Friday Paper Charts
August 25, 2023
Here we are, patiently awaiting our esteemed monetary leader to address the world with his unparalleled wisdom and showcase their ever-expanding ability to forecast where things stand precisely. A little reminder that merely 2 years ago, the same people deemed inflation as transitory, something any student of monetary dynamics could have dismissed at first sight. So, do you think any likely comment on where they think neutral rates are or whether they think they need to be higher will have any lasting impact? I very much doubt that.
I have opined precisely on this in this week’s ATW. I have also added a free thought piece about short and long-term neutral rates. This is a concept that the Fed opened up 5 years ago when they were trying to push short-term rates above long-term neutral. We all know how this ended.
There was also the fifth instalment of stories from my institutional past. This time, it’s about my experience when changing jobs. I’m sure many of you can relate to this.
During the week, subscribers got 2 model signal alerts during the week. As highlighted in last Friday’s charts and ATW, the likely rebound in risk assets, Gold and the JPY was highlighted in advance. If you are keen to join the pack and get all those timely notifications, sign up below.
The Fed's >500bps of rate hikes are passing through unevenly across borrowing rates and biting much more in some areas than others.
US credit card delinquencies, for example, jumped to the highest since 2012 in Q2 2023, while those behind on US mortgage rates are around record lows, with most borrowers locked in well below current rates.
Interest rates on US commercial bank credit cards have shot up to over 20%, the highest since records began, according to Fed data.
Rates pass-through is much slower elsewhere. US 30y fixed mortgage rates rose to 7.62% this week, the highest in over two decades, according to Bankrate.com. Few, however, are actually paying anywhere near that, with "roughly 4 in 5 homeowners with mortgages have an interest rate below 5%, and nearly one-quarter have a rate below 3%", real estate broker Redfin reported in June. This section of borrowers has been sheltered from rate hikes, which has helped household balance sheets and see consensus recession views to keep pushing out the curve.
Talking of recession, it is astonishing how expectations have shifted. The November 2022 consensus was for Q1/2 2023. The December 2022 consensus was for it to hit in Q2/3 2023. For April 2023, it was Q3/4 2023. Now, it is shifting to Q4 2023/Q1 2024, but actually not there yet. When will it hit? I will dedicate a whole post on this soon. In the meantime, there are basically two important questions you need to ask yourself:
Why has growth remained firm in the face of the most aggressive monetary tightening cycle since the early 1980s?
There are two possible answers:
First, monetary policy is not sufficiently restrictive because R*, or the neutral real interest rate, has risen significantly.
Second, the lags between monetary policy impacting the economy are unusually long in this cycle.
Next week, I will send out a note on a bond allocation model, which I have used for quite some time. It’s been doing very well and avoided the bond sell-off over the past 18 months.
I will also introduce “Paper Alfa Macro Book”, a new series on developing a front-to-back investment process. Exciting times ahead are ahead as we close in on the second month. More on this soon.
Now, let’s dig into what the model is telling us across the board. We are examining roughly 70 charts across Equities, Rates, FX, Commodities and Crypto.