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Chart of the Day - little help?
Yesterday I was out to a charity golf event. The course is large enough that there was another event at the same location. Both terrific causes - college scholarships for deserving & needing kids as well as children's cancer. There were quite a few people there to enjoy a day of camaraderie & competition but mostly there to give a little help where it is needed. Based on the generosity & mood of the people on hand, I still do no see a recession in the part of the Midwest where I reside.

This is a bit ironic too because they news in the mkts of late, & even the news in the mkt yesterday, wasn't that great. Yet the mkt got a little help. In fact, the mkts have been getting a little help from a number of places lately & perhaps what we are seeing is a reduction in the odds of the far left tail, which are leading to covering of risk positions.

The first place we saw help last month was from the BOJ which intervened in the JPY FX mkt to stabilize the currency that was under pressure & leading to other devaluations in Asia. We spoke about the importance than as the JPY trade & Japanese flows help support many mkts.

We also saw some help by the Chinese authorities that intervened in the offshore CNH mkt again to provide some stability. That mkt had breached the critical 7.00 level and has rebounded nicely the last week. Another layer of support in a shaky area of the mkt.

Then we saw the BOE support the UK Gilt mkt to help pensions & pensioners. I wrote more about this in my Stay Vigilant blog this week. The 30 yr bond mkt was trading like a meme stock & the BOE provided support. This support was augmented by the Truss govt backing off the tax cuts (really the repeal of tax hikes) for top earners added a sense of a little more fiscal austerity.

Then, the US mkt got some added support from an unlikely place - bad economic news. Recall we asked yesterday what were we rooting for. It seems we were rooting for slightly worse than expected growth numbers with a materially falling ISM price index. This added help because it led traders to price in the peak of Fed policy in December of this year. Recall we had discussed the twin peaks narrative before? There was a sense yesterday the twin peaks are here.

We have said for 2 months how bearish positioning is. Positioning is not enough of a reason to buy. It needs a catalyst. The catalysts is the intervention of the authorities or the assumption the authorities are getting out of the way at least. A little help was all the bulls needed to take control back in this tape. The fact that we are beginning Yom Kippur only adds to the catalyst to buy.

Much like the organizations we supported yesterday, the mkts need more than a little fincl support. They need time and talents to help sort thru the issues. For now, we will enjoy that we got some help and perhaps we have seen the worst for now. We still need to ...

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Still gotta… Stay Vigilant! Great piece today :) Great examples of the supports that are acting as catalyst right now
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Chart of the Day - what are we rooting for?
It was a perfect Fall weekend in Chicago, with bright sunny days & cool nights perfect for a fire. It was mornings filled with golf & afternoons with football. After a terrific win for my beloved Illini, I got together with college friends & the enthusiasm & expectations were quite high. I am trying to stay balanced & I am just rooting for a bowl game. On the flipside, the Chicago Bears came back to reality on Sunday. Emotions were similarly strong, but negative, on the outcome. However, I am also trying to stay balanced & getting a good draft pick probably serves the team better than a win. It was a weekend where I had to keep trying to remind myself - what are we really rooting for?

Today we will get the latest reading on ISM, my preferred measure of growth in the economy. We will get others this week too, with durable goods & non-farm payrolls. We will have a good idea of the direction of growth in the economy by the end of the week. Good numbers keeps the Fed solidly in play, as it will have no excuse not to tackle inflation. Weak numbers will point to the next show to drop - earnings - & give the bears another reason to press the move lower. So one must ask - what are we rooting for?

The expectation has been that growth would slow pretty considerably by now. Some thought, and still do, that growth will slow enough to pull down inflation. Not yet. However, I look at three measures that lead the ISM & all give us a sense that growth will fall below the 50 threshold of expansion/contraction & maybe even below the 47 threshold of recession.

The first is the yield curve, leading by a year. It is sending a particularly bearish message on growth and has been in freefall since the summer. It is in white. The second is the housing market index in yellow leading by 6 monhts. It is also in freefall but from much higher levels. We can also see that it is prone to wild swings in either direction as it foretold of a very weak economy in 2010-2013 that never really materialized. However, housing does lead the economy into and out of a recessions so we must pay attention.

The third measure, also leading by 6 months, is the ratio of new orders to inventories. The inventory build has been an ongoing theme all summer and Nike just brought it up again. Ironically, this measure n blue, ticked higher last month. We shall see how much was anticipatory inventory build ahead of potential strikes vs. goods that can't be sold at any price.

The forecasts for growth do not look really healthy. Consensus only sees ISM falling from 52.8 to 52 so not nearly as bleak. These other measures tell us there is more risk. However, is good news good or is good news bad? Is bad news good on the Fed front? What are we rooting for? Understanding this can help us keep our emotions in check after a good win or an ugly setback.

For what it is worth, being out and about this weekend, there are zero signs of a recession in my part of the country.

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Stay Vigilant blog is out

My latest Stay Vigilant
blog is out. The world is a riskier place indeed. What better person to
speak about risk with than Mr. Risk who joins me on a podcast. For those
that like the charts, there are plenty of those too.

If you like it, please share and subscribe. If not, message me to let me know why. I love the dialogue.

Either way, Stay Vigilant
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Chart of the Day - Ball of confusion
The song was originally released by The Temptations in 1970. It was covered by Love and Rockets in 1985. The lyrics seem just as appropriate today as when originally released:

"Oh yeah, that's what the world is today
Woo, hey, hey
The sale of pills are at an all time high
Young folks walking round with their heads in the sky
The cities ablaze in the summer time
And oh, the beat goes on

Evolution, revolution, gun control, sound of soul
Shooting rockets to the moon, kids growing up too soon
Politicians say more taxes will solve everything
And the band played on

So, round and around and around we go
Where the world's headed, nobody knows"

For the mkts, a major source of confusion is the labor mkt. For some, strength in the labor market is a lagging indicator & so less important to consider because leading elements of the economy such as housing and new orders have already fallen. It is just a matter of time before jobs fall.

For others, it is a sign of risk. The Fed has a dual mandate of full employment & price stability. As long as the labor mkt is strong, the Fed has carte blanche to raise rates as aggressively as it wants. Thus, a strong jobs mkt means more risk for stocks.

Building on my 'what if' theme yesterday, the labor mkt is potentially also a source of a soft-landing. This would like be driven by jobs holding up well,allowing the secular strength in household formation combined with low inventory of homes and rentals to drive housing.

So which is it? Depends on your horizon. However, that is not the only source of confusion.

We are trying to guess the future direction of Non-farm payrolls in yellow. I have two indicators that say further strength and two that say future weakness. I will let you decide.

In the weak corner, we have ISM employment numbers and CEO Confidence surveys. Both make sense. Asking companies what the expectation for hiring will be should impact future employment. Both of these are quite negative now. Both would point to NFP below 0.

In the strong corner we have Job Open and Labor Turnover & Jobless Claims numbers. Yes JOLT may be secularly higher because of online postings but even within that it is persistently high. 11 mm openings. Jobless claims which had weakened from April to August has been on a stronger trend for 7 weeks. The latter at least is hard data and not survey data. Do you give it more credence?

It isn't easy. First we need to figure out what will happen with jobs. Then we need to figure out if good, bad or indifferent.

"Fear in the air, tension everywhere
Unemployment rising fast
Rockets new record's a gas

Eve of destruction, tax deduction, city inspectors, bill collectors
Solid gold in demand, population out of hand, suicide
Too many bills, everyone movin' to the hills
People all over the world are dying in the war"

Ball of Confusion.

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Chart of the Day - what if?
One of the topics I harp on in all of my classes is the need for scenario analysis. By this I do not mean exploring only what can go horribly wrong. I also mean we need to understand where and how we might be too pessimistic as well. I know how well it worked into AND out of the GFC. I know how Twitter only focuses on one scenario.

I was on a panel discussion on Monday. A question from the audience was what is the likelihood of a soft landing from the Fed. Like many, I do not see this as being very likely. There have only been 3 soft landings in the last 14 rate cycles. Given the Fed is hiking aggressively when we already see signs of slowdown doesn't put the odds in favor of a soft landing this time around. However, one needs to ask what if?

A soft landing may only be possible if the housing mkt does not collapse like most think it is going to collapse. Please find me a link to anything on social media that is bullish housing. Every. Single. Day. there is a bearish housing piece. We know housing leads us into and out of a recession. So what if it doesn't lead us in? What if it is not that bad?

This would have to be because jobs hold up much better than expected. Buying a house depends on a mortgage of course, but it also depends on if you have a job that is paying you a good wage.

I looked over the last 20 years. I compared the median home price (white), median national income (orange), & avg 30 year mortgage rate (blue). Yes, this is overly simplistic. None of us live at the median. However, it is a stylized example. I then also assumed that people would put 20% down & borrow the rest. We know this didn't happen in 2005. However, it is now.

The data is below the picture. The bottom line is the key. It shows what % of one's income goes to the mortgage. It was around 25% before GFC. Got as low as 15% at the depths of housing in 2012. It got over 34% in 2022. Housing was unaffordable for most. Things had to change. You can see house prices doubled from 2008 while income only went up 40%. Not a good combo.

The last column on the right I make some assumptions, look at a scenarios. What if median home prices fall 20% further? What if the median income gets a 5% raise? What if we find a steady state where mortgages are about 23% of one's income as it was pre GFC. What mortgage rate would this need to be to make housing look compelling? I backed out from this 5.1% vs. the close to 7% we are at now. That is a big drop. However, the mortgage spread to the 10yr is over 3% vs. the 2.1% it usually avg. Maybe this is QT. Maybe this is nervousness. If we go back to average, that would mean we need the 10yr at 3%. Lets assume it doesnt go all the way, so we need 10yr in the high 2% vs the high 3%. This is not unachievable. It shows what is possible. If it did happen, so could a soft landing. Not likely? Neither was a very sharp rally in early 2009.

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Chart of the Day - sell on Rosh Hashanah, buy on Yom Kippur.
As I sat in the main business building yesterday, two young me came into the Atrium, said something in Yiddish, & blew on a ram's horn, a shofar. At this point I realized it was Rosh Hashanah. For some reason, my mind immediately thought of the old Wall Street adage to sell on Rosh Hashanah and buy on Yom Kippur.

The logic is as the new year is beginning, people should be free as possible of belongings & worries to start this 10 day period of self-reflection & self-appraisal. A quick Google search suggests it has worked 29 of the last 52 years, so basically a coin toss. If you include there is a positive drift to mkts typically, maybe there is something very small there but you would be squinting to see it.

This year in particular it may be tough if we look at the price action across all asset classes. We get to Rosh Hashanah and we are at the lows of the year in many products. Yom Kippur is on October 5. Are there any catalysts at that time?

The big mover of late has been the British Pound in purple which is hitting lows not seen since the Maggie Thatcher era. In fact, there looks to be a fat finger error/flash crash/barrier option breach on Monday that took the currency town 5 handles during Asian time (hat tip SR). Products tend to drift back in the direction of the error, so it wouldn't be surprising to see GBP move toward par.

Copper has been the weakest in yellow with concerns about housing mkts globally, led by China which caved first, but followed by the UK & the US. We will get the Natl People's Congress starting on Oct 16 in China so by early October there could perhaps be some positive news ahead of that. We will also get quite a bit of news on the jobs front in the US in early October. Perhaps these events can support the commodity mkt. There might be some hope for copper.

I have written about the relentless weakness in Treasuries, something most people have not really ever seen in their careers for any stretch. In early October, we will also be getting economic data on the ISM & CPI/PCE. As I showed yesterday, 10yr yields appear to be meaningfully disconnected from this data on growth & inflation, so perhaps these data is a catalyst to see some bid return to bonds.

Probably the best bet for a buy on Yom Kippur would be stocks. The week after Yom Kippur is the unofficial start of earnings when the big banks report. Historically, when the stock mkt is weak into earnings, stocks really only need to come in line vs. the lower bar & we can see relief rallies. I think it is fair to say stocks are weak. I think it is also fair to say that the bar is low on earnings. Could this be a bear mkt rally like we saw in July, when that earnings collapse did not come to fruition?

I wonder if anyone is really feeling confident to press their shorts at this point. Let me know in the comments. For those who celebrate, Shanah Tovah.

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Chart of the Day -getting away from them.
I got to play in a memorial golf tournament for a friend of mine yesterday. It was terrific to see a number of people I have not seen enough of over the last 20 or so years. The format was a
scramble which means one can feel confident to take risks. However, there were still a number of shots that got away from me.

I wonder if the Fed is feeling the same thing in regards to QT and balance sheet reduction. It probably felt confident to take the risks of unwinding a large amount of assets. Those risks might be getting away from them now.

You see, the Fed is not the only one looking to sell. Emerging market central banks are in a position where each needs to sell holdings of Treasuries to raise dollar liquidity and help domestic companies that have dollar debt. The Fed could extend swap lines to help these countries out. The Fed has existing dollar swap lines with Canada, UK, Europe, Japan and Switzerland. It has had temporary lines with others in the past. Given the dollar wrecking ball ripping thru the mkts, this could help relieve pressure. Until we see that, this source will not buy bonds.

Other central banks are not stepping into the void because of their own problems (Europe) or a new desire to diversify away from the US for geopolitical reasons (Russia, China, maybe others too).

Individuals are not quite there yet in buying but may soon. Pension plans are starting to see
corporate bonds around 6%. With a benchmark return need of 7 to 7.5%, corporate bonds get attractive soon. The spreading by dealers will bring some demand for Treasuries but not yet.

The reality is the bond yield is starting to dislocate from fundamentals. We can see back in
2021, bond yields were held artificially low when growth in white was spiking and inflation expectations recovering. That is the lower circle. Now we are in the opposite, where QT might be forcing yields higher than they should be as growth is slowing and inflation expectations out to 5 or 10yrs are also falling.

This is where the NY Fed needs to take note. It will survey dealers each day. It will determine that the liquidity in bonds is very poor. It will see the dislocation from fundamentals. Back in June when I first started discussing the idea of a Fed pivot or pause, I said the pivot would not come in rates but would come in stopping QT because the Fed would soon realize the mkt could not handle it. Even while the Fed hikes further, and I think it will in Nov and Dec, there is scope to use the liqudity and market stability argument, as well as stresses abroad, to slow QT. Perhaps we see that in the coming weeks. That would be a positive.

For now, the price action in bonds has me worried. This will cause pain in leveraged
accounts. We will hear of this soon enough.

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Chart of the Day - worried.
We had our annual Ryder Cup like event this weekend. I was on Team USA & unlike real-life, we did not win. A fun aspect of the event is that you can socialize with a number of people that you might not normally over the course of the year. They run the gamut from C-suite to fincl advisors to experts in real estate or logistics. I wrote about this in my Substack blog this week (Anecdotal evidence - stayvigilant.substack.com) & suffice it to say, they were all very worried.

These people are not the only ones that are worried. BAML has consistently pointed out that cash balances are very high. We see from the Committment of Traders that leveraged or speculative accounts are short the most economically sensitive futures markets. NYSE short interest is back to levels last seen in 2008. Emerging Mkts are failing. Currency traders see a series of rolling devaluations.

Which of these has you most worried though? We can start with the equity mkt. It is, after all, a leading indicator of the economy, & we surmise that via wealth effects, the performance of stocks impacts consumption. The blue line is the rolling 12 month yoy performance, we can see SPX is down 17% yoy, slightly less than YTD. People are feeling these losses. That is worrying in itself.

The pink line is the dollar wrecking ball (not sure who coined the term but I like it). The $ has been on a one-way train higher, leaving damage in its wake. There are $12 trillion of USD loans overseas. The higher dollar crushes those borrowers. The higher dollar is contributing to the pain we are seeing in EMs, in China, in Europe & in the UK. Saw someone on LinkedIn joke that the British currency is now being quoted in ounces & not pounds. Quite clever. Also see the new meme that 1 Bitcoin = 1 Bitcoin, an attempt to say 'focus on the number of coins you hold and not the price' but implicitly telling all that the dollar is crushing even crypto. Remember when we were worried that too many dollars were printed and the dollar would be debased? I am sure the dollar has some worried.

Commodities are in yellow & while they peaked earlier this year, the yoy is coming lower. Worried, but maybe becoming less worried if the trend continues. Gas prices are lower in the US even if food is not. Stay tuned.

The chart that has me the most worried is the green line, the yoy change in the US Treasuries. We are off to the worst start in 50 yrs in the bond mkt. These securities are a core part of every portfolio, particularly those in retirement that are no longer earning & can't afford to lose. Treasuries are also the underpinning of the pricing of all assets - corp credit, other soverign debt, equities & futures. Treasuries becoming unhinged, breaks all mkts. The inability to catch a bid here has me the most worried.

Hate to be so negative, but there are times when risk management is more important than return expectation.

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Chart of the Day - too much cash
After class yesterday I had a conversation with a couple of people who were asking my opinion on when the Fed might stop hiking rates. The implied question to me was more like 'where is the Fed put?' I answered by saying that it is my opinion the Fed does not care about equity multiples but cares about earnings. If the reason stocks are falling is due to investor sentiment, the Fed is less bothered. If it is due to the economy slowing & earnings falling, it may be more concerned. Earnings have yet to slow, though the expectation is Q3 for this.

When I got back to my desk I noticed an email from S&P Cap IQ (yes, I do in fact use more than my Bloomberg) where the headline was: "Data Dispatch: Certificate of Deposit rates at US banks fall well short of Fed hikes" I looked at Chase Bank, not to pick on the bank but because that is where I bank. I saw that rates are indeed well short of the current Fed Funds rate at 3.25% (see comment). In fact, for consumer savings & checking accounts, those rates still remain at a unhealthy 0.01%. Good luck on your retirement there, Boomer. Of course, if you lock it up a year, you might approach 1.5%. Why is there no competition for this sticky capital among banks?

I asked my trusted banks expert (hat tip PD) & he directed me to look at reverse repos. This is a little wonky but when there is not enough cash in the banking system, the Fed will do a repurchase agreement or repo, lending cash to banks for the short-term. When there is too much cash in the system, the Fed will do reverse repos, to extract it from the banks. The size of the reverse repos (about $2.3 trillion in the white line) gives you an idea how high, and still growing, the cash that banks have is. Banks are not raising rates because banks have too much cash on hand.

When the Fed sees this in both magnitude & direction, the Fed is not inclined to stop hiking rates any time soon. The purple line is the terminal Fed Funds rate imputed from Eurodollars. The mkt expects the Fed to stop sometime in Q2 next yr at 4.85%. That is a long way from 3.25% Fed Funds in blue. It means 75 in Nov, 50 in Dec & at least 25 in Feb '23. The commentary from JayPo supports this. The Fed is still solidly in play & the mkts need to take notice.

I have written about the link in Fed policy & multiples, credit spreads, & volatility. Expect multiples to continue to compress, spreads to widen, & vol to move higher. We are not at the twin peaks that I discussed last week (hat tip BK and FG). We are not close to the Fed put.

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Chart of the Day - you've gone too far!
What parent hasn't had to say that at some point to a child regarding actions that, at first, were fairly benign but subsequently led to something broken - broken furniture, broken window, or maybe broken feelings. I know I have said it. I know my parents said it to me. Heck, my wife might have even said it to me.

Well, today, the BOJ said it to the market. I have pointed out all year long that the BOJ was actively trying to import inflation to its economy, taking the problem that plagues the US and Europe onto its own shores because after 30 years of deflation, it could use a little inflation. It did this by keeping rates pegged lower while others were hiking. The result of this was that the Yen would weaken. A weakening Yen had repercussions for fincl mkts. It would lead to a preference among leveraged accounts to borrow in Yen & then swap out. It would lead Japanese investors, whose massive savings fuel global mkts, to repatriate. It would lead to higher 10 yr US yields.

I have also pointed out how rising 10 yr US yields would hurt all mkts. It is the rate upon which we price all other assets essentially. It would lead to rising earnings yield on stocks which was another way to say lower P/E and lower stocks. A sinking Yen could sink all boats.

I also pointed out how the weaker Yen was leading to a weakening Yuan (RMB) in an Asian FX war. Bottom line, what started as something fairly benign had proceeded to the point where things were breaking.

Last night, the BOJ yelled 'Now you have gone too far!' It intervened in the FX mkts to strengthen the Yen. As USD/JPY got near 146, a line in the sand was drawn. The pair immediately sunk to 141. The mkt was all leaning one way & had to react.

At the same time, S&P futures which were down over 40 handles rallied back 50 handles from being down over 1% to flat or up. CNY which had weakened to 7.095 strengthen to 7.07. 10 year US yields sank from 3.56 to 3.51. Heck, even Bitcoin rallied from below 19k to above 19k.

Time will tell if the children pay attention to the parents warning & actions or if they push the envelope a little more. WIll the BOJ's mettle be tested? I wouldn't be surprised. However, if there is a line in the sand for USD/JPY, this will have an impact on other fx pairs, it will have an impact on US yields. It will have an impact on other assets.

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