Daily Economic Update: October 31, 2023

 

The last day of posting quotes from the TV series 'The Wire'.  The inspiration for using these title quotes was stated here.  That post as a whole is probably worth a second read... unfortunately for Orioles fans their playoff run was quite short.  Equities have not been spooked to start Halloween following up on solid gains yesterday.  Even as equities rose, yields were rising yesterday.  Also yesterday, we learned Stanley Druckenmiller has a negative opinion of Janet Yellen and that Janet Yellen will be issuing less Treasuries in the 4Q than the market expected, but still $776 billion.

Today yields start the day lower by 3-5bps with the 2Y ~5.02% and 10Y ~4.82%, spurred in part by lower than anticipated treasury supply, the BOJ's tweak to it's yield curve control being implemented in a 'dovish' way, redefining 1% as a "loose cap" on the 10Y yield.  As expected, BOJ held short term rates as -0.1% as they still aren't confident in inflation sustainably hitting 2% there.  USD-JPY over 150 at 150.666.  EU area inflation came in below estimates this morning at 2.9% yoy.

On the day ahead we get employment cost index data, some housing data and some consumer confidence data.

The month started with strikes front and center, worker strikes that is, and while those seem to be slowly resolving, with UAW closing in on deals, the month concludes with concerns about other strikes, the kind made with missiles and artillery, unfortunately.

On the bright side, unless today is really bad, at least this October did not have a bank panic or stock market crash that rivaled Black Monday or Black Thursday.

If you're not going as Taylor Swift or Travis Kelce for Halloween, you can go as: (via Bloomberg Opinion's Jessica Karl)

XTOD: Have you received an official looking letter in the mail, supposedly from the Federal Reserve Bank of New York – or even the Chairman of the Federal Reserve – saying you’re owed a massive amount of money and all you have to do is call a number to give some vital information and pay a transfer fee before they release it to you? DO NOT call that number! It’s a scam!  If you think your personal information has been compromised, contact your bank and local law enforcement immediately! 

XTOD: Yeah, the Fed takes money through inflation. It never gives it away. Common sense people.

XTOD: Stan Druckenmiller on bonds:  “I am currently short bonds and long the front end”

XTOD: This Gavin Newsom video is something.   Dude thinks he's on the Globetrotters.   Keeps trying to spin a basketball on his finger and then commits an egregious offensive foul on a little Chinese kid and then wrestles him after he knocked him over.

XTOD: "If the SPX closes below 4288 on Tuesday, it will be its third consecutive monthly decline. It hasn’t been down four straight months since 2011 and hasn’t been down four straight months ending in November since 1946:" BTIG's Jonathan Krinsky

XTOD: ”Defeat is a state of mind; No one is defeated until defeat has been accepted as a reality.” -Bruce Lee

XTOD: Charles Schwab is undergoing mass layoffs today per multiple employees - some laid off employees stating they will be on payroll until January 5th before being terminated.   Likely to affect thousands of employees.

XTOD: Given the gap between objective and subjective perceptions of where the US economy stands, a serious question: Can social media amplify only bad news?  Any example of good news amplification?

XTOD: Every $1 you cut IRS funding will lose about $2 of revenue.....So that means this bill would add about $30 billion to the deficit.

Daily Economic Update: October 30, 2023

FOMC week is upon us, with the market pricing in effectively no chance that the Fed adjust policy rates from their current target range for the federal funds rate at 5-1/4 to 5-1/2 percent when they make their announcement on Wednesday.  Of course markets will again look for clues as to the future path of policy in both the statement and Powell's press conference, but the consensus view seems to be that we are likely at the peak in policy rates.  

As if geopolitical risk isn't enough, there's going to be plenty of "event risk" on the week with Bank of Japan, FOMC and Bank of England as well as the Jobs Report on Friday (where impact of strikes will be a factor). Somewhat under the radar is the Treasury's Quarterly Refunding Announcement with borrowing estimates released this afternoon and an announcement on Wednesday of its refunding plans, both of which are highly anticipated.

To start the day yields are up ~3bps with the 2Y at 5.04% and 10Y at 4.87%.  Mike Pence drops out of the presidential race already.  The similarity named, Mike Prince had his Presidential fate decided in the finale of the tv series Billions (I won’t spoil it).

On the week ahead:

Mon: Dallas Fed Index

Tue: Bank of Japan, Employment Cost Index, Consumer Confidence

Wed: FOMC Day, ADP Employment, JOLTS, ISM Manufacturing

Thur: Bank of England, Jobless claims, Apple Earnings

Fri: Jobs Day, ISM Services

XTOD: Pretty amazing that there's only a 19% chance of another hike over the next two meetings when Powells favorite inflation number rebounded to 5% annualized.  

XTOD: The Fed still should not think that its job of bringing inflation down is done. In fact, there is a real risk that it drifts up to 3.5% or higher.  But with long rates and other financial conditions doing much of the work for them no need to be planning any short-term rate hikes.

XTOD: D(t) =  (1+r)D(t-1)/(1+g) + d
D is the ratio of debt to GDP
t indexes time
r is the interest rate
g is the growth rate
d is the ratio of the primary deficit to GDP
When r>g this is an explosive difference equation.
 Currently we are in this case.  This is unsustainable

Possibility 1. Congress reverses the sign of d by cutting spending or raising taxes. 

Possibility 2. Since r and g in this equation are both nominal: inflation can push nominal GDP growth above r thus causing the debt to GDP ratio to fall. This is a ‘stealth tax’.  
Possibility 3. Rationing and price controls as we had in WWII.  Prices are held down artificially and goods are rationed using coupons for food and fuel. There would be a substantial black market for those who can afford it.

XTOD: The only purpose of saving is to fund productive investment. The problem is that we live in a highly unequal global economy that systemically forces up the ex ante savings of the rich and of surplus countries seeking to externalize their own weak domestic demand.....The way for countries like the US to bring debt under control is not through austerity. It is through a reduction in income inequality and a refusal to absorb the excess savings of surplus economies. Otherwise austerity just means unemployment

XTOD: Personally this seems lost on many but I see an obvious connection between oil’s restraint so far especially in phys (Iran dumping everything they can for USD asap, just as Russia crushed wheat this past year), and crypto strength as Hamas and pals need money. It’s all connected.

XTOD: Imagine being a “long term investor” that didn’t see this coming.  If there is a ever a chance for a limit down scenario to occur, Monday is the day.

XTOD: China is massively expanding its military and frequently the technology being used was stolen from the US.

XTOD: JUST IN: New South Park episode blasts Disney and says all their movies “suck now” and specifically blames Lucasfilm president Kathleen Kennedy.   Remarkable.“Joining the Panderverse” drops today and all of the main characters have been replaced by minority women, an obvious mockery of the woke film industry.  Cartman specifically blames Kathleen Kennedy for “why the Disney movies all suck now.”  Kennedy was responsible for overseeing the Star Wars films.

XTOD: “Old George Orwell got it backward. Big Brother isn’t watching. He’s singing and dancing. He’s pulling rabbits out of a hat. Big Brother’s busy holding your attention every moment you’re awake. He’s making sure you’re always distracted. He’s making sure you’re fully absorbed. He’s making sure your imagination withers. Until it’s as useful as your appendix. He’s making sure your attention is always filled. And this being fed, it’s worse than being watched. With the world always filling you, no one has to worry about what’s in your mind. With everyone’s imagination atrophied, no one will ever be a threat to the world.”

— Chuck Palahniuk

XTOD: Don't let circumstances dictate your life. Don’t let circumstances shape whether you are working out, doing the necessary work, doing personal growth work, or anything else that is PERTINENT to YOU. Bottom line is that you have DREAMS and we can’t let circumstances deter or distract us from where we are going, what we are doing, and what we are about to create.  Can you feel me?

XTOD: So goes the leader, so goes the culture. So goes the culture, so goes the company.

XTOD: Broncos celebrate win vs Chiefs with Taylor Swift music 👀

Daily Economic Update: October 27, 2023

 

Yesterday was another tough day for equities despite GDP exceeding expectations at an annualized 4.9% (seems like Atlanta Fed GDPNow model wasn't so bad after all) and yields falling 8+ basis points with a solid 7Y auction.   Durable Goods orders beat expectations and were the best in 3 years and jobless claims increased above 200K.  AMZN beat on top line and profit after the bell which is providing relief to equities, as equity futures are positive this morning. U.S. yields up slightly to start the day with the 2Y at 5.05% and the 10Y at 4.86%.

Biden doesn't believe in the Phillips Curve: “I never believed we would need a recession to bring inflation down – and today we saw again that the American economy continues to grow even as inflation has come down" and  “The unemployment rate has been below 4% for 20 months in a row, real wages are up over the last year, and median wealth for American families has grown by a record amount, accounting for inflation," 

The ECB  left the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 4.50%, 4.75% and 4.00% respectively and will remain 'data dependent'.  ECB also touched on the need for fiscal authorities to reign in energy  subsidies and to reform debt.

On the day ahead it's PCE, personal income and spending data and UofM survey about gas prices (kind of).   Investors will continue to weigh heading into another weekend with unresolved and heightened geopolitical risk, especially as the U.S. is countering attacks against our military resources in the region.

XTOD: Unemployment rate: low 

GDP growth: high 

Household net worth: never been higher 

Inflation: coming down 

Sentiment: worst economy ever 

My replies: the data is fake

XTOD:  The qualifying yearly income for a median-priced house in 2020 was $49,680. Now it’s more than $107,000, according to the NAR

XTOD: Both of these are true: 1) She's right, a 9-5 plus commute sucks and drains your energy. We all know it.  2) If it does suck, cultivate equanimity and work on escaping it.

XTOD: Janet Yellen is a delusional national embarrassment.

XTOD: JPMorgan CEO Jamie Dimon and his family intend to sell 1 million of the lender’s shares for financial diversification and tax-planning purposes

XTOD: "Using your money to buy time and options has a lifestyle benefit few luxury goods can compete it."

XTOD: Blackstone investment strategist Byron Wien, known as a friendly optimist in an investment world often driven by fear and greed, has died at 90

XTOD: In honor of Byron Wien, essential lessons from his long life. RIP. https://x.com/EdBorgato/status/1717615113308708995?s=20

XTOD: Before you work harder on something, spend time identifying the point of leverage in the situation.   Working harder on the wrong thing won't move you forward. 

This can be somewhat counterintuitive for those of us who have been taught to work harder when you're not getting the results you want.  

Working smarter is the most valuable form of working harder.

Daily Economic Update: October 26, 2023

 

A decent move lower for equities especially the Nasdaq as Google/Alphabet shares stumbled and as yields moved solidly higher yesterday, with the 10Y moving back towards 5%.  Weakness in equities continues as META's beat did little to improve sentiment and this morning UPS missed while citing lower package volume.  USD-JPY is trading above 150 as we near next week's BoJ decision.  In somewhat positive news, the UAW appears to have reached a deal to end their strike on Ford and, as Bloomberg Opinion stated, the Republicans Pick Some Guy to be Speaker

This morning the 2Y is 5.12%  and the 10Y is 4.95% as the focus shifts to data and the ECB.  The ECB is expected to be on hold just as the BoC was yesterday.  In US Data we get a first look at 3Q GDP along with Durable Goods and Jobless Claims.  We'll also get the always interesting 7Y auction which follows a weak 5Y auction yesterday that tailed over 2bps.  AMZN earnings after the bell today.

XTOD: The biggest lie they tell you as a kid is that Santa Claus isn't real. 

It turns out that there IS one guy who air-delivers presents to every kid in the world, maintains an army of low-paid workers in freezing conditions, and knows everything you've done over the past year

XTOD: Regional bank update  Regional banks in many cases at 1/5/10-year lows with price/book ratios at 60% plus or minus and yields at 7% plus or minus. Current situation resembles the axiom of “catching a falling knife.” It hurts if done too early. I’m waiting a few more days but they are great long term holds. 

XTOD: 85% chance Newsom is the D nominee.

XTOD: Bloomberg on “Bond Market’s ‘Vicious Cycle’ Risk Puts Spotlight on Fed’s QT.”

Put another way, the bond market’s once reliable buyer, with seemingly limitless buying appetite/ability and no price sensitivity, has now been forced by inflation and other excesses into becoming the market’s reliable seller — this at a time when there is concern about other buyers, as well as about the magnitude of forthcoming debt issuance.

XTOD: Jeremy Grantham: "In the U.S., the three near perfect markets with crazy investor behavior and 2.5+ sigma overvaluation have always been followed by big market declines of 50%. The current superbubble features a dangerous mix of cross-asset overvaluation."

XTOD: It’s always a good sign when something like #volatilitylaundering is finally starting to be understood and the launderer’s response is “ok, fine, instead let’s sell it to retail!” https://www.bloomberg.com/news/articles/2023-10-25/private-equity-s-kkr-wants-part-of-retirement-savings-with-fidelity-schwab

XTOD: This generation is completely doomed. They can't even hold a 9-5 job without having a mental breakdown.

Daily Economic Update: October 25, 2023

 A little stability in yields, at least relative to the moves of the last week.  Currently the 10Y is 4.86% and the 2Y is 5.08%.  Yesterday's 2Y note auction was largely uneventful and Bitcoin continues to rise on demand hopes. Just when you thought UAW was falling out of the news they waited for GM earnings announcement and then announced strikes on one of their most profitable factories.  It appears Mike Johnson will be the Speaker of the House, but we've seen how that goes. 

On the day ahead markets continue to speculate around the BoJ and their YCC band as their 10Y JGB hit a new high.  We'll get AMZN and META earnings after the bell as MSFT and GOOG shares moved opposite directions as markets weighed the growth of each companies cloud divisions following their releases yesterday.  In data it's new Home Sales and Bank of Canada decision. We'll also get the 5Y note auction

XTOD: "I'm always amazed that the market seems to think there's going to be a hard pivot here – I think it's going to be higher for longer."  @TDCowen   President Jeffrey Solomon offers his outlook for the Fed, predicting that bond yields are now "closer to the top than not."

XTOD: Jamie Dimon said the fact that central banks got financial forecasting “100% dead wrong” about 18 months ago should prompt some humility about the outlook for next year. 

He should know since JPMorgan Chase forecasts weren't exactly, you know, accurate.

XTOD: Dozens Of States Sue Meta For Sparking Youth Mental Health Crisis

XTOD: "The fallacy of ‘Term Premium’ | Is ‘Term Premium’ the lump under the rug where undesired inflation expectations are hidden?" |  

XTOD: So many people asked us about the rampant train robberies taking place in Arizona and New Mexico that we wrote an article about it.   If you're moving cargo by rail, you need to understand this new risk to your supply chain. https://www.flexport.com/blog/the-great-train-robbery-everything-we-know-so-far/

XTOD: Regional banks taking out their post SVB lows.

XTOD: New from me: Cruise withheld key footage of its car dragging an injured pedestrian 20 feet while executing a "pullover maneuver" when showing footage to DMV investigators. When the DMV found out, it suspended their license to operate driverless cars.

XTOD: NEW: The off-duty pilot who attempted to cut off a plane's engines mid-flight told an officer it was his first time using psychedelic mushrooms, per the federal complaint 

"I'm admitting to what I did. I'm not fighting any charges"

XTOD: What we consider defining moments, like promotions or a new house, matter less to life satisfaction than the accumulation of tiny moments that didn't seem to matter at the time. In the end, everyday moments matter more than big prizes. Tiny delights over big bright lights.

Daily Economic Update: October 24, 2023

 

Volatility in bonds continues with a big intraday move in yields yesterday, as the 10Y moved off the 5% level and fell 15bps. The move was largely attributed to be market reaction to tweets by Bill Ackman and a lesser extent Bill Gross (see XTODs below).  Today yields are moving slightly higher with the 10Y up to 4.86% and the 2Y at 5.08%.  In data it will be S&P PMI's (EU PMI's were weak this morning) and Richmond Fed Manufacturing.  The Treasury will auction 2Y notes and in equities, the start of big tech earnings today with MSFT and GOOG after the close will be the highlight.  

XTOD: We covered our bond short. There is too much risk in the world to remain short bonds at current long-term rates.  The economy is slowing faster than recent data suggests.

XTOD: Bill Ackman, once a vocal proponent for higher rates and shorting Treasuries, just covered his profitable bearish bet and stated that “the economy is slowing faster than the data suggests”.  Hence this Treasury turnaround.

XTOD: This is incredible: At 9:45 AM ET today, Bill Ackman posted that he covered his bond shorts. 4 hours later, the 10-year note yield is down 15 basis points, on track for its biggest daily drop in 2 weeks. This comes nearly 2 months after he publicly took a large bond short position. Ackman said there is too much risk in the world to continue shorting bonds. He also said that the economy is slowing faster than recent data suggests. Bond markets continue to make history.

XTOD: Something's going on with NFL passing offenses.  - Lowest passing TD% since 1993 - Most sacks per game since 1997 - Fewest yards per reception .... EVER???  All 33 NFL seasons with the fewest yards per reception in the history of the sport happened after Taylor Swift was born.  These are just the facts okay.

XTOD: We made it through Black Monday

XTOD: “Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and an ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.”  -Jens Parson

XTOD: Parents of young athletes: You're being sold a bill of goods…  Early specialization…It's a fear campaign…Its a billion dollar dumpster fire saying: To become a great athlete you must: Specialize early…Train year-round…Compete often…If you don’t your child is going to miss out and fall behind  ..And for the most part:  It’s complete bullshit…What it really is: Early Development of sport-specific skills. Early success in sport..Little to no development of fundamental movement skills ...Poor performances later in the sport..Higher chance of injury..Higher Chance of Burnout from Sport - Early start…Early finish!  It's a complete lack of understanding of how humans develop…

Daily Economic Update: October 23, 2023

 

This week starts with the 10Y yield already up ~9bps and back over 5% at 5.01%  and the 2Y climbing around 5bps to 5.12%. The catalyst cited is the unwinding of "flight to quality" positions as we headed into the weekend with unknowns in the war between Israel and Hamas.  The last time yields were above 5% "the number one song on the Billboard Hot 100 chart was "Crank That (Soulja Boy)" by Soulja Boy Tell'em (according to ChatGPT at least, I didn't verify the result). This song held the top spot for several weeks in 2007.. .  

Equities are currently looking weaker ahead of tech earnings. I'm uncertain as to whether Chevron buying Hess will increase the value of Hess toys collections.

Markets continue to wrestle with "higher for longer" as solid economic data has led Fed officials to talk up the prospect of rates not returning to lower levels for some time.  The curve has continued to un-invert via a bear steepening as opposed to the consensus view of earlier in the year that the dis-inversion would come from lower yields in the front end of the yield curve, via Fed rate cuts.  The "there is no way 10Y yields will get over 3% crowd, turned into the there is no way the 10Y yield will get over 4% crowd and is now the there is no way rates will stay over 5% crowd".  On the fringes you continue to hear some talk from the fiscal dominance camp or the treasury market instability camp around how the Fed will be forced into Yield Curve Control, but overall, the talk is about term premiums and the lags of monetary policy as the areas for markets to focus.  

Talks of strikes have fallen out of the media cycle but UAW strike is still out there and there's still no Speaker of the House.  Sunday's 60 Minutes reminding viewers that Chinese espionage is a threat to American's way of life.

The week ahead features GDP, PCE, Bank of Canada, ECB.  The Fed is in a blackout period as we approach the November 1 FOMC decision (markets are pricing in almost certainty of the Fed holding policy rates):

Today: No economic releases

Tuesday: S&P PMI's, 2Y Note Auction

Wed: New Home sales, 5Y Note Auction, Bank of Canada

Thur: GDP (3Q Advanced), Durable Goods, Jobless Claims, European Central Bank, 7Y Note Acution

Friday: PCE, UofM asking about gas prices

XTOD: Real Life Dune https://x.com/netcapgirl/status/1715747743212130398?s=20

XTOD: Workers are the unhappiest they've been in 3 years—and it can cost the global economy $8.8 trillion https://www.cnbc.com/2023/10/02/-employee-happiness-has-hit-a-3-year-low-new-research-shows.html?utm_content=Main&utm_medium=Social&utm_source=twitter%7Cmain

XTOD: Fed's latest Financial Stability Report is out. I thought it was less interesting than usual, in part because there were few special "box" sections. But there are still some helpful things:  Fed staff finds term premium still historically low (yields have risen a bit since Sept).  Common measures of Treasury market liquidity are still not good, Median interest coverage ratios for firms remain within historical ranges, in part due to much of the debt taken out a low rates. Some deterioration is being seen in the lowest rated debt. Default rates on lev loans are rising but still historically low.  House prices are expensive on a price to rent ratio. Bad for home buyers, but it is also boosting wealth of homeowners. Almost ALL homeowners have some equity. Does not look like there will distress there.  Household credit quality overall remains within historical ranges - auto loan and credit card defaults rose but are not high.

XTOD: What, precisely, can "monetary policy" do in the face of commodity shocks, transport and production shocks, and real-resource strains?

XTOD: Ah it's a Zoltan weekend I see. 1. There is a yield curve shape that would require a Fed response - current shape is not this shape by 100's of bp.  2. Before the Fed bought to constrain a 300bp positive 2's 10's slope they would change regulations on SLR to encourage private sector bank curve riding again  3. Long term treasury buying (QE not YCC) in a wartime environment is certainly possible.  What trade would one do today?  Buy gold?  Sure it's already up.  Sell USD. Probably but for what?

XTOD: I criticize parts of the Fed all the time and will continue to do so. It’s a civic duty!  With one huge exception.  @FedFRASER  is the most fabulous collection of documents and professionals there is, I will brook no dissenting views.

XTOD: Your time is your most valuable asset.  Leverage it wisely by focusing on what truly matters.  #TimeIsLeverage

XTOD: Thank you for the kind words. I hope people listen to the speech.  https://twitter.com/i/status/1715736101627834414

XTOD: Complexity is job security for many advisers.

XTOD: Connecting everything tightly together has downsides

Daily Economic Update: October 20, 2023

It hit 5 already, you could leave early... jobless claims once again proved you can't get fired (not career advice - you definitely can get fired - and probably for reading this while you should be working) and anyway I mean 5 handle on the 10Y.   The 10Y did cross 5% in the evening yesterday, but is now back down 4-5bps to 4.95%.   The 2Y is also lower, yielding ~5.16%.   Reuters reports that "The yield on the benchmark 10-year Treasury...has risen by 30 basis points this week - marking its biggest weekly rise since April 2022." (JPM research calls the WTD change 35.9bp...guess it matters what you call the open and close).  The next bond market watch is for the un-inversion of the 2s10s curve.

The prospect additional spending associated with Biden's Presidential address may have helped pushed yields higher last evening.  The USD:JPY also hit 150 last evening, despite Japanese inflation coming in at its lowest level in a year at 3%

There is no economic data today.

 

If you missed it yesterday, Powell was viewed as "dovish".  Powell gave a nod to 'long and variable lags' and the idea that the bond market is doing tightening for them, a premise that seems somewhat shaky or at least predicated on the Fed being a credible actor.  In his opening remarks Powell said the following:

• " inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal"
• "the labor market is gradually cooling"
• "the record suggests that a sustainable return to our 2 percent inflation goal is likely to require a period of below-trend growth and some further softening in labor market conditions"
• "The stance of policy is restrictive, meaning that tight policy is putting downward pressure on economic activity and inflation. Given the fast pace of the tightening, there may still be meaningful tightening in the pipeline" 
• "Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening. We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy." 

In the Q&A he hit on some of the following - along with my commentary in red:

• economy may be less interest rate sensitive - this one bothers me because those long-dated fixed rate liabilities are someone else's assets, hasn't Powell seen everyone complaining about bond losses on bank balance sheets?
• there's no precision in our understanding of lags, because forward guidance means markets should anticipate moves - I think I agree with Powell here, but isn't he saying that long and variable lags don't exist? Or is this all a "sticky price" thing?
• he seemed to hit on aging population and the good old Bernanke 'global savings glut' and uncertainty over long run growth - still no clue what the neutral rate is
• David Westin repeatedly tried to ask Powell what his hypothesis is around how rates impact the economy and what his sense is of the neutral rate.  - I'm not sure if Powell's answers basically implied he's some sort of market monetarist now, we'll know things are working when we see things working
• tails are really wide, but they happen more regularly than they should - Powell sounds like Nassim Taleb now
• longer term yields are not being driven about expectation of higher inflation or about shorter-term policy moves, so it's really term premiums and potentially bets on higher growth, as well as deficits and QT
• Powell talks about how long term yields impact financial conditions which impacts economic activity, hiring and inflations - Powell then hits on whether the change in longer yields is endogenous (dependent upon the Fed following through).  MS Research hit on this here 
• Does Powell consider fiscal policy when setting monetary policy?  - Powell calls the fiscal path unsustainable, I sensed tears from Stephanie Kelton.  Good to know the Fed doesn't believe their at risk of fiscal dominance, I can rest easy now.
• Powell says higher bond yields literally works by tightening financial conditions, as long as yields are rising for reasons other than those that they are expecting the Fed will be doing something, then they are tightening conditions and that's what the Fed is trying to achieve -  seems a little circular, but sure
• Most of the inflation wasn't from the Phillips curve it was the collision of strong demand and constrained supply - classic, supply and demand intersects at price, well played

XTOD: Powell: "We don't focus on fiscal policy."   Sure, for now. However, an "unsustainable (debt) path" can lead to fiscal dominance where the Fed is forced to keep the U.S. government solvent, gives up control of the price level, and becomes one with fiscal policy.

XTOD: I love the new way of baseball….where the pitcher is dominating and they go to the bullpen to see if one of those guys can pitch as good as the starter!

XTOD: Powell engages in a little trash-talk to kick off the game of chicken that Sargent and Wallace envisioned.

XTOD: Focusing on stable prices require fiscal policy to be consistent with that goal. On the other hand, what else could he say? He is trying to do his job

XTOD: [not a tweet, but I won't tell you what twitter tells me comes after "Hot Girl Summer" for the fall moniker...maybe you'll get a different answer]

XTOD: The year is 2027. Tens of trillions of sov bonds have been added to CB balance sheets around world. A summit is held in which CBs forgive the debt owed by their respective Govs.  S&P, Fitch & Moody's immediately upgrade the Sov ratings. Fintwit freaks out and says it isn't fair.

XTOD:.....I estimate from about 35% to about 50%. A hot war in another part of the world, like the ones in Ukraine and in Gaza, with the US playing a role like it is playing in the other two wars, would strain the US in classic ways that caused other past empires to become weakened by being over-extended, which would be another notable step toward a more global war.

XTOD: your kidney can go for like $300k and you only need one to survive 

god gave us all startup capital. you just have to want it bad enough

XTOD: Cash has ZERO upside, ZERO convexity and a 💯 Reinvestment risk.Just saying.

XTOD: It’s true the classic 60/40 stock-bond portfolio had a bad 2022, but that doesn’t make it a bad long-term strategy. A 60/40 portfolio “reduces the probability” of a large loss, it does not eliminate losses. If you were told anything else, you were told in error.

XTOD: If you have a 2.9% mortgage locked in, I have one piece of advice for you:

Refinance at 8% right now

The higher rate will motivate you to grind harder, and you'll end up becoming much wealthier in the long run

Daily Economic Update: October 19, 2023

 

Yields continued to rise as the 10y has a 5 handle in its sights.  This morning the 10Y is hitting new local highs yielding 4.96% and the 2Y is yielding 5.24%.  Yesterday, the 20y auction was well bid, but it's the 20y, so I'm not sure how much you'd want to read into that, especially not when there is plenty more supply coming from Treasury.   The lifting of some sanctions on Venezuela raises the prospect of additional oil supply which is helping to keep oil prices contained.  

Speaking of Treasury and sanctions, yesterday they announced new sanctions geared towards Iran and Hamas. The role that crypto has played in supporting terrorism is certainly a story to watch, especially as the SEC continues to consider crypto ETF's.

In Fedspeak - I guess we're at the part of the inflation cycle where we can blame continued inflation on people at home playing video games ???  See Governor Bowman: "What has been somewhat surprising, however, is that the relative strength in goods spending has persisted, rather than reverting to its pre-pandemic trends. This pattern we see in the U.S. is also unusual relative to other advanced economies, where the composition of goods versus services spending appears to have returned to historical norms. There are a number of potential explanations for these newly emerging spending patterns—some that would likely be temporary, and others more lasting. For example, the strong sales of computers, televisions, and video game consoles this year might reflect some ongoing pent-up demand following earlier supply shortages, or they might reflect a more permanent change in preferences for these goods due to the greater amount of time many of us are spending at home."

Maybe staying at home and watching TV is to blame, I mean look at how Netflix is trading post earnings.

Readers generally know that I've generally been open to questioning the standard narrative about how interest rates lower inflation (I'm not saying it is incorrect, just that it's worth examining).  Steve Williamson, formerly of the St. Louis Fed researcher had this to say on his substack yesterday: 

• Basically, according to these people, a disinflation is produced by high interest rates. “Demand” is too high relative to “supply,” an increase in the nominal rate of interest increases the real rate of interest, which reduces demand, which reduces the rate of inflation. It’s basically an IS/LM/Phillips curve story.
• if the central bank narrative is correct, why did inflation come down? In the basic narrative that reduction in demand shows up as a decline in economic activity and an increase in the unemployment rate - it’s not something I can see
• given this modern framework for monetary policy, central banks have a rather strange view of how inflation control works. For example, central bankers want to engineer a disinflation not through some means where we know where we’re going in the long run (low inflation, low nominal interest rates, economy humming along), and anything bad that happens is due to non-neutralities of money. Instead, they seem to think that disinflation works through the non-neutralities of money, as if Volcker reduced inflation because he induced a recession. Basically, we control inflation by controlling the unemployment rate. And we’ve known for a long time that that’s a messed-up approach - or maybe some people forgot.
• The danger here is the following. Long-run neutrality - inherent in all the dynamic models we work with, essentially - says that higher nominal interest rates ultimately engender higher inflation. That’s just Irving Fisher. That’s why the long run world with low inflation has low nominal interest rates. So, in a disinflation, engineered by the modern central banker, that central banker eventually has to find a reason to reduce nominal interest rates. What would make our central banks cut interest rates? More unemployment? Inflation at target? Both?
• The risk is that, if high nominal interest rates persist, then so does high inflation. How high?
• Serious disinflation is something that has never been done before in the context of modern central banking frameworks (inflation targeting and nominal interest rate rules). I wish I were more confident in BoC and Fed people, but they worry me.

…..of course Steve could be completely off-base and it’s just a matter of time until the ‘long and variable lags’ kick in.

On the day ahead we'll get Powell talking as well as jobless claims and leading indicators

....and if you're looking to read something different, have fun with this super-long "The Techno-Optimist Manifesto" from Marc Andreesen.

XTOD: Beige Book: "There were multiple reports of firms modifying their compensation packages to mitigate higher labor costs, including allowing remote work in lieu of higher wages, reducing sign-on bonuses or other wage enhancements"...... "shifting compensation to more performance-based models, and passing on a greater share of healthcare and other benefits costs to employees." ..."Contacts across many Districts reported less pushback from candidates on wage offers. "

XTOD: 2019-2022 was the largest 3 year jump in wealth over the past 30+ years  More than double the next largest increase on record  I wonder why we haven't had a recession yet? (crazy this period includes one of the worst years ever for 60/40 portfolio too)

XTOD: The 2022 net worth data for U.S. households was just released: 25th pct = $27,000 (was $12,410 in 2019) 50th pct =  $192,700 (was $121,760) 75th pct =  $659,000 (was $404,100) 90th pct = $1,936,900 (was $1,219,500) 99th pct = $13,615,400 (was $11,121,100)  Blog coming next week

XTOD: SCF early impression: America is flush with auto asset wealth.  (But are autos truly wealth? A thorny wealth inequality question suddenly has some higher stakes with it.)  https://federalreserve.gov/econres/scf/dataviz/scf/chart/#series:Owned_Vehicles;demographic:all;population:all;units:median.

XTOD: The thing to remember is that the median household has essentially zero financial assets. They have a house (the large majority of their wealth), then some liquid savings and a car. Past 3 years saw a big jump in housing, liquid savings, and car values, and it shows in the SCF. 

XTOD: Having fun with the new SCF microdata (and learning the R package "gt"). Here's a table showing how each age group got richer over the pandemic. Housing price inflation was an enormous boon to gen Xers https://twitter.com/riccoja/status/1714803786030444646/photo/1

XTOD: Student Loan Payments Will Have Minimal Impact on U.S. Economy, Fed Research Shows

XTOD: My view is that the modern media is set up to deliver a very negative view of tight labor markets. Tight labor markets are great for workers but not for employers and (to a lesser extent) investors.  Guess whose voices drive most economic coverage? Employers and investors.

XTOD: Bored Ape Yacht Club. WTF was that?

XTOD: ‘Growing concerns over the US government’s near $2tn annual budget deficit, which were exacerbated by Fitch Ratings decision in August to cut the US debt rating, have only added to upwards pressure on yields, investors said.’

XTOD: TL;DR: I'm leaving @LinkedIn! Will take some time off and then figure out what's next. :) Longer version below...10/ What's next? Spending a lot of time with my wonderful family and figuring out what I want to do next! It'll probably have to do with economics, so stay tuned. (And if you have an interesting opportunity, please reach out!)

XTOD: No, I think Congress will balance the budget. Means test entitlements. Fewer generals and F35s (shitty airplane anyway). Financial transaction taxes on leverage. Then clean house in the Caymans.   "Its easy if you try"

XTOD: War does not resolve any problem. It only sows death and destruction, increases hate, multiplies vengeance. War erases the future. I exhort believers to take only one side in this conflict: the side of peace – not in word, but in prayer.

Daily Economic Update: October 18, 2023

 

The beat in retail sales, including the revision higher of prior retail sales, sent yields to highs generally not seen since 2007, with the 10Y crossing 4.80% and the 2Y crossing 4.20%.   This morning yields are off those local highs with the 2Y down ~3bps to 5.18% and the 10Y down ~1bp to 4.83%.  Crude is looking at reclaiming $90 (WTI) on supply concerns. 

 Overnight, China's retail sales data beat expectations and this morning's UK inflation data beat expectations coming in at 6.7% YoY

The hospital bombing in Gaza further complicates Biden's trip to the region, which will now just be a meeting with the Israeli's as several Arab leaders all canceled their planned meetings with Biden. We still have no speaker of the house as we tick time away towards another government shutdown.  Despite all the negative, Atlanta Fed GDP Now is showing 5.4% for 3Q.

Yesterday's Fedspeak featured Barkin commenting something along the lines of, while the data is good, the vibes are bad and Kashkari saying inflation is too high.

On the day ahead it's housing starts, building permits, the 20Y auction, Fed Beige book and of course more Fedspeak. 

XTOD: Happy 1 year anniversary to the 100% chance of recession forecast that never happened

XTOD: Well as someone who runs true alts I wouldn’t go that far :)  But PE and private credit are not alts. Not close. They are full blown beta, often levered beta for PE, at massive fees with #volatilitylaundering.

XTOD: NEW: Private equity is making a huge new play in HVAC and energy services, buying up heat pump installers.   Part of an alarming trend: After big subsidies in IRA, enviros said prices of heat pumps would fall. Instead, they’re rising:

XTOD: ICYMI COLUMN: Exactly 50 years ago today, Arab nations weaponized oil against the US. 

Soon, America created a defensive shield: the Strategic Petroleum Reserve.  Now, the US needs to refill the SPR, which is at a dangerously low level. #OOTT  https://bloomberg.com/opinion/articles/2023-10-17/energy-policy-the-us-needs-to-refill-its-dangerously-low-oil-reserves?utm_source=website&utm_medium=share&utm_campaign=twitter | 

@Opinion

XTOD: The problem, Minsky argued, is systemic. When prices rise rapidly year after year, all you need is a normal distribution of risk-taking behavior among economic entities, in which case the overall system tends automatically towards leveraging up dangerously on property.

XTOD: What a scam!  UK private equity groups sell assets to themselves as exit routes dwindle 

Disposal of portfolio companies to ‘continuation’ funds becomes preferred strategy to return cash to investors  https://ft.com/content/042b1aa9-5f8f-4adb-9d93-83ddd2e83165 via @ft

XTOD: On CRE exposure:  $BAC Analyst: "...I just wanna make sure I heard correctly. Did you say you marked your exposure by 50% in CRE office?" 

$GS CFO: "Yes, to clarify, for our CRE in the office space, we've either marked or impaired that down by ~50%...that's quite significant"

XTOD: *SCHUMER SAYS `THE HOUSE IS SORT OF A MESS'  me to my husband

XTOD: BREAKING: The U.S. tightens the reins on Nvidia chip sales to China, a crucial move in controlling AI advancements. $NVDA is currently down close to 7% due to this news.  

The shocker? On July 27th, Nancy & Paul Pelosi swiftly offloaded their entire 25,000 Nvidia shares.

Daily Economic Update: October 17, 2023

 

Yields decided to take a break from bull flattening to resume their bear steepening, as the 10Y rose ~8bps yesterday to close above 4.70% while the 2Y rose only ~4bps to close at 5.10%.  This morning that move continues with 10Y moving another 5bps higher out to 4.76% while the 2Y is ~5.11%.  Markets continue to monitor foreign and domestic politics. Biden to travel to Israel tomorrow and domestically it's possible there is a vote to install Jim Jordan as Speaker of the House. There is still the ongoing UAW strike and in other financial news China's CRE is still a mess, as Country Garden debt could end up in default, and in the UK wages rose less than expected but still was up 8.1% YoY, so I guess inflation is under control.

On the day ahead we get BofA and GS earnings, Retail Sales, Industrial Production, Bowman and Bostic .

XTOD: Too many people are playing life like it's a single player game.   That's like trying to solve a puzzle with only half the pieces.

XTOD: Scientists propose sweeping new law of nature, expanding on evolution http://reut.rs/3LZ21uk

XTOD: Worth the read The Loser’s Game   By Charles D Ellis

XTOD: There's no free lunch. Save on labor, lose it to theft.

XTOD: No priority ever goes unfunded. If the votes are there, the money is there. 

True for defense.

True for Medicare.

True for Social Security.

XTOD: Yardi: "Multifamily rents turned negative in September, with the average U.S. rent declining $6 from August and $3 during the third quarter."  "It marked the first time since 2009 when national rents decreased in September."

XTOD: A fake news report that sparked a brief 10% rally in Bitcoin is shining a spotlight on a crypto industry that’s waiting with bated breath for the arrival of mass-market ETFs

XTOD: Bosses want people back in the office, but employees are finding a workaround—it's called 'coffee badging'

Daily Economic Update: October 16, 2023

 

Last week ended with UofM sentiment declining and showing rising inflation expectations, but all of the data is currently taking a continued (and justified) back seat to the wars.  On the week ahead, the highlights in data will be retail sales, industrial production, housing data, earnings and of course whatever Fed officials have to say (I believe there are something like 17 fed speeches this week - with Powell on Thursday as the highlight).

Today: Empire Mfg, Fedspeak

Tue: Retail Sales, Industrial Production and more Fedspeak

Wed: Building Permits, Housing Starts and still more Fedspeak

Thur: Jobless claims, existing home sales, Powell Speech at 12pm

Fri: and more Fedspeak

XTOD: How the drivers of US yields have evolved this (last) week: Monday/Tuesday: Dovish statements from #FederalReserve officials (lower yields); Wednesday/Thursday: Somewhat hotter than expected (PPI and CPI) inflation numbers (higher yield); and Today: Geopolitical concerns (lower yields).

XTOD: When researchers analyzed the performance of 18,000 regular gamblers in casino games, only 13% won over a two-year period.  But, less than 1% of day traders reliably generated a positive return two years running. Bookmark this 🧵 for the next time you feel like day trading:

XTOD: 2023 study: “Our thesis is that a primary cause of the rise in mental disorders is a decline over decades in opportunities for children and teens to play, roam, and engage in other activities independent of direct oversight and control by adults."  Psychologists sometimes talk about "get out of your head and into your body." You know what's really good at doing the opposite: taking you out of your body? Spending hours craned over at a screen where people you'll never meet are saying stuff that makes you feel a certain way.

XTOD: this is absolutely wild but my favorite bit is maybe when someone asks "what's the #1 thing that CZ might find in diligence that could blow up the deal" and she's like "oh nothing, FTX is pretty straightforward, except for the customer funds shortfall."

XTOD: I said it about Elizabeth Holmes, and I’ll say it about SBF: they are both functionary scapegoats. That does not mean they’re not both incredibly guilty and deserve to be punished to the full extent of the law. It means the serve a psychological and social role in our society. If you don’t understand that they fulfill the role of scapegoats—that they are stand-in’s for the guilt of many others—you don’t understand Girard’s theory.

XTOD: The surge in private credit has led to significantly compressed lending spreads relative to history. The argument is that these funds are lending to better credits. But anyone who has been through a few credit cycles knows that when spreads squeeze forward returns suffer.

XTOD: If a war with China over Taiwan takes us by surprise, we will have only ourselves to blame. We were blindsided by Ukraine, blindsided by Israel. By now we should have learned that the world is a more dangerous place than it was five or ten years ago.

Daily Economic Update: October 13, 2023

 

CPI came in above expectations including a rise in rents and owners' equivalent rents. On the Friday the 13th ahead we get JPM earnings, Import Prices and UofM survey of gas prices (kind of).

Heading into the weekend we still have many of the same question marks around wars, strikes, China's economy, the next House Speaker, impact of continued high deficits.

Lev Menand on Macro Musings 10/2/2023:  The thing to keep in mind is that the federal government has three core strategies for dealing with a mismatch between its revenues and its expenditures. It can increase taxes, it can borrow existing money, or it can print new money. There are obviously other things that the federal government can do, but we don't think of those as core strategies. It can seize goods, in kind..... We generally think of the US government only using the first two that, that third strategy of printing money is generally not thought to be on the table.

Reuters had a good infographic on the Hawk/Dove spectrometer which includes some of the recent quotes from Fed members

XTOD: CPI analysis:  Ex food, healthcare, transport, energy, vacation, entertainment, medicine, baseball cards, Rolex, Tesla, Perrier, dog food, vacuum cleaners, office supplies, light bulbs, batteries, diapers, matches, cable TV, vinyl albums, pretzels, real estate commissions, real estate, pots and pans, sunglasses, glasses, goggles, pizza, pasta, cookies cake coffee tea, and soda, it was a historically weak report.

XTOD: XTOD: Core #CPI remains persistently elevated. Full stop. You can slice and dice the data to tell the story you want to see in the data, but that's a dangerous game to play. .....What's it all mean? * The journey from 4% to 2% will be harder than 9% to 4%. *The longer inflation remains above target, the more entrenched it becomes. *Additional rate hikes aren't inevitable, but definitely not off the table.  10/10

XTOD: 'This is no longer about when the peak will get here – it's about where inflation is going to decline to. From 6.6% to 4.1% was the easy part. From 4.1% to 3% is going to be difficult. From 3% to 2%? So far, I don't see anything that gets us there.' https://inflationguy.blog/2023/10/12/summary-of-my-post-cpi-tweets-september-2023/

XTOD: Yields spike on fears Fed will have to hike more meaning the Fed will not have to do more meaning yields will now drop

XTOD: Do traders mislead salesmen by feeding them false narratives?  Of course, often.  Whenever they want to get rid of stuff on their books for which they can't find a home, especially if it's underwater.  Do salesmen collude with traders to mislead customers? ALL THE TIME.  If a salesman tells you the sky is blue, look out of the window before you believe them.  Same with "research".  It's all painting a picture to get you to buy stuff. 

XTOD: Ozempic--the new weight loss drug--is an appetite suppressant. No more buying a cart full of Cheetos!  Will Ozempic be bad for business?   Just think about all those poor companies suffering from less demand!  Introducing: The Fixed Window Fallacy https://www.economicforces.xyz/p/the-fixed-window-fallacy

XTOD: On Day 2 of the Hedgeye Investing Summit, Danielle @DiMartinoBooth dropped the TRUTH BOMBS Wall Street doesn't want you to hear...💣"After the pandemic, you gave people the money directly, and they spent it directly. That's what caused inflation. 💣2 individuals have been confirmed to the Federal Reserve Board who advocate for: - Universal basic income - Modern monetary theory - The Fed's ability to address climate change - Central Bank digital currency - Reparations  That's why, I joke (but not really) ...  💣If we get a Blue Wave and somehow, someway, they manage to have Special Ops take out Powell, I'm going to Italy. At least they embrace their socialism.  💣What progressives dream about every night is the Federal Reserve not actually existing to make policy. All they want is for interest rates to be 0. 💣Zero interest rate policy is NOT monetary policy. It's not. It's just a state of existence in third-world countries. But that's what the progressives want."

XTOD: Delete this shit. How dare you?

Daily Economic Update: October 12, 2023

 

Ahead of today's CPI release the curve continues its recent bull flattening with the 2Y down ~2bps to 4.99% and the 10Y down 4bps to 4.56%. Yesterday's  PPI came in above expectations and the FOMC minutes seemed to support the "for longer" part of higher for longer and stressed the data dependence. 

• A majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted. All participants agreed that the Committee was in a position to proceed carefully and that policy decisions at every meeting would continue to be based on the totality of incoming information and its implications for the economic outlook as well as the balance of risks. 
• Several participants commented that, with the policy rate likely at or near its peak, the focus of monetary policy decisions and communications should shift from how high to raise the policy rate to how long to hold the policy rate at restrictive levels
• A vast majority of participants continued to judge the future path of the economy as highly uncertain. Many noted data volatility and potential data revisions, or the difficulty of estimating the neutral policy rate, as supporting the case for proceeding carefully in determining the extent of additional policy firming that may be appropriate.
• most participants continued to see upside risks to inflation

This morning's data features CPI, jobless claims, the 30Y auction and the ECB minutes.  Data this morning out of the UK showed a resumption in growth.  

As usual, the latest Howard Marks memo is worth a read.  In it he re-discusses how he believes we’re entering a new structural regime, one without ultra low interest rates, and how some investors are ill prepared to navigate a higher for longer rate environment.  He posits that the days of easy returns by buying assets on leverage may be behind us. Marks is a fan of current yields on offer from high yield credit in today’s market.

XTOD: NEW: Wrote about a semi-secret Discord that Google runs for heavy users of Bard.  

In it, Google PMs, designers & engineers tasked w/ developing Bard say they don't know what LLMs are truly useful for, don't trust LLM output before verification, and more 

https://bloomberg.com/news/articles/2023-10-11/google-insiders-question-usefulness-of-bard-ai-chatbot?

XTOD: UAW workers strike biggest Ford truck plant in surprise move http://reut.rs/3ZQ4QTW

XTOD: "We should all be embracing uncertainty... Uncertainty is a much more accurate representation of the world of any prediction of the future."

XTOD: "Access to a CBDC (or a “digital dollar”) is not the same as having access to a bank account. Where a bank account opens the door for receiving loans, lines of credit, and other financial services, a CBDC does little more than offer access to digital payments." Exactly

XTOD: Ellison: I said I was more in favor of going under the radar. Sam replied, Same except the absolute opposite.

AUSA: Did Michael Lewis spend time with you in the Bahamas?

Ellison: Yes. Sam was cultivating an image as an eccentric founder....

XTOD: amidst this financial fraud there’s also a simple story of possibly the worst breakup in the history of all time

XTOD: There's a working assumption that many have (myself included) that when a society comes under external threat it will find ways to cohere. I wonder if that's still true in the age of social media. 

If 9/11 happened today, with our current political divisions and the proliferation of fake videos online would half the country even believe that it happened or that it wasn't a false flag? 

I'm not sure and that sort of freaks me out.

XTOD: Private Equity cash looking to opportunities to invest into isn't only sweeping through the equity markets. It's rolling through Private Credit, too...  "The New Kings of Wall Street Aren’t Banks. Private Funds Fuel Corporate America."

XTOD: After careful deliberation and too many hours poring over rosters, we are pleased to present the 2023-2024 All-Name Teams.  STORY: https://burnerball.com/the-all-name-team/

Daily Economic Update: October 11, 2023

Focus remains on the war in Israel.  Yields rallied strongly yesterday and continue to do so today with the 2Y down 2bps to 4.96%  and the 10Y down ~10bps to 4.56%.   Yesterday's NY Fed Survey of Consumer Expectations showed an increase in median inflation expectations at the 1 and 3 year horizons and households' reported some deterioration in respondents financial situations.  Fed Governor Waller spoke at 'The Legacy of Bennett McCallum and Lessons for Monetary Policy Today' conference, using his speech as an opportunity to discuss the importance of the credibility of the central bank, the Fed's responsibility for returning inflation back to target, and his view that the Fed will stay the course to achieve their inflation objective.  

ExxonMobil has confirmed they are buying Pioneer in an all-stock deal valued at $59.5bln. On the day ahead, PPI and FOMC Minutes are the economic highlights.  We also may have a vote on Speaker of the House at some point.

XTOD: Wall of Worry 1. Uncompromising U.S. Govt. Resorting to extreme  measures and lack of compromise led to credit downgrades by Fitch and S&P. If Moody's downgrades the US, Treasurys will no longer be triple-A and some investors will not long be allowed to own or Repo them. 2. U.S   Debt. Ironically almost the opposite of the first "worry," U.S.   government debt is   now in excess of $33 trillion   and growing. It is literally a time-bomb waiting to explode.  3. CMBS and commercial Real Estate Loans. Work-from-home policies have left offices in major cities partially vacant. Companies will take less office space and negotiate   lower rents, leaving many   commercial assets potentially insolvent. Another time bomb in waiting.  4.   China. China's economy will eventually crash similar to Japan in the early   1990s. Many market   commentators say "China   is the exception," but there never is an exception.  5.   Regional Banks. Their investment portfolios own US Treasurys, CMBS, and   commercial real   estate loans; at the same   time there is more competition for deposits due to higher interest rates.   Another time bomb waiting to  go off.

XTOD: AUSA: What was his involvement in the crimes?

Ellison: He was the head of Alameda then FTX. He directed me to commit these crimes.

AUSA: What makes you guilty?

Ellison: Alameda took several billions of dollars from FTX customers and used it for investments.

AUSA: What was the defendant's role?

Ellison: He set up the systems and told us to take the money.

AUSA: How much did Alameda take to repay its lenders?

Ellison: In the ballpark of $10 billion. Ultimately around $14 billion

XTOD: "You get in this vicious circle, where higher interest rates cause higher funding costs, cause higher debt issuance, which cause further bond liquidation, which cause higher rates, which put us in an untenable fiscal position." -Paul Tudor Jones

XTOD: Almost half of publicly-listed US companies are unprofitable, according to @GoldmanSachs

.  "Higher funding costs [viz higher interest rates] could force some of these companies to cut labor costs or even close."

XTOD: ECB Steps Up Scrutiny of Banks’ Commercial Real Estate Loans  @business  #CMBS  

The ECB has asked property valuers to explain the methodologies they use, as concerns grow that banks in the region have been too slow to mark down the value of commercial real estate loans.

XTOD: Veteran banker calling for "TARP 2.0" in Op-Ed to help banks with steep unrealized losses on their securities holdings  

Proposal would lend up to $1 Trillion against securities that have lost value to Fed's "meteoric increase" in interest rates ....Here is full piece (paywalled):

https://americanbanker.com/opinion/u-s-banks-need-tarp-2-0-a-trapped-asset-relief-program

Daily Economic Update: October 10, 2023

 

Long end of the yield curve is down double digit basis points to start the day as they catch a flight-to-quality/haven bid and Fed officials seemed to lean slightly dovish yesterday.  The 2Y is down ~8bps to 4.99% and the 10Y is down ~12bps to 4.67%. 

Yesterday's Fedspeak seemed to indicate higher bond yields can have an impact on the path of policy rates, perhaps leading to no additional rate hikes.  Both Logan and Jefferson highlighted the tightening of financial conditions driven by the recent rise in the 10Y yield as important consideration in assessing whether rates are sufficiently restrictive to return inflation back to 2%.  Logan pointed out that the reason for the increase in long-term yields matters for policy, if the driver of the increase is more driven by increases in the "term premium", then Logan would be more inclined not to hike.  Jefferson highlighted that rising yields could change investors attitudes to risk and uncertainty and act as additional tightening.  However, both officials were careful with their words, also noting that higher yields could be investors assessing the underlying economy as stronger than anticipated.  The nuance in both officials words seems to indicate that they might be familiar with Milton Friedman's interest rate fallacy whereby he stated: "Initially, higher monetary growth would reduce short-term interest rates even further. As the economy revives, however, interest rates would start to rise. That is the standard pattern and explains why it is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy."

The IMF revised up their U.S. growth forecast (in real terms) for 2023 to 2.1%.  The forecast for U.S. 2024 is 1.5%. This morning's NFIB Small Business Optimism index fell to the lowest in 4 months and continues to cite inflation and labor quality as tops concerns.  Ahead on the day is Wholesale Inventories, more Fedspeak and the ongoing developments in the Middle East.

XTOD: Israel's response to the unprecedented multi-pronged attack by Palestinian gunmen from the Gaza Strip will 'change the Middle East,' Prime Minister Benjamin Netanyahu said

XTOD: Dallas Fed President Lorie Logan, who has been at the hawkish end of the FOMC, takes seriously the recent run-up in Treasury yields and term premiums, in particular. 

Her conviction about the need to hike again sounds like it is diminishing as a result.

XTOD: According to WSJ, "Evergrande had the equivalent of more than $332 billion in liabilities by June, which included money owed to suppliers, unfinished projects and its bond and loan obligations."

This is substantially more than Argentina's external debt.

XTOD: Claudia is a baller. Create a whole new field. Win the Nobel Prize. Put out a short and understated tweet with a typo to celebrate.

XTOD: Overall Leasing Demand Turns Negative ⁦ @CoStarGroup Property Markets Give Back 26 Million Square Feet, Add 151 Million Square Feet of New Supply #CMBS

XTOD:  @MBAMortgage ,  @NAHBhome , and @nardotrealtor  just wrote a letter to Fed Chair Jerome Powell.  They’re asking for… 1. No more rate hikes   2. The Fed to “not sell off any of its MBS holdings until and unless the housing finance market has stabilized”

XTOD: My continued takeaways - The real estate industry faces a massive recession (in early stages), Fed should continue MBS roll off, the Fed should hike another 25bps. This industry and these people are destroying the future of America.

Daily Economic Update: October 9, 2023

The U.S. bond market is closed today, but equity markets are open.  While markets continue to interpret the large headline Jobs number from Friday, it is the unanticipated attack by Hamas on Israel has markets attention, especially oil markets where crude is up 3% this morning.   While geopolitics slide back into focus, markets will still get a slew of data this week with the highlights being the inflation reports (CPI and PPI) as well as the minutes of the last FOMC meeting.   Bank earnings and plenty of Fedspeak are in the mix as well.  On the week ahead:

Today:  Fedspeak from Logan and Barr

Tue: Wholesale inventories, NY fed inflation expectations, Fedspeak

Wed:  PPI, FOMC Minutes, moar Fedspeak

Thur: CPI, jobless claims, more Fedspeak

Fri:  import prices and UofM

XTOD: Iran Helped Plot Attack on Israel Over Several Weeks: WSJ  here we go

XTOD: Nonlinearity: Could Ozempick cause a deflation in the price of food? A mere 1% drop in demand can cause a significant overload.

XTOD: Brookfield Property Risks Being Cut to Junk on Refinancing Needs  @business  #CMBS 

S&P is considering cutting Brookfield to junk status because the company has “substantial” amounts of maturing debt to refinance during a time of higher interest rates and lower property values

XTOD: Goldman Sachs raises $15bn to buy stakes in private equity funds via @FT  “an appropriate discount”  Wait, they weren’t worth what they were marked at?  Well knock me over with a #volatilitylaundered feather.

XTOD: Crowding out is a real thing.

XTOD: "I continue to be amazed that people think you can do what we’ve done over the last 15 years, then jack rates this high and everything’s going to be fine. 

Am I open to being wrong? Yes, but it's kinda gonna be one of those 'Paul on the road to Damascus' moments where if I'm wrong, my religion needs to change. If I'm wrong, everything I know about finance needs to be uprooted and spun around on its head." Well put by  @KYRRadio

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XTOD: Treasury yields were already challenging the Fed’s control over interest rates (see link below). Global financial uncertainty connected to attack on Israel (and repercussions) may cause turmoil in Treasury market if foreign holders start scrambling for U.S. dollars; while Treasury securities are traditional “safe haven” when global tensions rise, we saw in March 2020 that the Treasury market froze while demand for dollars skyrocketed. Are Fed officials gaming out enhanced use of FIMA repo facility (repurchase agreement that allows foreign central banks to get cash from Fed in exchange for their Treasury securities so they don’t just dump them) and currency swap arrangements? Perhaps we need to exercise greater discernment over which foreign central banks are entitled to this privilege? Under Bretton Woods, the goal was to provide for currency stability among allied nations. And what are the monetary policy implications of providing vast amounts of dollars to foreign central banks with no control over how they are further loaned. 

The autumn bond rout is challenging Wall Street’s longstanding belief that the U.S. government can’t sell too many Treasurys https://wsj.com/finance/investing/government-spending-hurting-bond-portfolio-8a063f39?st=5lmkje3nh7kwef5 via  @WSJ

Daily Economic Update: October 6, 2023

Jobs Day in 'merica.   Yields are up slightly this morning with the 2Y at 5.04% and the 10Y at 4.74%.  Forecast calls for headline of +170K, a decline in the unemployment rate to 3.7% and average hourly earnings growth of 0.3% mom and 4.3% yoy.  Jobless claims again remained extremely low and, per Reuters reporting, additional data from Challenger, Gray & Christmas showed that September layoffs were down 37% from August, but up from a year prior.  Oil remains off recent highs having one of its worst weeks since March, down ~9%.  And in energy a huge deal is in the works a energy space as Exxon is reported to be near buying shale giant Pioneer Natural Resources.  Fedspeak yesterday from Daly and Goolsbee was largely in the pause with no need to hike further camp.  Daly was adamant that we're not seeing any signs of a wage-price spiral  On the Fed front we'll get a speech from Governor Waller at noon today.  

XTOD: What's the most Gothilocky reaction for NFPs tomorrow?

#1 = Strong NFP, followed by an Equity bounce and a Bond puke ("strong economy bro!")

#2 = Weak NFP, followed by an Equity puke and a Bond puke  ("it's never been more over")

XTOD: "We find that funds with facial unattractive managers outperform funds with attractive managers by over 2% per annum. We next show that good-looking managers attract significant higher fund flow..."

XTOD: Wall Street keeps thinking nothing of lasting significance happened in the spring of 2020, so they keep pounding away with all the same pre-pandemic rules and then "struggle to explain" when none of these rules work anymore?

In other words, don't be @Austan_Goolsbee. He is "puzzled" about higher rates because he still thinks it's 2019, and why his speeches about how things work have been way off the mark.

* The answer may be that we are in a higher inflation world!!!

* The labor market has changed forever (see the strikes and remote work)

* Deglobalization is a thing that is not going away

* Energy output is now a political weapon.

Want to know who does not understand this? Analysts Wall Street droning on and on about used car prices and airline tickets. This assumes, again, that nothing of lasting significance changed the inflation outlook in the spring of 2020. Instead, what is needed is a new understanding of how post-pandemic inflation works. It is not the same as the pre-pandemic inflation world. It is higher, and yields are following inflation higher.

Do this, and the "struggle" to explain rising yields will disappear.

XTOD: Anecdotally, from speaking with investors, this rings true. People were completely caught off guard by deficit coming in at $1.9 trillion - then they study the unsustainable outlook & see total dysfunction in DC = higher rates

XTOD: “sustainable” results is another mystery the CBO does not explain."  Of course, if interest payments really rose to 20%, even 10% of GDP, they would likely have big economic effects. The most obvious thing is increase spending, GDP and likely demand side inflation. But if they did that, the ratio of interest payments to GDP would fall. The reason this doesn't happen in the standard forecasts is, as I've said, they simply don't model the effects. It's easy to get a number to go to infinity in a model, but presumably we care about reality This is where the Fed comes in. If the Fed is raising rates, than its because they think the rising private interest payments drain demand more than the interest income adds to it. But if that's true, than again we're back to asking why we care if economic factors are good.  If these interest payments don't have macroeconomic effects, why should we care (outside of impacts on inequality)? This brings us to the final issue. As economist Scott Fullwiler pointed out 7 years ago, these models also don't model private debt ratios...Here the "Schrödinger's interest payments". issue gets especially stark. household and business interest payments relative to GDP would likely rise faster and crash the economy well before government interest payments got that high...Thus what won't be "sustainable" is Fed interest rate policy, not debt or deficits. On the other hand, if for some reason private sector debt to gdp (and thus private sector interest) stayed much lower than the public sector's, we're back to "lowering rates would reduce spending"

XTOD: “More fiction has been written in Excel than in Word.”    - Pythagoras, 544 BC

XTOD: This is not a meme stock, not the U.S. dollar, not yields and not even the global debt. 

This is the chart of orange juice futures 

Daily Economic Update: October 5, 2023

 

Yields are down another couple of basis points with the 2Y at 5.03% and the 10Y at 4.716% after a reversal of some of their recent bear steepening trend following yesterday's ADP employment data coming in below expectations. The move lower in yields was despite better than expected factory orders and ISM services data showing continued strength in the service sector.  The Kaiser Permanente health care 'temporary' strike became official, adding to a growing list of striking workers in 2023.  European data this morning has shown weakness again in Germany with both exports and imports falling more than expected.  Ahead of tomorrow's Jobs Report, we'll get another look at the job market with initial jobless claims this morning and there will be more Fedspeak.

XTOD: Is the Fed finally getting tighter financial conditions (via a term premium bump)? 

“These types of things often take on a life of their own until they self-correct” through weaker data or “a more sinister mechanism, such as a financial stability scare.”

XTOD: Two implications of the incredible run-up in real interest rates over the last month: 

1. The Fed should have a higher bar to raise rates again--to the degree they have more work to do this is doing some of it. 

2. More deficit reduction would be really helpful right now.

XTOD: The $MOVE is back above 140, time to send the bond market to its room for a time out.  The MOVE @ 140 implies a yield change of ~9bp a day for the next month, that is not sustainable; similar to the VIX near 50, or ~3.1% a day for a month.

XTOD: 5yr TIPs with current real yields at 2.6% will be the most compelling risk-return asset vs cash over the next couple years.  These bonds are offering boom level yields at a time when the economic cycle is softening and recent market moves suggest further softening.

XTOD: Will Michael Lewis's exposure as a fraud finally wake people up to the more general problem of rampant Lex Fridmanism?

XTOD: If long rates continue to rise we are not out of the woods for additional banking problems.  In addition, office and other challenged CRE will be harder to refinance, raising non-performing loans at the same time of large held to maturity securities losses.

XTOD: I am expecting 'unseasonality' over the balance of the year

*  In the coming months we will be forced to face and to navigate the hangover caused by years of quantitative easing and ZIRP

* Mounting consumer, corporate and government debt, the lack of discipline in fiscal

XTOD: In our latest infographic, economists from our #CenterForInflationResearch answer the question: How does raising interest rates help to lower #inflation?

Explore now: http://clefed.org/3Burp5e

XTOD: Hang onto the first people you hire. They're crucial to the company.

XTOD: I think the thing that offends me the most about this book is how Lewis gives a microphone to SBF to speak grandly about all kinds of broad philosophical, social, political, and economic conditions, as though an oracle, when, in fact, he sounds like a spoiled child.

Daily Economic Update: October 4, 2023

 

This October is already making history as McCarthy was forced to vacate the speakership, a first in U.S. history.  Of course this raises the prospect of a government shutdown. Everything sold off yesterday with the 10Y yield crossing 4.80% as bonds continued to bear steepen, and stocks falling by over 1%.  The USD-JPY touched 150 before it is assumed the BoJ intervened to support the Yen.  This all following stronger than expected job opening data. The 2Y is currently yielding 5.14% and the 10Y at 4.81%.

On the day ahead we'll get ADP employment, services data and plenty of Fedsleak.

XTOD: Every past market decline looks like an opportunity, every future decline looks like a risk.

XTOD: Could 10-year Treasury rates hit 13%?  @RickSantelli  charts the path to much, much higher yields, and warns that the Fed is running out of tricks

XTOD: The JOLTs summary - hiring rate stays below 2019 levels, quits remain right at it, openings have a slight reversal (though v/u remained the same for August).

XTOD: The Beveridge Curve has Normalized in a big way…. Solid progress, but economic strength continues - that’s a good thing when people have jobs. 

XTOD: Markets in a very dangerous spot here. Statistical risks flashing red. Banks and Utilities too. Credit starting to move. Lev loans liquidity sucked out. CRE unwind accelerating and housing market about to freeze. 

XTOD: But here’s the thing: the trade in 1987 was to play an equity crash. The trade today is to play the bond crash in 2023. Buying bonds then or shorting equities now was/is a deriv that may or may not work (worked in 87).

XTOD: He will go down in history as the man who reversed 30 yrs of ZIRP insanity. like him or not, he pulled the punch bowl away. Those that fail to see this, either support returning to an overleveraged ZIRP environment, or just dont understand how truly insane Greenspans spawn were.

XTOD: A Nobel Laureate Offers a Biting Critique of Economics - Angus Deaton says Larry Summers and other great minds in the profession have lost sight of its most important mission: Improving people’s lives.

XTOD: New monthly GDP estimates from S&P Global are out! NGDP grew at a 10.6% m/m ar (annualized rate) in August, accelerating from 9.2% in July....Consider the notion that inflation is what happens when there is too much money (NGDP) chasing too few goods (RGDP)....It's highly doubtful that RGDP can sustainably grow above 2%. Therefore, if NGDP growth is too high as S&P Global's estimates indicate, we should be ready for inflation to show some resurgence. Will be closely looking at NGDP when BEA releases its Q3 data on 10/26.