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The Macro Situation

adhesive remover (noun):

• a solvent designed to remove sticky residues, like gum, wax, glue, stickers, and sap;
• quantitative tightening when inflation is sticky;
• a recession when other methods don’t work to reduce inflation.

― New Entry in the Updated Devil’s Dictionary

This week our report is longer due to the complex state of the economy.

The economist Joseph Schumpeter believed that recessions were necessary to correct over-investment, market obsolescence, and debt arising after periods of innovation and growth. His Great Depression-inspired theory arguably applies to our current situation if inflation cannot be corrected via the Fed’s quantitative tightening.

Let’s see how.

Recall that the Fed measures inflation via a series of indicators, including the CPI, PPI, especially core PCE (personal consumption expenditures).

If the recent CPI reading wasn’t enough of a signal for the persistence of inflation, then the new PPI index data helped to sober the mood further. While the CPI is trending the right way – i.e. down, when comparing January (3.1%) to December (3.4%) – the PPI registered 0.3% increase in January.

Looking more closely at the January 2024 CPI report, there does not seem to be much room for movement towards decreasing the inflation rate.

• Amongst the core inflation factors, commodities (not including food and energy) and new and used vehicles were down.
• Expecting commodities to remain down is optimistic given how the conflicts in Ukraine and the Middle East are constraining supplies and inventories.
• As for vehicle sales, the decline in price is due to seasonal weakness and a drop in transaction costs (following a usually hot December for car sales).

That leaves housing as one of the main factors that might help. According to Bankrate, the housing market “accounted for more than two-thirds of the monthly all-items increase in January, up 0.6 percent from last month and 6 percent year-over-year.”

Will that abate?

According to CoreLogic’s Selma Hepp: “While appreciation is expected to slow, home prices will continue to extend to new highs entering the typically busy spring homebuying season.” A lot will depend on the affordability of mortgages, which is sitting at 7% for a 30-year loan.

Consumer confidence was high for January, so the decrease in retail sales by 0.8% compared to December may indicate either:

• a knock-on change in confidence is due; or
• consumers are optimistic yet just being strategic with spending just in case.

While pundits note that January sales (historically) are usually lower than December, the last ten years have been a bit of a mixed picture (50-50).

A recession may be the only way that inflation is finally tamed.

The March Fed meeting looks like a done deal with 90% of economists polled believing there will be no rate cut. Forecasting for the May meeting, a mere 35% believe there will be a cut.

Gold (2024.00) dropped sharply at the beginning of the week due to the strength of the economy yet clawed back some territory on the PPI report.

Crude Oil (79.22) closed at its highest since October 23 due to a shutdown at a large refinery in Indiana.

The 10-year US Treasury yield (4.281%) spiked (respectively) with the CPI and PPI reports due to fears that the rate cut schedule will be further delayed.

- Todd Mei, PhD and Sebastian Purcell, PhD

AI Sentiment Report

The following sentiment scores use ChatGPT as part of the AI tech stack to track sectors as leading indicators. (Lesson 4 of The Art of The Bubble covers the selection of lead indicators for bubble trades). The scores are most indicative for the next day of trading (a Monday), but they appear to set the general tone for the next week.

The methodology employed is based on this peer reviewed academic article, which produced 550%+ results in back tests over a 2 year time frame. We consider 4 and 5 scores to be positive, but please bear in mind that the AI model is still in its validation phase.

-The Research Team:

Dom Viera, Samantha Russell, Nicole Zinuhova, Michelle Milan

Free Stuff!

To incentivize the relaunch of our YouTube Channel, we're going to give away some Kaze Collection NFTs.

These will have a utility that we estimate should make them worth $1400+ as a floor price (it's a guess and it's free anyway)!

To qualify for a whitelist: we have a Zealy Campaign -- one that will grow over time.

Happy Trading!!

-The Team

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The 1.2 Labs Edge

Our paid plans make use of the same base algorithm that our hedge fund, 1.2 Capital Management does, but modified in timeframe so you don’t have to stare at your screen all day.

Below are two of our data service offerings for stocks. The Bubble Portfolio has never had a down year and the Leveraged Portfolio should be 3x the QQQ (so negative), but it’s outperforming by better than 12%.

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