It bothers me how primitive are BOTH the forecasting function and the reaction function at big companies like Microsoft.

Let’s look at headlines from Microsoft last few weeks:
1) Microsoft cuts earnings on the weakness in the PC segment
2) Microsoft Curbs Spending on Travel, Gatherings in Bid to Reduce Costs

From here we can conclude:
1)The nature of their misses says that they have NO ability to forecast the future beyond a simple extrapolation of short-term trends. 
They overhired at the peak of Covid lockdowns and they didn’t expect that the boom in PC sales would abate….

2) Now Microsoft Corp is asking teams across the company to rein in some employee expenses as the software giant tries to control costs in the current economic environment.

● Are they facing cash shortage? NO! They have $105B of cash on their BS
● Are they draining cash? No! They rake in $50B+ of Free Cash Flow a year (stunning, right?!)
● They overspent/overhired at the top and now they are cutting when everyone is!

BTW when Microsoft behaves in these pro-cyclical moves (i.e., hiring at the top and cutting employees when we enter a recession), how much do they help the economy? Given their enormous size, they just amplify the economic cycle globally…

Dear Mr. Microsoft, can I offer you predictive service to help improve your business forecasting function?

It bothers me how primitive are BOTH the forecasting function and the reaction function at big companies like Microsoft.

Dutch Gas TTF – most important natural gas proxy for Europe, just broke out to the all time highs, overtaking the spike from March.

It would certainly pull higher prices of other locally traded natural gases globally,
– including in Asia and, inevitably, in the US.
And, eventually, given the substitution of crude oil and gas this would lead to new highs of higher Energy prices globally.

Again, that would feed into the inflation globally through all commodities and global shortages.

Dutch Gas TTF – most important natural gas proxy for Europe, just broke out to the all time highs, overtaking the spike from March.

Make no mistake – this “benign” 8.5% inflation report does NOT nullify the inevitable recession.

Inverted Yield Curves (the US, Canada, the UK, Germany, Mexico) would argue strongly for the inevitable recession.

Have a look at how profoundly inverted US Yield Curve is!

Make no mistake – this “benign” 8.5% inflation report does NOT nullify the inevitable recession.

As debate (or, empirical feeling out) of the evasive neutral rate continues, the key thing about the Fed actions is simpler:

Finally the money is not free – that madness is over.

When money costs at least something nominally (1-2-4-5% – pick your number) it starts curtailing unproductive, speculative investments.

Zero interest rates – good riddance!

As debate (or, empirical feeling out) of the evasive neutral rate continues, the key thing about the Fed actions is simpler:

The key puzzle about the drop in the US GDP in both Q1 and Q2 is the following:

how come the economy has contracted despite adding 2-3 million new workers?
Possible answers look disturbing:

1) a dramatic drop in hours worked

2) a dramatic drop in productivity

Thoughts?

The key puzzle about the drop in the US GDP in both Q1 and Q2 is the following:

One more anecdote defusing the popular notion of the “demand destruction” caused by higher gasoline and oil prices.

On the recent earnings call Valero (largest independent US refiner) said the following:

“…there’s really no indication of any demand destruction.
In June, we actually set sales records. We sold 911,000 barrels a day in the month of June, which surpassed our previous record in August of ’18 where we did 904,000 barrels a day.
We read a lot about demand destruction, mobility data showing in that range of 3% to 5% demand destruction.

Again, we’re not seeing it in our system.
We did see a bit of a lull in the first couple of weeks of July, but our seven-day averages now are back to kind of that June level, with gasoline at pre-pandemic levels and diesel continuing to trend above pre-pandemic levels.”

Again, the myth of “demand destruction” popularized by the so-called “economists” who need to reexamine the facts, remains, well,… a myth.

One more anecdote defusing the popular notion of the “demand destruction” caused by higher gasoline and oil prices.

The darling of both the Wall Street and retail investors, Apple reported earnings 8% LOWER year over year.

– Aren’t Technology companies supposed to grow day in and day out?

Apple reported revenues growth of 2%, way below inflation and below the old dog IBM (which grew 9% year over year).

Check this chart on long term earnings of Apple suggesting how much their earnings SHOULD decline for the next 2 years based on the inevitable mean reversion on the Covid demand pull forward.

The darling of both the Wall Street and retail investors, Apple reported earnings 8% LOWER year over year.

When people hope for a short and shallow recession, can we reexamine the setup?

Shallow and short recessions are preceded by lack of any meaningful excesses without any serious overheating.

Do we have that? Hell, no!

We had serious, serious overinvestment in:

1) Technology – 13 years bull run in Tech

2) Venture Capital – propelled by the trillions in returns in IPOs

3) Cryptos – massively overbuilt, despite the long-term promise

4) Government Debt – irresponsible pile up (mostly G7)

5) Consumer Discretionary – on the back of low rates and post-covid stimulus

6) Economy was so tight that sub 4% unemployment was the lowest in 20 years…

Beyond these trillions of dollars of overinvestments – we have nothing to worry about!

No overbuilt in energy, transportation, airlines, hotels.

When people hope for a short and shallow recession, can we reexamine the setup?

The price of Natural Gas (Henry Hub US) is close to retaking previous highs, signalling that the lack of supply in Europe would resonate globally.

How could it be otherwise, our promise (and even if Australia and Qataris) will step by LNG shipments to Europe, other LNG buyers (S. Korea, Japan) would start bidding up prices immediately to secure their own supplies.

That is further reinforced by the merciless reality that even if the US, Qatar, Norway and Australia put in a major effort to boost production and exploration of natural gas, they would need at least till 2026 to alleviate any global shortages.

That applies to BOTH the production of molecules and inadequate capacity of LNG Terminals globally.

The price of Natural Gas (Henry Hub US) is close to retaking previous highs, signalling that the lack of supply in Europe would resonate globally.

When people contemplate the coming risk of a recession hitting Emerging Markets (EMM) harder than the developed markets, I see little objectivity in that conclusion.

It reflects nothing but hyperbolic retrospection of the 90th, when Emerging Markets were over levered and the Developed World debts were very low.

Let’s look at the Debt/GDP ratio (vertical axis) vs. the 10Y interest rates (horizontal axis):

It is so striking that Emerging Markets have much lower Debt to GDP (40-80%) vs. the Developed markets of 80-150%, not to mention Japan at 250%!
And Emerging Markets have already higher nominal rates, i.e., they were conditioned (and disciplined) for decades to have high interest rates, and inflation.

So, who do you think is more vulnerable now:
 – South Africa with the 70% Debt and 11% rates,
 – or the US with the 125% Debt and 3% rates? 
while inflation in S. African is lower than in the US?

BTW S. Africa is emblematic of a setup common for EMMs

When people contemplate the coming risk of a recession hitting Emerging Markets (EMM) harder than the developed markets, I see little objectivity in that conclusion.