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In this episode of the Week Ahead, Tony Nash is joined by Mike Green, Tracy Shuchart, and Sam Rines to discuss key themes including Productivity, Inflation & Secular Stagnation, Fed Outlook, and German Gas Issues.
Mike begins the discussion on Productivity, Inflation & Secular Stagnation by referring to his newsletter “ProcrastiNation” and explains the concept of Total Factor Productivity growing by constant amounts instead of constant rates, which may lead to secular stagnation. The team also reviews a chart from Natixis, which shows a bump in per capita productivity, followed by a sharp fall. The team discusses whether this productivity rise/fall is due to the boost of government spending and the blurry visibility of hours worked during the pandemic. The discussion also touches on how this impacts inflation and what measures could be taken to fight it.
Moving on to the Fed Outlook, Sam notes that the Fed isn’t letting up on inflation fighting and has been working on a delicate trajectory to achieve it. Sam talks about what he’s currently looking at and what’s changed since he first spotted this in Q2 of last year.
Tracy leads the discussion on German Gas Issues, highlighting that Natgas in Germany has been a significant topic since Russia invaded Ukraine. Tracy refers to a chart that shows how industry in Germany started curbing production during the first spike of TTF nat gas. The team also notes that capacity utilization has not come back at all, not just in Germany, but also in the Euro area as a whole.
Finally, the team discusses their expectations for the week ahead. Overall, the episode provides a comprehensive and insightful analysis of the key themes in the week ahead.
Key themes:
1. Productivity, Inflation & Secular Stagnation
2. Fed Outlook: What’s changed?
3. German Gas Issues
This is the 53rd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Mike: https://twitter.com/profplum99
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl
Transcript
Tony
Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash, and today we’re joined by Mike Green, who is the chief strategist at Simplify Asset Management, and Tracy Shuchart from Hilltower Resource Advisors. And Sam Rines from Corbu. So we’re going to start off today getting a little bit nerdy. We’re going to talk about productivity, inflation and secular stagnation. There’s a great piece that Mike wrote a week ago and I want to dive into that a little bit. Next, we’re going to jump into the Fed outlook with Sam. He’s been very consistent with his view on the Fed for the past probably nine months. And so I want to really see what’s changed with the Fed outlook. And then we’re going to look at German natgas issues with Tracy and kind of how that story is evolving. So guys, thanks so much for joining us today. I really appreciate the time you’ve taken to talk with us.
Tracy
Thank you.
Tony
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Tony
So Mike, I want to talk about your newsletter, really stellar newsletter on productivity and inflation. You called it ProcrastiNation. For anybody who hasn’t signed up for Mike’s newsletter, I would definitely recommend it. Do you mind walking us through that kind of at a high level? And why is that important, particularly right now?
Mike
So this is going to be an interesting part of the discussion. I’m obviously interested in Sam’s take on it as well. And can you guys hear me clearly? I just realized I took off my headset. So as long as you can hear me clearly, we’re good. The dynamics of what is actually going on, are we experiencing a slowdown in productivity growth or is our model of productivity broken?
And therefore we’re effectively trying to push on a string to get all sorts of things fixed that may actually be we may be damaging them in the process of fixing them is really kind of the core point that I was making. And there’s this question about how do we measure productivity growth? How do we think about it? The traditional model of what’s called the Solo swan framework is that productivity growth is a compounding feature.
I able to produce 1000 this year. Next year I’m able to produce 10% more. So 1100 the year after that, 10% more twelve whatever it is, 1221, et cetera. We can continue that process as we go through an exponential series that grows in a manner and suggests that we should be experiencing something along those dynamics. That model is increasing. And what we have seen against that is a slowing of the rate of growth that we measure as productivity or as total factor productivity. Effectively, the inputs that we’re putting in are separated. Let’s ignore the inputs and we’re looking at how much more effectively we’re using those inputs in each period.
It’s generally thought of as the technology component. The evidence is growing that our models for how to measure this and how to think about this are flawed. In other words, it’s not a compounding feature in the sense of multiplicative. It’s actually an additive feature. In other words, if executed properly, we can see our wealth or our income levels grow by a fixed amount each year, right? So if we start at 1000, the next year we grow by 100. The year after that we grow by another hundred. Year after that we grow by another hundred, et cetera. And every once in a while, technological innovations emerge that combinatorially change that and can lead to a step function increase in that. So wealth can begin growing by a differential amount. If you measure those data series, one that is compounding exponentially, one that is compounding in what’s called an additive fashion, at least initially, they’re going to look very similar, right? So 1000 plus 100 plus 100 plus 100 looks an awful lot like 1000 times 1.1 times 1.1 times 1.1 for a certain number of periods. But they very rapidly begin to diverge. If the model that you’re trying to pursue is this multiplicative one right, and this is hyper nerdy, I understand all this, then it means you’re going to try to force all sorts of things through and more importantly, you’re going to actually start budgeting around that dynamic, right?
Well, we expect to be this much wealthier in the future, right? We’re going to see this dynamic. Anyone who’s gone through life, and we all have to do that. You’ve gotten your first job. Your very first job leads to raises that are very rapid as you demonstrate competence. And then you can kind of budget off of that. You can budget off of, okay, well, my income is going to grow at 10% a year. But you rapidly discover somewhere in your 30s that that starts to slow down, right. And you suddenly discover that things stagnate. Well, the whole point is that you’re supposed to live within your means and slowly accumulate savings till that you end up okay. But if you budgeted off the constant increases in income, you’re going to really struggle.
That’s effectively what we’re experiencing as a nation. We budgeted off the idea of nearly unlimited and trend growth. And now it actually appears that that model was wrong. And so the answer is, do we try to bang our heads and do more of the same or do we actually start to embrace that maybe a different model is operating this and what are the implications for that? The most important one is if we try to believe in a multiplicative model and the reality is an additive model, then things like inequality really begin to matter. Because if you have the upper income classes or the elites of society taking a higher share, eventually it means that the absolute numbers that are available for everybody else begin to fall. I think there’s a tremendous amount of evidence that’s what we’re seeing we’re seeing genuine dissatisfaction rising amongst the lower income communities. Or more accurately, if I really want to address it, it’s the center of the distribution that’s really being hammered to this framework. We’re more than happy to basically buy off the very low end. We’re more than happy to encourage the very high end and say, boy, you guys are really a gift to society.
It’s those in the middle that are increasingly getting hammered by this situation and by this philosophy.
Tony
Okay, so let me ask you a quick question on that. When you say a constant rate of growth or relatively constant rate of growth, you’re talking about a real rate of growth, not a nominal rate of growth, is that right?
Mike
So I just want to be very clear. We’re actually not talking about a rate. We’re actually talking about a quantity.
Tony
Quantity.
Mike
So instead of our income growing by 5% a year, you should think about our income growing by $500 or $1,000 a year. And that’s going to continue. Now, naturally that leads to slower rates of individual growth, exactly as I described for an individual.
I start off my career, I get a 10% raise off my $35,000 1st starting salary. Wow, that’s fantastic. I make $3,500 more. By the time I’m 50, I’m making $150,000. I don’t get a 10% raise, but I get a $5,000 raise. Should I be unhappy with that 5000 versus the 3500? No, the 5000 by definition is more, but it’s still a slower rate of growth.
Tony
Okay, so let me kind of try to take this a little bit more. I don’t know, I guess theoretical when we have more theoretical than me, let me try a hypothetical situation here. If we have an inflation rate 7%, okay, and that’s goods, that’s services and so on, and then we have a super core inflation rate that takes out energy and food and a lot of other things that supercore is really telling us the price of services, wages, if we really boil it down. Is that right, Sam? What is supercore telling us?
Sam
Supercore is sticky, right? And it’s sticky because wages tend to be sticky.
Tony
Right.
Sam
You don’t give to the point Michael made, you tend not to give somebody a $350 raise and then take that raise away. You leave them at that and then you slowly pick them up higher or you fire them.
There’s kind of two options. You either keep giving them pay raises or you get rid of them.
Mike
The problem with trying to cut pay, right, except under extraordinary circumstances, is it’s a signal to the employee that they’re less valuable.
Nobody wants to hear that and then show up at work the next day.
Tony
So if we’re not seeing productivity raise, say, multiplicatively or on a percentage basis, then when we see excess inflation like we do today, there really isn’t a way for people in the middle, as you say, the top end keeps what they have. The bottom end is subsidized, but there really isn’t a way for people in the middle to keep up. Is that what you’re saying? Since that super core is constant.
Mike
Correct. This is actually really kind of the key component that I would highlight, and it’s why inflation feels so bad to those in the center.
Again, at the low end, we subsidize it, we inflation adjust, and we say it’s going to rise at a rate. The inflation rate is 5%. We’re going to adjust Social Security by 5%. We’re going to adjust Snap by 5%. That person in the middle, though, can only if they’re subject to these rules, which, as I said, increasingly appear to be true. Their increment of productivity is not a percentage. Just imagine yourself on an assembly line. It is implausible that you are going to become 5% more productive every single year, your entire career. That’s just a simple reality. And I produce 10,000 tubes of toothpaste as a single worker today. As I go through my career, I get more productive, but I don’t get 5% more productive every single year. Otherwise I’d be producing basically all the toothpaste in the world as a single worker by the end of my career.
It’s not entirely true, but you understand the illustration. What is entirely plausible is, is that I’m able to produce 100 more tubes of toothpaste each year because I figure out new ways of doing it. That’s a decreasing rate of growth perfectly matched by the data series we have in terms of things like productivity over time in a career. My initial steps into my career, my productivity rises very rapidly. Later in my career, my productivity growth slows down even though my absolute productivity is higher.
When you have a rate like inflation, that’s hammering. That because it is a rate that is being reduced. It means that I’m experiencing a real loss of income and purchasing power. My productivity is less valuable. Under that framework, my living standards fall. It matches perfectly. If we had a rate based dynamic, we really wouldn’t care.
Theoretically, we could just say, well, inflation is a truly pass through experience, but it’s not.
Sam
Thank you.
Tony
Okay, great. So let’s take this a little bit to kind of productivity. I saw this chart this week from Natixis, which is a European research firm. They’re a great team of smart economists. And so I’ve got it up on the screen. It’s in your packet, Mike. Looking at per capita productivity, which is economic output divided by hours, worked as a basic rough formula for productivity, right. So we see a bump in productivity than a sharp fall. Is this a real productivity rise or fall? Is it more of a boost of government spending and blurry visibility on hours work during the pandemic? What does this mean and how does this fit within the kind of constant rates discussion that you’re observing?
Mike
Well, I would actually highlight that this is almost a perfect illustration of that type of phenomenon. It’s something that we’ve seen since the 1990s, which is the reality is that adding additional workers to the process doesn’t simply increase the output by the number of workers.
The production process is inherently limited in finance terms. Effectively, the beta of an additional worker is always going to be less than one.
So when I add new workers, I’m going to end up lowering my productivity. When I add hours to the day, I’m going to end up lowering productivity. When I remove them, I’m going to raise productivity if the system does not operate under this phenomenon in which each incremental worker or each incremental hour has the same contribution.
It’s a great description of what’s going on. And by and large, what we’ve seen in 22 is no tangible increase in outputs relative to an increase in the inputs, which is what you’re showing on. And it takes this dynamic.
Part of that, by the way, I do think is actually measurement. How do we properly measure how many hours somebody working from home is working?
Am I spending my time working? Am I spending my time running the vacuum cleaner? Am I spending my time experimenting with keto recipes?
You all know the answer for me on that last one. So that has been a consistent pattern. I’m not entirely sure I completely agree with the way that natixis frames it, although I do think that that is the direction that we’re headed in. The Fed is on this path that I think is fundamentally flawed, where they’re effectively saying, okay, let’s really raise the costs of increasing production. Let’s really raise the costs of holding incremental inventory. Let’s make it increasingly difficult for companies to finance themselves. And off the back of that, we should expect to see a dramatic increase in production and a fall in inflation. Makes zero sense to me. But they’re doing what they’re doing.
Tony
So they’re effectively trying to force productivity improvement, at least in theory, by making the cost of that worker higher.
Mike
What they’re attempting to do, that’s a way of thinking about it, right. They’re trying to force a reorganization of society so that it is, at its core, more productive. That would be great if human beings were widgets. But one of the most interesting things about what’s going on right now is that this recession looks radically different than prior recessions that we’ve had. Traditional recessions target the cyclical worker, the person on the assembly line, et cetera. We’re still recovering from the depths of the Cobin crisis. On the production front, we’re producing less than 15 million vehicles. On the automotive side, we still have shortages of houses, we still have homes that are currently under construction from the last boom, et cetera. We haven’t seen the impact of those falling off yet. This cycle is very different. We’re firing people that have college degrees for the first time almost in history, without a meaningful slowdown in the rest of the economy, we all experience this. There’s shortages of housekeepers and low end workers, people that are willing to change bedpans in an environment of COVID In a nursing home, you can’t find those people, right? But you can find plenty of college educated French medieval literature majors.
Now, what good are French medieval literature majors? I’m not entirely sure, but we stole those signals from the market a long time ago through our system of student loans. And now, of course, we’re dealing with the ramifications of it in the Silicon Valley environment, where Google basically was trying desperately to hire anybody to conceal their innate levels of profitability and avoid things like antitrust actions. They brought in all sorts of workers who are very marginal contributors, primarily contributing of various TikTok memes in terms of how their pictures are taken. But the workers being laid off at Google make $275,000 a year on average. Stop and think about that. That’s a lot of money. That’s a great job, right? You know what the unemployment benefit is in California? The maximum unemployment benefit? I’m guessing Sam knows this off the.
Tony
Top of his head, like $1,500 a month or something?
Mike
No, it’s $13,000 total. Okay, so somebody who gets fired from a $275,000 a year job is supposed to immediately go and file unemployment claims so they can generate a $13,000 benefit over 26 weeks. When, by the way, if they just wait a year, they could actually file in arrears and get it as a lump sum payment that would help to pay for a flight to Hawaii. A vacation in Hawaii. They don’t know how to do this. They don’t know how to tap into the market. They have no idea how those systems work. In contrast to the traditional cyclical employees, when they lose their jobs, have the number taped to their refrigerator.
Tony
So I had dinner with a technology recruiter last night. He told me that for tech jobs in New York, for every tech job that he sees, there are 3000 resumes. For every tech job. He said it’s terrible in New York. I can’t imagine. Silicon Valley is much different. But he said there’s so much slack in the tech workforce in New York. That they get 3000 applications for every job that’s posted. He said, Honestly, I can’t go through all of them. I go through about 800 of them. I can’t look at it anymore.
Mike
Your brain fries on that.
But now the flip side of that is, of course, what we’re supposedly receiving from the Fed surveys of job openings and labor turnover of the jolt surveys and suggest, wait a second, there’s two jobs available for every unemployed worker. How do we possibly get to the 3000 applicants for every job if there’s two jobs for every unemployed worker? It’s just the data is a mess.
Tony
It’s a mess.
Mike
Yes.
Tony
Ba is not going to get that accurately. They’re working on a methodology that’s probably two decades old. I haven’t looked into it for a long time, but you guys would know more about that than I would. But I assume that their methodology is.
Mike
They took a terrible methodology and they made it much worse with the introduction of the birth death adjustments in 2012. So now they basically just assume that jobs are being created.
Tony
That’s good. Okay.
Mike
Yeah, I know. It’s great.
Tony
We have an economy based on assumptions, okay?
Sam
It’s why you just jump to the Indeed data and call it a day. That’s what I do.
Mike
You do what? I’m sorry.
Sam
I just look at the indeed.com data. That’s the only one I use.
Mike
Even the Indeed data, though, you have to recognize the dynamics of share gain.
Mike
So you have to make some adjustment for the fact that increasingly people are finding their jobs on Indeed.
Sam
Exactly. Yeah, you do. But it’s at least a little bit better because it’s at least real jobs being posted.
Mike
And the response rates, by the way, to the jolts data is like, it’s just so bad at this point. It’s fallen from Sam again, sam probably knows the data better than I do, but I believe the response rates for the jolt going into the global financial crisis were north of 65%. Today it’s below 30.
Sam
Yeah, it’s gone down about 50%, give or take count.
Tony
So the response rate to the jolts data you mean the companies who are responding to the surveys for jolts data?
Mike
The companies that are responding to the surveys for jolts data has fallen by around 50%, among other things. That’s because the bls continues to rely and this is true for the household survey as well.
They continue to rely on things like landline surveys. You will not get a call from the bls on your cell phone. This is a legacy from the dynamics of cell phone calls used to cost the receiver, so you used to have to pay if somebody called you. Therefore, they would never call a cell phone because people would be like, hey, there’s a survey. They hang up. Now we don’t have anybody with landlines anymore.
Tony
So, Sam, does your company have a physical landline?
Sam
I have never had a landline in my life.
Tony
Tracy, does your company have a physical landline?
Tracy
That would be no.
Tony
Mike, does your company have a physical landline?
Mike
We do not.
Tony
Neither does mine. So I know we’re probably outliers, but still, we’re in small, mid size companies, and none of our companies have a landline. So blsba would never survey us.
Mike
They would never survey us. And the methodology is that we are presumed to have the same behavior as those who answer their phones.
Tony
Yeah.
Mike
It’s just a mess. That is a technical term for what happens when you go through transitions and you have far too much dependence on accuracy of data.
We’ve tried to fine tune the system to the point that it’s not meaningful anymore, using that system to establish monetary policy of unprecedented levels of intervention.
Tony
Okay, so, Mike, let’s go to the conclusions of your newsletter. What does this mean for inflation? What does this mean for how you view our ability to fight it?
Mike
Well, again, I was saying this I say this over and over and over again. We’re a narrative based species. We have to explain everything. One of the narratives that we have deeply accepted is the idea that anything the government does is bad.
And so we basically have gotten to the point where our conclusion is, elon Musk is a more talented individual than Mike Green, therefore, he should pay less taxes, or certainly shouldn’t have to pay taxes on surplus through a higher progressive rate, et cetera. We want to keep the money with those who have demonstrated productivity. It’s not working. It’s the easiest way to put it.
What we actually know is that any one individual has a combination of luck and skill in their individual career. How that gets compensated, how that gets rewarded, is completely context dependent. If the world was back in the 19th century and we were reliant upon various forms of 18th century, we were reliant on various forms of physical strength, tracy’s role in the economy would be radically different today. Radically different than it is today.
Mine as well. Instead of being a giant forehead on a TV screen, I’d probably be slaving away in a coal mine somewhere. Our ability to raise individuals to that capability and to allow them to participate in the system is really what’s a question. And we’re just doing a terrible job of incorporating people into that system. We’re increasingly saying the only people that matter are the Elon Musk, peter thiels, sergey brin’s of the world, and we should want them to continue to bestow their capabilities upon us. Again, that’s part of the reason for highlighting the productivity dynamics. There’s no evidence that that’s actually true. So what we’re doing is we’re taking away from people who could be contributing to society at a lower level, but their aggregate contribution is like a bunch of ants.
I mean, each individual ant can bring something to the table. Even if they don’t get to be the queen, we’re disregarding them, saying that they don’t matter, reducing their role and their compensation in society, encouraging them not to participate. I think that sits at the core of the challenges that we face right now.
Tony
That’s a tough one, especially given where our infrastructure is today. Sam, what thoughts do you have on that?
Sam
I’m pretty much right there with it. I do think that there’s a significant amount of problems and it’s very problematic when the call it the lower quartile of the income spectrum and the middle in particular begins to see a real wage go negative and go negative in a meaningful way and they generally don’t see a way out of it. What’s also interesting is that we’re relying on cpi numbers. We talk about supercore, we talk about core services, ex shelter, et cetera, et cetera. But when the middle is actually looking at what their wages are going to, it’s predominantly the things we cut out, right? It’s shelter, oil and food that’s a significant portion of their income. So while it’s always entertaining and it’s always kind of a good thing to look at the underlying metrics on inflation, it is not the real world experience. The easiest way for me to feel good or bad in the morning. Well, not necessarily me because I’m in Texas. So the bigger the number on the gasoline board, the better off I am. But for the vast majority of Americans, that’s not true to me. There’s a significant longer term issue here when the consumption metrics are highly reliant on the bottom 50% and the bottom 50% is getting eaten away.
Tony
Yeah, sounds pretty dire. I hope it’s not really that dire. And Mike san Francisco Fed. I think you should go. Sam, Dallas Fed, I think you should be there and you guys should solve these problems.
Mike
I will tell you, I spent a significant amount of time last two weeks ago at the New York Fed and the answer is really quite straightforward. It is an orthodox institution that is extremely captured by the idea that the cost of money is ultimately the determinant of inflation and they’re not prepared to consider anything else. So the solution is the beating shall continue until morale improves.
Tony
Great. And I guess the real question to be a realist is how do you game that?
Mike
Right?
Tony
I mean, that’s the question for all of us and that’s why we talk about this every week, is how do you take that view and how do you game that to make the best of your income?
Mike
So the quick answer is that you do the best you possibly can to engage in the equivalent of Dumer prep. It’s not to stockpile canned food and pasta, it’s to basically remove yourself from a situation in which you are dependent upon the impact of the Federal Reserve. So the Fed is pursuing a model that is going to raise inflationary pressures that is going to lower economic activity. We’re all caught in the crossfire of that. That means that our incomes are going to be negatively affected in real terms. Our capacity to service debt is going to fall in the future. And therefore you want to reduce as much debt as you basically do the exact opposite of what we’ve been encouraged to do for the past 40 years. 40 years. You do everything in your power to reduce debt, reduce dependence on the system, and create put yourself into a situation in which you’re effectively benefiting from the higher interest rates. Meaning you’re holding cash.
Tony
Yeah. Very good.
Sam
Okay.
Tony
Thanks, Mike. There’s a lot to think about there. And again, anybody who doesn’t get mike’s newsletter, I would encourage them to look for his substac and subscribe his. So thank you for that, Sam. Let’s look at the Fed outlook. Given the kind of doomer Fed close out that Mike just gave us, let’s look at the Fed outlook and look at what’s changed. So back in July of 2022, you presented in your newsletter, you said peak inflation and peak hawkishness dominate the narrative. Following the fomc meeting. This was the Fed meeting in, I think it was late June, early July. But it’s you said that the fmc has tunnel vision on inflation, and the end of the tunnel is not visible. So this was, you know, almost a year ago, nine months ago this past week, you said very similar, you said until price over volume and the consumer breaks, it is still 25s for life.
So you’ve presented a very hawkish outlook for the Fed over that period. Well, not very relatively. I’ll say hawkish. So as far as I know, I don’t know, you’re the only person who’s got it consistently right. And you’ve been pretty flawless.
So the Fed isn’t letting up on inflation, and they’ve been working a pretty delicate trajectory.
Mike
Right.
Tony
I mean, they really went hard on seventy five s, and then they pulled back to 25s. What are you looking at now? And what has changed since Q 222 since you spotted this last year?
Sam
Yeah. So not much has changed. We can start there. Okay, good. Not much has changed relative to what we were thinking, that we were well above where the street was at that point for the terminal rate. And we continue to see twenty five s and those 25s continuing for the foreseeable future.
Mike
Right.
Sam
And I do think that it’s highly dependent on two things. It’s highly dependent on where inflation actually comes in, and it’s highly dependent on where wages and the consumer end up. And when you look at the data and to michael’s point, looking at the data that’s being printed off, the inflation report, the employment report, et cetera, there’s a lot of noise in those systems. So instead of doing that, I basically just go through earnings reports constantly as they’re released and take it as. These management teams tend to have a pretty good idea of where they’re going to set price, where they’re going to set wages, and what their input costs are going to be. When you look at companies from pepsi to coca cola, nestle, hershey, all of their pricing is going up and they’re going up significantly.
Tony
What’s the magnitude on average?
Sam
810 percent, 12% on average. It’s low teens in terms of year over year pricing. pepsi said they were mostly done pushing price, but that means that they’re still pushing price to date. Texas roadhouse, of all places, said they were increasing their menu pricing 2.2% in March. They saw their commodity prices increasing for the year 5% and their wages going up 5%. So that’s kind of one little I call it a cog in the system.
Tony
It’s interesting you mentioned Texas roadhouse. So we had retail sales, restaurants went up 25% year on year, right. How does that stop? I just don’t understand. How does that rate of growth stop? What does it look like from your.
Sam
Perspective in terms of the year over year numbers? I mean, the year over year numbers were somewhat skewed because of omacon last year, right. So you had some audies in the data going in to the retail sales report on a year over year basis, but on a month over month basis, they were very, very strong. And one of the things that another one of the great points that Michael made a moment ago, it’s really interesting when you look at the dynamics of income to start 2023, social Security payments increased by 8.7. That’s 70 million people that just got in a nearly 9% raise in January.
Mike
Right.
Sam
So that money is hitting the system. That’s somewhere around $120,000,000,000, and the marginal propensity to consume on that is extraordinarily high. The average dollar coming in the door on Social Security is going to the bottom half the income spectrum and mostly skewed towards the lower half of that half. That tends to get spent, and it tends to get spent very quickly. So that’s high powered automobiles directly into the system. Well, it’s a lot of eating out at restaurants, right? It’s a lot of cracker Barrel. You look at cracker Barrels earnings, their wages, et cetera, walmart raising their wage, a lot of middle America, particularly at the bottom, is beginning to see some pretty significant pay raises. And those pay raises go straight into the economy. They don’t go into savings, they don’t go into 401k, they don’t go into the stock market. They go straight into spending. And they tend to spend on, well, gasoline, groceries, eating food out, and to a certain degree, shelter.
Mike
Right?
Sam
So these these numbers are more than likely not one off type deals, right? We’re more than likely going to continue to see significant surprises to the upside. I mean, there’s, there’s some I think it was Texas roadhouse as well that said that their January was up in the mid 20s on a year over year basis. This type of dynamic, and I think it’s really interesting following on from mike’s portion, it’s a really interesting dynamic because if you don’t have inflation crack, the Fed is going to continue with these 25s for the foreseeable future. And right now we’re sitting at a terminal rate that’s 5.25 to 55. And they’re going to continue pushing those further. If you continue to have these data points, and it’s really hard to see when the data points are going to crack, you can kind of moving away from the restaurant and retail for a moment. John deere is mid teens on pricing for the year. Those prices aren’t going down so that’s farmers are going to see their equipment become more expensive. You’re going to have food becoming more expensive when you eat out. You have food at grocery stores becoming more expensive.
To michael’s point, it’s probably not going to solve the problem by increasing interest rates immediately. And you haven’t seen a crack in construction because of the massive backlog, because we didn’t have lumber and we didn’t have piping and we didn’t have concrete, et cetera. You still have construction jobs, you still have oil field jobs, you still have all of the stuff in the middle of America, and you’ve had a few thousand people get laid off in tech.
And they all got six to twelve months giant packages to go find another job. So they’re not going to hit the jobless claims for at least six to twelve months from when they got laid off. They’re all sitting pretty, they’re all going on vacations, they’re all spending money. So again, it’s one of those where the economy still hasn’t cracked and the Fed is going further.
Tony
Yeah. I just want to be clear. I know we’ve talked about this before, but I want to make sure that my understanding is still correct. The Fed is not trying to get pricing levels back to 2019. No, we’re just trying to get them to stop rising.
Sam
Correct. Yes. Well, they would prefer to have disinflation. Right. They want to get back to a 2% run rate, but no, they’re not trying to get back. They’re not trying to go deflationary.
Mike
Trying can I just toss something into sam’s point picture of North American tractor sales?
The really critical point is that we’re talking about price increases, dramatic price increases in tractor sales, even as tractor sales themselves are, give or take, 40% below the levels from 2008.
This is insane. This is clearly market power that is going through. The tractor industry is basically divided into two players, deer and agco, neither one of which, both of which have signaled we’re no longer going to compete on price. We’re going to basically try to load everything up and produce at a minimum level. These are monopoly and you know what I mean? oligopolistic. I’m sorry. Pricing patterns where you produce well below the marginal demand because you’re effectively trying to maximize your margins.
So we’re seeing this over and over and over again. That’s why we have the ftc. That’s what we should be going after in terms of the behavior of individual companies. We should be penalizing them. We should be working to introduce new competition into these spaces, et cetera, and we just refuse to do it. We’re terrified that in the process of harming these individual national champions like deer, that somehow we’re going to create conditions under which we all collapse into the proverbial flames of hell.
The second component is that Sam hit on this dynamic of somebody who has Social Security just experienced a 9% raise. They actually experienced far more than that because remember that those who are collecting Social Security tend to be amongst the class of individuals who have accumulated a degree of savings that they had anticipated living off of for the rest of their lives. Suddenly, their checking accounts or bank accounts have gone from yielding or their money market funds have gone from yielding zero to yielding four and a half to 5%.
If I have $100,000, that’s $5,000 of incremental savings that I’m receiving. I have a million dollars. That’s $50,000 that I’m receiving. And by the way, my propensity to spend that is dramatically higher because it’s income, not principal. Now, I actually am much more comfortable spending that than I would have been spending $50,000 before.
So everything that we’re doing in, like, the last desperate act of the boomers to totally screw us all is basically handing money to old people at the expense of young people who are going to lose their jobs.
Tony
I think that’s worth repeating. And we’ve talked about that in a couple of other shows. Not that directly, but say that again. So the government is handing out money to old people at the expense of younger, more productive workers who are losing their jobs.
Mike
Correct. It’s just that straightforward.
Tony
Yeah. Okay, great. Okay, so, Sam there’s a lot to digest here, guys. It’s not pretty. It’s not a pretty episode. So, Sam, tell us about what does the Fed look like over the next three or four months? It’s 25, as far as you can see. But it’s that simple.
Sam
It’s that simple. And it’s that simple. It really you only have a couple more prints of data before of data that matters before the Fed meets and redesign plot. I mean, that’s it’s. It’s 25s for the next four for the next three meetings. Okay. Then there’s the possibility of a pause, but I would be short the possibility of a pause there simply because, to reiterate what Mike said, again, it’s a pretty orthodox place.
Mike
Right.
Sam
They’re going to continue raising rates until inflation breaks because that’s what they believe will occur.
Tony
But I think June by June will have had the base effect of crude being in $130 a barrel, right?
Sam
Core Services, Ex Shelter doesn’t have oil in it. They don’t care.
Mike
They don’t care about that. But that actually is a really critical point. And forget the year over year comparisons because nobody actually does that, right? Nobody sits down and does their budget and says, gosh, oil was $130 this time last year. Now it’s only $80. Therefore I have more money to spend. They experience it immediately when they go to the gas tank and they go to fill up their gas. Their gas tank. A year ago, they were filling it up for $100. Now they’re filling it up for $60, money that has gone back into the economy from the period of June and contributed to the perception of rebound. That, in turn, is now theoretically feeding the inflationary concerns. We see this in consumer sentiment surveys that are heavily dependent upon gasoline prices, like the Michigan survey, et cetera. The minute gasoline prices bottomed or peaked, they began to experience improvements in sentiment even as the underlying conditions have deteriorated.
Tony
Okay, tracy, I want to bring you in here because I always get complaints when you speak last. So tell me your thoughts on that in terms of oil consumption, as far.
Tracy
As oil consumption in the United States.
Tony
And the impact on inflation, how do people experience that and what impact do you think that has on how the Fed acts?
Tracy
Yeah, absolutely. I completely agree with Mike. What it comes down to is what are the prices at the pump for the actual consumer, right? And that gives you extra, theoretically, or what’s envisioned is extra spending, right, extra spending money. Because you’re not paying $100 anymore, as he said, for that example, you’re paying $60. So now you have more excess cash to, I don’t know, go out to dinner. But that’s kind of like a theoretical situation. And the thing is that I think that when we are talking about gas prices and when we are talking, we really need to see longer term results for this. I think it’s premature to say we’re seeing excess spending in this area because gas prices are down this month because they fluctuate so much because gas has been very volatile since 2020. And so I think there needs to be a lot more long term data that is focused on this, which we’re probably not going to get from the government. But I think that would be beneficial into seeing how exactly does this over the long term reflect consumer spending habits.
Tony
Great. Okay, that’s hugely useful. Sam, back to you just to wrap this up. And you’ve had this concept of hawk grackledove, right? And for those who don’t understand, a hawk is obviously hawkish Fed. A gracklish fed. And Sam, correct me if I’m wrong, is one that kind of is talking out of both sides of its mouth, just making a lot of noise where they’re not entirely sure which direction they’re going to go. And then you have a dovish Fed, which is obviously dovish. Right. What data are you looking for or what behavior are you looking for? For the Fed to really swing kind of gracklish.
Sam
I do think the Fed is gracklish at the moment. The Fed went grackle when it went to 25 because that gives them wiggle room on both sides. It gives them the ability to both push the terminal rate higher, push terminal rate lower, much more data dependent. In terms of every you put in another 25 if you put up 400,000 jobs. If inflation comes in high, you put up another 25 basis point hike. If it comes in low, you take it out. That’s really what the Grackle is.
Sam
It’s when they talk a lot and don’t really give you any incremental information. Right. Last year, they were just pure hawk. It was every single time they open their mouth, they seem to just be hawk. Now it’s, well, maybe we wanted to go 50, but we went 25, but maybe we don’t have to go any further, which is what we’ve seen over the last week. Yeah, they’re grackles.
Sam
To reiterate this, and I think I said it here, I might not have the Grackle is the most annoying bird in the world. They are loud, they fly in groups, and they scream all the time. And at least in Texas, you can’t park your car under a tree for a long time. It’s just the worst thing ever. And it’s pretty easy to understand a Dubbish Fed. It’s pretty easy to understand a hawkish Fed. It’s very difficult to understand a Grackleish Fed. And that’s where I think we’re at right now.
Tony
Okay, great. So just more to come there. We’re waiting and seeing we’re going to see at least three more, then more to come. Yeah, that’s the story. Okay, thank you, guys. That’s great. Let’s move on to tracy, who everyone’s been waiting for, of course. And so, tracy, I’m responding to, we sent out a tweet asking for questions, and one of our regular viewers, Daniel Cook, said, how is industry in Germany coping with the nat gas situation today? So I want to bring in some of those questions pretty regularly.
And you sent me a couple of charts. The first one is on ttf netgas, so can you talk us through that and what’s happening in markets with ttf natgas?
Tracy
All right, so I feel like this is a total switch from what we’ve been talking about.
Tony
Absolutely, it is.
Tracy
We’re switching to Europe right now. Right. I hate to add to the non pretty situation, but this episode is going to continue with the non pretty situation.
Tony
That’s okay.
Tracy
I think that there has been irreparable damage to industry, and not only Germany, but in the Euro area as a whole. I sent you that ptf chart because I wanted to point out that in fall of 2021 is when we had that very first spike, right? And that’s when we really started seeing industry having to pull that. That is in particular in smelters glass companies and chemical companies. I just want to run through very quickly kind of a timeline of the biggies that happened. And this will make more sense later. Why wouldn’t do this? But so in October of 2021, nystar, which is one of the largest zinc companies in the world, they cut zinc smelting production by 50% in three top European smelters. December of 2021 started the aluminum smelting horrible problem, which dunker K Industries in France. My French is terrible. So I know a million people will say that’s not how you pronounce it. But anyway, which is the largest aluminum smelter in France, curved output. Then you had followed by romanian aluminum producer alto slatina. They started a program of total closure due to high energy prices. By May of 2022, aluminum production flies more.
July of 2022, almost all of European smelting production is offline. September 2022, that starts the glass industry. So you have French glass maker derelict stops production entirely.
Tony
Sorry, let me stop you. So with the aluminum smelting so if it’s not being done in Europe, where is it being done?
Tracy
Tell me. I was getting to that. Well, since you asked, ironically, it’s Russia. Of course it is, because ironically it’s Russian. What happened is that the EU actually sanctioned Russia aluminum imports in April of 2022. But there was a clause in that particular sanction agreement that said you can get an exemption of products from Russian origin to be imported if you can get a special permit.
Tony
Of course, europeans always circumvent their own sanctions.
Sam
Always.
Tracy
So long and short of that is, within six months, EU imports, Russian aluminum surged over 70%. So that happened back to my timeline. So Bass, after cutting production throughout the entire year, in October of 22, they announced permanently they were downsizing their factory in Germany as far as production and labor is concerned. And then in November 2022, they announced their largest service treatment treatment site in China. So long and short of this is that when you look at these industries, right, you have to look at especially smilting and glass in particular, these blast furnaces. You just can’t turn them back on, right? They take months and months to get them the proper temperature again. And if you look at if you revisit that ttf graph, you can see there’s been no relief for these industries to be able to get back online. So you can assume that’s gone because now it’s been over a year, right? And so people have already I mean, even Europe has already sourced other people outside of Europe. So these industries are not coming back.
Tony
So can you talk us through capacity utilization and how the industry is not going back has impacted capacity utilization? Because the capacity utilization is a measure of the capacity that is still there, right? Not the capacity that’s online.
Tracy
Right. What is still there. And so what we see in the graph that I sent you is Germany. But really, if you look at the Euro area as a whole, that graph looks exactly the same. And what we’re seeing is that even though Nat Gas prices has limited I can’t speak to that either. It’s limited over the last six months. We’re still seeing utilization down. These industries are not coming back.
Tony
In other words, where are they going?
Tracy
They’re being outsourced everywhere else. In fact, Europe has a big problem with regulations and red tape, which has been a huge pitfall for companies. And so oh, you know, companies have been looking elsewhere, for example, China, the Us. Mexico, South America, and realize they’ve been dealing with this since the first spike in fall of 2021. And so they’ve had plenty of time. And now, I know the EU has been very vocal about the Us. Inflation Reduction Act and worried that it’s going to incentivize business to leave the EU for the Us. Which is a concern. I understand that. But I guess I would say the essence of the debate has been this in face of the $369,000,000,000 worth of tax breaks and subsidies set aside to boost green technology and energy security in the Us. How can the EU maintain a leading position in clean tech industries moving forward? The problem is that they’ve taken six months to talk about this without doing anything. It’s all been talked. And so companies have already been looking elsewhere outside of Europe. So, unfortunately, I think what this is going to lead to is kind of a deindustrialization of not only Germany, but the Euro area as a whole.
Tony
Well, that’s pretty dire. So you say it’s going to China, Us, mexico and parts of South America. I assume that’s Brazil? Maybe.
Tracy
Yeah.
Tony
So that’s a net positive, I guess, for North America.
Tracy
At least it is for North America. Europe is running very scared right now. Right. Again, they’ve been having meetings for the last six months, but the problem is that they continuously drag their feet on making decisions. And when you drag your feet that long, you give companies ample time to make other plans.
Tony
Right. Okay. So how does this end? If if we had Nat Gas stay at low levels for three years, do you think that manufacturer would would come back?
Tracy
No. Back to Europe? No, I think they’ve already made once you’ve already made other plans, and you already left. And we’re talking about companies that have literally shut down things permanently.
Tony
So parts of Germany become western Pennsylvania.
Tracy
Yes, but again, I don’t want to be a doom and gloomer and say it’s totally in German manufacturing, but I will say that I would keep a close eye on that, because I think that you’re going to see, I think Germany as an industrial powerhouse is going to not be over the next ten years wow.
Mike
Tracy, when you say over the next ten years it’s not going to be a powerhouse, is that because the cost of producing, you’re saying effectively is so high that they’re no longer going to be able to compete?
Tracy
Correct.
Mike
Is the flip side of that just that the cost will go up because the world needs their supply?
Tracy
Well, that’s a twofold question. First of all, we’ve already seen industry already close there permanently, such as basf, just the largest chemical manufacturing company in the world, basically has already decided to leave Germany. Not entirely, but they have decided to pare down their manufacturing process and their labor in Germany and look elsewhere. And I think that it’s going to continue to happen because I think if you look at Germany or EU in particular, there is a lot of bureaucratic red tape there and a lot of things. And until I think that Europe really addresses that issue, more and more companies are going to be encouraged to go other places where perhaps that rig tape is not so difficult. In addition, it’s a lot cheaper as far as labor, et cetera.
Tony
Wow. Okay, so how does the German market what can they do to cope with nat gas prices just in terms of the day to day consumer?
Tracy
Well, obviously nat gas prices have come way down since the peak in July of 2022. But I don’t think that is completely over with. I think the market is a little complacent right now because prices have come down so much because the German government has been asking for people to cut their consumption not only on the consumer side, but on the industry side as well. And so we’ve seen a 30% decrease in consumer industry consumption due to a lot of initiatives that they’ve asked for.
Tony
While increasing their coal consumption and shutting nuclear.
Tracy
Yes, I think it’s a difficult road. I don’t think Europe as a whole is out of the woods yet as far as natural gas is concerned. We talked about that last week a little bit. But as far as industry is concerned, I am really worried because I think the signs are all there, that we are at least starting to see the deindustrialization process of airport, which would be mark a significant change in industry, particularly for Germany.
Tony
Wow. Okay. That’s something to really think about, something we want to keep an eye on because I’m very curious about that. Okay, guys, thanks for a real downer of a show. That’s awesome.
Sam
Wages were going up. That’s not all bad.
Tony
This has been great. Look, we’ve been a little more thoughtful today, I think, a little more kind of looking at kind of the whole context rather than just the markets. And I think that’s great. And I think what’s interesting to me is there’s not a lot of focus on this in the day to day hype cycle that we see. Of course. Right. But these are things that we have to look at within the context, not necessarily within the decisions that we’re making every day. And so I really appreciate this Mike, I really appreciate between you and Sam, your newsletters have such deep thought in them and application to what’s going on today as well as say the medium or longer term. It’s just fantastic to get that. Having said all that guys, what’s on your mind for the next week? So tracy, let’s start with you the week ahead, what do you have coming up next week?
Tracy
What do we have coming up next week? I think next week, I think honestly it’s going to be more of the same. I think we’re going to see a lot of volatility in markets, especially looking at obviously commodity markets are kind of my focus. I think that you are going to see that. I think everybody should keep an eye on the dollar, particularly if you are trading commodities because we are sort of seeing a technical breakout of some sorts looking at the daily charts. So keep an eye on the dollar and then again I still expect volatility to continue in the commodity markets. With conflicting news on a higher dollar, china reopening Russia export. They said they were cutting five hundred K million barrels per day starting in March. But then they just said this morning that their butt they’re keeping exports the same. Crude oil markets didn’t really like that.
Tony
Their natural production is down 20%. So of course they’re going to cut $500,000 for domestic consumption. Are you still there tracy? Okay, Sam, what are you looking for in the week ahead?
Sam
I’m basically just kind of listening to whatever. I don’t really think there’s that much that’s all that interesting coming out next week. Maybe jobless claims will be interesting, unlikely, I don’t know. Honestly, it’s just a lot of chop. It’s all about waiting. It’s kind of like waiting on godot except you just sub in China for godot, wait for them to reopen, wait for them to actually make a move on the stimulus. Some announcements that actually makes sense in terms of how they’re going to stimulate, et cetera, et cetera. So right now I think it’s a waiting game and sitting on your hands is probably the most intelligent thing to do through the job.
Tony
Yeah. China is going to announce rail stimulus like they have for the last 30 years. I can guarantee that’s part of the mix. Okay, thanks for that. And Mike, how about you? What are you looking at for the week ahead?
Mike
Well, we have the traditional data dynamics like tracy, I’m very closely watching the Us dollar, but more importantly I’m starting to watch the credit events that are beginning to pile up. So you had brookfield walk away from two buildings last week. You had Standing file for bankruptcy today as fuel pump manufacturer has been in business continuously for 150 years citing unsustainable levels of debt repayment from buyout done with cerberus. This is the waiting the higher for longer framework. The continued tightening of liquidity is the equivalent of a distributive top in equity terms. Right. You have to wait and it’s going to happen. You’re going to see the distress begin to mount and the Fed will ultimately manage to crush demand because they’re creating an incredibly compelling reason for those at the high end with true discretion, right? I mean, remember the low end, that bottom 50 percentile that Sam and I are highlighting in terms of the consumer, they don’t really have a choice about discretionary spending. They basically don’t really have any savings. And so when they’re faced with a loss of real purchasing power, as we’ve seen over the last year, they originally kind of that second quartile turns to credit cards and other mechanisms to allow them to continue to purchase goods and services in the hopes that things are ultimately going to get better.
Mike
We’re now seeing those hopes begin to run out. The additional space on their credit cards is becoming exhausted. Unlike the old and the extremely wealthy, they don’t have significant quantities of cash in bank accounts or in money market funds. So they’re not benefiting from the increasing purchasing power. They’re beginning to falter. We’ll see the signs of that. My expectation is sometime in the next quarter.
But it is a waiting game right now, right? And until the Fed begins to see the evidence that it’s mission accomplished in hammering the demand side of the equation as compared to the supply side, which is really what they’ve hit so far, my guess is that they’re going to continue to proceed. The words we’re getting are the equivalent of subprime is contained, even as those of us who are following it closely fully understand that sub prime is a critical part of the stack and was never really the problem to begin with.
Tony
So what you’re all saying is kind of take a deep breath for now.
Mike
Take a deep breath and be prepared to hold it as we submerge. My advice.
Tony
Okay, it’s good to know. Guys, thank you so much. This has been a real kind of wake up. So thanks very much. I really appreciate this. Have a great weekend and have a great week ahead. Thank you.
Sam
Thank you guys.
Mike
Thank you.
