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US CPI preview | Grifols take gloves off

Table of Contents

“Que me hizo comprender Todo el bien, todo el mal”

Grifols get tough

The Grifols leadership team has decided to adopt a very tough, aggressive stance towards the Gotham City Research (GCR) report. In contrast, Block (SQ) remained relatively unfazed when Hindenburg published a short thesis on the payments firm. In recent history, the most aggressive action taken by a company accused of wrongdoing was probably Wildcard's response to the Financial Times for exposing their fraudulent practices. It was a story in itself.

Who are the good and bad muchachos?

In this story, it's not clear who are the good and bad guys. Maybe there will be a sudden twist in the plot at the end of the movie where it is revealed the real bad guys are the cops.

Former Gowex CEO tells Grifols' team to buy shares

The founder of another Spanish biotech company, which failed a decade ago following a short-sell report by GCR, advises the management team of Grifols not to sell their shares but to buy more, even if it means going into debt. Risk it for a churro.

A banker would never have the cojones to state that publicly. Not only because it might constitute bad financial advice, but also market abuse/manipulation. There are worse people than bankers.

When key allegations are clear enough for LLMs

Nonetheless, the allegations in the GCR report are sufficiently clear that even a standard (non-customized) large language model (LLM) can accurately resolve them. A pro tip: it’s better to remove the authors' report summary when using an LLM tool in such cases. Otherwise, the output is likely to be just a regurgitation of the written summary.

Yen starts to weaken… for now at least

Meanwhile, the Japanese Yen (JPY) has begun to underperform against most major currency pairs. This situation is challenging, where the fundamentals and technicals, as we previously discussed, point in opposite directions. It’s been a while since we had a nice alignment of fundamentals and technicals on an investment thesis. Unfortunately, the pressure to perform, especially after a dismal year, may be too much for some to exercise patience. Sadly, this is also what creates many of the opportunities.

US CPI outlook and what we're looking for

A few people have asked if we have any special insights into tomorrow's US CPI inflation number. The short answer is no. Most of our inflation insights come from Craig, who is currently waiting for further developments on the economic front. Here are a couple of things we’re watching:

– Month-on-month changes in Housing/Shelter. Our hypothesis is that the unexpected increase in housing costs in November was due to a rapid decline in energy costs in the CPI rents calculation methodology, i.e., pure rents after adjusting for utility costs which might be included in gross rent costs.

– We believe corporate America has planned for a slowdown in US economic activity in 2024. There is a risk that these projections may be overly pessimistic in Q1 2024, potentially triggering a reacceleration in hiring and capital expenditures. This is not our baseline expectation, but it could have a significant impact on wages.

– Some have noted that investor sentiment indicators published by major Wall Street banks are near the top of the range. We suspect these indicators reflect recent market price actions, whether directly or indirectly. Qualitatively, a more appropriate sentiment range period would be from December 2021 (most bullish) to December 2022 (most bearish). We are probably currently in the 60-70% maximum bullish range, though we haven’t conducted any quantitative analysis to support this view.

US recession probabilities

– We are constructing our 2024 economic scenarios and recession probability based entirely on statistical analysis. We do this not because we believe statistical models are superior to economic forecasts, but because most Wall Street analysts perform poorly in this regard. A rapid decline in inflation is likely to increase the likelihood of a US recession, contrary to popular belief. This is according to statistical models, without considering changes in Fed monetary policy in response to an economic slowdown.

– At the start of last year, the historical frequency of recessions was one of the strongest arguments against the imminent risk of a sharp economic slowdown, as well as the conditional probabilities derived from key economic indicators in Q4 2022. As such, we estimated a 10-15% probability of a recession (depending on the formal definition of its start date), slightly lower than the historical unconditional probability of 15%. Goldman Sachs Research made an out-of-consensus (low) prediction of 20%, but they actually conduct economics research. Nevertheless, it was one of those rare instances where the best fundamental research and unbiased statistics concurred, contrary to the broader market consensus.

Unfortunately, we don't see any similar gifts to benefit from at the start of this year.


A few comments to add:

1) Scanning through a handful of market commentaries, a Consumer Price Index (CPI) release that is in line with, or slightly above, consensus expectations is seen as positive for risk assets. In the unlikely scenario where the CPI declines across a broad range of components and measures, we may enter a new paradigm that is not necessarily favorable for risk assets—as per our previous update.

2) Investor bull/bear sentiment indicators published by Wall Street banks are likely to be misleading in this context, as they reflect, whether directly or indirectly, the recent market price action of risky assets. Bitcoin spot prices, relative to their peak in December 2021, might be a better measure of risk appetite. Some argue that price levels from 2021 should be excluded from data samples, yet they were actively participating in the markets during that same year.

3) Our primary focus today is on rents and shelter costs, specifically whether the uptick observed last November was systemic or the result of a technicality in the CPI calculation methodology related to declining energy prices.

Good luck!

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US CPI preview | Grifols take gloves off

What we’re looking for in the inflation data