"An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today."
- Laurence J. Peter
This quote suggests that economists, like many other experts, can sometimes make predictions that do not come true. It also highlights the idea that economic forecasting can be difficult and uncertain, and that even the best economists may not be able to accurately predict the future.
Here are a few questions you could ask yourselves about inflation:
What causes inflation?
Can central banks stop inflation?
If inflation is at 7%, where should interest rates be?
Back to the global macro grind . . .
What causes inflation?
There are several factors that can cause inflation, including an increase in demand for goods and services, an increase in production costs, an increase in government spending, and a decrease in the supply of money. Other factors that can contribute to inflation include natural disasters and geopolitical events that disrupt the supply chain, as well as changes in taxes and interest rates. In general, inflation is caused by a combination of these factors, and the exact causes of inflation can vary depending on the specific situation.
Can central banks stop inflation?
Yes, central banks can take various measures to try to stop or prevent inflation. One of the main tools that central banks use to influence inflation is monetary policy, which involves adjusting the supply of money in the economy. For example, if a central bank wants to reduce inflation, it can tighten monetary policy by raising interest rates or reducing the money supply, which can help to slow down economic growth and reduce demand for goods and services. This, in turn, can help to reduce inflationary pressures.
In addition to using monetary policy, central banks can also use other tools to try to control inflation. For example, they can use fiscal policy, which involves adjusting government spending and taxation, to influence the overall level of demand in the economy. They can also use other tools, such as direct intervention in the economy or regulation of certain industries, to try to address specific causes of inflation. Ultimately, the effectiveness of these measures in controlling inflation will depend on the specific circumstances and the underlying causes of the inflation.
If inflation is at 7%, where should interest rates be?
It is difficult to say exactly where interest rates should be if inflation is at 7%, as this will depend on a variety of factors, including the overall health of the economy, the level of unemployment, and the specific goals of the central bank. In general, however, if inflation is high, central banks may need to raise interest rates in order to control inflationary pressures and maintain price stability.
This is because high levels of inflation can be harmful to the economy, as they can lead to uncertainty and instability, and can erode the purchasing power of money. By raising interest rates, central banks can make it more expensive for households and businesses to borrow money, which can help to reduce demand and curb inflation.
However, raising interest rates can also have negative consequences, such as slowing down economic growth and increasing the cost of borrowing for households and businesses. As a result, central banks must carefully balance the need to control inflation with the need to support economic growth and maintain financial stability. The exact level of interest rates in a given situation will depend on the specific circumstances and the goals of the central bank.
If you haven’t figure it out by now, this entire note so far was written by an AI engine called ChatGPT. The AI engine came up with the title, the quote, the proposed questions, and all the answers. It took me about 2.5 minutes to put together.
As investors, we are going to have to become increasingly cautious when interpreting and evaluating information with the many advances in artificial technology. Now, of course, I probably didn’t fool you, but I’m a novice at this. Regardless of the advances that do occur, hopefully we can always fall back to the data as a reliable source of information, but even there time will tell.
In the last few days, we’ve received PMIs for most countries around the world and they certainly tell a direct story. With a few exceptions global PMIs slowed into November and/or stayed at contractionary levels (sub-50). The Chart of the Day highlights Eurozone construction, services, and manufacturing PMIs and it shows a bleak picture. Specifically, manufacturing PMI came in at 47.1, services PMI came in at 48.5, and the construction PMI registered a 43.6.
There are no two ways about it, this is a dramatic slowdown in growth. On the positive, PPI in the most recent report slowed from 41.9% Y/Y to 30.8% Y/Y. CPI also slowed sequentially from 10.6% Y/Y in October to 10.0% Y/Y in November. The slowing global economies have seemingly slowed inflation, at least on the margin.
This is #Quad4 in a nutshell. Slowing growth and slowing inflation. The risk, of course, is what we are seeing in Europe. Namely, recessionary economic data combined with inflation data that, while decelerating, remains near record levels. Some might call this stagflation.
In the U.S. we will get another river card on inflation with the November PPI report coming out this Friday. It is possible that it slows much quicker than expected and we get another rip higher in risk assets. A likely scenario may be that investors start to realize that inflation higher for longer means rates higher for longer and, ultimately, growth lower than expected.
At the moment, our top ranked Macro ETFs for the current economic environment are as follows: UUP, EWJ, BUL, GLD, XLP, PPLT, TAN, ITA, XLV, BTAL, GDX, XLU, PINK, SLV, MSOS, TUR, TOKE, SQQQ
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.47-3.87% (bearish)
UST 10yr Yield 3.43-3.82% (bearish)
UST 2yr Yield 4.22-4.57% (bullish)
High Yield (HYG) 73.28-75.70 (bearish)
SPX 3 (bearish)
NASDAQ 10,771-11,498 (bearish)
RUT 1 (bearish)
Tech (XLK) 127-136 (bearish)
Consumer Staples (XLP) 74.41-77.51 (bullish)
Nikkei 27,584-28,501 (bullish)
DAX 14,075-14,595 (bearish)
VIX 19.08-25.23 (bullish)
USD 104.12-108.41 (bullish)
Oil (WTI) 72.87-80.88 (bearish)
Gold 1 (bullish)
Silver 20.50-23.48 (bullish)
MSFT 235-255 (bearish)
AAPL 138-149 (bearish)
AMZN 86-96 (bearish)
Bitcoin 15,903-17,310 (bearish)
Keep your head up and stick on the ice,
Jonesy AI
