Morning Note: Rampant Optimism — And — Always Ask, “What Could Go Wrong?”

A number of global Manufacturing PMIs (Purchasing Managers Indices) were released overnight and this morning and, make no mistake, optimism is rampant throughout much of the world. 

Which of course makes sense! I mean, the world (save for a few lingering Covid hot spots) is opening back up, and, yes, the thing we’ve been spending much of our time on herein — inflation — is, despite what the Fed would be so condescendingly to have us believe, on the rise. And if business is booming and you can easily pass your higher costs onto your end customer, all’s good…

Yes, yes, there’s the reality of the forces (money printing, government spending, debt) that held the ship together, getting us to this point, that will have to be reckoned within I suspect the not too distant future!

Speaking of the Fed, this from popular macro thinker Muhamad El Erian (in a CNBC interview) should sound very familiar to clients and subscribers:

“The Fed is pinning itself in a corner by insisting that this is transitory on inflation pressures. All the evidence suggests that you should have an open mind.”

You’ve got to keep an open mind. Unfortunately because it is now hostage to a framework that has to be outcome-based I think the Fed has no choice but to insist it’s transitory. But I fear that this is persistent, that this is not transitory.”

As for what those PMI surveys say about inflation; here’s straight from the U.S. report:

“Chris Williamson, Chief Business Economist at IHS Markit said: 

“US manufacturers reported the biggest boom in at least 14 years during April. Demand surged at a pace not seen for 11 years amid growing recovery hopes and fresh stimulus measures. 

“Supply chain delays worsened, however, running at the highest yet recorded by the survey, choking production at many companies. Worst affected were consumer-facing firms, where a lack of inputs has caused production to fall below order book growth to a record extent in over the past two months as household spending leapt higher. 

“Suppliers have been able to command higher prices due to the strength of demand for inputs, pushing material costs higher at a rate not seen since 2008. 

“Attempts to expand capacity via hiring extra staff gained further momentum, though in some cases staff shortages were an additional constraint on production. However, with confidence in the outlook continuing to run at one of the highest levels seen over the past seven years, buoyed by vaccine roll-outs and stimulus, further investment in production capacity should be seen in coming months, helping alleviate some of the price pressures.””

Same stuff from Europe’s:

““Eurozone manufacturing is booming, with a new
PMI record set for a second month running in April.
The past two months have seen output and order
books both improve at rates unsurpassed since the
survey began in 1997, with surging demand boosted
by economies opening up from COVID-19
lockdowns and brightening prospects for the year

“However, supply constraints are also running at
unprecedented levels, leading to a record build-up of
uncompleted orders at factories.

“The consequence of demand running ahead of
supply is higher prices being charged by
manufacturers, which are now also rising at the
fastest rate ever recorded by the survey.

“The big uncertainty is how long these upward price
pressures will persist for, and the extent to which
these higher charges for goods and services will
feed-though to consumers.

“Encouragement comes from the sharp increase in employment and investment in machinery and equipment signaled by the survey, which suggests firms are scaling up capacity to meet resurgent demand. This should help bring supply and demand more into line, taking some pressure off prices. But this will inevitably take time.””

Asian stocks were mixed overnight, with 9 of the 16 markets we track closing lower.

Europe’s starting the month off in the green, with all but 2 of the 19 bourses we follow higher as I type.

U.S. major averages are strong out of the gate as well: Dow up 269 points (0.80%), SP500 up 0.57%, SP500 Equal Weight up 0.37%, Nasdaq 100 up 0.55%, Nasdaq Comp up 0.45%, Russell 2000 up 0.54%.

The VIX (SP500 implied volatility) is down 2.74%. VXN (Nasdaq i.v.) is down 0.22%.

Oil futures are up 1.13%, gold’s up 1.50%, silver’s up 3.91%, copper futures are up 0.94% and the ag complex is up 0.27%.

The 10-year treasury is up (yield down) and the dollar is down a not-small 0.40%.

Led by silver, gold miners, oil services stocks, uranium miners and metals miners — yet dragged a bit by ALB (lithium miner), solar stocks, bank stocks, wind stocks and TIP (inflation-protected bonds) — our core portfolio is up 0.73% to start the day.

I’m halfway through Julia Galef’s The Scout Mindset, and while it’s not a book about investing (it’s about thinking), it looks to be a treasure for the thoughtful investor:

“Life is made up of judgment calls, and the more you can avoid distorting your perception of reality, the better your judgment will be.”

“Whether you’re proposing a new product feature or a military maneuver, asking yourself, “What are the most likely ways this could fail?” allows you to strengthen your plan against those possibilities in advance.”

Have a great day!


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