Daily Economic Update: August 21, 2023

J-Hole week is upon us.  The week starts off with rates up 3-4bps with the 2Y ~4.97% and the 10Y re-approaching 4.30%, but it will be capped off on Friday by Powell's 10am speech at the Jackson Hole Symposium.  The recent rise in yields has been attributed to everything from growth, inflation and selling by central bank reserve managers.  Overnight China cut it's 1 year loan Prime rate by 10bps to 3.45% as they continue to deal with their slowing economy.  In between today and Friday there is some Fedspeak and otherwise Thursday's jobless claims and durable goods reports are highlight.

Ahead of J-Hole, we have Nikileaks out with an article about r-star (the neutral rate) and how it might be higher post Covid.  Speaking of r-star, there was an interesting paper in March 2022 from Fed researchers that posited what follows (in fairness with respect to persistent low rates, but it wouldn’t be inconceivable that this same feedback loop can work with higher rates): “an incomplete information setting where the central bank and the private sector learn about r-star and infer each other's information from observed macroeconomic outcomes. An informational feedback loop emerges when each side underestimates the effect of its own action on the other's inference, possibly leading to large and persistent changes in perceived r-star disconnected from fundamentals. Monetary policy, through its influence on the private sector's beliefs, endogenously determines r-star as a result. We simulate a calibrated model and show that this `hall-of-mirrors' effect..”

TTOD: How many people know about Winnie the Pooh and Xi Jinping? Is it just me who knew nothing about this?

TTOD: "Not only do high interest rate policies directly lead to significant increases in interest payments as a percent of GDP, but they also indirectly raise interest payments if they slow the economy..."

TTOD: Expectations about returns in choosing how much to save and in what was the driving force in the mechanisms I described in this thread

TTOD: 2. Without nominal rigidities, the price level would indeed behave like an asset price, reacting to future changes in monetary and fiscal policies.  John Cochrane would be (largely 😊) right. Shifts in aggregate demand would be absorbed automatically by changes in interest rates.

TTOD: Fiscal theory of the price level easily adds sticky prices! That’s what most of the book is about, and the whole literature, starting with Leeper 1991 who didn’t even present the flex price case. A fiscal price level jump becomes a drawn out but finite  inflation with sticky prices — exactly as happened.

TTOD: “Conceptually, if the economy is running above potential at 5.25% interest rates, then that suggests to me that the neutral rate might be higher than we’ve thought."

TTOD: In sum, the pandemic may have flipped us from a savings glut to a savings shortage almost overnight.  If so, markets have more adjustments to make (fixed income and equity).

TTOD: But it's not the lower interest rates that caused the increase in investment. The desire to invest was already there, based on the expected productive consequences of that investment, and the lower interest rates simply accommodated this desire...The problem in China's speculative property market in the past two years hasn't been expensive mortgages, but rather the perception that prices will no longer inexorably rise, and so there is no longer any reason to buy property. In that case the only way lower mortgage...

TTOD:  The heart of Hudson Yards' microgrid is a cogeneration system that consists of four Jenbacher J620 gas engines.  Each engine generates approximately 3.3 MW of electrical power.  These things are beasts.

TTOD: Doctors transplanted a genetically modified pig’s kidney into a brain-dead person more than a month ago. It’s still working.

TTOD: I've never felt more bearish  Inflation ?  You need risk seeking financial credit creators 

I don't see any...  And we got an $18 trillion behemoth with huge excess capacity to make stuff that will eviscerate companies granting 6% plus wage growth in the West. Go on, I dare you, raise wages in this environment and face commercial extinction