The Timber Log – 9/20/22

by | Sep 20, 2022 | The Timber Log

The Timber Log is a quick overview of Timber Point Capital’s most recent investment thoughts. If you have questions about the content, please reach out to Patrick Mullin. The information contained herein does not constitute investment advice or a recommendation for you to purchase or sell any specific security.

CPI Inflation figures – rental prices for shelter and food now the main culprits

  • Core CPI suprises to the upside…shelter rental (OER) and food are primary culprits
  • OER lags home prices by 12 – 18 months and is 33% of CPI…will be elevated for awhile
  • According to Nat’l Assoc of Realtors (NAR), existing home prices fell for 1st month in July
  • Some CPI components are now in decline m/m – gasoline, rental cars/trucks and airline fares
  • “Putin price hike” talking points dispelled…gasoline prices have declined for past 12 weeks
  • Ironic that Inflation Reduction Act ceremony held on same day CPI released…golf clap please
  • At 8% annualized, inflation is essentially taking one month of pay out of workers pockets
  • 75bps coming our way this Wednesday; ZIRP to 3% fed funds rate in 6 months…
  • Interesting that a number of spectators (Musk, Gundlach) calling for 25bps…recession fears
  • Yield curve inverted on 2/10’s, has been harbinger of recession in the past
  • All eyes on PCE report 9/26…this is the Fed’s preferred inflation tracker

 

PPI figures give a bit of respite on inflation – market shrugs it off

  • PPI report shows input prices down .1% m/m…up 8.7% y/y vs 9.8% in July…lowest since 8/21
  • Goods price increases down 1.2% while wholesale services increase by .4%…
  • Goods decline largely led by lower gasoline prices, down -12.7% m/m
  • Services inflation continues elevated trend as post-Covid consumption normalizes back to services
  • Recent FedEx report consistent with 2nd month of negative m/m results in transport/warehouse services
  • Why care? PPI prices feed into consumer prices, provide window on overall pricing in economy
  • Factset Earnings Insight estimates 3Q22 revenue growth of 8.7% vs. earnings growth of 3.7%…margin pressures continue

 

QT (quantitative tightening) ramps up…watch the “excess reserves”

  • An analysis of the monetary base provides look at how QT is currently being accomplished
  • Monetary base mirrors the balance sheet of the Fed…to buy bonds (assets), Fed prints money
  • This money circulates in the economy or is used as reserves against deposits to make loans
  • Surprisingly, since 12/21, Fed has lowered monetary base by $1 trillion, down 14%
  • Yet inflation remains high, how does this square with inflation as a monetary phenomenon?
  • Money in circulation is unchanged, entire reduction is from reserve balances
  • Reserves are required to back deposits…but deposit levels in economy have not changed
  • Thus, actual reserves could not have not changed…implies reduction in excess/idle reserves
  • QT has been removing excess reserves, has not had impact on money supply or credit creation
  • However, QT impact will be felt…slow at first and then accelerate with negative yield impact
  • Less excess reserves puts economy at greater risk in times of crisis
  • Let us know if you would like a copy of Victor Canto’s deep dive on excess reserves

 

Revisiting the Consumer…how is spending holding up in spite of inflation prints?

  • August Retail and Food Services rose .3% m/m and 9.1% y/y…consumer spend remains healthy
  • Increases in motor vehicles/parts of 2.8%, building materials/garden and food services up 1.1%
  • Declines in Furniture/furnishings down -1.3%, gasoline stations -4.2%, nonstore+ retailers -.7%
  • Interestingly, online sales were down -.7% as consumers do more “on site” purchasing…further evidence that purchases of online goods giving way to in person services
  • Employment outlook is still positive for the consumer…more jobs than job seekers and Initial Unemployment Claims, a leading indicator, remain subdued
  • Average hourly earnings are running 6%, up 2x vs. pre-pandemic levels…though on inflation adjusted basis, “real” earnings are declining
  • Personal Savings levels have declined from Covid related stimulus but still healthy and in approximate range of 2010 – 2020 levels, are above 2000 – 2010 levels
  • Household debt, both housing and non-housing, continues to grow, totals $16 trillion, up 10% from pre-Covid levels
  • Household debt service as % of disposable income has trended up from Q21 multi-decade level low of 8.3%, now at 9.5%…still below prior decade level of 10%+
  • If we are entering, or already in a recession, the consumer is in a better starting position with still strong employment prospects, higher personal savings and less debt relative to income than in Financial Crisis era…

 

David Cleary, CFA is the President and Chief Investment Officer at Timber Point Capital Management, LLC. Prior to founding TPCM, David served as the Chief Investment Officer at Crow Point Partners. Before Crow Point, Mr. Cleary spent 23 years at Lazard Asset Management where he held a series of senior portfolio management roles over multi-asset and global fixed income strategies. Additionally, he served as the firm’s global head of fixed income, a $26 billion platform. Prior to Lazard, David worked at UBS and IBJ Schroder, mostly in fixed income asset management roles. He began working in the asset management field in 1987 upon his graduation from Cornell University, with a BS in Business Management and Applied Economics. Mr. Cleary holds a Chartered Financial Analyst (CFA) designation.

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