Month: August 2022

Authored by Peter Reagan via Birch Gold Group

No matter how you look at it, most Americans saving for retirement are feeling incredible pressure on their entire financial situation right now.

But before we dive into just how dire the economic situation is in the U.S., on the global level things aren’t “peachy” either. In fact, the International Monetary Fund (IMF) is predicting a massive global slowdown:

The IMF now expects the world economy to grow 3.2% in 2022 before slowing to a 2.9% GDP rate in 2023 — marking a downgrade of 0.4 and 0.7 percentage points, respectively, from April. The Washington-based institute said the revised outlook indicated that the downside risks outlined in its earlier report were now materializing. Those include soaring global inflation, China’s slowdown and the war in Ukraine.

But while the global GDP outlook isn’t so hot, the Biden economy could also be heading for serious trouble over the next few months.

To illustrate how fast things can change from one day to the next, on the 25th the chances of entering a recession were only “fair” according to CNBC and Janet Yellen:

The economy stands at least a fair chance of hitting the rule-of-thumb recession definition of two consecutive quarters with negative GDP readings. Should inflation stay at high levels, that then will trigger the biggest recession catalyst of all, namely Federal Reserve interest rate hikes. Treasury Secretary Janet Yellen said “we just don’t have” conditions consistent with a recession.

But only a few days later, and following her “faux pas” about inflation, Yellen was shown to be wrong once again. The U.S. economy did contract according to official GDP numbers released only a few days later, on the 28th.

This means that short of some miracle that isn’t likely to happen, a “widely accepted” economic recession is already upon us:

The U.S. economy contracted for the second straight quarter from April to June, hitting a widely accepted rule of thumb for a recession, the Bureau of Economic Analysis reported Thursday.

You can see the two-quarter slowdown in GDP reflected below on the bar graph from the U.S. Bureau of Economic Analysis (BEA):

Source

Note this chart shows the change from the previous quarter – so two consecutive quarters of negative growth are compounding.

The BEA statement on the second quarter slowdown revealed another disturbing fact that could be a signal of even more economic malaise to come:

Real GDP decreased less in the second quarter than in the first quarter, decreasing 0.9 percent after decreasing 1.6 percent. The smaller decrease reflected an upturn in exports and a smaller decrease in federal government spending that were partly offset by larger declines in private inventory investment and state and local government spending, a slowdown in PCE, and downturns in nonresidential fixed investment and residential fixed investment. Imports decelerated.

This appears to reveal that U.S. exports “saved the day.” But even those gains were offset by various declines and slowdowns. That isn’t a good look, especially if exports were to decline in 3Q2022.

The next official BEA release is August 25, 2022. Assuming there are no major changes between now and then, the “cement” will have dried on this recession’s start.

Unfortunately, red-hot 9.1% inflation looks to be one of the causes of a slowing economy (people spending more carefully). That also just happens to be one of the Fed’s mandates.

Their idea of a solution is to raise funding rates to bring inflation under control.

Necessary Fed rate hikes aggravate the economic damage

So while the Fed attempts to “mop up the mess” that they created, the potential for further economic slowdown from their rate increases could send the U.S. into a deeper recession than it already is.

According to an article by Wolf Richter, the Federal Reserve just decided to increase rates another 75 basis points (.75%). It also doesn’t look like Chairman Powell wants to slow this hawkish behavior anytime soon:

To make sure everyone got it, he said several times that “another unusually large increase could be appropriate at the next meeting,” depending on the inflation data… Out the window went the notion of a “pause” in September that had been ridiculously hyped by some tightening-deniers a couple of months ago.

And Powell said that “we wouldn’t hesitate” to go even higher – so a 100-basis point hike maybe – if inflation data comes in hot.”

So in addition to the most recent rate hike, Powell finally appears to be putting the brakes on “cheap money for Wall Street.”

Any retirement saver who is thinking “It’s about time!” isn’t alone. In fact, a recent NPR piece put the situation as plainly as ever:

“The economy hangs in the balance.”

So does your retirement nest egg, if you aren’t prepared.

Protecting your savings from a different kind of recession

We can take an educated guess that international diversification won’t help much if we enter a global downturn. We don’t know how long or how deep that downturn will be.

We do know the Fed really messed up, so it’s critical that they clean up their mess. There’s no turning back from that now. A Fed clean-up on the economy aisle, in this case, means slowing the economy. Raising interest rates. Discouraging economic activity. That’s bad for businesses and investors who depend on cheap loans and easy-money policies. The Fed is also cleaning up their mess very slowly, and ongoing interest rate hikes are too small to tame inflation quickly, but still enough to keep punishing bonds.

Maybe it’s time to consider diversifying your savings with assets whose value doesn’t depend on the whims of unelected bureaucrats?

With these thoughts in mind, it’s a good idea to consider safe havens for your hard-earned savings. Traditional inflation-resistant investments including TIPS, Series I bonds, and physical precious metals like gold and silver are excellent ones to consider.

A few minutes spent right now on learning how to preserve your retirement savings could save your financial future from the Fed’s mess.

As reported earlier, the week is closing on a very downbeat note, with futures sharply lower – ES down as much as -95bps / NQ -110bps – as focus shifts to the aftermath of this latest meme stock bubble bursting (BBBY -40%), $2T in options rolling off and the back up in yields following hawkish commentary from Central Bank speakers Bullard (calling for 75bps) and George (case for raising rates remains strong).

In Europe, ECB’s Schnabel said the inflation outlook has failed to improve and even if they enter a recession, its unlikely inflationary pressures will abate by themselves, meanwhile the latest PPI print was an absolute shocker, courtesy of the neverending surge in energy prices. Also, as we noted previously, volumes yesterday were the lowest of the year, and outside of expiry, today will not be much different.

What’s behind today’s weakness? Below is a list courtesy of Goldman trader Michael Nocerino (full note available to pro subs)

• Retail Meme Stocks Unraveling – BBBY -40%…Imagine shorts will be coming out of the woodwork – keep an eye on Goldman’s PB data for confirmation.
• Crypto following suit – XBT -7%
• German PPI Came in at Record Highs – 5.3% rise
• DXY Strong following suit – EURUSD testing parity…
• Bullard called for 75bps in September – yet mkt still pricing in 50/50 short of a 75bps hike in Sept.
• Yields Higher following suit – 10y at 2.97…
• Large Expiry – $2T in options rolling off – “4300 Magnet In Effect”: Previewing Tomorrow’s $2 Trillion Op-Ex“

EURUSD Continues to Test 2002 Levels…

Speaking of today’s monster expiration, here it is by the numbers:

Here’s what our GS options strategists (h/t Rocky Fishman) had broken down as when/what options expire (data ran earlier this week, but gives you a sense) =>

At the 930am SQ settlement:

• $770bn of SPX AM options will expire
• $65bn of non-SPX index will expire (e.g. NDX, RTY, SOX Index, etc)
  • Total of $835bn expires at the open

on the 4pm closing settlement:

• $205bn of options on E-minis
• $185bn of SPY options
• $205bn of SPX PM options
• $220bn of non-SPY ETF options
• $430bn of single stock options
  • Total of $1.245tn expires on the close

Here is Nocerino’s list of key factors to focus on:

• VOLUMES….Second worst of the year, but if you take out the volume in BBBY, it was the worst of the year. 9.5B shares traded yday vs. ytd avg of 12.23B.
• NOTIONALS…Total traded across all exchanges yesterday was lowest ytd ($380B vs. ytd avg of $612B)
• RUSSIA/CHINA/US…Xi Jinping and Vladimir Putin will attend the G20 summit in Bali in November, raising the prospect of a meeting with Joe Biden at a time of heightened tensions between the world’s military superpowers over Taiwan and Ukraine. FT
• GS DESK FLOWS…We saw HF shorting in macro products and passive L/O demand in energy and tech.

Goldman Prime Broker Update (08/18)

• Overall book modestly net bought (1-Yr Zscore +0.3) ahead of large option expiry today, driven by a 2nd day of risk-on flows with long buys > short sales 2.4 to 1
• Single Stocks and Macro Products both modestly net bought and made up 56%/44% of the $ net buying, driven by long buys and short covers, respectively.
• 7 of 11 sectors were net bought led in $ terms by Info Tech, Financials, Real Estate, and Industrials; Comm Svcs, Energy, Health Care, and Consumer Disc were the most $ net sold
• After 15 straight days of covering, Consumer Disc shorts increased +0.3% yday (still down -12% MoM) driven by Automobiles and Hotels, Restaurants & Leisure names

Month-end Pension rebal update

Still unch’d as we continue to trade in a range…As of yday’s close, Goldman’s model estimates $11bn of US equities to SELL for month-end. Reminder we saw one trigger event occur on Aug 11th in which $13bn of US equities were sold. This brings total estimated rebalancing for Aug to $24bn of EQ to be sold. Quick stats on the remaining $11bn to be sold — $11bn to SELL ranks in the 39th %ile in absolute dollar value over the past 3yrs and in the 65th %ile going back to Jan 2000. $11bn to SELL ranks in the 50th %ile on a net basis (-$70bn to +$150bn scale) over the past 3yrs and in the 21st %ile going back to Jan 2000 (small relative to history).

More in the full note available to pro subs.

More layoffs are here, even in the face of the latest super-duper jobs number that we swear doesn’t include people taking on their 2nd or 3rd jobs just to make ends meet and catch up with inflation. 

Wayfair has just become the latest in a long line of companies to pare back its workforce, announcing this morning that it was going to cutting its labor by about 5%. 

In a Form 8-K filed on Friday morning, the online retailer discussed the layoffs, amidst other cost cutting measures. Wayfair “announced a workforce reduction involving approximately 870 employees in connection with its previously announced plans to manage operating expenses and realign investment priorities.”

The filing continued: “This reduction represents approximately 5% of our global workforce and approximately 10% of our corporate team. Concurrently, the Company is in the process of making substantial reductions in its third party labor costs.

The company said it was going to take “between approximately $30 million and $40 million of costs” in Q3 2022 as a result of the layoffs. 

These layoffs come a year after reports that Amazon was planning with a premium service that lets customers opt to have furniture or appliances assembled as soon they arrive at their homes.

Recall, we wrote a piece just days ago helping our readers visualize all of the latest major layoffs at U.S. corporations. We noted that in June 2022, Insight Global found that 78% of American workers fear they will lose their job in the next recession. Additionally, 56% said they aren’t financially prepared, and 54% said they would take a pay cut to avoid being laid off.

In this infographic, Visual Capitalist’s Marcus Lu visualizes major layoffs announced in 2022 by publicly-traded U.S. corporations.

Note: Due to gaps in reporting, as well as the very large number of U.S. corporations, this list may not be comprehensive.

An Emerging Trend

Layoffs have surged considerably since April of this year. See the table below for high-profile instances of mass layoffs.

Layoffs are expected to continue throughout the rest of this year, as metrics like consumer sentiment enter a decline. Rising interest rates, which make it more expensive for businesses to borrow money, are also having a negative impact on growth.

In fact just a few days ago, trading platform Robinhood announced it was letting go 23% of its staff. After accounting for its previous layoffs in April (9% of the workforce), it’s fair to estimate that this latest round will impact nearly 800 people.

US futures are down hard overnight, erasing all the week’s gains, following a stunning German PPI print overnight. Nomura’s Charlie McElligott described the 5.7% MoM surge (and 37.2% YoY) as “apocalyptic”…

…as the energy crisis impact sparks full-blown economic carnage domestically…

…, and knocks-into global Central Bank hike expectations, Rates, FX and Vol.

With Euro now being devalued daily due to the energy crisis on fwd growth being doomed—and all into a priced “impulse tightening” ahead in coming months from a “behind the curve ECB” who can do nothing about “supply” and only “demand” (big “ooof”), the spill-over is a global financial conditions surge “tighter / more restrictive,” as the US Dollar “wrecking ball” is again screaming higher—and that’s a negative for global risk-assets

Like I have been messaging over the past few weeks, the near-consensus “buy-in” to the “past peak inflation” story is at risk of being caught flat-footed by ongoing “fits and starts” of structural “supply-side” inflation issues which cannot be solved by CB policy, despite the comfort which has been provided locally by the recent roll-over in Commodities / Goods, as well as forward “survey” data

Simply-put, inflation is not going to roll-over in a smooth, linear-fashion…and likely stays “sticky higher” above target, keeping CB’s in the uncomfortable “restrictive for longer” territory required

And bigger-picture, this is another reminder that even a seemingly idiosyncratic or isolated situation (UK inflation Wednesday, today’s German PPI) can elicit a “butterfly effect” impact: flapping its wings locally, but risk causing a chaotic “tornado” outcome elsewhere, in a future state

As the Nomura strategist notes, this horrific escalation of the EU / UK energy disaster in recent days as a knock-on “Vol catalyst” potential elsewhere, and how critical this could be with the concurrent timing of the Equities Op-Ex “window for Vol expansion,” as we see a large amount of $Gamma set to drop-off today, which then allows for resumption of broader distribution of price-outcomes thereafter…

But, as McElligott notes, for a larger market “price shock,” this needs to occur against the “right” conditions – so not just getting that required macro “Vol catalyst(s),” but against market-structure conditions which can allow for movement – which is where today’s Op-Ex can come into play.

SPX “Gamma Gravity” now the key at holding this market near the whopping 4250 strike line ($3.51B total $Gamma there, $1.47B front-expiry) into the a.m. expiration, because this line is in-particular is loaded with front-week Options set to expire—which, in-turn, means a “Gamma Unclenching” thereafter which can open us to a wider distribution of outcomes / broader range of prices, as the prior Dealer hedging barriers are suddenly diminished by nearly half

42% of the 4250 line’s $Gamma set to drop-off today, and similarly lumpy amounts from overhead strikes, which can then “expose” a lower-end to the range if broken

Obviously, losing the prior “barrier” which has pinned / supported the market this week can be a “big deal” now that we have a macro / rate vol / central bank policy “butterfly flapping its wings” catalyst which is reminding us that we are not out of the woods at all yet, as it relates to structural inflation “supply-side” issues trying to be solved-for by “demand” levers

IF we were to convincingly break through 4250 to the downside….technicals become more important then to see a further and sustained move lower:

• Walter Burke sees today’s weakness in ES as breaking below the bottom of the mid-July bull channel and latest breakout level at 4202

• 4200 has about $2.1B of $Gamma after today’s expiration as a support below

• But it’s the “Gamma Flip” level down at 4174 which should mark the real risk of acceleration LOWER, as that is the location we see Dealer Gamma pivoting “Short,” which means that instead of their hedging flows acting as a counter-cyclical buffer…that they can then instead begin to feed into the move LOWER, have to sell more futures the lower we go, in order to stay hedged against Puts they’re Short to clients

Simply put: Negative Gamma regimes allow for Vol Expansion and unstable movement—so a flip “Short Gamma vs Spot” territory would be our first real downside acceleration risk seen since mid-June.

General Motors has announced this morning that, after more than 2 years, the company is re-instating its dividend and share buybacks. 

A company press release said on Friday morning that the company’s Board of Directors “has authorized the reinstatement of a quarterly cash dividend on the company’s outstanding common stock at a rate of $0.09 per share.”

It continues: “The first dividend will be paid on Sept. 15, 2022, to shareholders of record as of the close of business on Aug. 31, 2022.”

Regarding stock purchases, the company said that its Board “increased the capacity under the company’s existing repurchase program to $5.0 billion of common stock, up from the $3.3 billion previously remaining under the program.”

CEO Mary Barra commented: “GM is investing more than $35 billion through 2025 to advance our growth plan, including rapidly expanding our electric vehicle portfolio and creating a domestic battery manufacturing infrastructure.”

She continued: “Progress on these key strategic initiatives has improved our visibility and strengthened confidence in our capacity to fund growth while also returning capital to shareholders.”

Paul Jacobson, GM chief financial officer, commented: “GM’s consistently strong earnings, margins and cash flow, our investment-grade balance sheet, and the achievement of several significant milestones in our growth strategy enables us to invest aggressively to accelerate our all-electric future while also supporting the return of excess free cash flow to shareholders, aligned with our long-term capital allocation strategy.”

The company PR then went on to talk about some of its recent operating milestones, which include:

• The largest single investment announcement in the company’s history: more than $7 billion in four Michigan manufacturing sites, including a new Ultium Cells LLC plant in Lansing, that will create 4,000 new jobs and retain 1,000

• The launches of the GMC HUMMER EV Pickup and Cadillac LYRIQ, the first vehicles developed on GM’s Ultium Platform

• Significant customer demand for the GMC HUMMER EV Pickup and SUV, the Cadillac LYRIQ and the Chevrolet Silverado EV

• The first customer deliveries for the BrightDrop Zevo 600 electric delivery vehicle, with volume commitments from leading companies including FedEx, Walmart, Verizon and Merchants Fleet

• The Ultium Cells plant in Warren, Ohio is ready to come on-line this month; significant construction progress has been made at the Ultium Cells plants in Spring Hill, Tennessee, and Lansing, Michigan, which open in 2023 and 2024, respectively

• Combined, these Ultium Cells plants are expected to create 6,000 construction jobs and 5,100 operations jobs when they are at full capacity, and the location of a fourth U.S. cell manufacturing plant will be announced soon

• The successful execution of binding agreements to secure all the battery raw material GM requires to scale EV production to more than 1 million units of annual capacity in North America by 2025

• The historic launch of a fully driverless commercial ride share service in San Francisco by Cruise, GM’s majority-owned subsidiary

By Simon White, Bloomberg Markets Live reporter and commentator

Anticipation that Powell’s Jackson Hole keynote will showcase his inflation-fighting resolve should depress equities in coming days. However, it’s hard to envision how he can successfully cause rates to reprice, and the speech will likely fall short of expectations.

It’s an article of faith among most analysts that inflation is too high and that it requires a significant tightening in financial conditions to bring it back to target. Furthermore, the 2023 Fed dots are 51bps higher than Jan. 24 implied Fed fund futures.

With equities still in a relatively buoyant frame of mind Powell seems to have a free shot at establishing his hawkish credentials.

There’s a good chance the Fed chief will craft a speech that signals that he is focused almost solely on inflation, the risk of the wage-price spiral, and the costs of inflation expectations getting out of hand (as Bloomberg economist Yelena Shulyatyeva has suggested). He should try to convince markets that these risks far exceed the costs of bumpy landing.

However:

• What more can he say that hasn’t already been said? In the last press conference, Powell implied that the headline inflation measure was unusually important because of its role in potentially de-anchoring inflation expectations. He also said “nothing works in the economy without price stability” and “we don’t see it (the fight against inflation) as a trade-off with the employment mandate”. This language would need to be significantly sharpened or strong research findings would need to be produced to illustrate that the trade-off should be put on hold for there to be an impact on the longer-dated Fed expectations

• Will markets be able to believe that the Fed will go on hiking once a sizable number of people are put out of work, and the noise of the mid-term elections is behind us?

• There are precedents for the Fed dots sharply being disconnected from market pricing, and for the markets being right. For instance, the market was pricing 1.75% for Jan-2020 fed funds on June 13, 2017, versus the median dot released on June 14 which had Fed funds at 2.9% at end 2019, and the gap widened into September. It turned out that the market was right: effective fed funds ended 2019 at 1.55%

Granted, he could choose to focus on the need for tighter financial conditions or choose to flag a short-term front-loading of hikes at a faster pace than the market expects.

While both are reasonable for equity markets to worry about, there are reasons to be skeptical that either course of action will be taken.

Simpler than trying to deal with expectations further out would be to flag an imminent front-loading of hikes at a faster pace than the market expects:

• Presumably, the very strong labor market and high headline inflation can be used as justification. Powell could easily communicate with the board ahead of time to get buy-in, and Bernanke probably did in 2012 to flag September QE3.

• However, this is not the norm for Jackson Hole, which tends to deal with issues at a longer-time horizon.

• Furthermore, it’s not short-term pricing that’s the problem. The Jan-23 Fed Fund Futures are already 11bps north of the dots.

Another method would be talk about the need to tighten financial conditions in the short term, which would imply that longer-term rates are too low, and that the Fed would not respond to equity weakness:

• However, in Powell’s most recent press conference and the minutes, all references to financial conditions indicate that the Fed is happy with the tightening so far, and there doesn’t seem to be recognition that these conditions are too loose.

• Indeed, the line on page 10 of the minutes which describes “a notable tightening of financial conditions” is quite typical of how they are described on all 9 occasions. That is, Fed might want conditions to tighten over time, but there seems no urgency in recent communications.

* * *

One final point here, from ZH, is that contrary to the Fed’s view that financial conditions have tightened “notably”, just the opposite has in fact occurred because as Goldman showed recently, the 20+ day period since the July FOMC has seen one of the biggest easings of financial conditions (driven by the surge in markets) on record.