History, Inflation and an Average Rally

By Jeff Kelly on August 12, 2022

I had a terrific Professor in college, Michael E Parrish. He was Chairman of the history department at UCSD. He was brilliant and even better he was very, very cool. My favorite book of his was The Hughes Court. Felix Frankfurter And His Times is a close second.

I had one of his classes every Monday, Wednesday, and Friday at 11:00-12:00. The best part of class was Friday’s session would also include an invitation to a local pub to further discuss the historical topics of the day.

I vividly remember one pub session where we discussed the potential for emerging countries to grow and prosper as the United States had done. We discussed the potential for Japan and China. The consensus among the students was Japan could develop better and faster because they had the rule of law. China, a communist country, couldn’t possibly keep up.

Professor Parrish said he agreed with our assessment, but we were leaving out the possibility that one or both countries could change their governments. One could become more capitalist. Or one could become less dependent on the rule of law. Laws could be changed in Japan to give more control to localities. China might allow the historical ingenuity of their people to develop business within a framework of communist rule.

We couldn’t conceive countries changing that much. We were American college students, with virtually no experience at a significant change in government. Then a kid from Iran started to speak. The prior year he was studying in America with his home still in Iran. One day he couldn’t reach his family when he called. Soon the news of the Iranian revolution broke. He hadn’t been home or spoken with another family member since that day. To his knowledge several of his family were killed and some were in hiding. It was an emotional address. He assumed his future would be as his experience had been. Then the world turned upside down.

I thought about that young man a lot lately. We’re complacent these days in America. Voices advocating violence are all around us. The rule of law needs to prevail. Somewhere along the way some have confused allegiance to country and law with allegiance to party and individuals. The country and the laws need to prevail over parties and individual politicians. Even the laws we don’t agree with. The character of folks is most evident in defeat, not victory. Sometimes you lose. Studying history is valuable. The key is to study it all, not just the parts with happy endings. The losses and the wins.

The markets are not viewing anything as a problem these days. We have said the reaction to the news is more important than the news. Over the past couple weeks even bad news isn’t bad or it isn’t bad for long.

Inflation news has been better than prior months but only modestly so. A large semiconductor company issued an earnings warning prior to the market open on Tuesday morning. As you would expect it sold off almost 10%. However, by Thursday it had recovered most of the decline. The market is ignoring the comments from Fed officials and the likelihood of earnings declines in the third quarter. Can it continue? The markets can do anything. Maybe it’s the start of a new bull market. That’s not our view. We think history is a good guide. For the country and the markets. The signs of trouble are present in both for those willing to look. The difference is markets do go up over time. Countries sometimes don’t recover past glories. Ask the folks from Rome or Troy. The answers are all in history.

CHARTS FROM THE WEEK PAST

The Equity markets rallied quite a bit on the Producer Price Index Wednesday showing a decline.

The chart below shows the CPI-PPI divergence at its highest level since 1973. This simply means the gap between what these two tell us will narrow. Likely by a convergence of the two. PPI up, CPI down.

Some things are picking up, unfortunately it’s inventories and margin pressure.

The cost of living is squeezing many.

It’s been a very nice rally but it’s about average for a rally in a bear market.

China’s carbon emissions now exceed all developed nations combined.

Advance/decline line moving with the market.

We need more from this to consider a longer-term bottom in place.

The introduction of chemicals has led to higher farm yields, much higher yields.

No matter what the ESG folks would have you believe.

The UK has some tough going ahead.

Financial conditions can’t continue to tighten if the rally in equities is to continue.

Firearm Deaths.

The leading cause of death in many age categories.

Suicide leads the way for firearm deaths.

Maybe it would be worth some time and energy from Congress and the media to address this issue.

If you are a billionaire buying an NFL team this can lead to many billions more.

Flows still moving to safe assets over risky assets.

We are starting to hit the weakest part of the 4-Year Presidential Cycle.

Bond and Currency volatilities remain elevated while equities have broken support.

Inflation is considered the biggest problem by small business.

Productivity has suffered over the last year.

The producer price index had a nice decline.

Let try to get a few in a row.

The anti vax movement could now give polio a chance to come back.

Stupid, sad and part of the anti-science campaign being waged against America.

More price drops than at any time since 2015.

Median Sales Price drops 8.5% year over year.

Online retail keeps changing.

German bonds see the biggest range since the Euro debt crisis.

They have covered some shorts but are nowhere close to long yet.

Someone is pocketing the difference.

Refiners via the crack spread.

Car dealer inventories are still too low, prices are still lower relative to used cars.

Seems wrong.

U.S. Freight Transportation index working it way higher.

The box size below represents the contribution of components of the inflation report.

July a mirror image of June.

Service sector inflation month over month annualized at 4.13%.

Better.

90% of all trading days this year have seen over a 1% range.

You don’t usually see this group trade together.

Fewer stocks at a 20-day high than when the market was lower.

Curious to say the least.

No huge outflows yet.

Lots of stories about “the new bull market”.

More likely a new market in “bull”.

WEEKEND HOMEWORK

Russian prison camps. These are not our friends.

‘Absolute evil’: inside the Russian prison camp where dozens of Ukrainians burned to death

This isn’t hyperbole. Compare Hitler’s comments on race mixing in 1925 & Viktor Orban’s comment on race mixing in 2022. This has become accepted now. We can pretend it doesn’t matter & watch it grow. Or fight. You can’t compromise with hate. Pick a side.

“No more than Nature desires the mating of weaker with stronger individuals, even less does she desire the blending of a higher with a lower race”

Adolph Hitler 1925 at Party Rally-wildly cheered by Nazi party members

“This is why we have always fought: we are willing to mix with one another, but we do not want to become people of mixed race.”

Victor Orban at CPAC 2022-wildly cheered by attendees

Interesting article on a company that represents 8% of the S&P 500. Not a typo…8%.

Apple robbed the mob’s bank, part 3

UK container port set for a strike.

UK’s busiest container port set for eight-day strike

You can be a capitalist, I am, and realize the carried interest loophole is easily the stupidest tax policy ever invented. This allows private equity folks, among the highest paid in the world, a capital gains tax rate on ordinary income.

How the Private-Equity Lobby Won – Again

The ‘reunification’ or invasion of Taiwan is now apparent for the world to see. Today, the Chinese ambassador to France ?? made a public comment saying that after China ‘reunifies’ Taiwan, the Taiwanese people will immediately undergo ‘re-education’.

America’s system for the disabled is nearing collapse. Surely this is more important than political posturing.

‘People will die waiting’: America’s system for the disabled is nearing collapse

Family separation is simply wrong. There is no reason, none. It’s America, we don’t do this sh@#$.

The secret history of the U.S. government’s family-separation policy

Shreyas Doshi is a startup advisor who has formerly worked in the product teams of tech firms like Stripe, Twitter, Google, Yahoo. He regularly writes about product, strategy, org psychology, leadership, and life! 

Infinite Loops | Shreyas Doshi – Making of a Great Leader (EP. 118)

Erik Townsend and Patrick Ceresna welcome Charlie McElligott to MacroVoices. Erik and Charlie discuss:

• Perspectives on the recent sell off
• The next Fed pivot – does it have to be dovish?
• Fading expectations of the Fed rate cut in spring ‘23
• Consolidation of August rally and where it’s headed next
• How to navigate increased volatility
• Why Gamma is the most important flow

MACROVoices | #336 Charlie McElligott: Is There Another Shoe To Drop For Equities

Life is short. Let’s make this weekend count. Call an old friend, hug a loved one, help make the world a better place with a simple act of kindness. We can make a difference. See you next week.