s&p 500 vs. cboe equity put/call ratio (15-day avg

Meridian Macro Research LLC 5/23/2021

1Meridian Macro Research LLC Tel: 561-855-4840 [email protected]

Caution Flags Remain: equity put/call ratio continues to rise, now above 0.5 for 10 straight days. The ratio had spent the better part of a year under 0.5, which has only occurred once before: during dot.com bubble.

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S&P 500 vs. CBOE Equity Put/Call Ratio (15-day avg., inverted)

Last:Last:

0.55

5/21/2021data thru:

4,155.9

5/23/2021 Meridian Macro Research LLC Tel: 561-855-4840 [email protected]

Meridian Macro Research LLC

Home2

Stratospheric rise in Tech stocks looks to have stalled as Nasdaq, NYFANG indices part ways with the S&P 500.

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S&P 500 vs. NYFANG

5/21/2021data thru:



Home3

Good news: Initial Claims continue to fall, now at lowest since early 2020. Bad news: Continuing Claims rise 111k to 3.75 million.

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Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21

Jobless Claims (Regular State Programs, 000s)--Initial --Continuing

source=Dept. of Labor

Last:Change:

Last:Change:

444-34

3,751+111

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Continuing Jobless Claims4-week change (000s)

source=Department of Labor

Last: +99



Home4

Moving in the wrong direction: Continuing Jobless Claims see first 4-week rise since last March. The fact that Continuing Claims seem to have hit a ‘permanently high plateau’ is troubling and suggests we may see disappointing employment reports ahead (or, lack of ‘blockbuster’ jobs numbers which we should otherwise

expect). Elevated continuing claims may also be a warning of high level of permanent job losses. Should this be the case, all roads point toward additional stimulus programs.



Home5

Total Continuing Claims (all programs) drop -887k to 15.9 million. Given that economic activity is heading back toward normal in most of the country and that many states have discontinued Covid-related unemployment claims programs, we should certainly see this number decline dramatically in the weeks ahead. This will indeed be good

news, however the Continuing Claims number is what to watch going forward.

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2007 2009 2011 2013 2015 2017 2019 2021

Continuing Jobless Claims: All Programs(000s)

source=Dept. of Labor (nsa data)

Last:1Wk Chg:4Wk Chg:

15,975.5-886.6-1,429.7

Jan. 2010: 12.06 million

Oct. 2019: 1.39 million(2nd lowest on record)



Home6

While the overall trend continues higher, Housing Starts & Building Permits slumped in April: Starts fell -9.5% vs. expectations of -2%.

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2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

New Housing Starts(thousand, saar)

source= Census Bureau

Last:1 Mo Chg:M/M% Chg:

1,569-164-9.5%



Home7

Has urban exodus come to an end? Following the disappointing Housing Starts data comes the third month in a row of Existing Home Sales declines. Sales fell -2.7% vs. expectations of a 1% rise and have been negative for last 4 of 6 months. As suggested in a number of our reports, home sales would inevitably soften once the urban

exodus had run its course…and it seems this moment may have arrived.

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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Total Existing Home Sales(million, saar)

Source = NAR

Last:1Mo Chg:

5.85-2.66%



Home8

Meanwhile, median prices jump 4.8% to highest on record as inventory remains tight

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1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Existing Home Sales - Median Price$thousand

Source = NAR

Last:Chg:%Chg:

347.4+15.9+4.80%



Home9

As noted last week, home buying conditions continued to sour even as interest rates remained favorable. Latest UMich survey shows Home Buying Conditions tumbling -19pts to 95 (lowest since 1983)…

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2006 2008 2010 2012 2014 2016 2018 2020

UMich Consumer Sentiment: Buying Conditions: --Homes --Autos

source=University of Michigan

Last:Change:

Last:Change:

102

95-19

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Home10

…with respondents pointing to soaring prices as the determining factor. Chart: home buying conditions index (related to price) tumbles -15pts to record low -40

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UMich Home Buying Conditions Related To:--Price --Interest Rate

source=University of Michigan

Last:Change:

Last:Change:

-40.0

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-15.0

-9.0



Home11

Meanwhile, inflation indicators continue to run hot: Prices Paid regional composite now at record high following Empire Fed (highest Prices Paid reading on record) and Philly Fed (highest PP since 1980) updates this week.

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2005 2007 2009 2011 2013 2015 2017 2019 2021

Prices Paid: Regional Fed Bank Composite

Last:Change:

77.4+7.2

source= Empire Fed, Dallas Fed, Kansas City Fed, Philly Fed



Home12

Inflation on the rise

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2006 2008 2010 2012 2014 2016 2018 2020

--CRB US Spot Raw Industrials --S&P GSCI Index Spot--Dow Jones US Basic Materials Index

2006=100

Last:Last:Last:

165.1117.3

source= Bloomberg; weekly data

269.2



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2006 2008 2010 2012 2014 2016 2018 2020

CRB US Spot Indices--Raw Industrials --Metals --Textiles --Fats & Oils

2006=100

Last: 165.1 259.2

source= CRB, Bloomberg; weekly data

280.3127.5



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S&P GSCI Spot Indices: -Composite -Industrial Metals-Precious Metals -Energy -Grains -Livestock

2006=100

Last: 117.3source=Bloomberg; weekly data

92.2 153.1 354.6 243.9 141.6



Home15

Record stimulus has created a massive disconnect between inflation expectations and labor market conditions.

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Labor Participation Rate vs. 5Yr Breakeven Inflation Rate

Last:Last:

65.372.64%

source= Bloomberg; weekly data



Home16

Rising import prices sending production/input costs soaring…

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All Commodity Import Prices y/yvs. PPI y/y

source=BLS

10.60%9.50%

Last:Last:



Home17

…and sending the dollar lower.

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CRB Spot Raw Industrials Index y/y vs. Trade-Weighted Dollar (inverted)* y/y

source=CRB, FED. *Trade Weighted Nominal Broad Dollar (month average)

40.8%Last:Last: -8.65%



Home18

Primary Metals import prices up 43% y/yPrimary Metals PPI: +34% y/y

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Primary Metals:--Import Prices Y/Y --Unfilled Orders Y/Y --PPI Y/Y

source=Census Bureau, BLS; PPI=primary nonferrous metals & metal products NSA

42.6%17.2%

Last:Last:Last: 33.8%



Home19

Fabricated Metal Import Prices and PPI also heading higher

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2007 2009 2011 2013 2015 2017 2019 2021

Fabricated Metals:--Import Prices Y/Y --Unfilled Orders Y/Y --PPI Y/Y

source=Census Bureau, BLS; PPI=fabricated structural metal & metal products

5.6%12.7%




Home20

Import Prices from China are surging...

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US Import Prices from China Y/Y--All Commodities --Fabricated Metals

source=BLS

2.14%6.73%

Last:Last:



Home21

…this as China’s metals smelting & processing inputs costs spike (along with China’s broader PPI), exacerbating global inflation risks

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China PPI: Smelting & Processing of Metals Y/Y --Ferrous vs. --Non-Ferrous

source=China National Bureau of Statistics

30.0%26.9%

Last:Last:



Home22

Consumer-goods-related import prices from China also turning higher…

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US Import Prices from China Y/Y-Computers -Household Appliances -Furniture

source=BLS; *computers & electronics

0.48%1.53%




Home23

…as are food prices.

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US Import Prices Food & Beverage Y/Y

source=BLS

Last:Chng:

7.50%+3.75



Home24

As record stimulus sets off inflation, dollar bets remain decidedly bearish: Speculators, Asset Managers increase net shorts for 6th and 5th week in a row respectively…with Asset Managers nearing record net short.

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Net US Dollar Bet (futures + options, $billion) Leveraged Funds Speculators Asset Managers

source=CFTC; Bloomberg

-$15.94

-$66.91

Last:1Wk Chg:

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-0.67

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$0.99+0.70



Home25

US Dollar as % Global Forex Reserves fell for 3 straight quarters thru end of 2020, and sure to continue lower...

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US Dollar (DXY) Index vs.US Dollar as % Global ForEx Reserves

Last:Last:

89.9859.02%

*Monthly dataForex Reserve data source= IMF: quarterly data (pulled in as monthly) thru: 12/31/2020



Home26

…as Deficit spending explodes, and likely to remain elevated as spending programs are sure to continue, with possibility of further rounds of stimulus checks (especially if permanent job loss numbers are as high as

Continuing Claims seem to indicate).

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source=Bloomberg, US Treasury, Census Bereau (12mo Budget Deficit + Trade Deficit)

US Twin Deficit ($bln) vs. US Dollar (DXY) Index

Last:Last:

-4,347.190.72



Home27

Expectations are for widening deficit over the next decade…

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1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030 2033

10Yr CBO Projections: Budget Deficit(-) or Surplus ($bln)vs. Interest Expense on Public Debt ($bln)

<---Actual Projection--->

-$1,883

$799



Home28

…and, further out, the situation is not expected to improve.

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CBO Extended Projections (2021-2051)--Total Revenues --Total Spending

as % GDP

source= CBO



Home29

Indeed, the debt-fueled spending path we are on will be near impossible to break free from. In addition, raising rates in the current environment would create a massive negative feedback loop as it would slam the brakes on economic expansion and send interest expense exploding higher…which of course would lead to more stimulus

and debt, in turn retarding growth. In astrophysics terms, we have effectively breached the debt Event Horizon…the point at which nothing can evade its inescapable and destructive grasp. The organic growth

necessary to escape this gravitational pull of endless debt-fueled spending simply is not there.

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10Yr CBO Projections: Interest Expense ($bln)--Gross Federal Debt* --Public Debt

<---Actual Projection--->

source=CBO; *expense on Gross Federal Debt is Fed historical data thru 2020, plus 10yr CBO projections. Gross Federal debt is debt held by the public plus Treasury securities held by federal trust funds and other government accounts.



Home30

Yes, the Fed is indeed trapped as debt levels are simply too enormous to consider raising rates. If the Fed were to state they plan to raise rates, say within the next 2-3 meetings, the market ‘tantrum’ would be seismic in our

estimation. The Fed cannot allow a sustained bond market selloff either as rising interest rates would slam the brakes on the economy. Chart: Fed maintains ‘lower for longer’ even as CPI heats up. Note: Gap between CPI y/y

and Fed Funds Rate (expressed as % difference; ie – gap is now a record 98.3% and would be 100% if Fed Funds were at zero instead of 0.07%). Prior largest gap where CPI was positive and Fed Funds was near zero

was in August 2011 at 98% as European Sovereign Debt Crisis and US growth scare rocked global stock markets.

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% Gap between: CPI Y/Y - Fed Funds Ratevs. Fed Funds Rate

source=Bloomberg, BLS, Fed

Fed Funds Rate = ZERO

June 1980:CPI: 14.4% y/yFFR: 9.5%



Home31

We wanted to point out something which has been conspicuously absent considering exploding deficit and debt,expectations for further spending programs, plus multiple warnings from the CBO regarding the unsustainablefiscal path we are on: a US credit rating downgrade. The most recent shot across the bow came from Fitch in Julyof last year in which the United States’ AAA rating was affirmed, yet the outlook was revised to Negative fromStable. Fitch noted that while the US benefited from issuing debt in the world's reserve currency, it also had thehighest debt of any AAA-rated sovereign and had not presented a credible plan to address massive debtaccumulation resulting from the economic shutdown. They also predicted Debt/GDP ratio would exceed 130% byend of 2021 (a marker which has already been hit in Q1 if we factor-in latest spending programs). Since Fitch’sJuly 2020 report, the Budget Deficit has jumped $2.25 trillion and we saw the 12mo deficit hit a record $4.09trillion in March. Should we see passage of additional ($trillion+) spending programs (seems like a certainty)without a credible budgetary offset plan, it would only be logical the US would see a downgrade from one or moreof the big 3 ratings agencies.

It seems Fitch is already warning a downgrade may not be far off. From Fitch Ratings (March 9, 2021): “The $1.9trillion American Rescue Plan (ARP) ….will deliver a strong economic boost but the scale of the package points toa delayed return to a fiscal stance consistent with stabilization of the government debt ratio, says Fitch Ratings.Consequently, the prospect of debt stabilization is further away than when Fitch placed the US Sovereign Ratingof ‘AAA’ on Negative Outlook in July 2020, despite a stronger economic recovery demonstrated by improving dataand supported by the ARP. At the time of the review of the US rating in July 2020 we said that we would assesswhat steps the new administration took toward deficit consolidation in the post-pandemic phase, noting that therating could be downgraded in the absence of a credible commitment to address medium-term public spendingand debt challenges. The future path of mandatory spending including Medicare and social security will remain animportant driver of medium-term financing needs.”

The report goes on to say: “…without a fiscal anchor and in light of the ambitions of the administration, fiscalpolicy may be more expansionary, leading debt to rise more rapidly.” Translation: debt will rise uncontrollably.

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J F M A M J J A S O N D

S&P 500 2011 2021

*daily data

Operation Twist Announced

(9.21.11)



Home32

A potential credit rating downgrade feeds right into the idea of a market correction ahead…much like the scenario seen in 2011. In August 2011, global markets reeled over fears of contagion from European Sovereign Debt Crisis,

concerns over slowing US growth plus the shock of Standard & Poor’s US credit rating downgrade to AA+ from AAA. Fast forward a decade to today, and it all sounds eerily familiar. Europe is still struggling (negative Eurozone

GDP last 4 of 5 quarters, see addenda chart 3), Europe’s debt pile has soared, US macro data is softening as stimulus check programs come to an end, and US Debt/GDP hits record highs. Could we be on the verge of a

2011 repeat as a double-whammy of growth fears (or stagflation fears) and credit ratings downgrades send markets reeling? Buckle up, volatility may soon be back in a big way.

S&P issues US rating downgrade



Home33

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source=US Treasury

Budget Deficit12-month sum - $billion

-3,582.3+512.4

Last:Change:

Fitch, July 2020: affirms AAA rating, outlook revised to Negative

S&P, Aug. 2011: US credit rating cut to AA+, outlook negative

Oddly enough, S&P’s August 2011 credit rating downgrade press release included the following: We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to,

higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case. It looks as if those targets (save higher interest rates) have easily been met, yet here we are a decade later…with 12-month deficit nearly 3x where it was in August 2011… and no movement from S&P. The Dollar is no doubt in the Fed’s crosshairs as they attempt to reduce America’s

debt burden, so a credit rating downgrade could be just the ticket to accelerate the dollar’s slide.



Home34

Should we see this scenario play out as it did in 2011, what will be the result? Why, additional fiscal and monetary stimulus of course. Whether it plays out this way or not, we believe the longer-term prospects for the dollar remain

decidedly negative as debt accumulation has effectively entered autopilot mode.



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Nominal GDP vs. DeficitGrowth By Calendar Year ($bln)

source=US Treasury, BEA

Last:Last:

554.21,133.3

Addenda chart 1. Waiting for real growth to arrive: 2$ in deficit spending for every 1$ in growth so far in 2021



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GDP - Gross Pvt. Domestic Investment (Total) --Q/Q --Y/Y

source = BEA

Last:Change:

Last:Change:

-0.62%-7.08

6.15%+0.96

Addenda chart 2. US growth stalling? Gross Private Domestic Investment (Residential + Non-residential Investment + Change in inventories, *nominal) turns lower again, first negative print since Q2 of last year.



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Eurozone GDP--Q/Q --Y/Y

Last:Change:

Last:Change:

-1.80%

-0.60%

source=Eurostat; quarterly data thru:

+0.10

+3.10

3/31/21

Addenda chart 3. Eurozone GDP negative for last 4 of 5 quarters thru Q1

Meridian Macro Research LLC Tel: 561-855-4840 [email protected]© 2021 Meridian Macro Research LLC. All Rights Reserved. The information and data contained herein is assumed to be accurate, but is not

guaranteed. Specific reference to any specific security should never be construed as a solicitation to either buy or sell. The charts and commentary released under its banner may not be reproduced, forwarded or referenced without the express consent of Meridian Macro Research LLC.

5/23/2021


Home

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Industrial Production (2008=100)-USA -Eurozone

Last:100.9

source= bloomberg

99.2

Addenda chart 4. Eurozone Industrial Production remains firmly below 2008 highs; US Industrial Production is just above water over the same period.

s&p 500 vs. cboe equity put/call ratio (15-day avg

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