Daily Economic Update: August 23, 2023

U.S. yields start the day lower, with the 2Y down 4bps back at 5% and the 10Y down 6bps at 4.26%, both back to where they were pre-SVB (remember SVB?).  Eurozone PMI contracting further with German manufacturing continuing to weaken.   Some retail earnings weren't great on Tuesday, but really where are there still Macy's anyway??..and stop stealing from Dick's [insert if Staples sells Staples then...videos here].  There are some academic and non-academic theories connecting a rise in retail theft (or "shrinkage") to inflation.  Generally those theories are that either: (a) rising prices make some goods more expensive so people steal them and (b) rising prices creates an incentive to sell stolen goods below retail prices on the black market.  As we wait for Powell at J-Hole on Friday, attention has turned to bashing Biden's trip to Maui, counting Trump arraignments, Republican primary debates, or, dare I say mask-mandates?  On the day ahead we have S&P PMI's, new home sales and 20y auction today.

If we're going to keep talking about R-Star, can we at least give my man Knut Wicksell some credit?  Wicksell believed that while you could not see the natural rate, you could see the impact of policies that kept rates above or below this rate by looking at trend growth rates. Today, our central bankers discuss their interest rate policy relative to this neutral rate or “R-Star” to determine if their policy is restrictive or not. 

“Nature’s productivity has a strong tendency to keep up the rate of interest” – Irving Fisher ....read the Febezzle article 

XTOD: Confession: in the past 3 years, I've never listened to a single podcast that someone has sent to me. I'm maxed out.  Always feels like main point can be summed up in a tweet or a paragraph rather than expecting me to block out 1-3 hours.

XTOD: Time to scrap ALL stars. ystar, ustar rstar

XTOD: Zoltan: “The west dreamt of the Brics as a lapdog, that they would accumulate dollars and recycle them into Treasuries, but instead of that they are renegotiating how things are done.”  Who opened this door?   “The signal moment for them in the past 18 months, argues the former Kofi Annan aide Mousavizadeh, was not Russia’s full-scale invasion of Ukraine in February 2022 nor Nato’s rediscovery of its purpose, but the freezing of Russian central bank reserves, which dramatically underlined once again the power of the US dollar.  “For middle powers, it was the equivalent of someone going in and seizing embassy property.”

XTOD: Interesting article, but with a pretty bizarre quote from Zoltan Pozsar: “The west dreamt of the Brics as a lapdog, that they would accumulate dollars and recycle them into Treasuries, but instead of that they are renegotiating how things are done.”.....I don't think he understands at all how the international balance of payments works. If he were the only one, it wouldn't matter, but he repeats a very common confusion....There is a popular conspiracy theory (sometimes called the petrodollar conspiracy) that claims that the main purpose of US foreign policy is to trick or cajole foreigners into buying US Treasuries so as to lower the borrowing cost for the US government...This is total nonsense. Net foreign purchases of US assets is just another name for US trade deficits, and the US has been eager to reduce its trade deficits, which is just another way of saying that the US wants foreigners to stop buying US assets..BRIC countries want to do exactly what Pozsar says they don't want to do, and the west wants them to stop doing exactly what Poszar says the west wants them to do.

XTOD: Microsoft $MSFT just announced the public preview of Python in Excel - Tech Crunch

XTOD: Unexpected inflation can lead to redistribution, hurting creditors and possibly workers.  But steady, expected inflation gets built in to interest rates and wages—it does not hurt workers or creditors.  To a first approx think of real wages as unrelated to average inflation.

XTOD: Crash coming.  Haven’t used that word in forever.  Retail is getting taken out back today.  The consumer is not strong.  Airlines all failed miserably and household savings is 90% below it’s peak of 2020/2021.  Asset prices and real estate prices are going to fall with rates pushing above levels not seen since 2007.  Credit conditions are tightening and we have record debt levels.  This is the most obvious precursor to a recession I have seen since the financial crisis.  Takes time and more layoffs, but it is coming.  I haven’t been this bullish on the vol market since the beg of 2022