This week, we transcribed an interview (interrogation) by the advisory team. It’s meant to act as a summary piece on some of the more pressing issues at the moment.
Just two quick topics to discuss today…
The Personal Consumption Expenditures (PCE) price index rose 5% in December from a year earlier after increasing 5.5% in November. Core PCE rose 4.4%, the slowest rate since October 2021.
The PCE is the Fed’s preferred measure of inflation, and it only confirms what we’ve already discussed. Inflation is coming down.
Also, note that the PCE is materially lower than the CPI. Since the Fed uses PCE more than CPI, that would imply that we are a lot closer to its 2% inflation target than what much of the punditry has implied.
But as discussed in the interview piece I’ve attached, inflation is a money supply problem. There’s still a ways to go before the pig makes its way through the python.
Lots of debt
The interest expense of U.S. government debt rose to $766 billion over the last 12 months (per Charlie Bilello’s blog). That’s an all-time high, and if it continues, Mr. Bilello points out that it will soon surpass Social Security to become the largest line item in the Federal Budget.
Sounds pretty scary, right? Before the urge to pack your bags and move to Canada overwhelms the senses, here’s an excerpt from Bloomberg earlier this morning:
Each of the Treasury auctions this month was awarded at a yield lower than expected based on pre-sale trading, known as “stopping through” — meaning that demand was strong. Primary dealers (who are obligated to bid) in Thursday’s $35 billion offering of seven-year notes picked up just 6.1% of the securities, the smallest in any Treasury note or bond auction in data going back to 2003.
Primary dealers are big financial institutions that have special status with Uncle Sam, requiring them to put out a bid on all government debt sales. They basically act as the conduit between the government and its citizens.
Primary dealers like J.P. Morgan put a bid in to buy debt directly from the government, and if their bid is attractive to the Treasury, they get an allocation. Then, JPM turns around and sells that debt to clients and other parties for a spread (a.k.a. “market maker”). Or they keep it on their books for whatever reason.
The point here is that primary dealers only got 6.1% of this allocation, the smallest they received since 2003. This is an auction process, meaning someone else wanted this debt more than the primary dealers in the U.S.
Here’s where the demand is coming from…
“Every single Treasury auction so far this year has gone incredibly well and the interest is coming from foreign buyers,” JPMorgan Asset Management fixed-income portfolio manager Kelsey Berro said on Bloomberg Television. “So for those who think that the debt ceiling is scaring away that foreign interest, we’re not seeing that yet.”
If I had to guess, the rest of the world is anticipating the Fed pausing very soon, and they are trying to lock in yields today that nobody has seen on risk-free securities in 15 years.
Perhaps we should be thinking the same way for our clients.
The Financial Times has a great chart below showing that the number of swear words on corporate earnings calls has risen steadily.
I’m not sure if there’s anything actionable here, but clearly there is comedic value. I remember my days on the sell-side when we would listen to all these useless quarterly calls from management and then write countless reports on our findings that also provided zero value (garbage in, garbage out).
Every once in a while, a CEO would lose it and go off on someone, and it would be amazing. Sort of like Jeffrey Skilling back in the day (audio is not safe for work). So much that it was really the only reason why we never wanted to miss a call, even though 99.99% of them were a waste of time.
Said another way, earnings calls are a lot like soccer. We endure them because when there’s a score, the excitement is amplified due to the other 89 minutes and 59 seconds of pure torture.
Enjoy the weekend…
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