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I Change My Mind

This was the hardest newsletter I’ve ever had to write. It’s time to face some tough realities and admit I’ve been wrong on a lot of fronts. Before we jump in, here’s an update on my inflation wager. 

JMO Core PCE Wager Tracker

January      2.9%
February   2.8% 


Last Week This Morning

  • 10 Year Treasury at 4.21%
    • German bund at 2.29%
  • 2 Year Treasury at 4.63%
  • SOFR at 5.33%
  • Term SOFR at 5.33%
  • Fed Sentiment check
    • Chairman Powell – Fed not in a hurry to cut rates
    • Cook - Need to be cautious when approaching rate cuts
    • Goolsbee - Sees 3 cuts this year
    • Bostic - Expects just one rate cut
    • Waller - No rush to cut rates
  • Core PCE m/m 0.3%
  • Core PCE y/y 2.8%


The Week Ahead 

After two years of egg on my face, I am throwing in the towel. It’s soft landing time. Heck, it’s no landing time. Stonks to the moon. Inflation is never going to reach 2% again. The 10T will be 5% by year end. The Fed’s next move is a hike. I give up. I’m changing my mind.  

PCE came in this week pretty much as expected, which is to say inflation isn’t cooling off fast enough to warrant cuts. PPI from 18% to 0%. CPI from 9.1% to 3.2%. Core PCE from 5.6% to 2.8%.   None of that matters if it is taking too long to go from 3.0% to 2.0%. The last three monthly prints annualize at 3.3%, way too far from 2% to begin cutting.  

Really, the economy is going gangbusters. In 2021, GDP was 5.4%. The Fed hikes 5% and 2023 GDP was still chugging along at 3.2%. Stocks are at all-time highs.

I wish I could buy my way out of my JMo Core PCE wager. That 2.8% January print was revised up to 2.9%, giving back some of my cushion. That puts us at 2.85% - way too close for comfort. The media has finally convinced me inflation is reaccelerating. We’ll blow back through 3% any month and I’ll have to deal with Mr. Insufferable. 

Let’s face it – Bidenomics is working. Federal spending is really the best use of tax payer dollars. If they own the printing presses, just turn them on and hand out money to everyone. If anything, President Biden hasn’t handed out enough free money. I’m just happy to do my part for those who weren’t lucky enough to be born with my work ethic. I’ll keep writing this on the weekend so they can chill. 

For long-time readers, you know how hard this must be for me to admit. If you look up Confirmation Bias in the Econ Dictionary, you’ll see a picture of Larry Summers. But if you look closely, you’ll see he’s holding the Pensford Newsletter with a picture of me. My wife tells me all the time that admitting when I am wrong is a sign of strength, not of weakness, so that should make this the strongest newsletter ever. 

Office is never going to rebound. I’ve been the jerk because I think people don’t work just as hard at home as they do in the office. I’m too old fashioned when I believe relationships are built with face to face interactions – Zoom calls are just as effective. WFH is more productive, plenty of studies done by WFH academics confirm this. It’s just science. We’re closing both offices and working remotely and will be better companies for it. The surge in profits should allow us to finally pursue ESG initiatives. 

On the topic of rate cuts, I’ve been calling for the first cut to come in June. But why? The economy is doing too well to cut rates. The minute they cut we will be off to the races again. We are comfortably absorbing 3%+ real rates, so why press on the gas pedal and cause inflation to reaccelerate? In fact, odds of a June hike should be higher than a cut.  

Labor continues to prove me wrong. I will stop picking on the headline NFP number. Who cares if the job gains are part timers or multiple job holders? Who cares if the response rate for the surveys has dropped from 70% to 40%?   Who cares if the February 2020 participation rate would mean today’s real unemployment rate is north of 5%? Who cares if we keep revising last month’s number down and distract you with this month’s shiny new number? This is the strongest labor market in history and this will keep spending high and mean we can absorb higher real rates for longer. 

Speaking of rates, the 10T is more likely to finish the year at 5% than at 4%. In fact, Jamie Dimon was right when he said it could go to 7%. Deficits, China selling, demographics, the great unwinding of globalization, the loss of reserve currency status. We will look back at 4% 10T’s and wonder why we didn’t lock everything. The great bond bull run is over, as is my misguided belief that the economy is slowing rapidly.   


The Week Ahead 

Jobs jobs jobs.