Nice Try, PMI

Quick programming note: Welcome to The Investor’s Edge! After a few years of sharing charts and infographics that have caught my eye, this will be a place for my slightly longer thoughts on markets and investments. These posts will be based on conversations and themes I’ve been discussing with experts here at Man Group or allocators, or key market events which I see as important for investors to know about.?

I've been in NYC this week, talking to allocators about some of their most pressing investment challenges as well as getting to see Man Group's brand new office in midtown (a great view of the park by the by).

And one thing I noticed on the morning 'commute' was that the trains were busy, sure. But they weren't that busy relative to before the pandemic.

So given today's release of the PMI services numbers, it made me wonder if services are back in expansion territory, is this maybe as good as it gets for those companies that are depending/hoping for a return to the pre-pandemic levels of office workers in the city?

Let's look at the data.

The February US services purchasing managers index is at 55.1, in line with their 57.4 10-year average. We may not reach the ‘re-opening euphoria’ levels of late 2021 for a while yet, but relative to their counterparts in manufacturing (last reading: 47.7…), services purchasing and supply managers are practically jumping for joy in comparison.

But.

Service workers are still producing, yes, but the businesses that depend on these workers coming into the offices each day – the in-house lunch delis and the city gyms for example – are likely still wondering, where the hell is everyone?

So taking New York as an example of a densely packed, commuter-based office culture, almost three years since the onset of the Covid-19 pandemic, the subway system is still struggling to reach beyond 77% of the number of passenger journeys compared to 2019 levels.

New York I Love You, But Your [Regular Passenger Journey Numbers Are] Down

LCD Soundsystem, paraphrased…

Taken together, the implication is that the home working revolution that occurred during the pandemic has become entrenched (which most of us will have observed anecdotally). Service companies may be back in business, but less and less time is being spent at the office, which means fewer mass transit journeys and fewer purchase transactions.

For investors, and equity investors in particular, this may also serve to continue the phenomenon of ‘Covid losers’. Those companies which have failed to, or cannot, adapt to a lower in-person environment. For them, this may be as good as the recovery gets; for example, the share price of the Planet Fitness gym chain has stayed flat for nearly 3 years since the pandemic.

So all in all, while economic activity is up, the aftereffects of the pandemic seem to have become permanent...

Show Me The Money!

?A key factor in the recent inflation we have experienced has been the rapid growth of the US money supply.?

With such a rapid increase, a small uptick in the velocity of money was enough to create inflation. In contrast, now the quantity of US money is declining, we are experiencing disinflation.

While disinflation is often good for asset prices, the sheer quantity of money still in the system should give us pause. With M2 still close to record highs, there still remains a great deal of fuel for further inflationary firestorms should the velocity of money rise again.?

If you've got any feedback or ideas for future topics to cover in this newsletter, I'd love to hear from you. Just let me know in the comments below.