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  • Writer's picturen ev

Where have all the bears gone?

Did Ai kill the fintwit bears? Even my LinkedIn nemesis has pushed the goalposts to 2024 before he expects a financial crash.

The S&P500 futures along with every other version of the US benchmark index, has retraced all of the move lower since the start of the Fed's rate hike cycle.

At the current rate of change, we could be at new all-time highs before the end of the fiscal year (end of September).

The technicals look great and for the most part so do the fundamentals.

For the stock market indices to go higher, we need companies to be making money and for the economy as a whole to be making positive gains.

As the chart above shows, the Atlanta Fed GDPNow is above 2% and while we're holding up at these levels, you do not want to be shorting growth. With that in mind, we should see if there are any other indicators that may be showing good news stories or potential worries ahead.

The Fed has a dual mandate. To provide economic conditions to support maximum employment and to keep prices steady.

The US labor force participation rate is slowly creeping back up to pre-pandemic levels, but we know that a lot of people, not only died but just left the workforce in retirement as much as anything, so unless we get a big boost in work-age folk coming into the workplace, we may not get the same participation rate as before. Unemployment is currently at historic lows.

Prices are still not at pre-pandemic levels either but inflation has come a long way back towards 2% but still work to be done.

Using the Fed's preferred metric for measuring inflation we can see that the highs of 2022 have come down. But it's massively off the 2% and clearly, Jerome Powell's wish for 2022 to be the end of this, was a really bad prediction. Though if you want to be kind, when the Fed changes its rhetoric, the opposite is likely to happen in the not-too-distant future, in the same way, that the front page news, euphoric or when blood is on the streets, is likely to be the top or bottom in the markets.

So Fed clearly has some work to do to get the dual mandate in a place where everyone is happy!

It would seem that the public has been drained of all their spare cash now. So purchasing on Amazon via the 1-click function may come back to normal levels.

The COVID spike in cheques to everyone was killed off by 2022's really high tax drain. Taxes are still relatively high in 2023 but they haven't been able to push the US Gov. into Surplus yet.

April 2023 was the last real Surplus but as keen be seen in the chart above, that was nowhere near April 2022's transfer of wealth from the non-government back to the government. Current monthly leading flows are hitting higher than $600 billion per month, so we're on track for a $7 trillion+ spending this fiscal year.

Consumer loans are not accelerating a lot higher currently, though still growing. But Credit Cards and Revolving plans are steadily increasing and we're nearing $1 trillion in debt there.

Now when you lump all the consumer loans together and then try and work out the percentage of disposable income these loans actually take up, the chart above shows people must be okay to put debt on the card or take out a car loan, as they can afford it based on it still being at low (historic) % levels.

Commercial and Industrial loans have not been rising in 2023! But as of this week just gone, most companies in an index are now trading above their 200-day moving average. Showing that it's not just the Ai tech stocks that are doing well, but even 1000+ of the constituent companies within the Russell 2000. Maybe the banks will be okay with lending more to these commercial entities. Maybe the balance sheets at the banks are constricting their ability to lend.

Banks' cash levels have come back to the mean having spiked higher, this is most likely a consequence of the US Treasury selling more debt after the debt ceiling was lifted and the corporate tax drain in June.

In July 2006 the chart above shows that the Fitted Instantaneous FWD's crossed under the Market Yield on a 2-Year UST. A year later the Fed started its rate cut cycle.

We've seen the same phenomena occur in the charts around November 2022, so I am now on the lookout for a Fed rate cut around November 2023. Like I said, earlier, inflation is on its way back down. If anything the EFFR is keeping things more expensive. Oil is below $80 per barrel. There is less friction on the supply side. Demand is still strong and people still have jobs. This is the new'ish normal. Maybe the post-pandemic normal at least. We will be going into a new US Presidential election cycle, so I would expect the markets to push higher on promises of lower taxes, the recent cancellation of Student Loan debts, and many more sweeteners to entice a vote.

Spending as always is key and i'll keep an eye on when that gets swamped by the taxes or someone cuts it.


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