New Post
In this issue of the peel:
Market Snapshot
Banana Bits
The Daily Poll
Trump 2.0 has issued 27 Executive Orders already, ranging from energy production to federal hiring freezes. Which area do you think will have the biggest impact?
Previous Poll:
What should be prioritized to boost consumer confidence in spending?
Lower inflation: 39.5% // Higher wages or more stable incomes: 47.9% // Better market performance: 8.4% // Improved retail and service options: 4.2%
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Macro Monkey Says
No U-Turns For Uncle Sam
“No one can predict the future, least of all economists.”
We all know this quote, whether we’re aware of it or not. What we don’t know, however, is the quote’s original source. So, I’m just gonna go ahead and claim it as my own.
Now that we’re all in agreement that I said that quote (I’ll sign autographs later), let’s talk about how right I am. We just got the latest data on a less-watched but extra-nerdy macro indicator, so…
Let’s get into it.
What Happened?
Yesterday, the Conference Board published the Leading Economic Index (LEI) for the U.S. in December.
The LEI isn’t an indicator you’re likely to find in your textbook. Much like having your first child, it doesn’t have a huge track record, but it’s fun and might be valuable, so let’s talk about it.
Essentially, the LEI is made up of 10 subcomponents that are themselves considered leading economic indicators. The Conference Board weights these subcomponents on relevance and predictive value, throws them in a wrapper, and slaps the label “Index” on it.
The goal is to try to predict turning points in the U.S. business cycle. Based on December’s data, don’t expect Uncle Sam to bang a uey anytime soon.
The Numbers
The U.S. Leading Economic Index declined 0.1% to 101.6 in December.
The index uses 100 as its baseline, reflecting economic conditions in 2016. The level of the LEI barely matters, but the monthly, bi-annual, and annual changes are like a pair of pants that are too small—quite revealing.
Now, we apes eat a 0.1% decline for breakfast. However, there are two reasons why this month’s reading could be concerning: 1) the long-term trend and 2) the subcomponents pulling the index lower.
As we can see in the blue line above, the LEI has been in near-constant decline since early 2021. The Coincident Index (more on that below), has stayed strong, but as we can see in the late 2000s, the LEI had been in decline for a long time before the GFC hit.
That’s not to say this is a forecast for another GFC. But it’s important to keep the longer-term context in mind. The LEI has been in decline for a long time, so each additional step lower adds concern.
Further, the subcomponents pulling the LEI lower are—unfortunately—some of the subcomponents that actually matter.
We could care less about Consumer Expectations for Business Conditions, which declined 0.07% in December, as sentiment has little predictive value, especially when negative.
But, watching Average Weekly Initial Unemployment Claims weaken by 0.03% as ISM New Orders fell 0.06% suggests a potential threat to aggregate demand.
The subcomponents pulling the index higher could tell us something, too. An improving Credit Index, a rising stock market, and longer manufacturing hours (despite anemic demand) aren’t exactly functions that directly support the broader economy.
The good news is that the Coincident Economic Index (CEI)—which seeks to size up conditions currently on the field—held up well, rising 0.4% in December.
The CEI has only four subcomponents, fortunately, a number I can count to. Payroll Employment, Personal Incomes Less Transfer Payments, Manufacturing & Trade Sales, and Industrial Production all improved their conditions in December.
For the 6-months to close 2024, the LEI declined 1.3%, slower than the 1.7% decline through the first half of last year. The CEI rose in both periods, up 0.7% from January to June, then picked up speed and improved by 0.9% from July to December.
The Takeaway?
“How do you go bankrupt?... Gradually, then suddenly.”
Unfortunately, the ghost of Ernest Hemingway won’t let me steal that quote, but that’s largely what the CEI and LEI tell us in a nationwide economic context.
In the modern era, Fed policy and a strong service-based economy reduce the risk of recessions in the business cycle compared to history. However, that doesn’t mean we’re immune to downturns—just that they might be less regular than the standard theory of the 7-year cycle.
Declines in the LEI are worth paying attention to but don’t get worried until they’re paired with declines in the CEI. Then we can CRY.
Career Corner
Question
Question on the connection between S&T and IBD: is S&T involved in equity/debt capital raising for comps?
My understanding is no because S&T is facing more institutional investors (HF, PF, etc.) rather than companies. Is it the financing side of a firm’s IBD that typically executes capital-raising transactions?
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Answer
There is a group that essentially sits between IB (insiders) and S&T (outsiders) called "Capital Markets." When IB has a transaction that involves investors, like an IPO, secondary offering, or bought deal, Capital Markets will quarterback the execution of the transaction, with S&T as the investor interface.
That can include everything from pricing an IPO to allocating orders.
S&T is the customer-facing distribution network responsible for "selling" the deal.
To your last question, ST executes the deal by soliciting and gathering orders from institutional investors for the offered debt securities.
A fixed-income salesperson will regularly provide service to a fixed-income fund manager, who must decide whether or not to buy any of the issues... with help from their fixed-income salesperson (in ST).
Also, I wouldn't describe the divisions as "public" and "private" because they all operate primarily in public financial markets.
Rather, think of client relationships: in IB, the client is a company, and in ST, the client is the institutional investor. They each serve their clients in different ways at different times. I think the difference you are trying to capture is more "insider" and "outsider"
IB is always an "insider" since they will have access to material non-public information about their clients (i.e., are the thinking of M&A, issuance, bankruptcy, whatever), while S&T (and research) operates exclusively as an "outsider" with ONLY public information to recommend investment strategies, execute market trades, etc.
Head Mentor, WSO Academy
What's Ripe
Netflix (NFLX) 9.7%
Moderna (MRNA) 7.3%
What's Rotten
Lucid Group (LCID) 6.6%
Johnson & Johnson (JNJ) 1.9%
Thought Banana
Executivenomics
We all have things we love to do. For me, long walks on the beach, spending quality time with friends, and losing this month’s mortgage on a zero-day options trade are just a few of life’s simple pleasures.
For President Trump, he loves to write his name on buildings, stock tickers, and, most of all, Executive Orders.
Let’s dive in.
The Executive Orders
We’re about 69 hours into Trump 2.0 (that’s not a joke, 9am will be 69 hours from 12pm on January 20th), and in that time, he sure has worked up quite a sweat.
According to ChatGPT and this list on Wikipedia, 47th President Trump has signed 27 Executive Orders already. 45th President Trump only signed 6 in that time.
Executive Orders are a little weird in the U.S. We didn’t want a king (obviously), but wanted some way to accomplish things without those freaks in Congress slowing things down, probably so that they had time to place trades on whatever insider information they got.
These directives from the President are not laws. Executive Orders allow the President to direct action on behalf of the federal government and agencies to ensure “the Laws be faithfully executed,” but not create new laws themselves.?
As always, we don’t do politics at the Peel. However, several of the EOs are directly related to the U.S. economy. So, without commenting on their implications, positive or negative, some of the most impactful Executive Orders signed so far include:
The Takeaway?
President Trump, as promised, is moving very quickly.
It’s easy to lose sight of what news is truly material when so much is coming out. While not exhaustive, the above list is a decent starting point for understanding the economic changes expected at the federal level over the next four years.
Expect growth in the energy sector, a few shaky employment reports, less federal aid to much of the economy, both foreign and domestic, and potentially falling bond yields if spending is reigned in even… at all.
Whether it will be fun or not is up to you, but it’s sure to be interesting.
The Big Question: Which Executive Orders will have the greatest impact, positive or negative? What other EOs can we expect?
Banana Brain Teaser
Previous
If the range of the six numbers 4, 3, 14, 7, 10, and x is 12, what is the difference between the greatest possible value of x and the least possible value of x?
Answer: 13
Today
What number is 108 more than two-thirds of itself?
Send your guesses to [email protected]
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Donald Trump
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David, Vyom, Ankit & Patrick