Morning Report: Inflation rises double digits

Vital Statistics:

S&P futures4,18523.2
Oil (WTI)96.20-6.59
10 year government bond yield 2.09%
30 year fixed rate mortgage 4.43%

Stocks are higher this morning as we begin the FOMC meeting. Bonds and MBS are down.

Inflation at the wholesale rose at a 10% clip in February, according to the Producer Price Index. Ex-food and energy it rose 8.4%. Rising energy costs were the big driver of the increase and we are seeing increased diesel prices push up transportation costs, which is now flowing into intermediate goods. The Fed will almost assuredly raise rates this week, however all eyes will be on the dot plot and the new economic forecasts.

The Nasdaq officially closed in bear market territory as many high flyers are getting some air taken out of their multiples. Leaders like Netflix and Tesla have been smacked down hard so far this year. The mortgage bankers have been wrecked as well.

Sarah Bloom Raskin, Biden’s nominee just had a blow dealt to her nomination after West Virginia Senator Joe Manchin expressed opposition to her nomination. Without Manchin’s support, she will need a Republican to vote for her, and that chance is remote.

What is the issue here? Well, she wanted the Fed to take into account climate in banking regulation. In practice this would mean restricting credit to the energy industry. For example, the Fed could decide that excessive energy exposure would cause a bank to flunk its stress test, which would limit dividends and buybacks.

Note that ethical, social governance (ESG) investors are pushing energy companies to shut down production, along with a group of banks and money managers which control $60 trillion in assets via Climate Action 100+ which have refused to lend to natural resource companies. The Arizona AG is investigating this group for antitrust violations under the theory that colluding to raise prices is illegal regardless of whether it is done for profits or ideology.

The bottom line is that increasing production to counter higher prices is going to be more difficult than it was in the early 00s, the last time energy prices spiked. In normal times, the cure for high prices is high prices. That might not be the case this time around. Which means the Fed has its work cut out for it.

Mortgage delinquencies fell to 3.4% from 5.8% a year ago. “Nonfarm employment grew by 6.7 million workers during 2021, the largest one-year increase, supporting income growth and keeping more families current on their loans. Nonetheless, places hit hard by natural disasters have experienced a spike in missed payments. Serious delinquency rates for December in the Houma-Thibodaux metro area were nearly two percentage points higher than immediately before Hurricane Ida. ”

Back to the issue with energy companies. ESG investors and the big passive investors are driving corporate decision making in a way that didn’t exist even 5 years ago. To grasp the implications of this, it is important to understand the way index fund managers are paid: They are paid to mimic the index, not to pick good stocks. In other words, if XYZ corp is a dog with fleas, but the index they are matching has 2.4542% of XYZ corp, the manager will have to hold 2.452% of his or her fund in XYZ corp.

This creates something similar to what business school professors would call an agency cost. The incentives of the manager and the shareholder are not aligned. The manager of your index fund doesn’t have to care how the stock performs. Since they have no skin in the game with corporate performance they can costlessly push for things that might not be investor’s best interest. Ain’t their money. And that, folks is the “cost” of that rock bottom management fee. . At a minimum, it certainly raises fiduciary responsibility questions. If you support the ESG ideology, great, but if you don’t chances are your retirement fund does.

I have a feeling that the era of outperformance by passive fund managers is about to come to an end as the big index names get tied down with ideological institutional investors. It will become what people used to call “a stock picker’s market.”

28 Responses

  1. More proof, as if more proof is needed, that men are better at being women than women are.


    • It’s just bizarre. A dude who wears a wig and a dress and I’m not sure seriously does anything else to transition is “woman of the year”. And that’s “woman of the year” to wokesters who, every time they get a chance, jump at the opportunity to completely erase actual womanhood.

      And while there are some dudes who are pretty good at being women, this guy isn’t one of them. He’s fucking terrible at being a woman.


    • Does anybody think it matters that Biden is there, or that he will have anything whatsoever to contribute? I mean I know a lot of people feel obligated, financially or otherwise, to parrot the party line but can anybody watch Biden in action and think he has anything to contribute at all?

      The quality of whatever it was would be bad even if he was 30 or 40 years old but at present he doesn’t even bring his youthfully bad foreign policy ideas to the table.


  2. Now this is interesting as it’s both an acknowledgement of the reality of the world while also being a slap at Biden.

    Would the Saudi’s have agreed to this under Trump? It is bound to happen but I think it would’ve been delayed until he was out of office.


    • I’m not sure if we care under second term of Trump because we’d be going full speed ahead at being a net exporter of oil and natural gas. We could respond by putting a tariff on Saudi oil because it wouldn’t be a huge impact to the domestic market, with us being a net exporter, probably.


  3. “Sarah Bloom Raskin withdraws nomination to Fed board

    Raskin’s path was all but doomed after Republicans on the Senate Banking Committee boycotted her confirmation vote and Sen. Joe Manchin said he opposed her.

    By Rachel Siegel and Tyler Pager”


  4. Interesting but I have a hard time think that people are this smart.


    • It is fascinating to watch the left these days.


      • Social media. Used to be all the worst people in progressive circles had to work hard to find each other. Had to pick the right college. Subscribe to the right newsletters, which were hard. Move to the right city with the correct quasi-cult-like charismatic leader, etc.

        Now they just lift up their phone and immediately are put in touch with thousands of destructive idiots just like them, and they all stroke and pet each other for being so much smarter than everybody else.

        It’s a technology revolution on the scale of the industrial revolution and the invention of, you know, the wheel. In terms of disruptive impact.

        It will not be over with in my lifetime. I think eventually we will get to a point where we are at an equilibrium with the new communications order and a lot of what now is cheered will be recognized as addiction or emotionally destructive for the participants. Probably some rules will be set. Culture approbation will set in for what now is “what’s cool”. But it will take a while.


    • Well they can be that smart, potentially, but it’s not possible you’ll get everybody to agree and do everything on the hush-hush across cultures and competing incentive structures. I don’t think intelligence is necessarily a limiting factor–just unmanageable complexity, too many moving parts.

      That being said, the incompetence of experts continues to astound me. So probably not smart enough to pull it off, either.


  5. It was the best of times…


    • the left is going to get someone killed one of these days.


      • You mean, more obviously and directly observable without bi-partisan coverage of some kind . . . I assume. Political elites get people killed all the time, as do the mobs they spawn.

        But yes, definitely will get some people killed because they feel censorship and authoritarianism–with themselves in charge–is the only way to do things and no matter how insane they get, everybody will bow to their genius. Elites seem very unaware of how much of their “let them eat cake” attitude stirs the pot that will eventually boil over–and if not scald them, it will get something.

        I think a lot of what’s going on now is social media and it’s self-selective nature. The left has generally decided it loves state power and mobs, because it seems like the mob is huge and on their side and the state is powerful and on their side. Social media let’s them safely dive into a comforting mob-mentality, in the belief that dissenting opinions are minor, insignificant, and on the wrong side of history anyway so destined to lose every argument.

        This is a distortion of the social media bubble–made worse by the recent censorship and shadowbanning on said platforms. They are blind to a much, much larger mob of people that will–if they don’t stop being a mob of bullies–eventually coalesce into something very bad for them (and everything else, at least for a time). Which I’m not hoping for and I hope the mobs can all settle down but the left is not helping, at all.


        • This is tough because that guy—like the guy who shot Gabby Gifford—was mentally ill. There are going to be nuts with all sorts of ideological orientations.

          So despite the unproductiveness of their incitement, I much more concerned about progressive or Uniparty policy killing people. I think the net outcome of the COVID lockdown measures—-and constant paranoia—-likely killed more than it saved. I think their energy policies may end up killing people who can’t get heating oil or need emergency care during rolling blackouts. And so on.

          Clearly, war with Russia could also accomplish a “killing lots of people unnecessarily” outcome as well.


        • I’ll bet you dollars to doughnuts that the Las Vegas shooter was a leftie who hated rednecks and decided to shoot up a country music festival.

          and the FBI / MSM are sitting on that info for partisan reasons.


    • Read some of the comments. Twitter remains a cesspool. Perhaps the worst invention since cigarettes, or meth for toddlers.


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