The Boock Report

We finally made it! Yesterday we saw the last bond in the Bloomberg Global Aggregate Index of Negative Yielding Debt that was yielding below zero to move to zero so there is now NO bonds with a maturity more than 1 yr with a negative yield. Good riddance but we now have to deal with the popping of this epic sovereign bond bubble.

$ Amount of Negative Yielding Debt

I’ve disagreed with just about every macro opinion and monetary policy stance of Neel Kashkari since he took over as president of the Minneapolis Fed in 2016 and 2023 is starting off no different after he gave an inflation apology speech yesterday titled “Why We Missed on Inflation, and Implications for Monetary Policy Going Forward.” He argued that the inflation we saw over the past two years was similar to ‘surge pricing’ that we see with ride sharing companies, which I agree is a pretty good analogy. But, he then goes on to say, “And this is key to our miss: The inflation in this example is not driven by the two primary sources that traditional Philips-curve models used by policymakers, researchers, and investors consider: 1)labor market effects via unemployment gaps, and 2)changes to long run inflation expectations. In these workhorse models, it is very difficult to generate high inflation…From what I can tell, our models seem ill-equipped to handle a fundamentally different source of inflation, specifically, in this case, surge pricing inflation.” So, he just blames it on the econometric models and also wants to raise the fed funds rate to between 5.25-5.5%. 

It however doesn’t take an economist degree, a PhD or even a class in Economics 101 to understand that when the federal government spends $5 trillion over two years (about 20-25% of the US economy at the time) and its central bank finances most of it by buying the bonds used to pay for it, that we’re going to most likely have ‘surge pricing’ inflation and realize it then, not after the fact. 

My point here is not to ridicule, again, Neel Kashkari, but to highlight the need for central bankers to not ALWAYS rely solely on their faulty econometric models and instead throw in some human nature common sense sometimes. With inflation now rolling over and job growth clearly slowing, some of that non-econometric model thinking is needed so they don’t now overdo it on the tightening side. I’ll say again, just keeping rates higher for longer is itself a continued form of monetary tightening because of all the debt that will be refinanced each and every month at this higher level of interest expense after 15 yrs of ultra cheap money where all the maturing debt was priced off. 

Speaking of one of the two most interest rate sensitive parts of the US economy, that being autos, Wards said December vehicle sales out yesterday totaled 13.3mm at a SAAR, 100k less than expected. That’s down from 14.1mm in November but above the inventory starved situation in December 2021 when sales came in at just 12.44mm. Inventories are still not where they were (measured by days of inventory) pre-Covid, and might not ever get back because of a new industry approach, but they have dramatically improved. The problem now though more so is the faltering demand side. 

The few remaining PMI’s were reported in Asia. China’s Caixin services PMI for December remained below 50 not surprisingly but did rise to 48 from 46.7. Again, this is old news and in Q2 will improve dramatically. Hong Kong’s PMI rose about 1 pt to 49.6. 

The surprising disappointment was in Singapore where its PMI fell under 50 at 49.1 from 56.2. S&P Global said “The issue of deteriorating demand that had plagued many neighboring Asian countries has likewise set in for Singapore, albeit at a marginal level. The downturn in demand not only affected firms’ willingness to accumulate inputs and labor, but also shifted the pricing power away from businesses as indicated by the fall in selling price inflation even as input cost pressures mounted.” As China fully recovers this year, the Asian economies should be a huge beneficiary of that and I repeat that Asia will be the most vibrant economic region in the world this year and in turn will help parts of Europe, like Germany, that do a lot of business with them. International stock markets will thus again outperform the US as will their currencies. 

After Spain, Germany and France reported moderating inflation over the past few days, albeit helped by energy price caps and still are very high prints, Italy said its December CPI was up by 12.3% y/o/y as expected but European bond yields are little changed. While we’re likely going to see continued moderation in inflation in the coming months (in part depending on where energy prices go), the ECB is still so far behind that they will continue to hike and will initiate QT in Q2.