In Excess

Remember the cassette era, the one that preceded the compact disc…we Gen Xers thought revolutionized music as we knew it? We created mix tapes to pop into Sony Walkmans and boom boxes or, even better, our cars’ cassette players after which we would cruise around town. The exceptions to any mix were albums that featured multiple hits from the same artist. In our humble opinion, Australian rock band INXS released the epitome of “album” in October 1987. Certified platinum six times by the Recording Industry Association of America, Kick was the band’s sixth studio album and most successful, spawning four U.S. Top 10 singles including “New Sensation,” “Never Tear Us Apart,” “Devil Inside,” and “Need You Tonight,” which hit No. 1 on Billboard’s singles chart. AllMusic’s Steve Huey retrospectively described Kick as crystalizing “all of the band’s influences – stones-y rock & roll, pop, funk, contemporary dance-pop – into a cool, stylish dance/rock hybrid.”

In the dry science, the phrase ‘in excess’ carries different connotations. The heat of excess demand implies stronger-than-normal growth, greater resource utilization, and higher inflation. The cold of excess supply denotes the opposite all the way to disinflation or outright deflation. For some time, the aggregate of five Federal Reserve District Banks’ — New York, Philadelphia, Kansas City, Dallas, and Richmond — regional manufacturing surveys’ Current Backlogs has flagged the latter (dark green line). Following the post-COVID peak of 27.0 in May 2021, this gauge stumbled to 5.0 inside 12 months. The descent has continued – in 15 of the last 16 months ended December, it slipped under the -10 threshold. While the low point for this series during the 2007-09 recession plumbed south of -30, the current episode wipes that stretch clean for its persistence.

Because positivity remains elusive, the lag effects of the Fed’s tightening – which continues with every passing day via Quantitative Tightening – are still rippling through the economy. How much more disinflation is in train is seen through the real-time prism of Truflation (yellow line). This high-frequency guide, which boasts a .97 correlation since its 2013 inception with the headline Consumer Price Index, has taken a dramatic turn, sliding from a recent high of 3.28% in mid-September to yesterday’s 2.56%.

Over time, Goldman Sachs’ financial conditions have guided M&A activity. While punk backlogs reinforce one of QI’s 2024 themes of disinflation, easier financial conditions have yet to catalyze a Merger and Acquisition (M&A) cycle. December marked a fresh post-pandemic low (fuchsia line) despite financial conditions easing (inverted blue line). As for the broader revenue outlook, C-suite occupants are refusing to answer the clarion call of easier conditions to synthesize top-line growth by acquiring it. At the highest level, Corporate America’s executives don’t yet see a bottoming in the business cycle.

Another way to tease out the bottom-up perspective is via the capital expenditures (capex) outlook. Echoing the five-Fed-figure for Current Backlogs, Future Capex in these same five has kept weakening, with readings in the mid -4 neighborhood (purple line). Current levels are softer than that which preceded the cliff dive prior to Lehman’s failure in the fall of 2008. The Equipment Leasing & Finance Foundation’s (ELFF) monthly confidence index (MCI) corroborates. This qualitative assessment of prevailing business conditions and expectations comes from executives in the $1 trillion equipment finance sector. Since the survey’s mid-2009 inception, the MCI never has posted three straight readings below the 43-mark until 2023’s October (40.8), November (42.8) and December (42.5, light green line).

Separately, the Equipment Leasing and Finance Association (ELFA) publishes a countercheck – a quantitative monthly leasing and finance index (MLFI-25) from 25 companies representing a cross-section of the equipment finance sector. Three names among them with which you may be familiar include Bank of America Global Leasing, M&T Bank Corporation, and U.S. Bank. ELFA explains that the “MLFI-25 is the only near-real-time index that reflects capex, or the volume of commercial equipment financed in the U.S.” This complement to Durable Goods and the Institute for Supply Management manufacturing survey helps “provide a complete view of the status of productive assets in the U.S. economy: equipment produced, acquired and financed.”

Thus far in 2023’s final quarter, the MLFI-25 shows New Business Volume declining at a -14.5% year-over-year rate (red line). The pandemic aside, the move is well into Great Recession territory. Deteriorating credit conditions through higher charge-offs substantiate the notion that disinflation that hits the capex cycle is far from being exhausted (average losses, inverting light blue line).

Complicating matters is the overabundance of easy money that flowed throughout the year the current administration let Fed Chair Powell swing in the wind, during which “transitory” did not die a timely death. In March 2022, as reported by Bloomberg yesterday, the SEC began to clamp down on special purpose acquisition companies, or SPACs.  Two months later, as Wall Street distanced itself from the dirty business that’s since morphed into $46 billion in investor losses, and after a year of speculation that Lael Brainard might succeed Powell, the U.S. Senate confirmed the current chair with a thumping 80 votes. Today, e-commerce retailer Parts ID was the latest to fall in the SPAC-backed cyclical space. The automotive aftermarkets parts seller went down in flames with $18.7 million in assets and $55 million in debts. Can you blame executives for being hesitant about making new investments and trusting in valuations amidst an excess of minefields in their midst?

Posted in Daily Feather.