Perhaps it’s the heat melting my brain but I’m feeling better about things. I’d normally avoid twisting the thoughtful logic and words of William Shakespeare by claiming now is the summer of our discontent but please indulge me. Yes, the home of The Bard is, like many countries, enduring crippling inflation, a decline in real wages and growing labour force unrest. And…the shocking headlines about a winter of rocketing electricity/gas bills and geopolitical tensions in the Taiwan Strait don’t help either. However, what if the bad stuff has actually peaked before winter has even arrived? What if, winter will really be summer? Crikey, I’m suddenly finding my inner Rees-Mogg! However, unlike Rishi or Liz, we might have reality-based supporting data to illustrate potential winter relief. Here are ten developments which have caught our eye….
- Inflation: Hot off the presses but US inflation(CPI) has just printed at an annual rate of 8.5%. Not great, but better than the commentariat expectations of 8.7%. Remember, inflation is all about future expectations. So, what if monthly rates of inflation roll over? Well, ex-Conlethian, David Kelly, is Chief Global Strategist at JP Morgan and he thinks August could see monthly rates go negative after peaking at 1.3% in June. Falling gasoline prices and mortgage rates(long-term interest rates) are the big driver here which is also causing some amusing reverse-ferret action from various Biden-bashing US media channels. More of that later.
- Jobs: Yes, the jobs market is a lagging indicator so it would be one of the last areas to signal recession. However, there is something strange going on. A quick tour of Connemara in recent days confirmed staff shortages are still a big issue. Ireland flying along at 6.3% GDP growth may not be reflective of global conditions but if we return to the US a potential ‘goldilocks’ scenario is emerging. Lots of companies have frozen hiring plans but recent data shows July job openings falling by more than 600,000 compared to job creation of 528,000 new roles. Currently, the ratio of openings to available candidates is 2:1 but the Fed would rather see that at 1:1. So, expect some job market cooling but possibly not as many job losses as in previous downturns.
- Interest Rates: We never stop saying the cost of money drives everything. The reason US mortgage rates have dipped back below 5% is that global long-term debt markets are seeing rates/costs/yields fall as investors factor in an economic slowdown, and lower inflation.
- Business Cycle: There are many analysts out there who believe these lower interest rates will be accompanied not just by a slowdown but by a wintery recession. We’re not so sure. Two things fly in the face of that cycle swoon. First, if recession looms then investors wouldn’t be buying stocks in the at-risk Consumer Discretionary sector. In fact, they’d be buying safety in the defensive Consumer Staples sector. Hmmm. Why then did July see Consumer Staples have their worst month relative to Consumer Discretionary in more than 20 years? Secondly, another hyper-cyclical sector, media, should not really be seeing M&A activity at juicy buy-out valuation multiples. Well then, explain news publisher Axios being bought by Cox Media for $525m or more than 5x its annual revenues, or Dive being swallowed up by the UK’s Informa PLC on similar 5x multiples.
- M&A Activity: It won’t just be Elon Musk forced to do big deals(Twitter) – yes, selling $7 billion of Tesla stock was the tell. We noted in last week’s article “Islands Of Investor Love” that the likes of Amazon, TD and Estee Lauder were doing deals. Currently global M&A activity is holding up at 80% of the record-breaking levels achieved last year but remember our mantra about the cost of money/capital driving everything? In particular, healthy debt markets(lower interest rates) drive deals for a very very important player…..
- Private Equity: Private equity(PE), by its very nature, uses debt/leverage to ‘juice” the equity returns for its investors and partners. So, when we see US long-run interest rates drop below 3% we smell the PE “Barbarians” coming to the buy-out gates soon. And, boy do they have some weaponry. Just the $3.6 trillion of “dry powder” in PE parlance is sitting earning miniscule returns with institutional investors becoming impatient. Expect increasing pressure on PE giants to do deals as interest rates stabilise or keep falling.
- Confidence: Technology is our future. A struggling tech sector and painful share price collapses do not help confidence. So, after a difficult first half of 2022, check out one of the best months ever(July) for tech stocks: Apple up 19%, Airbnb up 22%, Amazon up 24%, Paypal up 24% and Tesla up 31%. Wow, that happened quietly. Clearly, the media preferred the bad news and spin; but for the most important country in the world, confidence is absolutely critical right now.
- US Healing: I could be guilty of wishful thinking here. Anyway, here goes. The US Supreme Court over-turning of female healthcare rights protections in Roe v Wade was a very dark day and the Google searches for “US civil war” have spiked significantly. However, recent news flow hints at a United States whose institutions are beginning to re-assert themselves. First, the Biden White House is finally getting some wins. Falling gasoline(under $4) and mortgage costs(under 5%) certainly help but the Democrat administration is also chalking up some big legislative results on climate protection, drug pricing, veterans healthcare, semi-conductor(CHIPS) investment, infrastructure spend, Ukraine support and gun control. The majority of Americans see these as good for the country. But, espionage is most definitely not. Of course, the FBI search warrant served on the Donald’s Mar-a-Lago residence triggered MAGA/GOP hysteria and accusations of political “harassment” but…..there is a much bigger accusation hanging in the Florida air. The division of the DOJ/FBI who searched Trumpolini’s mob base are tasked with countering espionage and sabotage by foreign powers. Me thinks the Trump-appointed Director of the FBI, Chris Wray, and judges who permissioned the search would not have risked political chaos to secure the return of the minutes of an Oval Office briefing. Something far more damaging to US interests was probably “for sale”. Hence, the political risk taken. We shall see (Trump whined but didn’t show the warrant) and probably be shocked, again. It won’t move the MAGA fanatics but mainstream GOP types won’t fancy wearing ‘Make Saudi Great Again’ hats….unless they’re pro golfers.
- China: Taiwan tensions won’t go away but Beijing will have noted a bi-partisan US determination to support their ally. Instead, hopefully it will allow China to focus on domestic challenges and stimulate consumer demand. It is encouraging to see a lead indicator, “the China credit impulse” which tracks the injection of credit/liquidity into the economy, pick up in recent days per Bloomberg data. China is the biggest shopper on the planet so that “credit impulse” is rather important to the global economy.
- Supply Chains: The Financial Times is citing S&P Global data which indicates delivery times/supply chain pressures are easing around the world. It is important to note, and contrary to current central bank orthodoxy, that the inflation pressures in the world have been supply driven(blockages, wars, Covid etc) rather than demand (consumer, wages) driven. Arguably, inflation which caught central banks napping on the way up might surprise our monetary overlords and the commentariat on the way down.
Clearly, we can’t forecast the future but the data above does, at least, indicate “change” in the trajectory of many of the challenges of 2022. Alas, for Ukraine there is not much in the way of encouraging data, but perhaps history. Exactly eighty years on, let’s hope the winter of 2022 crushes the empire ambitions of a tyrant. Now, that would be truly Shakespearean.