AI explosion creates monster investment opportunity
The government’s on a roll…
The Treasury Department just issued its Monthly Treasury Report and indicated that the government overspent by $296 billion in February.
So far this year they’ve shelled out $593 billion for social security, $369 billion on health care, $363 billion on defense, $350 billion in interest payments, $324 billion for Medicare and on and on it goes. All this deficit spending is finding its way into the economy (and adding to that net interest payment) and giving it the appearance of above average growth. (Perpetual debt isn’t growth… or at least it shouldn’t be.)
But last week the economy actually got some bona fide good news…
PMI is Back in the Headlines
We’ve talked about the Purchasing Managers Index and why it’s an underrated but important indicator.
First is because purchasing managers are in the know about nearly everything that’s going on in their companies.
The second reason is it’s an incredibly straightforward calculation. A net score above 50 is good. A net score below 50 indicates trouble.
The third reason is because it’s as close to a real time indicator that you can get. (It’s not subject to months of revisions like so many other indicators.)
And if you want to add a fourth, it’s a forward-looking indicator. It’s what purchasing managers see coming.
PMI reports (issued by the Institute for Supply Management (ISM) and S&P Global) are reported for both manufacturing and service businesses. Services, which have been the foundations of our economy for some time, had been keeping things afloat over the past couple years.
But in the most recent reports for March, manufacturing readings in both indexes rose back above 50.
And that’s a good sign for the sector.
A Boom in Manufacturing?
A boom in manufacturing would be an honest-to-goodness good thing for the economy.
According to the US census, manufacturing is the fifth largest employment sector in the economy…
The manufacturing sector is responsible for the largest dollar amount of exports in the US…
According to McKinsey:
The country currently meets 71 percent of its final demand with regional goods, trailing Germany (with 83 percent), Japan (86 percent), and China (89 percent).
manufacturing means greater supply chain resilience…
They’ve created a graphic that sums up all the benefits of a healthy manufacturing sector…
So this developmenet is actually osme pretty good news for the economy.
And if the trend persist…
Now Comes the Bad News
Stocks have long been anticipating the Fed to cut rates. Cheap money means “risk on.” And the market’s been risk on since at least November 2023. (If not October 2022.)
An actual boost in manufacturing PMI is probably the worst news they could get.
An actual growth spurt in the economy, one that has come with a funds rate of 5.5%, means easing should be out of the question. (PMI manufacturing prices paid dumped gas all over that fire jumping way above estimates as well.)
Higher for longer carries all kinds of risks for other parts of the financial system. The Treasury has trillions in maturing debt to refinance and regional banks are holding hundreds of billions of CRE debt their books that will need to be refinanced soon as well.
We’ve previously suggested a strategy the Fed might use in the future to justify cuts. It’s still on the table
Tomorrow, however, we’ll get more clarity when official inflation numbers come out.