A Tale of Two Economies.

 A tale without end.

"Did you see the latest jobs numbers? Employment increased 339,000 in May, according to the Bureau of Labor Statistics. Woo-hoo! But the same report showed that the number of unemployed persons increased by 440,000. Weird. Tech layoffs are continuing, but so are shortages of cashiers and cooks. Also, last week saw the largest money inflow into technology equity funds ever. The S&P 500 is up 12% for the year, but it's down if you exclude seven top tech names. We're living in a Dickensian tale of two economies -- the best and worst of times.

The market is going sideways. We're at one of those precarious Yogiesque forks in the road for the economy and market. We tread water, walk a tightrope. It's both an "age of wisdom" and an "age of foolishness." What will tip things up or down?

Here's some nasty stuff: Now that the debt-ceiling arm-wrestling contest is over, Treasury needs to raise more than $1 trillion in auctions over the next few months. That is some overhang. Who is going to buy all that debt? Not the Federal Reserve, which is in quantitative-tightening mode. And remember, U.S. banks are $2.2 trillion underwater in their bond portfolios. As deposits move to higher-yielding money-market funds, banks are selling bonds as well. Plus, their commercial real-estate loans are a mess. Defaults are the highest they have been since the 2008-09 financial crisis as city office occupancy rates hover around 50%. No shortages there.

As opposed to eggs. This spring's egg shortage caused prices to jump 60% year over year. Now guess what's in short supply? Baby chicks. Note the eggs came first. Shortages began during the pandemic and kept rolling: dumbbells, toilet paper, baby formula, many generic drugs, lithium, nickel and now GPUs, graphic processors used for graphics, crypto and artificial-intelligence platforms like ChatGPT.

Nvidia stock popped 25% in May, reaching a $1 trillion market cap based on decent earnings and a shortage of their GPUs. That's $200 billion in value created in a finger snap. AI is hot. It's the next upside. Any company that so much as whispers "AI" has seen its stock skyrocket.

But beware -- AI companies are the new meme stocks. The cart is way ahead of the horse. Nvidia is valued at 35 times annualized sales and 123 times earnings. There's reason for caution. First, an influx of venture-capital-backed AI company buyers of GPUs and a shortage of these chips has given Nvidia pricing power. Wait, I know where there are plenty of spare GPUs. Venture folks should politely call all the failed crypto startups they invested in last cycle and beg those companies to ship their hoard of GPUs to AI companies.

Also, AI still needs work. In a federal suit against Colombian airline Avianca, the plaintiff attorney admitted to using ChatGPT to supplement his research. Judge P. Kevin Castel noted that "six of the submitted cases appear to be bogus judicial decisions with bogus quotes and bogus internal citations." The lawyer later asked ChatGPT if a case labeled bogus by the judge was legit, and ChatGPT responded that it was real. It wasn't. This is not ready for prime time.

After six months, ChatGPT has 100 million users. Incredible. Sales folks everywhere are using AI to craft email pitches. I read one to an oil company in Texas that began, "Does your team have work struggles that's as bad as the oil spill in the Gulf?" Oof.

Are we in "a winter of despair"? High interest rates, debt overhang, money-supply overhang, the commercial real estate time bomb and pending corporate-earnings blowups. Feel free to add Ukraine, Taiwan and Biden-Trump part deux.

Or are we in "a spring of hope"? It sure feels as if inflation and rate increases are closer to the end than to the beginning. The U.S. is a relative haven of stability compared with the rest of the world. White-collar layoffs and blue-collar labor shortages are starting to peter out. Banking has stabilized, and a radical restructuring of work is happening right before our eyes and could trigger a productivity revolution.

New experiments are taking place in work-from-home, generative AI, and educational methods. Industries such as real estate will soon have new tools like Apple's (rather awkward) Vision Pro ski goggles. Many of these innovations will fail. But the ones that succeed will be cookie-cutter copied quickly. That's what drives economic cycles.

So which way will we tip? The stock market is right where it was 26 months ago. The St. Louis Fed Financial Stress Index and the Vix volatility index serve as warning signals, and both are near lows, meaning expectations are for stability, for now. That's why a drop or upturn may be massive, given that no one is expecting either. I wouldn't be surprised if we get both before the 2024 election." [1]

1. Inside View: A Tale of Two Economies. Kessler, Andy. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 12 June 2023: A.15.