8# Signal 2 Noise

In today’s issue:

1. S2N Updates.

2. Key Performance Wrap

3. Inflation is causing quite a stir

4. What does Bezos know that we should know?

5. Commercial real estate values and their impact on loans

S2N Updates

I have almost finished the pricing and registration process for joining the letter. I still want to write to only a few friends for the rest of the month and assess the quality of the letter at that point. From there, decisions can be taken with our going-to-market strategy.

A further point is that due to some of the technical issues I have had as well as the fact that this is a new routine that is also currently very experimental, it is taking me a lot longer to write than I anticipated.

Performance Review

Yesterday was a big day in the markets. The rally in stocks was very extended, so any news that was less than expected was likely to trigger a strong reaction. The monthly CPI came in slightly worse than expected. That was all that was needed. You can see in terms of the Z-Score shading that the SP500 had a significant down day. The 10-year Treasury and the US dollar had a significant up day. Please take note that with the 10-year Treasury, the price here is the yield, so the yield going up means that the value of the Treasury dropped (bonds have an inverse relationship to yield).

I thought I would share a chart showing how Telsa is underperforming the tech heavyweights. I am not sure if it is just me, but suddenly Telsa feels like a boring company. No, not the Boring company; I am saying boring as in not that exciting. Tesla has killed every bear in sight over the last decade. Can it justify its valuation as a boring company? I am noting how stories about Musk’s drug use and his current distractions with Twitter, SpaceX, X.ai, and the mind chip are likely to become even more prominent should Tesla slip further. Not sure why I am writing about Tesla it was not what I was planning on doing.

Main Chart Gallery

Interesting

I am sharing this version of the US yield curve as I wanted to highlight how the current curve has shifted up from the previous few weeks in a significant way.

Screener Signals – Today

There were more than enough signals generated yesterday. I will spend more time in future letters on this section, where I will bring this important section to life. It is currently just a prompt to do your own homework, but I want to share where the homework has already been done for you.

Economic News Today

S2N Insights

Inflation is causing quite a Stir

The big news coming out of the USA was the higher than expected inflation numbers. There was an expectation for the year-on-year number to come in below 3%. It came in at 3.11%.

Here are some comments: It is important to keep in mind that we are at the mean inflation rate since 1948. I know this is quite a bit above the Fed’s target of below 2%, so there is no chance of the Fed lowering rates in the near term. The Fed cutting interest rates has been the main market driver over the last few months. This is making markets a bit nervous.

What are the market’s future expectations of inflation? This is not a simple chart and needs more explanation. I will write a blog post going into more detail where I explain what breakeven inflation is. Just for the sake of brevity, it is the nominal bond yield less the inflation-adjusted bond yield (TIPs). What you can see is that the market is anticipating 5 and 10-year inflation just above the 2% mark; in other words, nothing serious. We will keep an eye on this chart to see if the market starts to once again anticipate higher inflation.

I usually don’t drill into the inflation numbers; I try to keep things big picture, but I wanted to share one insight that I think explains why most people got their estimates wrong and could be a source of stubborn inflation.

Both of these charts share the same thing, but the bottom version shows you that their hasn’t been such a big diversion since 1993. That kind of statistic always catches a signal versus noise hunters attention. So what is all the noise about?

Shelter is a significant component of the CPI inflation basket. They call it OER (owners equivalent rent). This component usually changes more slowly than market based rents. Market rents have been coming down quite steeply over the last few months. For some reason, probably seasonal, OER went up last month. Those with a bullish bias think this is just a short-term anomaly. I wouldn’t be Dr. Bearman if I didn’t share an alternative, more bearish scenario.

From the chart above, I am not going to make a forecast of where I think rents are going, either CPI OER or Zillow’s Rent Index.

What I would like to suggest is that the CPI OER is still underestimating what the true rent inflation has been over the last 8 years. This means that overall inflation has been understating what is being felt in reality. The Fed should take extreme caution about future rate cuts until reality and government manipulation become closer friends.

What does Bezos know that we should know?

Yesterday, Jeff Bezos sold another $4 billion of Amazon stock, adding to the $2 billion he had already sold since the 7th of February this year. $6 billion is quite a lot. I think that is more than one typically requires for some liquidity. Perhaps he too thinks the markets have had an incredible run and need some breathing space.

Commercial real estate and their impact on loans

This is a major subject and not something I want to race through. I want to bring this to your attention as the $20 trillion US commercial real estate market is a big market, and write-downs on value will have a significant impact on loans and the ability of the borrower to repay the loan. Watch this space; this is what started the Chinese economies rot. 

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