Stagflation leading to Recession - The Kodiak Bear Thesis

[EV1]

I read this on twitter the other day, and started googling around for FEDEX indicator and had seen some old articles referencing it. Figure I’d include the guys thread, and after seeing the violent reaction that FDX brought to the markets (granted vix was high on a green spy day prior to the drop as well, which seems like it was going to be explosive up or down), I think there is some merit to the idea, albeit a different market environment today with QT going full blast this month…

This is from TheShortBear on twitter, I can link him if you want, seems like an insightful fellow

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$FDX earnings and its meaning for the FED.

Let us go back in history.

Alan Greenspan

Mr.Greenspan was the 13th Chair of the Federal Reserve

In office. He served from August 11, 1987 – January 31, 2006.

20y of experience.

He managed to keep the inflation in check under 6% during the 20y he served as chair.

Which tools did he use?

The FedEx indicator.

The FedEx indicator is based on an easy idea.

Most items need to be shipped, thus demand is reflected by the shipping rate and general earnings quality of the shipping company.

Mr.Greenspan’s policies were directly reflecting within shipping.

The FED has one major tool to influence the economy. Demand support or tightening to keep inflation in check.

He used FedEx as a gauge to analyze the impact of his policies which he got right from the source.

FedEx used to be Federal Express.

Now that we know FedEx is a tool to analyze demand, how can we use it?

Let us look at the earnings for the highest inflation rate within his tenure, 1991.

Federal Express 1991 earnings, CPI is at 6% and topping.

•10% increase in revenue

•32% decline in income

•Fuel cost increased 29% over the last year

•International and domestic demand decline

The CPI declined and did not come back for 20y

earnings: Earnings Report

Let us compare to today.

FedEx 2022 earnings, CPI is at 8.3% and topping.

•5% revenue increase

•19% loss in income

‘FedEx highlighted a 30% increase to their margins as a result of passing through fuel surcharges to the U.S. consumer’

Incredibly similar statements in a similar inflationary environment.

Where were we within the rate cycle?

We cut rates continually by 25bps and once by 50bps in February 1991 and December 1991.

Look at the date of the annual date above.

How did the market react?

The Dow Jones corrected 22% and bottomed out.

See any similarities?

All in all the FedEx indicator is a tool we can use to gauge demand.

1991 was a very similar situation.

As the demand dropped, the FED backed off, despite 6% inflation. The FedEx earnings gave an accurate representation of demand and inflation.

We prospered for the next 20y.

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[TheHouse]

This is very interesting, thanks for putting it all together. I think FedEx earnings painted a pretty grim picture of the current state of the economy, FedEx isn’t a leveraged “growth” tech company that hasn’t ever made money, we have plenty of those zombies still floating around. This was a surprise in every sense of the word.

This is what makes this FOMC so interesting, 75bps is the expected move, but with CPI surprising to the upside last week, what will J Pow have to say at the press conference? This is the biggest question mark for me this week.

J Pow has been consistently hawkish about where monetary policy is headed these last few months and FedEx echoed what we already know about the economy.

So the picture seems clear and consistent, continued hiking into a slowing economy. What J Pow says and how the market reacts is yet to be seen, but I cant imagine a scenario where J Pow reverses his tone to be more dovish, again, not after CPI last week.

Haven’t decided how I’m playing this yet, but I do know I will be cash heavy until after J Pow speaks.

[tedro]

The FedEx indicator is a fascinating read. One of those things that almost sounds like bullshit but the data is there.

Question though - should the FOMC release and JPow’s speech be treated as different events and catalysts?

[TheHouse]

Yes, exactly, heres an example,

First- Policy hike comes in at 75bps which is expected, market likes certainty so it moves higher on the descision as this was “priced in”

Then- J Pow during his speach talks about additional tightening or acknowledges economic weakness then reiterates tightening plan or new hawkish tone. Market doesnt like uncertainty so moves lower.

I’m going to try to scalp the volatility of the rate descision, then be prepared for the speech to do more scalping and look for entries for some swings as I am betting this sets the pace for the next leg.

Bull Side
GOLD
SLB
UUP (puts)

Bear Side
HYG
SPY
IWM
CCL
FEZ
AAPL

The disclaimer is, any hike in the eyes of the real economy is challenging. Restrictive monetary policy = Higher unemployment, less credit expansion, lower asset values, and weaker balance sheets

Also, I am more than willing to expand on any of these tickers if anyone isnt familiar with the name or has any questions.

[TheHouse]

This is an excellent excellent read.
https://www.wsj.com/articles/jerome-powell-inflation-volcker-fed-11663595217

[TheHouse]

If anyone read and enjoyed the book Lords of Easy Money by Christopher Leonard I had posted at the beginning of the year, This book is great aswell.

Bernanke does a great job laying out the mechanical details of modern monetary policy while sharing his views on where the fed is at this year. Highly recommend

[TheMadBeaker]

Just pointing this out more for historical tracking purposes, but diesel prices are still staying stubbornly high.

This translates into continued high costs for… well, everything on the commercial side.

[Kevin]

Update

[Kevin]

Maverick conducts a review on the recent FOMC Jpow conference here.

Below are points/notes from the video that I think the forum or TF haven’t quite covered yet.

When will the rate hikes stop? 3 conditions.

Jerome Powell gave 3 conditions to allow for the pausing of rate hikes:

1. Growth moving down.
2. Unemployment going up.
3. Inflation moving down towards 2%.

These 3 ingredients = recession. JPow is looking for a recession.

Most Important Piece of Economic Data for JPow: Core PCE

JPow stated that the main incentive for aggressive front loading of rate hikes is the core PCE, not the CPI, not the PPI. The inflation target is 2%. Currently the core PCE at a 3, 6 and 12 month trailing annualized basis is at 4.8%, 4.5% and 4.8% accordingly.

Think back to Volcker. This means the fed funds rate needs to be at least 5% to meaningfully drive down core PCE. We are now at 3.25%, which means we have 175 bps of rate hikes to come.

The 2Y yield is another indicator of more rate hikes. The 2Y is above 4% right now. The fed is always chasing the bond yield. For example, soon we will see 5% 2Y yield and the fed funds rate will be 4ish%, then a 5.5% 2Y yield and fed funds rate of 5%, etc.

In order to show that the fed is in charge, they would need to immediately hike rates to 5% above the 2Y yield, above the core PCE.

Was there anything at all for the bulls and doves? Yes-ish.

• JPow is seeing some evidence of the beginning of supply chain restoration.
• Commodities peaking.
• After initially playing down the possibility of a soft landing near the start of the conference, JPow shifted tone to say that they are keeping an open mind on the possibility of a soft landing achieved by job openings coming down without unemployment rising too high.

[TheMadBeaker]

Interesting thing I noticed when reading over the Fed’s latest Summary of Economic Projections.

While everyone is looking at the “Median” numbers, in theory they could still swing quite a bit in either direction.

[TheHouse]

Closed most of my put positions from FOMC. Holding Oct / Nov HYG and FEZ puts. Will do some scalping today, very short timeframes.
Hope everyone has a great weekend

[TheHouse]

https://www.bloomberg.com/news/articles/2022-09-28/apple-ditches-iphone-production-increase-after-demand-falters

Fedex now Apple referencing demand issues. This type of news isn’t speculation or opinions, this is everything making its way to bottom lines in the real economy.

So, if this is what Apple is saying, how are those other ER’s going to look?

Ill also add that this news alone could move us well under our 360 support and start our next leg down into earnings.

[TheHouse]

If this move holds, and Im willing to bet it does, Ill be looking to snag short dated SPY 350’s and IWM 155’s.
Need to watch out for any dovish fedtalk if things get dodgy.
This is an unusual event at an unusual time, but nonetheless has been talked about in this thread for months.
High Risk / Reward

[TheHouse]

Big news this morning.

Bank of England “Will carry out temp purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions”

I have no idea how this plays out for US equities so im going to be cautious today with entries but this should be seen for what it is, a temporary QE pivot. All with a 9.9% UK inflation, grab your popcorn history is unfolding right in front of our eyes.

[TheHouse]

Post announcement

[macromicrodick]

Listening to Bloomberg this morning, it seems like the BoE is choosing this method of currency intervention to give time for the fiscal policy (government side) to clawback their loose tax cuts. Similar to the BoJ buying up Japanese bonds, but the BoJ does it for a day, and only when the Yen closes in on 145.

Here, the BoE has announced that they will be buying 30-Yr bonds from today, 09.28 until 10.14. Whether that means everyday they will be conducting bond purchases unclear but it’s for a prolonged period.

The hope was to restore stability to the GBP but from this morning the markets have shown little confidence that this will do anything as it’s hitting new lows PM.

So now the BoE is in this precarious situation until Oct. 14. The entire world is saying to this Truss government that their fiscal policy is irresponsible and the BoE has provided, at least on the surface level, that they are trying to do something about the attack on the GBP. The other nuclear option would be to raise rates hard and fast but it will cause a mountain of hurt to UK mortgage holders.

https://www.cnn.com/2022/09/27/economy/uk-mortgage-rate-increase/index.html

[macromicrodick]

Wanted to follow up on earlier post about the Bank of England’s intervention today. Thanks to @hansolo for clarifying on TF that this wasn’t to intervene in the currency markets and defend the pound.

Instead of confusing folks more, I found an article that explains it better than I could ever hope for.

Essentially, this article breaks down the mechanics of the political environment, coupled with the bond intervention, and the results in the currency markets:

https://www.nytimes.com/2022/09/28/business/economy/bank-of-england-bonds.html

I would definitely take note of dates though:

1. The BoE will continue to buy long dated UK treasuries, up to the tune of $65B, until Oct. 14.

2. US CPI report comes out Oct 13.

3. The BoE has decided that it’s planned QT of selling bonds at the end of the month will now be deferred.

What does this have to do with SPY and the bullish reversal?

This is my purely my opinion but we saw a corresponding drop in the US 10-Yr after the decision was made as it was hovering above 4% overnight. I suspect it means that bond traders are pricing the likelihood of the Fed intervening should yields get too high here.

Further bullish data dropped, mainly the inventory numbers being above forecast and to a lesser extent housing (again my opinion), which added to the turnaround.

Had the news of $AAPL’s production decision not dropped, we might have been even more bullish.

The continued sell-off in the 10-Yr is surprising, especially given that the planned QT by the Fed is suppose to be ramping up by the end of this week. I don’t think the BoE’s decisions will effect the Fed’s policies - just look to the weakening Yen as an example.

Nothing has changed in the Fed’s stance. With PCE this Friday, and expected core inflation to stay sticky, there really isn’t a reason for the Fed not to stay the course.

[TheHouse]

I appreciate this as the BOE move is pretty unique.
Wild to think we hit a YTD low pre market before the news broke.
The reason I don’t think inventory data moved anything this morning is because retail inventories have been increasing all year, all while inflation continued to move higher. Something that has been tracked and discussed all year in this thread.

I would find it unusual that just this month the market would take that as a signal to be bullish. I also think that is a weak case to be bullish anyway as this leads to profit losses all over the supply chain.
but I def agree that PCE should carry some weight when thinking about J Pow’s next policy decisions.

[jjcox82]

As always your knowledge is appreciated. Largely small ticket items inventory increasing is actual from my perspective a relief on inflation. What caused a vast uptick in inflation rates was supply vs demand if supply starts to outpace then you start to see a leveling off of sorts to price inflation. Essentially starting to turn to the times of old where WMT or TGT has a sale rack in every aisle. This type of steadiness and return to pricing/supply normalcy is what would be required to avoid some kind of recession/depression.

However these small ticket items and inventories have little affect for everyday consumers like housing or auto or other big ticket expenses. Which I believe is why JPow strongly suggested we need a see movement in housing before they think anything different than their current path.

Also seperate topic and this is a question wanting your opinion.

Do you think BOE transitioning to QE makes the FED rethink their plans to enlist QT here ? I know these old fucks all talk to each other.

[TheHouse]

Just keep in mind inflation chooses who and what gets demand. If you remember the HOPE chart, higher inventories that don’t turn leads to less orders (O) less orders lead to less profit (P) less profit leads to less hours or workers (E). This type of data expresses itself in equities through ER’s.

And great question on the BOE deal, I think there is some speculation around this, fedtalk most especially from J Pow will continue to be important going forward. Personally, I don’t think J Pow and friends have any luxury at the moment to pivot rates or QT and I would imagine J Pow will need to make that clear once again