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China EVs are sending warning signals to the West, the World Bank is warning 2024 growth will slump, and analysts with #N/A original thoughts in their heads warn AI is the new ESG.

Let’s dive in.

Economy Heat Check

As of 6/7/2023 market close, unless otherwise stated.

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Expectations Reset

Full-Employment Recession Ahead?

Job growth is soaring yet output is falling. Your MD’s secretary blames a historic slump in productivity.

There couldn’t be less in common between the strong employment numbers and recession indicators. May saw significant job growth, adding 339,000 jobs and bringing the total number of jobs added this year to nearly 1.6 million. But the overall economic output, as measured by real gross domestic income, has been shrinking.

Most attribute the growing discrepancy to a decline in productivity. And, more specifically, the output per hour worked. Labor productivity fell 2.1% in the first quarter from the fourth, and was down 0.8% in the first quarter from a year earlier. That’s the fifth-straight quarter of negative year-over-year productivity growth—the longest such run since records began in 1948. It raises concerns not just about the effectiveness of tech and AI adoption, but also the risk of inflation.

What's particularly concerning is the widening gap between gross domestic product (GDP) and gross domestic income (GDI). GDI, which measures incomes earned in wages and profits, has been contracting while GDP shows a modest expansion. This gap between the two indicators has historically been a precursor to recessions.

It’s not about to get much better. Over the past two quarters, real GDP shows the economy expanding by 1.0%, not far off potential growth, whereas GDI shows it contracting by 1.4%

Projections indicate that the second quarter will be weak, with minimal GDP growth expected. And despite the contracting economy, there haven't been significant job losses.

But be cautious about higher inflation due to decreased productivity. If companies are unable to maintain productivity levels, they may resort to raising prices – and increasing inflationary pressures. If GDI is a more accurate reflection of output than GDP, it suggests a greater economic slowdown and the possibility of a larger economic pullback being required to reduce inflation.

Silver and the Debt Bubble Burst

It’s back to the forties for interest rates – the 1940s, that is. We’ve officially re-entered an era of rising rates that is similar to a period that started in the early 1940s.

Back then, the US also faced high government debt-to-GDP ratios. But there are key differences this time around. In the past, the US benefited from the dollar's status as the world's premier currency, thanks to the Bretton Woods agreement. Today’s US has massive debt liabilities and rising interest rates, while other nations gradually move away from the dollar as the global reserve currency.

During that previous rising interest rate environment, silver experienced a significant bull market. It soared from around 35 cents in 1941 to about $50 in 1980. Interest rates reflect the market's perception of the value of debt, but silver behaves inversely. When interest rates are low, the market assigns a relatively low value to silver, and vice versa. Naturally, the historically low interest rates in 2020 marked a massive bottom for silver.

The current rising interest rate era is expected to undermine the dollar's status as the reserve currency. This could provide even more momentum for silver, compared to the period from the 1940s to the early 1980s. Most anticipate silver will once again rise, similar to its previous trajectory. But, this time amidst a collapsing monetary system.

World Bank Enters the Bear Cave

The World Bank gave us hope just to let us down easy. Yesterday, it revised its global economic growth forecast: predicting better performance for 2023 but downgrading expectations for 2024. The improved outlook came down to resilient consumer spending in the US and China's faster-than-anticipated reopening.

But, the bank warns of slowing growth in the second half of 2023 and a muted expansion in 2024. The culprits are clear: high inflation and rising interest rates. The World Bank now projects global economic growth of 2.1% this year (prev. 1.7%). For 2024, the bank predicts growth of 2.4%, slightly lower than its earlier estimate of 2.7%.

The World Bank highlighted that even more banking turmoil and tighter monetary policy could lead to even weaker global growth. The drag from tighter monetary policy is especially noticeable in interest-rate-sensitive sectors like business and residential investments. Emerging markets and developing economies, excluding China, are expected to experience a slowdown in growth from 4.1% in 2022 to 2.9% this year. The bank expects many countries to face increased challenges, including high inflation, tight global markets and record debt levels – leading to growing impoverishment.

Still to Come: Treasury’s $1T Debt Threatens Market Calm

Aunt Karen’s financial advisor is pressed about the potential impact of $1 trillion in Treasury bill issuance post-debt-ceiling. About $850B in bonds are set to be sold by September. The risk is that this massive influx could overwhelm buyers, leading to market volatility and higher borrowing costs.

Much to the chagrin of fear-mongers, recent market conditions have been relatively calm so far. The S&P 500 has gained modestly while the volatility index remains at multi-year lows.

Not to fear, J Pow is here to add a bit of spice to your life. Short-term bond yields have already increased in anticipation of the Fed maintaining higher interest rates for a longer period. And as the Treasury Department rapidly replenishes its funds, large banks could face mounting pressure to finance the replenishment of the Treasury General Account (TGA).

Regulators are still focused on boosting banks’ cash buffers to prevent another banking crisis, while the Fed continues to allow its balance sheet to shrink. In other words, liquidity is draining from markets on both sides. But some analysts believe that any unforeseen issues would be resolved quickly, with papa Powell stepping in if necessary.

Money-market funds will be one to watch, as they could play a major role in financing the bond issuance. This could limit its impact on broader markets. But to attract those funds away from the safety of the Fed's facilities, the government would need to offer higher yields on Treasury bills. Overall, though the sheer size of the issuance is expected to increase funding costs, not everyone believes it will trigger market turbulence.

Meme Bank

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