Kurt Warner never suffered from triskaidekaphobia. He donned the number 13 jersey from his quarterback era as a Panther at the University of Northern Iowa to the Arena Football League’s (AFL) Iowa Barnstormers and his 12-year career in the National Football League (NFL) with the St. Louis Rams, New York Giants and Arizona Cardinals. During his first season as an NFL starter, Warner led “The Greatest Show on Turf” offense to the Rams’ first league title in Super Bowl XXXIV, earning him league and Super Bowl MVP honors. Warner’s Cinderella story is remarkable as he was the only undrafted player to be named NFL MVP and Super Bowl MVP in addition to being the only undrafted quarterback to lead his team to a Super Bowl victory in his first season as the primary starter.

Of course, Hollywood got in on the action! Warner’s biopic American Underdog, was released on Christmas Day 2021. It’s an uplifting, inspirational true story that demonstrates that anything is possible when you have faith, family, and determination. Before his climb to stardom, Warner was released by the Green Bay Packers after a tryout in 1994. He needed all that support when he was a stock boy at a Hy-Vee grocery store in Cedar Falls, Iowa making $5.50 an hour.

Speaking of stocking shelves, in the spirit of Channeling Kurt Warner, yesterday’s advance U.S. retail inventories data also saw an extraordinary spike in December. The 4.4% gain registered in the last month of last year was the largest since the 1967 inception of this data series. Of the $27 billion absolute increase, $10 billion was accounted for by motor vehicles and parts and the other $17 billion was spread across the non-auto retail space.

December’s one-month wonder didn’t explode in a vacuum. During 2021’s fourth quarter, retail inventories were progressively built up: November was faster than October’s rise; December was well north of November. Over the course of the autumn quarter, retail inventories posted nearly a 30% annualized jump (green line), qualifying for the “U.S. Economy’s Hall of Fame” (wink-wink, nudge-nudge).

Levity aside, the record restocking by retailers should be viewed through a contrarian lens. This fundamental indicator is now clearly overvalued, and the asymmetry of risk points in one direction: down. The same goes for one step up the distribution chain for U.S. wholesalers who yesterday reported a 28% annualized increase in inventories in the three months ended December as well. Bulging supply is an indication that future output is more likely to decelerate or decline, building conviction for the risk of an industrial recession in the States.

So how does our close trading partner to the north, Canada, play a part in this narrative? Industrial supply chains are linked most closely in regional blocs across the globe. Asia has China while Japan and South Korea play their respective parts with smaller Asian nations. Meanwhile, Europe has the whole of the Euro Area and emerging Europe as an interconnected network.

In North America, there’s this understood tight knit relationship between the U.S., Canada and Mexico. It’s a given that the biggest buyer in North America is the U.S.; its export channels north and south of the border feed the narrative.

As for forward guidance from Canada, look no further than its manufacturing purchasing managers’ index (PMI). The uniqueness of Canada’s PMI is that it breaks down manufacturing activity by the type of production – intermediate goods, investment, and consumer goods. For the purpose of this analysis, let’s zero in on the last one that matters because it informs the North American auto sector, a vital cyclical industry.

The inversion in the consumer goods demand-supply (new orders-inventories) spread in December (red line) implies that industrial output in Canada for these kinds of products is set to slow in the first quarter. That translates directly to Canada’s export channel that feeds the U.S. wholesale and retail sectors. The PMI is hinting at a further compression in Canadian auto exports (blue line), most of which land inside U.S. borders. The much tighter relationship that’s unfolded in the last two years between the consumer goods new orders-inventories spread and auto exports implies higher conviction for an industrial slowdown impulse to cross the border from the north.

Now for a lesson in GDP (gross domestic product) math. What’s important to take away from the above analysis is that U.S. inventories have reached an inflection point. Since inventories are entered into GDP as a change from one quarter to the next, a smaller supply build (e.g., from $100 billion to $50 billion) detracts from growth (-$50 billion in this example).

This is how the industrial recession will first manifest — as a significant inventory adjustment. PMI data will reflect this. Watch for the risk as soon as next week’s ISM report, whose middle name, by the way, is ‘supply’.

What about U.S. auto demand? Just like Kurt Warner didn’t get fooled by defenses, we caution not to get too bulled up about any upside surprise in U.S. vehicle sales in January. Cox Automotive notes in its outlier bull call for a 15.3 million seasonally adjusted annual rate (SAAR vs. 12.6 million consensus) that most of the January improvement will be due to seasonal adjustments.

The pace of the raw, underlying not seasonally adjusted new vehicle selling rate should remain stuck in a range (1.0 to 1.2 million). In mid-January, the University of Michigan noted that attitudes toward discretionary purchases like autos remained depressed as all-time record numbers of consumers complained about high prices. Stagflation, anyone?

In March 2021, Ramiro Alanis, the Florida-based super fan, broke the Guinness World Record for the most cinema productions attended of the same film after watching Avengers: Endgame 191 times! Dr. Gates’ son reminds him that Endgame is a unit of measure; the final to Marvel’s epic Infinity Saga has a running time of exactly three hours and one minute. Any three-hour event, be it a plane ride, train excursion or road trip, is anchored by how many Endgames it takes to arrive. As for Alanis, his feat took a whopping 573 hours to complete, consecutively, but spread out over 94 days. Alanis saw it five times on the opening weekend in April 2019 and went on to watch it twice on weekdays and four or five times on weekend days. Understandably, he conceded that his social life suffered — he stopped going to the gym and lost 16 pounds of muscle. But it was worth it as the previous record-holder watched Avengers: Infinity War a wimpy 103 times.

Binging isn’t reserved for sloths. Couch potatoes with a La-Z-Boy recliner in their family room give countless Americans license to spend unchecked. The set up for such a situation occurred in the first quarter of 2021 when the U.S. government’s printing press was working at a breakneck pace – measured in Endgames – cutting stimulus checks on top of tax refunds to the tune of a sizzling $643 billion in cash flow from the U.S. Treasury. From that point forward, the fiscal support (green bars) subsided quickly. The binge buying supercharged U.S. retail sales to the tune of quarterly annualized gains of 37.3% and 28.7% in the first and second quarters of 2021. Nobody called Guiness, but these back-to-back quarterly advances were unprecedented events of economic largesse.

Any spending bender of historic proportions is not going to be completely funded by U.S. taxpayer-funded cash. Consumers willingly whipped out the plastic given the presumption that their cash flow would follow along an upward trajectory. No doubt, this expedited the speedy recovery in underwriting credit card borrowing. From March 2021 to November 2021, revolving credit on a six-month annualized basis transitioned from a -3.5% decline to a 13.3% advance (yellow line), the strongest credit card impulse observed in 20 years.

Based on the proximity of the deposits from the U.S. Treasury, it was surprising to learn that the 2021 credit card binge was not concentrated in the spring or summer. Sure, July’s $17.5 billion single-month increase was a hefty debt load to pile on midsummer. However, it was the bills rung up in November — $19.8 billion to be exact — and at $36.2 billion, the three months ended November, that put a timestamp on this rampage that the trend was back loaded as opposed to front loaded.

We raise this calendric detail because soft-data forward guidance for spending has rolled over as 2021 has transitioned to 2022. Households have segued being less optimistic about their short-term financial prospects. To wit, income expectations over the next six months fell to a net 4.3%, measured by the spread of those anticipating an increase compared to those calling for a decrease (light blue line). Crucially, this wasn’t a one-month disappointment. Consumer caution about take-home pay has been rising since the post-COVID high reached in June. Moreover, momentum for income expectations has done an about face. The six-month change in income expectations fell from its high point in July to contraction territory over the last two months. At -6.9, the January reading was the worst since August 2020 (red line).

The juxtaposition of an accelerating credit card trend against deteriorating income prospects speaks to the emerging risk of household balance sheet stress. In past cycles, divergences of this magnitude occurred in late-cycle economic phenomena prior to the 2001 and 2007-09 recessions. A continuation of increasing discretionary debt and worsening income expectations would raise the vulnerability meter on the U.S. economy’s growth prospects.

And here we find ourselves today. The inflation shock of 2021 gets a good chunk of the blame for higher credit card bills. Furthermore, the higher usage per se is endemic just because it’s more expensive to live. It would be infantile to claim that last year’s price pressures were centered solely on energy prices, offshoots of past oil shocks. Instead, the hit to purchasing power was more broad-based, especially the run-up in prices for essentials that are unavoidable in a typical household budget.

In turn, surging inflation expectations found themselves conjoined with rising interest rate expectations in the Conference Board survey. These pollsters have been tallying consumer views on inflation and rate outlooks since 1987, the year the Greenspan Put was born. What happened in 2021, however, was unmatched over any time since the survey inception. That’s depicted in the right chart, which depicts the one-year rolling correlation of inflation expectations to higher interest rate expectations (purple line). From July to October, the relationship became so tight as to push the correlation over .9 for the first time ever.

It’s clear from these peak correlations that Americans sniffed out the Fed’s policy pivot in 2021’s summer and early fall. The capitulation presumably arrives at 2:00 p.m., when the Fed statement hits and again at 2:30 p.m., when Powell explains himself. Households anticipated the rate rises which can only cut further into purchasing power, diverting more purchases to the passing fancy of plastic purchases.

“He’s taking a pretty big lead out there, almost daring them to try and pick him off. The pitcher glances over, winds up and it’s bunted. Bunted down the third-base line. The suicide squeeze is on. Here he comes, squeeze play, it’s gonna be close. Here’s the throw, here’s the play at the plate. Holy cow, I think he’s gonna make it!”

R.I.P. Meat Loaf. But his music will live on. This excerpt from the timeless rock opera “Paradise by the Dashboard Light” off the 14 times platinum Bat Out of Hell album was delivered by legendary Yankees shortstop, Phil “The Scooter” Rizzuto. We do want to clarify any ‘confusion’ that Rizzuto often claimed to not get the innuendo behind his part of the song about teenage lovers in a parked car. In 2007, Meat Loaf told ESPN, “Phil was no dummy – he knew exactly what was going on, and he told me such. He was just getting some heat from a priest and felt like he had to do something. I totally understood. But I believe Phil was proud of that song and his participation.”

“Stop right there…!” Ellen Foley, who sang the duet with Meat Loaf, blasted out that next line immediately following The Scooter’s recording. That was what resonated after seeing January’s IHS Markit’s U.S. Flash PMI (purchasing managers’ index) yesterday.

A quick glance revealed the authors dismissed the disturbance in the data as an outlier tied to Omicron. The implication: A bounce back is imminent and inevitable. With deference where due, surprising weakness is still just that until proven otherwise. To take but one example, we find nothing aberrant in Markit’s manufacturing output index plumbing a 19-month low of 50.3. At 49.6, it would be equally superficial to shrug off the factory sector’s employment index posting its first contraction since July 2020. Backing the need to employ fewer warm bodies to work down backlogs were…backlogs which have posted a four-month cumulative compression of 8.1 points, the magnitude of which was seen in the last two recessions.

The Street knows that IHS Markit’s business survey data has long played second fiddle to the longer running ISM (Institute for Supply Management) report. We happen to be partial to the series given it reflects broader macroeconomic breadth by casting a wider net. Moreover, another entity under the IHS umbrella produces a GDP tracking model that’s best in class gauging the current quarter’s growth momentum.

Formerly known as Macroeconomic Advisers, the group’s crack economists cut their 2022 first-quarter gross domestic product estimate by four-tenths from 2.4% to 2.0% following the Flash PMI’s release. Contrast that with Bloomberg’s 3.0% consensus. Per IHS, the 50.3 print was the lowest since June 2020 and, “indicative of less goods GDP in January than was implicit in our previous GDP tracking for the first quarter.”

Dr. Gates reached out to the team and discovered that this metric is used as a check against their own goods GDP model, especially when there are outlier moves. What’s unique is the seldomness of this manifestation – as relayed, the economics team can count on one hand the number of times the PMI changed their tracking. That’s unusual and significant all at once.

Omicron or not, top-line growth is slowing abruptly to kick off 2022, driven by the cyclical industrial sector which casts skepticism at the expected path of S&P 500 revenue growth (purple line). Short-run guidance is provided from a coincident-to-lagging comparison in the manufacturing PMI. Through January, the Production-Inventories (of inputs, not finished goods) spread posted the second inversion in three months (green line). Recall that inversions are triggered when demand runs below supply, as was the case in November and January. The expectation is that growth will slow in the near term.

Stalling industrial output implies burgeoning impediments to growth outside the confines of the factory sector. As it happens, productivity proxies suggest a downshift is in the makes in corporate earnings. The manufacturing output-employment spread (yellow line) and services business activity-employment spread (blue line) stand as illustrations to the premise.

According to analysts’ estimates collated by Standard and Poor’s, S&P 500 operating earnings per share (EPS) are poised to moderate through 2022’s second quarter and then expand at a quiescent pace through yearend 2023. The compression in productivity proxies, first for manufacturing and now more visible for services, suggests the storied soft landing in earnings is at risk and that (shockingly) analysts might be too bullish.

Granted, all eyes are on Wednesday’s Federal Reserve meeting. As we tweeted out yesterday, it wouldn’t surprise us if Fed officials had a big screen TV rolled into that massive room in the Eccles Building to watch the action these next two days. They’d be joining stock jockeys and overnight technicians who are hyped up about stocks’ history-making Monday turnaround. We too stood witness in wonderment.

As amazing as it was to watch, violent volatility cannot detract from evidence of a slowing in economic activity to a 2% annualized rate in the first quarter, within spitting distance of the longer run 1.8% growth pace. Further deterioration risks the U.S. expansion slipping below trend. That’s when the aberration of a contraction in Markit’s labor market reading becomes the norm.

“Holy cow!” Philip Francis Rizzuto, God rest his Hall of Fame Yankees soul, would channel his best radio announcer persona and tell us that here it comes, squeeze play, top line and bottom line, it’s gonna be close. From one paison to another, you ain’t kidding, Scooter.

Some roles define the actor. And then there are actors who define roles. In 1977, John Adam Belushi was 28 years old and a rising star thanks to being one of the original seven cast members of Saturday Night Live (SNL), which was in its third season. For that, he had Chevy Chase and Michael O’Donoghue to thank for pointing SNL creator Lorne Michaels to the young comedian. Fame did not find the actor, notorious for his hard partying, until the release of the movie he filmed that same year, National Lampoon’s Animal House. Produced for $2.8 million and directed by John Landis, it remains one of the most profitable movies ever made. Inspiration for the scene in which John Blutarsky, or Bluto, drove a motorcycle up the stairs was inspired by Belushi’s days at the University of Wisconsin-Whitewater. In the movie, with his beloved Delta Tau Chi Fraternity under siege by Dean Vernon Wermer, Bluto pushes pause on his Jack Daniels and indoor motorcycle ride to rally his frat brothers: “What? Over? Did you say ‘over’? Nothing is over until we decide it is! Was it over when the Germans bombed Pearl Harbor? Hell no!”

The true winning Bluto quote, as pointed out by a QI client was, “Christ. Seven years of college down the drain. Might as well join the f**king Peace Corps.” Shepherded into existence by President John F. Kennedy, Jr. in 1961, at least the Peace Corps offers the opportunity to contribute to the greater good. The choices for volunteers – Agriculture, Community Economic Development, Education, Environment, Health and Youth in Development – can all be steppingstones to careers.

A disturbing Wall Street Journal Weekend Interview with Nicholas Eberstadt, a political economist at the American Enterprise Institute and author of “Men Without Work,” revealed that millions of unemployed U.S. men have no desire to help where they can – whether it’s in their own homes or through charitable endeavors, such as the Peace Corps. Instead, they’re putting in 2,000 hours a year in front of screens – exactly what they would expend working 50 hours a week. Unemployed women also have leisurely lives, though not to the same extent.

On a personal note, my mother is a retired 37-year paralegal veteran of Social Security’s Disability Insurance program who valiantly fought blatant fraudsters. But millions of slackers succeeded. Since 1977, those collecting disability nearly doubled to 4.3% from 2.2%. As we’ve written extensively, the post-pandemic fiscal programs were economically toxic. Eberstadt concurs: “We did this limited dress rehearsal for a universal basic income. A situation for a year and a half where there were many more people obtaining unemployment benefits than actual unemployed people.”

The upshot is the labor force participation rate (LFPR) among 25-54-year-old men has slid from 96.9% in 1961 to 88.2%. One in eight U.S. men in their prime working years are idle, the culmination of a long and sad downtrend that’s been exacerbated by the pandemic and a deeper decline than what was seen in the Great Depression.

This is what economists refer to as “scarring.” Alan Greenspan taking the helm at the Federal Reserve, which kicked off an era of the Fed increasingly monetizing fiscal largesse, further pressured the long-term decline in the LFPR. The vicious feedback loop catalyzed further constricts the Fed’s capacity to tighten following cycles that poorly conceived monetary policy prolong. To that end, with a hat tip to Simplify’s Mike Green, the 2-year-forward 2-year/10-year Treasury yield curve is 4.5 basis points. With evidence of economic slowing mounting, we find it exceedingly curious that the bond market and investors have casually priced in four rate hikes in 2022 (top two charts).

Current estimates call for the 2022 federal fiscal drag to shave nine percentage points (pp) off GDP. The effect has been immediate. Per Bank of America, “Between July and December, total card spending’s two-year percent change for households that received the Child Tax Credit (CTC) jumped by an average of 5 pp between the day after and the day prior to CTC distribution…we estimate that the expiration of the monthly CTC payments weighed down total card spending growth on a two-year basis for households that received CTC by 3 pp as of January 15.”

Reflecting the prospects of economic weakening and Fed tightening, volatility (bottom left chart) has started to come unhinged. While the VIX is the most violent, rates volatility has begun to bleed into the credit markets. As you see on the lower right chart, last September’s Federal Open Market Committee (FOMC), which set the taper in train, marked an inflection point in the yield curve, the longer-maturity Treasury exchange traded fund and that of Investment Grade (IG) debt. Taper talk also decoupled the performance of IG vis-à-vis Treasuries; the former has increasingly underperformed the latter and is at its widest differential of -1.7 pp. Through this year’s first three trading weeks, IG spreads are 6 basis points wider. High yield bonds have performed even worse.

For all the bluster about rate hikes, it’s likely this week’s FOMC will focus on the Fed’s balance sheet. As Jeffries’ David Zervos notes, the optics of paying big banks interest on excess reserves are awful in today’s politically charged environment. With luck, targeting the balance sheet could also arrest the flattening in the curves. We suspect any finesse required of the Fed will prove as efficacious as Bluto teaching U.S. history.