- “The correlation between wage growth and inflation has declined over the recent decades and is currently near historic lows. It is notable, however, that this correlation has ticked up recently“
- Source.
Macroeconomics
Snippets on the big picture.
Wage Growth
- Interesting to see wage growth rolling over. An important chart for long-term inflation.
- Source: DB.
Inflation Expectations
- Economists often focus on inflation expectations as the key driver of inflation – as expectations ingrain they feed inflation.
- Although recent work has, as usual, thrown shade on these ideas, they are still important to watch.
- Chart h/t Daily Shot.
The Best Strategies for Inflationary Times
- Most investors, including me, have limited experience of inflationary risk.
- This paper, from 2021, is an excellent guide – looking at passive/active strategies across asset classes over the past 95 years.
- As we have seen it is tough – unexpected inflation is bad for traditional assets (bonds, equities). Commodities do well but depends which ones. Trend following and active equity are the best protection.
Google Search Philips Curve
- Nice twist of the famous Philips curve using Google search data.
- Source.
Participation Rate
- Interestingly the US labour force participation rate is reversing.
- Is the great resignation ending?
- Source: BCA Research (h/t The Daily Shot).
Jim Grant Interview
- Jim Grant has been publishing the Interest Rate Observer since 1983 (that is nearly 40 years!).
- He is a noted contrarian, who has witnessed market booms and busts and all manner of human folly in-between. Always armed with a sharp mind, a wonderful network and a skilled pen.
- This was a nice recent interview with him on his views especially on the impact of rising interest rates.
- “That’s what we try to do at Grant’s. We try to imagine how a hardened consensuses of opinion could change—how people think that there’s no alternative but the way things are, and how that could change. So yes, there will be trouble ahead, but also a lot of interesting things to do.“
Poor Europe
- Europe always seems to end up looking worse.
- Europe currently has almost twice the energy burden of the US.
- Source: Blackrock.
Italian House Prices
- Almost uniquely in Europe Italian house prices have been very weak in the last several years.
- This has meant, that despite only moderately increasing income, affordability has improved a lot.
- Source: Fitch.
Mortgage Payments
- Interest rates are hitting mortgage payments hard.
- “The following graph shows the year-over-year change in principal & interest (P&I) assuming a fixed loan amount since 1977. “
- “Currently P&I is up about 21% year-over-year for a fixed amount (this doesn’t take into account the change in house prices).“
Equity and Bond Performance
- 2022 really does stand out …
- Source: Blackrock.
Oil Shocks
- Recent oil price shock is now almost the same magnitude as the worst historic shocks.
- Is the worst behind us?
- Source: Blackrock.
Equities and Yields
- Equities struggle generally when yields are rising AND forward earnings per share (EPS) expectations are falling.
- Source: Oxford Economics.
Ukraine
- This is a very useful resource for tracking what is going on in the Ukraine war.
- Produced by The Institute for Study of War (ISW) it is a daily assessment (see under “Latest”, example here) of the situation on the ground along with a useful map (pictured).
- Here is a video that time lapses all the maps since the invasion began.
- This Substack (written by Lawrence Freedman, Emeritus Professor of War Studies at King’s College) provides some very good analysis of the meta situation.
- One angle that is key to watch for second order thinking is China. This was a really great piece to understand the China angle as was this (arguing that perhaps this crisis could push China back to collective leadership).
- (h/t The Browser).
European inflation
- Europe is experiencing an unprecedented surge in producer prices relative to consumer prices.
- This surge is either going to hit margins and profits, or will need to be passed through to consumer prices.
- Source: JPM.
Earnings Sentiment
- Earnings sentiment has taken a big knock in the last two months.
- Source: themarketear.com.
Inflation Impact
- The price shock is already starting to lead to changing consumption patterns.
- h/t Daily Shot.
Recession Watching
- New home sales is a great variable to watch for recessions.
- “When the YoY change in New Home Sales falls about 20%, usually a recession will follow.”
- Any Fed tightening cycles that cause recessions show up here first.
- There are exceptions to this rule – usually due to strong spending on defence or non-residential investment holding the economy up. The pandemic also distorted the series.
- Currently this indicator isn’t flashing red.
China People’s Daily
- Chart showing the percentage of front page headlines of the People’s Daily in China containing the name of the leader.
- No comment needed.
- Source: DailyShot.
Inflation Perception
- Data from ECB showing that people perceive inflation to be a lot worse than the officially measured values.
- Interesting to see how this difference moves over time and behaves in spikes.
