There’s a vociferous debate raging in the macro community where economists, technocrats and economists employed as technocrats, are struggling to determine whether and to what extent Fed policy’s restrictive.
The question at the heart of the debate is this: If policy’s restrictive, why is the economy still performing so well and why are risk assets so buoyant?
One answer is that the equity market and the broader economy only look healthy on the surface, below which less fortunate companies and households are strugglingly mightily.
A corollary says the “haves”/”have-nots” divide both at the household and corporate level has created a situation where the neutral rate varies widely depending on who you are. If you’re a “lower quality economic participant,” as Morgan Stanley’s Mike Wilson put it last week, policy is, in fact, restrictive.
Wilson told a similar story this week, using a range of indicators and metrics to make the point. The figures below are from the NFIB survey. Small businesses, which account for most US job creation, are increasingly concerned about high rates and their pricing power is waning.
That’s a mirror image of the situation facing Main Street. “High prices are leading to a worse assessment of personal financial situations when compared to a year ago [and] the probability of consumers seeing real income gains over the next five years fell notably to cycle lows,” Wilson remarked, referring to the latest University of Michigan survey.
Needless to say, this divergence of figurative and literal fortunes is particularly acute when you compare the Nasdaq 100 to US small-caps on… well, on any metric, really, but particularly on revisions breadth.
As the figure below shows, small-cap revisions breadth is still negative in stark contrast to the NDX, where breadth’s positive and gaining momentum.
“Large-cap trailing earnings growth is pushing higher driven by rising EPS YTD and not simply due to easy comparisons from last year,” Wilson went on, noting that “large-cap, quality pockets of the market [aren’t] seeing the same degree of headwinds from still elevated rates and falling pricing power” as small-caps.
The bottom line from Wilson’s the same as it was last week and the week before that and so on. The market will likely continue to exhibit narrow leadership and a quality bias given the “haves'” immunity to elevated rates versus the “have-nots,” who’re suffering.
“In short, the policy mix is crowding out most businesses and consumers,” Wilson said. “This phenomenon is now reaching a point where it can influence the aggregate data unless policy changes significantly.”
So, daddy, our system favors the rich?
Honey, all systems favor the rich
Not that anyone will listen to me and not that I have a magic spell to make R Congress people disappear but FISCAL intervention is what’s called for here.
A week or two ago a post on here included a red downward sloping asymptotic curve about which I commented. I will comment once again. This curve, sometimes called the “ABC curve” for its connection to inventory distributions, describes the distribution of everthing in our economy. In this case it describes the distribution of have and have not businesses, as well as investors and individuals. Most of the countries wealth, income, investments, etc. are owned by the top 1%. That is a situation unlikely to change. The curve also describes our businesses, their customers, their suppliers, etc. Thos high up on the curve have the (bargaining) power, those low down, don’t. My family’s business had 10,000 customers. Ten of those provided 75% of our sales. Ninety percent spent less than $50 a year. Such it is, and IMO, and always will be. But the contents of the various piles, as it says on the box, may be subject to settling.
frredm421- yes tax policy. but if weve gone beyond the tipping point….neither employees nor politicians will stand up to their oligarch overlords.
Forgive me for only seeing things from a very personal ground-level viewpoint nowadays, but honestly the thought struck me last week that just accepting the notion of being homeless by next year and being mentally prepared for it might be my best path forward (I lived in my car for a while when I was younger, so it’s not as outrageous an idea to me as it might be to a lot of people.) I’m not being hyperbolic here. This is the best plan I’ve been able come up with, And, unexpectedly, maybe the most comforting thought I’ve had in a year. I think those of us in the increasingly hollow center are in for a ferocious couple of years… I’ve already had a ferocious year and it seems to be only getting worse.