2022 Year in Review – Part 2



Why has The Fed been on such an aggressive tightening path?

That question is for all the people who live under rocks.

The obvious answer is INFLATION.

Unfortunately a lot of the data used by The Fed to determine monetary policy is backward looking.

They are driving the US economy while looking in the rear view mirror.

Meanwhile, many other LEADING economic indicators are suggesting inflation already peaked (June?) and will be declining rapidly, along with the US economy.



In Part 1 we already discussed the collapse in M2.



Chicago PMI below 40 has called 8 of the last 8 recessions with zero misses.



The US ISM manufacturing prices paid index tends to lead US CPI inflation by 3 months.



Businesses and market participants can see the writing on the wall.

The Small Business outlook is the lowest in 48 years.



The percentage of “professional forecasters” seeing a recession in the next 4 quarters (12-months) is by a long-shot the highest in over 50 years.



Recession or not, asset prices everywhere have already “deflated”.

The following are at or below their Covid March 2020 lows.

  • Emerging Market Currencies (stronger US Dollar)

  • Emerging Market Bonds

  • U.S. Corporate Bonds

  • U.S. Treasuries

  • U.S. Consumer Sentiment

  • U.S. Real Wages

  • IBD 50 Index

  • Chinese (and Hong Kong) Stocks

  • The British Pound (weakest against the dollar in nearly 40 years)

  • The Euro


We went from a “liquidity-pumped-moon-shot” asset bubble to a “full-orbit-retrace-back-down-to-earth” bust (suck, suck, suck).


Ok, sentiment is crap, and everyone thinks a recession is coming, but inflation isn’t going anywhere because of supply chain disruptions, right?



What a difference a year makes.



The models are clear what the impact a reversal in supply constraints will have on inflation (and the economy).



Commodity bulls (looking at you energy) might want to reconsider their positions as freight prices (collapsed) are taking global commodity prices with them.



Even if inflation does start to cool (and fast) it still could be a while before the Fed pivots (cuts rates) especially if they continue to use lagging indicators.

CPI (consumer price index) measures inflation as a rate of change. The year-over-year numbers have been the big shocker for markets this year (especially bonds) with June clocking in at 9.1%.

But the trend hides in the month-to-month figures, which also influences Fed policy decisions.

Core CPI removes the more volatile components (although most important) of food and energy. The month-to-month increase has averaged around 0.5%.

Even with a total collapse in Core CPI it could take another two-quarters before inflation is back to the Fed’s two-percent target (or below).


However, a total collapse (in inflation) is what The G5 Global Credit Impulse is forecasting.

A popular forward leading indicator for growth and inflation, in late 2020 the G5 Credit Impulse predicted 50% year-over-year growth in earnings per share and 7%+ inflation by 2022 Q2.

Currently it now suggests negative earnings and inflation below 2% by 2023 Q4 (this time next year).



The Credit Impulse may be too conservative.

In October, Core CPI was already negative, if you exclude shelter.

Housing tends to move with a lag to the rest of the economy and is usually the last domino to fall, but as housing goes so does the economy.



Housing is something we will be looking at in greater detail later in this report, but up next in PART 3 is the stock market.


PART 1 | PART 2 | PART 3 | PART 4 | PART 5

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