Weekly Reflection for May 5, 2023

The Week - An Update in Charts

It was a bit chaotic in the stock market this week. Regional bank stocks both fell precipitously and rebounded, Apple shared a good earnings report and the Federal Reserve raised interest rates amid decent employment numbers. It was just difficult for market data to please investors for more than a few minutes at a time, as stocks ended broadly down, despite a big rally on Friday.

One more time - the Federal Reserve officials were unanimous in their vote to raise rates for the 10th, and possibly final, time this past Wednesday. Rates are now in the range of 5.0% - 5.25%, the highest since 2007.

Fed Chairman Powell predicted a rather rosy future - a good employment market, falling inflation and an economic slowdown, but not a full-blown recession. The markets did not buy his assessment and fell sharply.

Fed Chairman Powell also said in his Wednesday press conference that the sale of First Republic Bank to JP Morgan “draws a line under” the recent period of bank instability. Markets, and some banks themselves, are signaling otherwise. The regional banks, those with under $100 billion in assets, remain under the most pressure.

It was just one of those very weird moments when a security plummeted for no clear reason - this time it was oil. The price of WTI, which is West Texas Intermediate - the oil market followed most closely in the U.S., dropped over 7% in the first few minutes of trading on Wednesday. Although a "fat finger" accidental trade was initially blamed, it seems to have been an intentional trade by a someone who had turned very bearish on oil.

Oil prices have been all over the place this year as investors and traders consider different economic scenarios. The bullish case for higher prices includes the on-going war in Ukraine and OPEC+ cutting production. The bearish case revolves around fears of worldwide recession.

Carl Icahn, an admired and feared corporate raider slash activist, owns some 85% of Icahn Enterprises L.P. (IEP), a publicly-traded conglomerate with holdings in many areas, including energy, real estate and the automotive industries.

Hindenburg Research, known for its deep dives into the tiniest of details of billionaires' portfolios, has said Mr. Icahn and his son have grossly inflated the shares of IEP by 75%. The stock dropped 40% before recovering a bit. Read about it here.

Yahoo! The WHO (World Health Organization) has declared the emergency part of the Covid-19 pandemic over. Deaths in the U.S. since last spring have fallen off significantly. Johns Hopkins stopped collecting data this March, after roughly three years of obsessively counting the world's cases. At that time, it had tallied nearly 677 million cases and 6.88 million deaths worldwide. The number of people personally affected by Covid-19? Pretty much all 8 billion of us.

White-Collar Job Losses

Federal Reserve Chairman Powell said this week that it is possible that we will have a slowdown in US productivity, and not a recession, and that jobs will stay level. He admits that this would be “against history” and “against the pattern” but it could happen. Jobs is about the most important factor in this whole equation. If there are jobs, then there will be spending. And the April employment number says a lot about where employers are willing to bet on the direction of the economy.

Zooming in on various job types, leisure and hospitality continue to lead the way on hirings in a big way. These are the fastest growing sectors since last year and have more than recovered from Covid lows. Given these businesses enthusiasm for hiring, assume that this summer will be very busy for vacationers. Education, healthcare and construction are also growing, signaling bullish signs for life as usual.

A loss of jobs in manufacturing bucks the trend. It may not be a problem of layoffs though. To hear from hiring personnel in manufacturing, the problem is with “quits”.

In many cases these are men aged 25-54 and the talent is not available for backfilling.

Overall job openings have shrunk a bit and layoffs have increased a bit. There are 1.68 available positions for each person actively seeking employment, down from over 2 at one point.

The highest paid workers are losing positions at a faster rate than other lower paid workers, going back to December 2022. This tracks with the well-publicized layoffs in the high tech and finance sectors.

It is an interesting warning sign for an economy that is heavily dependent with consumer spending. White collar workers are those that spend on travel, services and goods the most. A downturn in white- collar employment, where it can take six months for one to secure a new job, will be an interesting development.

A King is Crowned

The U.K.is not forecasting a recession and experts believe that the country will just barely skim the edges of a downturn. Activity in the service sector is picking up and the housing market has some oomph, which will help the country avoid a downturn. Inflation is still eye-watering, 10.1% annually, and the Bank of England shares the same 2% inflation target as our own Federal Reserve does. For now, the BOE is anticipated to keep raising interest rates; its base rate is currently 4.25%.

Still, things are not great. The long shadow of a tumultuous and messy economic breakup with the European Union hangs around. Average working families report more trips to food pantries and stresses over heating bills than normal. So, although short-lived, Great Britain is welcoming a little bump in spending this weekend during King Charles III's coronation. Unlike in the U.S., the hospitality business there has just barely recovered from Covid stresses and sorely needs the positive attention. One-third of leisure and hospitality businesses have recently reported that they are still at risk of going under in the next year. But tourists and feel-good spending on anything to do with the royal family will be in focus over the next few days.

The coronation and festivities are expected to cost £50 to £100 million pounds ($63 to 125 million dollars). The U.K. government will not share actual details until Tuesday. It is expected that the King will help pay, even after scaling back the overall decadence, and therefore cost, of the event. In a circular way, the King will just be giving back to the government money that it paid to him. Brits might feel a little better about the cost and all if they recall the history of King George III.

King George III is widely derided in the U.S. for being our foe during the American Revolution and for being the comic relief in the Broadway show Hamilton. But, upon taking the throne in 1760, he handed over all of the royals' land and property to the

government. The revenue from these assets, called The Crown Estate, went to the treasury, which then paid out a fixed salary to the king. This salary, now called the Sovereign Grant, pays an annual sum to the crown, which then distributes it to the "working royals". So who pays for the coronation this weekend is a bit like splitting budget hairs. It is what it is.