Intelligence Briefing Takeaway — 5.14.22

The collective Street has its eye on the wrong ball. The short-term conclusion – that an excess of cash among individuals and corporations combined with credit card spending – will be sufficient to support economic growth embodies superficial analysis. At $1.15 trillion, aggregate savings are at their lowest since July 2019 when savings were $1.14 trillion. If you prefer to view the data through the prism of savings as a percentage of disposable income, this metric averaged 7.6% in 2019 and peaked at 33.8% in April 2020 when the CARES Act direct deposited to Americans more money than the government had ever handed out like so much candy. March 2022’s 6.2% is the lowest since 2013. With essentials inflation running rampant, it’s misleading to suggest that the record surge in credit card spending reflects confident households splashing out on services spending. Real time data via Morning Consult show that while spending on gasoline is up 9%, that directed to airfares and recreation has fallen by 15% and 21%, respectively.

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QI PORTFOLIO STANCE

More than any time in postwar history, U.S. politics dictate economics.  Credit was already compromised when the pandemic hit. Rather than be capable of going at it alone as the Fed did post-GFC, a combined monetary and fiscal response was required but likely misallocated too universally, over-leveraging the COVID-induced supply-shock inflation. Post-pandemic, the under-appreciated risk of the debt limit, budget resolution, and removal of direct fiscal support and the resultant depleted tax refund flows for households should act as anchors on long-maturity Treasury yields. A flattening bias underlies the building stresses on household finances as the global and U.S. economies return to their pre-pandemic trajectories. 

QI QUICK QUILL CALLS

•  Post-pandemic, the under-appreciated risk of the debt limit, budget resolution, and removal of direct fiscal support and the resultant depleted tax refund flows for households should act as anchors on long-maturity Treasury yields. A flattening bias underlies the building stresses on household finances as the global and U.S. economies return to their pre-pandemic trajectories. [5/3/2022]
• With the risk that China slides into recession in the current quarter and given the record breaking run they’ve had, we think the long commodities trade is long in the tooth. The caveat is that soft commodities could see further upside depending on the vagaries of Mother Nature. We’d rather not stay until the very end of the speculators’ party. [5/3/2022]
• Advertising metrics are getting toppy. The cycle-tracing M&A deal count in the advertising industry is showing susceptibility to gravity. We are sellers of risk-on rallies.  [4/20/22]
• As the Fed tightens, already anemic liquidity gets tighter and asset price volatility rises. Though momentum & technicals clearly favor stocks into April, vis-a-vis the MOVE, the VIX looks increasingly inexpensive. Look to build VIX entry points when stocks are in blind rally mode. [4/5/22]
• With affordability already pinched, the threat of tighter Fed policy could sideline more would-be vehicle buyers. Given a lack of pending stimulus and rampant inflation in essentials, a demand shock is unlikely to be cured with a return of zero financing. Fundamentals suggest downside for the auto sector. Auto Retailers in particular, who’ve reaped huge gains are likely to see those go into reverse. [3/24/22]
• With record low cap rates pushing 2%, half of 2007's prior record, if you own anything in CRE, even Industrial, sell and sell now.
• Supply-chain inflation is cresting, while wage inflation threatens to persist. Now is a good time to reduce long exposure in TIPS positions.

ON QI'S RADAR

 We anticipate entry points to step into longer-dated maturity Treasuries given the risk that Germany and China are sliding into recession with the U.S. not too far behind. [5/3/2022]
• We are at or near a top in Consumer Discretionary inflation.  High prices are already forcing consumers back to mean purchasing levels.  Debt accumulated to avoid any near-term pain will also hamper near-to-medium-term spending. [3/12/2022]
• Many of late have called for the dollar’s demise.  QI is of the opposite view. ‘Sell the news’ this week notwithstanding, as global money supply shrinks a scarcity of US Dollars is likely to ensue driving the relative value higher medium-term.  Calls for the Dollar’s structural demise fail to see two basic tenants of a reserve currency: 1) a reserve currency must be running a significant trade deficit (i.e., people want to be paid with it) and 2) the reserve currency must allow OUTFLOWS from their country.  Neither of those things are on the horizon for China and Europe is on the precipice of war. [3/14/2022]
• Be mindful of rampant corporate credit creation in a higher cost environment. More spread widening is likely on offer.