Stock Market Direction (Part 2)

[musa_2]

There’s a very broad range of macroeconomic data available. But, as I recall, the Fed’s mandate isn’t about a “strong economy” or countering recessions, but rather about promoting employment while ensuring price stability.

At Jackson Hole in August 2020, the Fed decided it would no longer use models or forward-looking indicators at all.

Labor market data is glowing hot. The Fed isn’t trying to model future developments but acts based on this red-hot data.

The starting point now is that the Fed is tightening financial conditions and allowing the markets to tighten them independently until the labor market is sustainably warm.

What is the timeline and through what stages does unsustainably hot become sustainably warm?

I’m certainly not trying to guess.

In my opinion, the Fed has an absurd hubris in its approach to asset values.

According to the Fed, asset values don’t need any attention as long as inflation is moderate. Moderate inflation, in the Fed’s view, indicates that the wealth effect hasn’t swelled too much to overheat the economy.

The Fed imagines that it can, at any time it wishes, suddenly adjust asset values just right downwards, after first allowing them to swell uncontrollably, mostly as an indirect consequence of the Fed’s actions, but also quite directly by pumping them up (MBS purchases).

Now we are very firmly at the stage where the Fed hopes for uncertainty that gnaws at the lives of the well-off, as to whether they can treat asset values as mark-to-market.

Time will tell when something happens that changes the Fed’s attitude.

[Tunturisusi]

I agree with this.

[Verneri_Pulkkinen]

@Juurikki

Europe has already strengthened its competitiveness by 5% compared to the USA through the weakening of the euro. Is Europe so unfortunate that it needs another 5% increase in competitiveness through real wage cuts?

To this good point, one could add that competitiveness should perhaps be considered more in the context of individual Eurozone countries.

Judging by what an export monster the Eurozone is, we do not have a competitiveness problem as a whole. An individual country like Finland might have one. But Germany hardly does. In fact, probably the best thing that could happen to the Eurozone would be “too” sharp a rise in wages in Germany, which would stimulate the country’s weak domestic consumption and shift jobs to less prosperous countries.

From this perspective, German wage increases would be quite… bullish.

[Expaco_b]

Wait, could you clarify why Germany would be doing particularly well right now?

The country is an export-oriented industrial nation, and exports are currently faltering, for example, due to a component shortage, one car brand isn’t even accepting orders. At the same time, the country is suffering from record-high energy prices and is a top country for energy dependence on Russia with its pants down, and so on.

Yes, the euro’s exchange rate specifically reflects Germany’s problems, of course, as part of Europe. Smaller countries like Finland can operate much more nimbly. Whether they do, of course, is another matter. Finland’s employment rate, for example, is dismal, and this is now becoming concrete as there isn’t enough money to distribute to everyone when there aren’t enough payers.

[Enkeksi]

This is a pretty essential part of Finland’s competitiveness, and since you’re always linking clever articles here, a “German job market for dummies and whether an even redder chancellor has an impact on it” would be nice!

[Verneri_Pulkkinen]

@Expaco_b

Wait, can you clarify why Germany would be doing particularly well right now?

The country is an export industry nation, and exports are struggling right now, e.g., due to component shortages, one car brand isn’t even taking orders. At the same time, the country is suffering from record-high energy costs and is a top country for energy dependence on Russia with its pants down, etc., etc.

Yes, the euro’s exchange rate specifically reflects Germany’s problems, of course, as part of Europe. Smaller countries like Finland can act much more agilely. Whether they do is, of course, another matter. Finland’s employment rate, for example, is dismal, and this is now becoming concrete as there isn’t enough money to distribute to everyone when there aren’t enough payers.

I should have specified that this was the case at least before the current energy crisis and component shortage.

Though this situation also well illustrates the weakness of the German model (export-driven): as soon as the world stumbles and BMWs aren’t selling, the economy is in trouble.

Behind this is a very high-level idea that the economic area’s engine should be a driver of demand, not an absorber of demand. Just as the United States is the “spender of last resort” for the global economy, which is why it is relatively immune to many fluctuations in the global economy.

@Enkeksi

This is a pretty essential part of Finland’s competitiveness, and since you always link smart articles here, some “German labor market for dummies and whether an even redder chancellor has an impact on this” would be nice!

Regarding Germany, economist Michael Pettis has had good writings for years on the country’s current account imbalance (super surplus) and how it reflects on its domestic consumption and, on the other hand, elsewhere.

I recommend his and his friend’s recent book, Trade Wars are Class Wars, where, among other things, Germany’s situation is explained very understandably.

In short: Germany’s economy was in a really bad state in the 90s and was practically uncompetitive. The country implemented massive Hartz reforms, which curbed wage growth. After decades of this, we are in a situation where domestic demand is weak because a larger slice of the pie goes to export-profit-making companies. The current account is in a super surplus, and Germans invest their accumulated savings with poor success, such as in Southern Europe.

Within the eurozone, the problem has been that if every country doesn’t discipline households in the same way as Germany, they fall behind in competition, and the alternative is rising unemployment or indebtedness to Germany. The latter is easier, and voilà, the euro crisis and the problems of the eurozone.

This is quite old, but it should serve its purpose because Pettis’s arguments have been relatively consistent for years. Which indicates that they work when they don’t need much modification.

Page not Found | Carnegie Endowment for International Peace

Addition: or for example, this tweet thread https://twitter.com/michaelxpettis/status/1475437492199469058

[Tunturisusi]

World's Top Exporters and Importers - World Options — World Options - Shipping

It seems imports are greater than exports in Europe. There are no other export giants in Europe besides Germany, where export revenues significantly exceed imports.

[Enkeksi]

Tweet

See new Tweets

Discussion

\n\n\n\n\nHolger Zschaepitz\n\n\n\n@Schuldensuehner\n\n\nGood Morning from #Germany where risk of price wage spiral is real & not just product of #inflation angst ingrained in German DNA. Last week’s IGM demand for 8.2% pay increase (for 12mths) for steel industry provided another reminder that German wage pressure index turned red hot\n\nTranslate Tweet\n\n\n\n\n\n8:15 AM · May 4, 2022·Twitter Web App\n\nAnd then AI immediately put this in front of me. That’s quite a wild starting point for negotiations.

[Sijoittaja-alokas]

Greetings!

Marianne has already welcomed everyone to follow the Federal Reserve interest rate decision event:

These events have gained exceptional popularity, which means Marianne has received great questions, and the thread has also seen good messages and links during the event.

To ensure everyone has a pleasant experience and the event is as clear as possible to follow, I’d like to highlight a few things:

1. Lighter topics and memes can be posted in the Coffee Room. Inderes Coffee Room (Part 4)
2. Around and during the event, company share prices are likely to fluctuate, so you can wonder about them here: Stock Price Queries, Horrors, and Praises - Thread
3. Here you can update on slightly larger daily market movements: Daily Market Movements and Corrections (Bear’s Den & Bullfighting Arena)

This thread is, in my opinion, the best place to follow the event, so get your home studio ready for the evening and don’t forget the popcorn!

[Jarnis]

My uneducated guess: An unsurprising +0.5% rate hike, after which the skittish market will correct upwards somewhat as fears of more dramatic moves fade. What they’ll babble about the future, I can’t say, hopefully boringly predictably the same as before. And popcorn ready.

[Rokka]

Oh, what a day of joy it would be if the free market could operate without the control of central banks. I personally guess that there is a long way down if the Fed’s talk about future interest rate hikes remains the same.

[Juurikki]

@Rokka

Oh what a joyful day it would be if the free market could operate without central bank control.

And for the past decade or so, we’ve been thinking, oh what a joyful day it would be if central banks would stop messing with the markets and inflating stock prices with their endless money injections.

[Verneri_Pulkkinen]

@Rokka

Oh, what a joyful day it would be if the free market could operate without central bank control. I, myself, would guess that there’s a lot of room downwards if the Fed’s talk about future rate hikes remains the same.

That’s a relatively common comment, which is why I’m addressing it.

If you scroll through market comments decades back, you can observe a certain repetition: “Fed, too much debt, about to collapse.”

Central banks are a part of the economy, but they don’t control the markets. They do have a lot of influence on the markets, however. They also adapt to market and economic realities. The Fed is currently caught between a rock and a hard place, having to raise interest rates while inflation rages, but at the same time needing to ensure employment and its own credibility.

US government debt interest rates clearly show how rates rebound before the Fed has even properly started with its hikes.

There is no such thing as a “free market” in the sense* that the market operates in a complete vacuum. US markets were truly chaotic before the Fed. Central banks elsewhere are much older.

In my opinion, the Fed gets too much weight: good companies push forward regardless of where the Fed’s actions and rates are.

It’s just a very clear actor with a face, and it’s easy to make memes about it.

*Completely free markets have never been known to exist, and probably never will, and for good reason

[Kesa86]

This is how interest rate forecasts live. Less than a year ago, it was considered almost certain that the Fed’s policy rate would be close to zero at the end of 2022. Currently, expectations are around 3%, but the change can ultimately be sudden in the other direction as well.

Excerpts from morning reports.

17.6.2021

Today 4.5.2022

[musa_2]

TINA suddenly over.

[MattiZ]

Ostopaikka tekno-osakkeissa? | Traders' Club 135

An unfortunate error by a Citi employee caused the Nordic stock exchanges to briefly plummet on Monday. Jukka and Tuomas discuss the causes and consequences of the flash crash, examine potential buying opportunities in tech stocks, and review the Q1 earnings season as it approaches its conclusion. Watch the episode and stay up-to-date on the latest market developments!
0:00 Intro
1:13 Markets Now
16:56 Market Review
27:26 Portfolio Review

[miiamafia]

It would be wonderful if someone would bother or have the energy to briefly summarize these Traders Club episodes instead of just linking them

[Saint]

Those forecasts largely reflected the “transitory” term emphasized by central banks.

It also shows up on Google.

It would be interesting to know if central banks truly believed in that transience or merely communicated transience just to lower inflation expectations? The latter would admittedly be quite a gamble for confidence.

I personally don’t believe, nor is there strong evidence, that QE has significantly affected the current underlying inflation. It has certainly boosted asset prices. The reasons for inflation lie in global supply chains, which lockdowns etc. disrupted in an unprecedented way. It’s difficult to find indicators for supply chains, so researching the topic is relatively hard. Perhaps that was one of the reasons why the true nature of the situation wasn’t fully understood.

The price of oil even dropped to negative at one point. Such a second price shock doesn’t immediately come to mind. The consequences of this will surely be investigated. This price shock was one of the first indications for me that we were seeing something completely new in the economy and that traditional models and interpretations should be critically examined.

In the long run, the economy will adapt, and these problems will be fixed, and competitive companies will thrive in any environment.

[Jarnis]

Where’s the recession, aren’t these supposed to be going in the other direction…?

https://twitter.com/DeItaone/status/1521848488903987200

On the other hand, if the economy doesn’t go into recession, JPow might speed up interest rate hikes?

Eek, is this good news or bad news!?!?

[Jamon]

IMO, a recession is a given because inflation is outpacing wages, and interest rates are rising simultaneously. I’m already noticing that I don’t have as much left over after essential expenses as before, and it’s practically the same for everyone else.

These changes in interest rates and net wages will only start to take effect after at least a few months’ delay. Currently, many people are still making large one-time purchases fearing that prices will rise even further, but this cycle will break at some point. My guess is that the break will happen last in the USA because the strengthening dollar will support local consumers for a while.

The Fed is being watched with interest, but my feeling is that now that we’ve moved into a situation where inflation is a problem and needs to be eradicated, the ball has shifted back to the interest rate markets. If the Fed doesn’t tighten its monetary policy enough, long-term interest rates will rise as market confidence wanes and/or inflation accelerates. If, on the other hand, the Fed tightens more and credibly curbs inflation, then long-term interest rates will fall.

It might be somewhat irrelevant for stocks whether the Fed takes a stricter or more dovish stance. A more dovish stance is bad for stocks when long-term interest rates and inflation expectations rise, while a stricter stance causes ever-increasing recession fears.

I’ll certainly watch the Fed’s press conference for entertainment, but whatever comes out of it, it won’t affect my investment decisions It never should have, if it did…