’s largest companies by market cap. Though it’s well diversified, the index is weighted by market-cap; so the 100 largest companies in the world (i.e. Apple, Google, Amazon, Microsoft, Tesla) drive about 90% of the action. In other words, the index is very much tech & growth weighted.

On the other hand, the U.S. 10-year Treasury has been viewed as the benchmark of investor confidence. Like all other bonds, when the yield goes up, it means the value of the bond is going down & vice versa. Additionally, because it’s a U.S. government bond, it’s also viewed as less risky; in some financial models (such as the WACC), it’s even used as the ‘risk-free rate’ to calculate risk premium.

Normally, when the yields on the 10-year rise, it means investor confidence is up. When investor confidence rises, investors no longer feel the need to play it safe and are encouraged to take on more risk for a higher return in the stock market. This rotation will then drive up both the Nasdaq and the 10-year yield.

But these are abnormal times. If the rising 10-year signals a pull back in the Nasdaq, it means investors are leaving the stock/bond market as a whole and going to cash (or maybe gold & crypto). This means investors are now rotating between cash & the stock/bond market, instead of rotating between the stock market and the bond market.

Why? Well, we currently have an almost $9 trillion Fed balance sheet that needs shrinking, 40% of all cash supply created after April 2020, inflation at 7.5%, and a central bank that can’t commit to a rate hiking plan. Unwinding these problems means reducing the monetary supply & velocity. Therefore, investors trying to time this monetary tightening have one focal point: Cash.

Cheers,

05/02/2022

In case you missed it, March oil futures managed to top the $90 milestone this week. To contextualize this move, in the last 52 weeks, oil prices have surged roughly 65%, including the 22% jump in the 5 weeks of 2022 alone. When was the last time oil futures traded above $90 per barrel? October 2014.

Will this price increase trickle down to the price at the pump? Almost certainly. And to pour some gas on the fire (pun intended), Goldman Sachs, Bank of America, Morgan Stanley, and other big players on the Street all see oil surpassing $100 per barrel.

The people who call themselves experts have cited a variety of catalysts; such as supply chain bottlenecks, surging demand, inflation, political/geopolitical tensions, lost Covid revenue, and even corporate greed and energy regulations. However, these ‘experts’ that have cleverly found a link between those catalysts and the increasing price of oil, seem more interested in debating/speculating the problem rather than searching for a solution.

But as history has shown, strenuous economic events always seem to prove the resiliency of the working class. Paying 65% more for an inelastic product is exceptionally burdensome; on top of all the other inflationary concerns. But the fact that we have sustained our way to these levels also proves that our economy has been much stronger than we all thought.

So cheers to our working class,

28/01/2022

27/01/2022

The purpose of the Federal Reserve (according to the Federal Reserve) is to enact the monetary policy needed to help the country achieve maximum employment and price stability. Normally, this goal is achieved through the adjustments of federal funds (interest) rates; and in extreme circumstances, bond purchases and the expansion of their balance sheet.

Prior to the FOMC meeting this week, the general market consensus was for that the Federal Reserve was going to hike rates 3-4 times in 2022, completely taper their bond purchases by March, and rollout a plan to shrink their colossal balance sheet.

During the Fed meeting this week, in order to “adapt to the evolving economic environment,” the Fed issued a more dovish-than-expected statement (keeping rates unchanged at 0-0.25% and ending asset purchases in March as expected) followed by a more hawkish-than-expected press conference, citing a strong labor market and inflation being “well above” it’s 2% target rate for so long.

After the FOMC meeting this week, the markets initially reacted positively to the dovish sentiment before being crushed by the hawkish tone from the press conference.

In all fairness, the hawkish tone and the taper tantrum is warranted for the same reasons they cited in the meeting. However, what was rather astonishing was the immediate market reaction, even after the correction we’ve seen in the last couple months. But from the market’s perspective, the Fed had been pumping liquidity in and driving equity prices up for the last two years on top of the dovish policy for the preceding decade. Any announcement of a liquidity vacuum will provoke at least some kind of sell-off; apparently even after it was expected.

So cheers (I guess),



https://lnkd.in/gHKmEmnd

The Federal Reserve concluded its January policy meeting Wednesday.

21/01/2022

Since 2013, China has been aggressively investing in emerging markets thanks to President Xi's Belt & Road initiative. Because many of these projects are 'hidden,' experts estimate China has invested almost 14,000 infrastructure projects across 165 developing countries, amounting to almost $900 billion dollars.

Because $900 billion is no small number and because emerging markets aren't exactly "safe" investments, China has been financing these deals through high interest loans from Chinese state banks. However, when collecting debt from the emerging markets, Chinese state banks have been behaving more like loan sharks.

Since September of 2021, China seems to have lost steam on their investment into emerging markets. Although there could be a multitude of causes for this (i.e. their mortgage/housing crisis, energy shortages, Chinese stock market meltdown), their method of doing business has certainly not done them any favors.

Conveniently for China, their central bank just announced an interest rate reduction; citing this monetary ease will boost the economy. More specifically, they lowered their 1-year LPR 10 basis points (3.8% to 3.7%) and their 5-year LPR 5 basis points (from 4.65% to 4.6%).

It's tough to argue that this rate reduction won't help jolt their struggling economy; but it's funny how it also perfectly accommodates their Belt & Road initiatives. Though it is a marginal rate reduction, it would certainly make $900 billion much easier for countries like Laos and Congo to borrow.



https://www.reuters.com/markets/europe/china-cuts-mortgage-reference-rate-first-time-nearly-two-years-2022-01-20/

China lowered mortgage lending benchmark rates on Thursday as monetary authorities step up efforts to prop up the slowing economy, after data earlier in the week pointed to a darkening outlook for the country's troubled property sector.

13/01/2022

The Producer Price Index (PPI) measures the average change over time in the selling prices received by domestic producers for their output. A good example of this could be the price of steel, rubber, plastics and aluminum a car manufacturer would have to pay to produce finished goods that they then sell to the market.

Off the back of months where mega-caps reported record profit margins, the YoY PPI data also came in at 12-year high of 9.7%. Although better than expected (up 0.2%, exp. up 0.4%), the thrill of constantly reporting record margins might be on the brink of experiencing a hangover.

However, 'experts' have been saying "party's over" for months now; so what has even kept it going for so long? My uneducated guess: supply chain issues combined with reopening/seasonal demand pull.

Cheers,



https://www.cnbc.com/2022/01/13/wholesale-prices-up-0point2percent-in-december-less-than-expected-but-still-a-new-12-month-record.html

The producer price index was expected to rise 0.4% in December. Jobless claims were forecast to total 200,000.

12/01/2022

The last time inflation reached 7% was the same year Thriller by Michael Jackson was released. On the flip side, the effective Fed Funds rate that year ranged from 8.68%-14.94% with most of the year being above 10%.

Luckily for the USBLS, they can always resort to changing the way they measure CPI data moving forward. Pictured is a screenshot of their website ( https://www.bls.gov/cpi/ ) in case the notification is removed by the time you click on it.

Not saying this is the right or wrong move given the anomaly that was the last two years; but I'd be hard pressed to say I don't find it oddly convenient that they have ability to suddenly change the way core inflation data is measured.

12/11/2021

Just did an episode about monetary policy after a trip to the treasury. I think it’s be cool if it fell on your ears after 2 shots of whiskey.
Cheers 🥃

03/08/2021

Idk. Seems like the spike in real estate prices is slightly leveraged?? Not crying "bubble," I'm just saying...
https://www.cnbc.com/2021/08/03/household-debt-jumps-by-the-most-in-14-years-to-nearly-15-trillion-in-the-second-quarter.html

Household debt rose by its highest dollar amount in 14 years during the second quarter, thanks mostly to a surge in the housing market.

20/07/2021

North Sea oil futures are up a percent and a half today.

16/05/2021

Im going out on a limb and saying we were on the money this week...

I know, it took us about time to talk about the most basic principle of economics: Money. How did the concept begin, why is it currently the way it is, and where is the function of money headed? (That last question's just a guess by the way). Find us on Twitter, Instagram, & Facebook ...

29/03/2021

WHAT THE FUDGE???

13/03/2021

Well let’s just see how this projection plays out...

09/03/2021

This guy (David Fiala) went on to start one of the best futures trading platforms in America (FuturesOne) and most recently was our first ever guest on Drunkenomics.
Here’s a link👇🏼
https://open.spotify.com/episode/5fgIcB01eRajLC7puepJ40?si=AdDl4jdzR7i2i_WSNKnv6g&context=spotify%3Ashow%3A0ogwiXxZRYxwVNGE6oLmQW

26/01/2021

Their wealth has a P/E ratio of 1000

More than 70 million Americans (or roughly 40% of the labor force) have filed unemployment claims since the start of the pandemic.

31/12/2020

Wow...didn’t know we were so well-loved in the D.R....where they makes some fine ci**rs. Just sayin’

31/12/2020

At DRUNKENOMICS we have a simple rule: Be Drunkenomical. Robbing a bar is definitely not that. If you're in Lincoln stop by McKinney's and show some support. Cheers