Central Economic Planning and Economic Conditions | Top Things to Watch this Week

Posted: July 17, 2022, 1:31 p.m.

Central Economic Planning and Economic Conditions

"Sometimes, you get a groupthink around a base assumption and everybody agrees to the same thing and acts reflectively, and doesn't really challenge what's going on." - David Einhorn

How Low Do We Need To Go?

I hope you had a great weekend after a busy and inflation-data driven week in markets. In the lead-up to the upcoming Fed policy decision on July 27, we will continue to provide you with content, so be sure not to miss out on it. You can access last week's Macro Corner Episode #6, The China Divergence and check out this week's chart booklet with all the graphs and data here: Blue Line Futures Macro Corner Episode 7 Chart Booklet

During a conversation with a long-time friend this weekend, we theorized about the state of European politics and society. Why has the continent been so ignorant about its energy security and what is the coming famine in parts of the world going to mean for the EU member states' social construct? While many questions stayed unanswered in our conversation, one 'answer' was closely related to a quote by Blaise Pascal: All of humanity's problems stem from man's inability to sit quietly in a room alone.

I wrote about this some months ago and shared my thoughts about the idea of increased interventionism as a result of high inflation, polarization and food/energy shortages. Indeed, political history suggests that times of stress are often used to excuse higher taxes, more government intervention and less problem-solving in the hands of market participants. However, it is again the lack of inaction, the lack of market forces resulting in maximal surpluses that lead to inefficient and unequal outcomes. Rather than realizing that compounding happens as a result of creating the conditions of good returns (exceptional, far above-average research, etc.) and then sitting still for a long-time, central planning agencies created unsustainable fiscal and monetary conditions. MMT is one such idea. 

MMT, also known as modern monetary theory, has certainly contributed to a speculative mindset over the course of the last 2 years. In the case of Japan, MMT has left the BoJ with few options when it comes to the impact of inflation; in fact, the country is buying an unlimited number of bonds to keep 10yr JGBs inside 0.25%, despite import inflation and a cyclical slowdown of global economies pushing the Yen south. 

Now, to be clear: unsustainable conditions can be quite sustainable and the market can remain irrational longer than you can stay solvent. Thus, risk management within the context of your convictions is of awfully critical importance! 

Central Bank Planning In The Present Day:

Central bankers globally are wrestling with high inflation prints. Just this week, CPI came in at 9.1% as energy accelerated from 3.9% MoM in May to 7.5% in June. Broadly speaking, the energy component acts on a lag and is expected to cool with gasoline, crude oil and heating oil having deflated over the recent past. While energy will decelerate, shelter accelerated from 5.4% to 5.6% YoY (1/3 of headline CPI). Noticeable, OER (the bulk of shelter) tends to act on a lag to housing prices and there's catch-up to be had when we compare OER vs. the Case-Shiller Housing Price Index. In addition, deflationary forces from used cars over the last few months are set to become less and decelerating freight rates will only get reflected on a massive lag; thus, preventing the Fed from declaring 'victory' any time soon. 

Markets move on the margin, however, and markets are quick to price marginally dovish news. In fact, Fed governors commenting on the rate at which inflation may cool gave a lift to markets at the end of the week and brought down the likelihood of a 100bps hike at the next Fed meeting to 'just' 29%. As Ben Bernanke put it: setting monetary policy is 98% talk, 2% action. 

Returning to what's being planned, we remember early 2021 before inflation took off and few saw coming what later unfolded. To be more precise, one of the main things the Fed was aiming at avoiding: a wage-price spiral. As prices increase, price changes in the economy become more and more similar. That is partially a result of the self-fulfilling prophecy called inflation where price sentiment permeates through the economy. One component of those price changes is wages. As inflation remains elevated, the indexation of wages to inflation increases (also known as the wage-price spiral.) 

The velocity with which the risk of highly similar prices can be fought depends on how much excess there is in the economy.

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Besides excesses, we have also talked about credit spreads and the fact that the lower-end of the consumer is hurting substantially. But overall, albeit the need to find a lower equilibrium point, data is getting worse; potentially, though, not enough to turn an acknowledgement of 'weaker demand' in the Fed's Beige Book into something more significant. 

This is arguably to the contrary of the 'Fed Pivot' being introduced soon enough for it to become tradeable -- a theory we've discussed in past writings. However, big picture, things are worsening but not yet in a horrific place. 

With that being said, the Fed's goal is to worsen the economic environment (the Fed refers to this as financial conditions.) Worsening conditions amidst a divergence amongst low-to-high income consumers is particularly tricky in a world where high interest rate credit is expanding rapidly (the burden is not shared equally.)

While high interest credit is largely a reflection of low income consumers trying to keep pace with price appreciation, a substantial portion of assets are held by people outside the bottom 50%. That part of the demand equation is mostly addressed via wealth destruction (the price of assets coming down.)

So, again, while financial conditions have gotten significantly worse, structural forces of inflation are persistent and call for action. Credit spreads are relatively higher, but not yet recessionary. With that being said, the market is screaming for recession given where the 2s-10s curve is trading.

Where interest rate policy is ultimately going to settle will most likely depend on financial plumbing indicators rather than absolute inflation (temporary victory being declared at that point.)

At the end of this writing, I would like to address what I started of with: central planning and interventionism. While the underpinnings of those two variables may be highly questionable, there are people trying to 'get the job done' regardless. It is not a role many would aspire to be in given the circumstances and the potential for a lose-lose scenario. There is a balance to be struck between respect for what is trying to be accomplished and a healthy dose of caution when it comes to the underpinnings of the aforementioned actions.

Be sure to check out prior writings of Top Things to Watch:


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Economic Calendar


Data Release Times (C.T.)



Data Release Times (C.T.)


Data Release Times (C.T.)

More Of The Upcoming Economic Data Points Can Be Found Here.


Food for Thought



Bank of America (BAC) reporting ahead of the open on Monday:

  • Consensus: EPS est. $0.77; Revenue est. $22.82bn

Commentary on the following will be monitored:

  • Costumer credit
  • M&A Activity
  • Economic conditions


Netflix (NFLX) reporting after the close on Tuesday:

  • Consensus: EPS est. $2.90; Revenue est. $8.06bn

Commentary on the following will be monitored:

  • New equilibrium for post-Covid streaming behavior
  • Content spending
  • Customer churn
  • Password sharing
  • Potential partnerships and M&A


Tesla (TSLA) reporting after the close on Wednesday:

  • Consensus: EPS est. $1.73; Revenue est. $18.26bn

Commentary on the following will be monitored:

  • Car sales expectations
  • Labor situation and lay-offs


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Federal Reserve Wages Consumer Credit Inflation Spiral Wealth Effect

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