Thoughts From The Divide: Identifying Ducks

“We only know it by its works, really”

While we may have missed getting out our Thoughts From The Divide year-in-review piece before the new year (mea maxima culpa), we did manage to spend some time going through our “best of” and “greatest hits” in anticipation of the changing of the calendar. As usual, there were some repeated themes and tropes, but at the highest level, what struck us was that last year seemed very much governed by the timeless question from the underrated philosopher of science, Whitney Houston: “How will I know?” (closely followed by her observation that “crack is whack”)

At its root, confusing the overall economic picture was the massive contrast between various areas of the economy. As we wrote on a number of occasions, interest rate-sensitive sectors were “a dumpster fire” and to such an extent that the Fed felt the need to refer to the economics of “fire sales” and the potential scale of bank exposures to CRE losses. Office deals were completed at enormous markdowns, making office mark-to-markets a potential nightmare for both owners and their lenders. In the circumstances, no one should be surprised that both parties were more than happy to plug their eyes and ears to avoid noticing any inconvenient truths about market valuations.

But at the same time, the consumer and the labor market were being described with adjectives like “impervious”, “robust”, or “indomitable”. For much of the year, the overall economy appeared unstoppable, despite the Fed’s Lilliputian attempts to cast ropes over the Gulliver-esque behemoth of the labor market, lest there be a wage-price spiral. Amusingly, referring, once again, to one of our favorite papers, “after residential investment as a contributor come consumer durables, consumer services and consumer nondurables”… “it’s weakness in consumer spending that is a symptom of an oncoming recession”.

As these counter-currents raged, and the Fed did its darndest to keep financial conditions aligned with their ostensible goals, the best advice on the state of the economy was perhaps given by Jerry P himself, who pointed out in the context of tight financial conditions, that “we only know it by its works, really”. If we extend that idea beyond financial conditions, we arrive at something akin to “if it walks like a duck…” Financial conditions are easy? Fiscal is stimulative? Bond issuance could be a problem, but Yellen and crew still seem disposed towards continuing to hit the bid on the front end rather than causing any potential indigestion for duration. While we wouldn’t want to toot our own horn too much (we didn’t exactly expect the equal-weighted S&P to jump roughly 15% in the last two months of the year), our August newsletter, “Noticing” (the previous link) seems to have caught all of the trends above and is perhaps worth a review…

All of this is to say that while you all may have a variety of resolutions going into the new year, we plan to be even more explicit about calling out the waddling and quacking we notice and will hope to do so from quite a long way away.

Thank you once again for reading, interacting, and sharing with us, and we look forward to and wish you a very prosperous 2024.

https://www.gocomics.com/calvinandhobbes/1986/04/08

Other posts

Day Hagan/NDR Smart Sector® with Catastrophic Stop Strategy February 2024 Update

BY BRIAN SANBORN
Day Hagan/Ned Davis Research Smart Sector® with Catastrophic Stop strategy, model and allocations update. Read more →

C8 Hedge – Hedge with an Edge

BY JON WEBB
We are delighted to announce that C8 Technologies is launching a systematic FX hedging platform which helps businesses easily and effectively manage their currency exposures. C8 Hedge offers corporate treasurers and investment professionals precise guidance for actively and optimally managing their foreign exchange exposures across multiple currencies, using intuitive and simple to use online tools. Read more →

NDR Fixed Income Allocation Strategy February 2024 Update

BY BRIAN SANBORN
The NDR Fixed Income Allocation Strategy, Positioning Update Read more →
Back to all posts →