Pay is Beating Inflation - Everybody’s Playing in the Heart of Gold Band

That’s right, earnings season has started, big banks have crushed lowered expectations, and everything is awesome.  According to Professor Steve Hanke at Johns Hopkins via CNBC, inflation is a thing of the past.  There is some nuance to that statement that ignores the current numbers relative to a year ago, but he makes the point that the money supply is contracting at a rate not seen since the 1930s, and that is usually a sure sign that inflationary numbers are soon to be in control if not disinflationary.  Frankly, this measure is a good sign that the Fed’s rapid increases in rates have been effective, and we hope he’s right. 

Meanwhile, the Wall Street Journal pointed out that wage growth is finally outpacing inflation for the first time since 2021, and the logical conclusion is that this condition will mean we avoid a recession.  

Super speculative stocks, including the meme stocks, are up big.  Cryptocurrencies are again ripping higher, and investors are pumped up because they finally believe that a soft landing is possible.  Fear of missing out continues to drive a nervous buyer into risky assets at ever higher valuations.  Just don’t look for large capital markets transactions, and everything is fine. 

The contrarian in us feels like this is some combination of dead cat bounce, bear market rally, and whatever other market talk colloquialism you can think of.  Many markets are shut off completely by tight lending standards, many huge loans written in better times are coming up for refinance, and the real economy hasn’t reported yet.  

What we have seen is not surprising.  Big banks were beneficiaries of concerns at regional banks earlier this year.  On top of that, net interest margins continue higher with rates.  In contrast, those banks with big trading businesses struggled. 

Goldman Sachs and Morgan Stanley both beat expectations, but profitability was hurt materially by trading.  While we’re firm believers in the idea that there is always an opportunity somewhere, the current headlines suggest that there is nothing to be worried about anywhere and that risks will only be rewarded.  These headlines need to be taken with a grain of salt. 

Source: Wall Street Journal, CNBC, Wall Street Journal