FOMC Recap: What did the man in the orange hat say today?

 

What did the man in the orange hat say today?  

Is the correct answer, “I don’t know, and I don’t care”?

On a long enough horizon, how many times the Fed cuts rates in 2024 is just a bump on the long, unmapped road that investors need to navigate, a road that is filled with plenty of uncertainty.  A road where the only certainty is that there will be some unexpected twists and turns along the way.  Those that can navigate the unforeseen and the short-term setbacks on this journey are likely to reach their destination, those that attempt shortcuts and are reckless may not.  We all know that the game of predicting the future is a tough one, filled with many losers, so speeding down the road in search of returns based on prediction alone may not always end well.  We have plenty of recent experience to know that the biggest shocks to the economic system tend to come without warning.

Speaking of uncertainties, 2024 is an election year.  Appointed to lead the Fed in 1979, Paul Volcker was no stranger to election years.  In his memoir, Keeping At It, Volcker recounts the story of a meeting in the summer of 1984, an election year, where he was summoned to the White House to meet with President Reagan.  The message from Reagan’s Chief of Staff, Jim Baker, was “The president is ordering you not to raise interest rates before the election.”  Volcker laments that he wasn’t planning on tightening policy at the time and the dilemma he faced in deciding whether to report the incident (he didn’t), stating, “How could I explain that I was ordered not to do something that at the time I had no intention of doing.”  Volcker describes the whole incident as a “striking reminder about the pressure that politics can exert on the Fed as elections approach”.

The Powell Fed may find themselves in a similarly tricky political position.  The Fed may believe that cutting rates is the correct policy but potentially worry that cutting rates later this year may look to be politically motivated, or vice versa.  In navigating the politics of an election year, Powell would be wise to heed some advice from Volcker’s memoir, specifically the importance of credibility in restoring price stability and guarding against the “real danger [that] comes from encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking…”

So much attention is focused on predicting what the Fed will do next, but what really matters for navigating the long road to investment returns is the institutional credibility of the Fed, ultimately earned not by words, but by actions.  Actions that ultimately create a stable environment for businesses to do their job of solving the world’s most difficult problems.  Actions that at times mean changing interest rates and at other times finding creative solutions to keep the banking system from imploding.

In maintaining the independence and power of the Fed that ultimately backs its institutional credibility, which is necessary to foster a trusting and stable business environment, my advice to Powell is to revisit Robert Greene’s book The 48 Laws of Power with specific consideration to the following of Greene’s laws:

              Law 4: Always Say Less Than Necessary: When you speak, always say as little as possible. The more you speak, the more likely you are to say something foolish.

              Law 5: So Much Depends on Reputation – Guard It With your Life: Reputation is the cornerstone of power. You can influence more people and gain more opportunities with a solid reputation. Therefore, it is essential to protect it fiercely.

              Law 9: Win through your Actions, Never through Argument:  Winning an argument gives you momentary advantage but winning through actions gives you lasting power. Actions demonstrate competence and create value, whereas words, often in arguments, lead to negative emotions and resentment.

               Law 20: Do Not Commit to Anyone: It is the fool who always rushes to take sides. Do not commit to any side or cause but yourself.  By maintaining your independence, you become the master of others.

Following these laws, over the long run, the Fed can maintain its reputation for fostering sound money and financial stability. For all the criticism, controversy, mistakes, and triumphs attributed to the Federal Reserve, as an institutional system, it has served the country well.  In Volcker’s words “…it remains a precious asset for the country in troubled times.”

Daily Economic Update: January 31, 2024

FOMC Day is here. Check back after Powell's presser for a recap.  Yesterday's JOLTS showed an increase in openings, but subdued quits is seen as a sign of some loosening in the job market.  Consumer confidence remained solid and while stocks were relatively flat, after hour earnings from Alphabet and Microsoft were viewed as weaker than expected.  Yields fell a few bps with the 2Y at 4.32% and the 10Y at 4.02%.  Overseas China's economy and the two wars are still a mess.

Ahead of the Fed we get ADP Employment, Employment Cost Index, and the Treasury Refunding Announcement. 

XTOD: The economy is so hot companies have to make layoff announcements every day.

XTOD: Never incorporate your company in the state of Delaware

XTOD: New money wants a Lambo, old money wants a tax shelter.

XTOD: Billionaire Barry Sternlicht sees more than $1 trillion of losses for office real estate, calling the properties “one asset class that never recovered” from the pandemic.  Once a $3 trillion asset class, offices now are “probably worth $1.8 trillion,” said Sternlicht, chief executive officer of Starwood Capital Group. “There’s $1.2 trillion of losses spread somewhere, and nobody knows exactly where it all is.”  “We’re in the business of getting loans,” he said. The banks “don’t show up, they’re not even playing. So the alternatives are the debt funds, which are having a field day.”

XTOD: Just Months After "Massive Labor Deal," UPS Announces Massive Layoffs

XTOD: Quits and hires rate are now a notable step below 2019 levels.  Quits does better predicting labor market conditions and there's an increasing trend in job openings across the 21C. So, at this critical moment, worth weighing quits more when we are watching labor market. /1

XTOD: By now, everyone knows Taylor Swift is a government psyop and this is exactly why Corporate Media is having a meltdown about it:

-4 years ago, the Pentagon Psychological Operations Unit pitched NATO about turning Taylor Swift into a “social influence” asset

-In 2019, George Soros bought her entire music catalog

-In 2020, she came out as a raging liberal Joe Biden supporter, after previously being politically neutral

-In 2023, her Eras Tour raked in higher revenue than the GDP of 50 countries

-In 2023, she helped register over 35k new voters with a single Instagram post

-And now she’s dating a Pfizer & Bud Light agent in the NFL, the most watched live sport in America

-Even the NYT wrote a story on how Biden is courting her for an endorsement and how he wants to appear on stage with her

You don’t have to be a conspiracy theorist to put it all together, you just have to be paying attention

XTOD: This guy’s hilarious

XTOD: Did you know syphilis can kill? As US cases soar, here's everything you need to know, from symptoms to treatment

Daily Economic Update: January 30, 2024

S&P (new ATH) and Nasdaq continued to rise as we await tech earnings and the deluge of data and central bank speak yet to come.  The 2Y is 4.32% and the 10Y is 4.08% with yields falling slightly following the Treasury's announcement that they expect to borrow less than market expected, we'll know more about the mix of bills and notes come Wednesday. 

Yesterday, we finally learned that China's Evergrande is indeed bankrupt, something I think everyone has known for like at least 2+ years.  Maybe Elizabeth Warren can fix China's property sector?  It's simple, the solution to every problem is to cut rates. If housing market sucks and prices are falling, cut rates, if the housing market has rising prices, cut rates.  There is literally nothing rate cuts can't cure.

In fairness to Senator Warren and the 3 other Senators who sent the letter to Jay Powell, they make some valid points.  Indeed, higher borrowing cost do make it more expensive to buy a home and higher interest cost can make it more expensive to bring on new housing supply online, all good points. However, in my opinion, they missed an opportunity to really hit the Fed on all the MBS they bought through QE and how that possibly led to existing homeowners refinancing at ridiculously low rates which likely discourage them from putting their home on the market.  There are likely a myriad of other factors creating supply and demand mismatches including zoning policies, WFH policies (less need to move for a job), increased boomer wealth (less need to sell, downsize, as they already have 2nd homes), as well as some of the other policy distortions that have come out of the pandemic......who knows.

Call me crazy, but it's weird that it seems like home prices were rising the fastest when rates were near zero and they've started to level off now that the Fed has hiked rates...

On the day ahead it's JOLTS as the highlight.

XTOD: Market summary:  Janet Yellen launched another drone attack on bears.

XTOD: Buffett held up stacks of paper and said, “Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest.  All of you can do it, but I guarantee not many of you will do it.  - The Joys of Compounding

XTOD: 1/ What is a compounder?  "High quality, franchise businesses, ideally with recurring revenues, dominant & durable intangible assets, pricing power and low capital intensity. We focus on franchise quality, durability, financial strength, industry position, & management quality"..... Key characteristics:

• High ROIC • High margins • Recurring revenues • Low capital intensity• Innovation-driven • Pricing power • No excess debt • Quality management • Low cyclicality • Resilient in downturns • High barriers to entry • Organic growth potential...Avoid traps like:  • Fading companies • Highly acquisitive companies - where mgmt are not disciplined • Poor or greedy mgmt • Overdependence on single product • Cuts to R&D, marketing, development • Mgmt with short-term focus   https://t.co/I8y4BGcAA4

XTOD: American men are stuck in what’s been dubbed a friendship recession, with 20% of single men now saying they don’t have any close friends, an all time high, per PBS.

XTOD: Working on becoming a combination of Erlich from Silicon Valley, Walter from The Big Lebowski, and Phil Connors from Groundhog Day

Daily Economic Update: January 29, 2024 (finfluencers, civilization and an FOMC preview?)

FOMC week is upon us, with the Fed rate decision on Wednesday.  A central question will be how Powell reacts to the number of rate cuts currently priced in for 2024 and perhaps more specifically how he addresses the possibility of a March rate cut.  Friday's PCE report, while showing a higher MoM index reading than the month prior, painted a picture of strong consumer spending with continued disinflation. 

On the week ahead: Tuesday: JOLTS, Wed: ADP, ECI and FOMC, Thur: Jobless claims, ISM mfg, Friday: Jobs Day in 'merica

As we wait on the Fed, so much of what the Fed seems to do today is verbal suasion, they try to influence with words and ultimately if they follow through they are said to be "credible" (this is important - see below). 

While what Powell and the Fed says might matter, recent CFA research reminds me that what Powell says might be less important than what "finfluencers" on social media say about what what Powell says.  Per the research report:

Social media influencers are becoming a key vehicle to promote products and services, including in the financial services sector. This development has given rise to the neologism “finfluencer” (financial influencer).  Finfluencers represent a new intermediary between

financial institutions and consumers. They provide general investment information, promote investment products, offer guidance, and, in some instances, make investment recommendations. It is often unclear whether finfluencers are authorised to conduct regulated activities; however, they have become an important source for young investors—particularly those aged 18–25, who are part of Generation Z—to access investment information.

While social media is definitely a relatively new phenomenon, the challenges of poor information, disinformation, etc. is anything but new.  In fact you could argue it is an inevitability of becoming "civilized", at least economist and philosopher John Stuart Mill considered this inevitability to be the case all the way back in 1836 in his essay titled "Civilization".   Mill defined "civilized society" by contrast to barbaric or rude society; 

"We accordingly call a people civilized, where the arrangements of society, for protecting the persons and property of its members, are sufficiently perfect to maintain peace among them; i.e. to induce the bulk of the community to rely for their security mainly upon social arrangements, and renounce for the most part, and in ordinary circumstances, the vindication of their interests (whether in the way of aggression or of defence) by their individual strength or courage."

Mill argues that the attainment or advancement to a civilized state requires a diffusion of property and knowledge, combined with the power of cooperation.  However, Mill recognized some consequences that come from obtaining and growing civilized society, including that "the importance of the individual, as compared to the masses, sink into greater and greater insignificance."  [Side bar: Professor and author Dr. Michael Muthukrishna in discussing his book, A Theory of Everyone, posits that one of the pivotal moments towards what he calls "the securitization of trust" necessary in fostering the diffusion of property and knowledge was the Catholic Church banning cousin marriage.  He sees this as largely ending kinship based tribalism, which further leads to humans learning to cooperate and build trust beyond the familial structure.]

What does any of this have to do with "finfluencers" and the Fed?  Well, Mill understood that "When the masses become powerful, an individual, or a small band of individuals, can accomplish nothing considerable except by influencing the masses; and to do this becomes daily more difficult, from the constantly increasing number of those who are vying with one another to attract the public attention."  Consequences of which included in Mill's words:

• The individual becomes so lost in the crowd, that though he depends more and more upon opinion, he is apt to depend less and less upon well-grounded opinion; upon the opinion of those who know him.
• There has been much complaint of late years, of the growth, both- in the world of trade and in that of intellect, of quackery, and especially of puffing: but nobody seems to have remarked, that these are the inevitable fruits of immense competition; of a state of society where any voice, not pitched in an exaggerated key, is lost in the hubbub. Success, in so crowded a field, depends not upon what a person is, but upon what he seems: mere marketable qualities become the object instead of substantial ones, and a man's labour and capital are expended less in doing anything, than in persuading other people that he has done it
• It is our own age which has seen the honest dealer driven to quackery, by hard necessity, and the certainty of being undersold by the dishonest. For the first time, arts for attracting public attention form a necessary part of the qualifications even of the deserving: and skill in these goes farther than any other quality towards ensuring success
•  It corrupts the very fountain of the improvement of public opinion itself; it corrupts public teaching; it weakens the influence of the more cultivated few over the many
• The world reads too much and too quickly to read well
• when almost every person who can spell, can and will write, what is to be done? It is difficult to know what to read, except by reading everything; and so much of the world's business is now transacted through the press, that it is necessary to know what is printed, if we desire to know what is going on. Opinion weighs with so vast a weight in the balance of events, that ideas of no value in themselves are of importance from the mere circumstance that they are ideas, and have a bonâ fide existence as such anywhere out of Bedlam

While Mill expressed concerns over civilization causing a loss of individual energy (loss of courage, work ethic, patience, etc.) and a weakening of the influence of superior minds, he believed that the answer wasn't to limit diffusion of knowledge, but to establish counter-tendencies by further perfecting means of cooperation and reforming education and politics.  

The problems of Mill's 1836, seem quite similar to some of the problems of our current day and some of the reforms he discusses seem eerily similar to some debates around higher education today.

So what's the lesson?  Perhaps it is that when listening to Powell this week, take a longer view.  The Fed is part of a fabric of institutions that have been developed over time to help "securitize trust" and foster societal cooperation.  If you believe that societal cooperation solves problems and makes a better world, then what the Fed does with 25 or 100 basis points here or there over the next month or year is likely far less relevant than whether you believe that in the long-run, institutions like the Fed, remain somewhat credible in fostering a stable environment for businesses to solve problems.  If you think that over time our ability to remain civilized holds, then it's a case for optimism, a topic I mentioned here.  

XTOD: Doing less meaningless work, so that you can focus on things of greater personal importance, is NOT laziness. This is hard for most to accept, because our culture tends to reward personal sacrifice instead of personal productivity.  Let’s define “laziness” anew—to endure a non-ideal existence, to let circumstance or others decide life for you, or to amass a fortune while passing through life like a spectator from an office window. The size of your bank account doesn’t change this, nor does the number of hours you log in handling unimportant e-mail or minutiae.   Focus on being productive instead of busy.

XTOD: the spouses of the very rich are the dark matter of american politics

XTOD: Taylor Swift performs in Japan the night before the Super Bowl. It will end around 10pm Tokyo time (5 am Las Vegas time). The flight from Tokyo to Vegas takes 12 hours, meaning Swift can arrive at 5pm local on the day before the Super Bowl, 25 hours, 35 mins before kickoff.

Daily Economic Update: January 26, 2024

In a big day of data, the U.S. GDP 4Q advance reading was well above consensus coming in at 3.3% vs. 2.0% est. while the GDP Price Index data was below estimates, showing signs of cooling inflation.  The GDP data of the last two quarters coupled with further signs of disinflation is continued fuel for the soft landing narrative.   Jobless claims were above 200K for what feels like the first time in a while. Durable Goods Orders and New Home Sales were also solid.  The ECB was on hold as expected with LaGarde trying to push back on rate cuts, while hitting on the fact that they are waiting to see wage growth stabilize or slow, but the continued weakness in soft data such as PMI's has markets continuing to price in fairly aggressive cuts.   Overall the S&P was up, EUR:USD was weaker as markets focus on U.S. growth and U.S. bonds closed lower and the 7Y auction was better than the ugly 5Y auction from Wednesday.   2Y ~4.30% and 10% ~4.12%

If you missed it the other night, the Fed ended the BTFP arb as they wind down the BTFP facility in March as well.  If you were unfamiliar with the arb, banks could borrow from the BTFP and deposit those funds with the Fed and earn IORB, in other words you could borrow from the Fed and earn a positive spread on those funds from the Fed.  

In geopolitics, headlines indicate that Putin might be open to talks on Ukraine.  On the day ahead it's PCE as the main course.

XTOD: Q4 GDP:  3.3% vs 2.0% exp.   The best GDP report a half a trillion dollar deficit in one quarter can buy!

XTOD: The airport is nowhere in sight. H4L baby.

XTOD: the 'strengths of monetary policy transmission' is code for 'who knows?'.

XTOD: I dread disagreeing w/ Claudia, but the fact that there has been a soft landing does not itself mean the inflation was transitory.  A soft landing was possible, w/ the help of Fed rate hikes, even if it was partly due to excess AD growth. Indeed, the belief that there can’t be a soft-landing from a situation of unwanted demand-driven (hence, non self-reversing) inflation itself reflects Philips-Curve thinking. 

(I’m going to go put my suit of armor on now.)

XTOD: I've put together a list of 5 key areas to watch this year. Yes, volatility can surprise businesses and financial markets any year. What makes 2024 different is the exponential impact volatility could have in the economy. I hope you'll give them a read. https://www.linkedin.com/pulse/five-flashpoints-2024-nomi-prins-a9gce/

XTOD: Let's not forget: The inflation was premeditated & intentionally created by the central planners, as they implemented the Blackrock plan to cause inflation via my QE2 proposal that I designed for a deflationary shrinking economy -when supply was restricted https://t.co/PCzsDTf2Mv

XTOD: The best way to gauge the quality of someone’s ideas isn’t to listen to them talking. It’s to read their writing.  Compelling speakers can mask weak logic with strong charisma. Putting key points on a page exposes flawed reasoning.  Compelling writing requires clear thinking.

XTOD: Surprising new data on religious affiliation and the rise of None:  

None 28%

Evangelical Protestants 24%.

Catholics 23% 

In 2007, "None" made up just 16% of Americans

Daily Economic Update: January 25, 2024

New all-time highs on the S&P as tech/nasdaq stocks lead the way.  The S&P PMI's exceeded expectations and showed service sector expansion.  IBM beat and Tesla missed and DuPont shares were ugly. Yields were higher after a 5Y Note auction that tailed 2bps.  The 2Y is ~4.38% and the 10Y is ~4.17%

I recently wrote about the "cruel irony of investing" and Ben Graham's ideas around the difference in investing on the basis of projection vs. protection here, and that might sound like a call to avoid optimism...it's not.  I recently enjoyed a post by Joachim Klement titled When Optimism Becomes a Dirty Word .  In the article Klement fleshes out an argument that pessimism and doom and gloom hold back societies by decreasing entrepreneurship and productivity over time, he might be right.

Simon Sinek is definitely an optimist.  He defines optimism as "the undying belief that the future is bright"  while also providing that it is not blind positivity or ignoring difficult circumstances.

I don't find optimism incongruent with concepts like "margin of safety".  In fact I think it's quite congruent with the wisdom of Graham and his protege Warren Buffett.  In Buffett's words, "In order to succeed, you must first survive."  For anyone who is familiar with the basics of compounding, you have a growth rate on the bottom and an exponent. While you can get really large outcome by having a high growth rate, for those who study the best compounders they find that it's the exponent that matters the most.  That exponent is time and you can't enjoy compounding if you or your portfolio aren't around.

Author Morgan Housel likes to say "save like a pessimist, invest like an optimist"  meaning you can only be an optimist in the long run if you can survive all the short-run setbacks.  Housel has also recently written about Optimism it's worth a read.  In a talk Housel gave when discussing optimism and his first book, The Psychology of Money, Housel provided:

 Real optimists don’t believe that everything will be great. That’s complacency. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way. 

,,,,But the most powerful and important book should be called “Shut Up And Wait.” It’s just one page with a long-term chart of economic growth.  Physicist Albert Bartlett put it: “The greatest shortcoming of the human race is our inability to understand the exponential function.”

One thing that can risk interrupting compounding unnecessarily and not allowing you to achieve the long-term optimism is excessive leverage.  "It pushes routine risks into something capable of producing ruin."   We've talked about leverage recently...go back to January 10th post on Howard Mark's "Easy Money" memo. 

On the day ahead it's the Q4 GDP Advance, Durable Goods, Jobless Claims, 7Y Note auction. ECB expected to hold, we’ll see how hard they push back against rate cuts priced in.

XTOD: I'm finding the idea that the US experienced a series of small, sector-specific recessions in 2022-2023 more and more compelling. If so, that would lower the odds of the economy generally losing momentum now.

XTOD:  "Profit: While we continue to execute on innovations to reduce the cost of manufacturing and operations, over time, we expect our hardware-related profits to be accompanied by an acceleration of AI, software and fleet-based profits." - TSLA

XTOD: Sobering chart on commercial real estate and the Fed's tightening cycle. This  time is different! https://imf.org/en/Blogs/Articles/2024/01/17/us-commercial-real-estate-remains-a-risk-despite-investor-hopes-for-soft-landing

XTOD: Berkshire Hathaway spikes to record highs on news of the upcoming release of ChatBRK which will be “trained” on Buffett and Munger letters and interviews. Berkshire will also change the URL of its website to brk dot ai and will unveil a new nft logo.

Daily Economic Update: January 24, 2024

I didn't write about the Chinese stock market or the Bank of Japan this week because what's there to write? On China go back to this post from August 2023, it tends to be a lot of rinse and repeat of the same general headlines with no real changes to the underlying themes, same with the BoJ.  No one cares anyway, we're all just busy watching Netflix apparently, as evidenced by subscriber count.

Bitcoin down something like 20% since ETF's launched.  A down day for the Dow so I'll have to slow play the Dow 40K hats. Yesterday's 2Y auction was on the screws at 4.365%.  The curve steepened a little with 2's at 4.37% and 10's at 4.14%.

On the day ahead it's S&P PMI's, the Bank of Canada and a 5Y Note Auction

XTOD: Worst trick the devil ever played was to make people believe that BTC supply is limited to 21 mill.  It's actually infinite.  We can now print as much of that shit as you want.  Just like gold. We don't even need to mine that crap.  We can create endless quantities through futures and never deliver.

XTOD: We highlight two reasons why unemployed aren't apply for claims: 1) eligibility is at all time low pre-recession. and 2) UI benefits not catching up with inflation, opportunity cost of collecting benefits higher than ever before.  We estimate that the average wage coverage gap is bigger than ever, abut $1400/week. Why collect benefits when you can earn way more as gig worker or freelancer and actually be able to pay your bills? The lower the coverage of UI, the lower the recipiency rate, at state level.  One implication of this: when UI claims do rise to a high level, then it is truly painful for people -- more so than the same level of UI in past recession.....because this time around UI claims can no longer pay the bills, and one must have exhausted other options.

XTOD: I read once (forget where) that as recently as 100 years ago the rich had the worst medical care, because they could afford all the quack treatments from sham doctors offering miracle cures that would actually just increase your odds of death/poisoning.   Something something, financial advice.

XTOD: i spent years being really confused about why states and municipalities were hoarding cash after Covid   but honestly I kinda get it now!  mea culpa   theyre now spending down those cash reserves, and it’s helping stave off a real recession

XTOD: For a certain type of voter, the logical conclusion of "everything is terrible—but I'm fine" is "burn this whole damn system down—but don't go changing things"

Daily Economic Update: January 23, 2024

Stocks continue setting all time highs (is there a market for Dow 40K hats?...trying to be proactive) as yields fall slightly and the curve flattened a little.  Some observers question whether the Mag 7 or other stocks are in a bubble.  At some level the concept of "bubbles" implies that the foundations of finance are flawed, that markets are not efficient and that people will buy an asset at a price above what they judge to be a fundamental value (people do by Bitcoin...so). As David DeRosa writes in his monograph Bursting The Bubble: Rationality in a Seemingly Irrational Market:

"Although it is not certain that anyone will be ever able to prove conclusively whether or not bubbles exist, research shows that many famous financial crisis that have been portrayed as bubbles were not bubbles at all."

DeRosa references Occam's razor, which calls for always seeking the explanation that makes the fewest assumptions possible, and Mark Rubinstein's The Prime Directive, which says that you should attempt to explain asset prices by rational models as reasons to search first for fundamental, rational explanations for asset prices before resorting to "bubbles" as the last resort.  If you want to hear DeRosa speak on the topic of Bubbles, he was interviewed here.  If you're not familiar with the story of John Law and the Mississippi Company, listen around the 11 minute mark for a quick overview, though Niall Ferguson's account in The Ascent of Money  is much better in my opinion.

Are markets rational?  I'll leave it to those smarter than me to answer.  While I believe Ben Graham believed in efficient market hypothesis, his parable of "Mr. Market" is always worth a read and reminder.

In other news, according to yesterday's NY Fed Survey of Consumer Expectations, SCE Public Policy Survey, "The average perceived likelihood of an expansion in federal student debt forgiveness increased to 28.7 percent in December, up from 27.8 percent in August but still well below its year-ago level of 34.7 percent." .....see MMT ?? 

On the day ahead it's Richmond Fed Mfg Index as markets await Thursday's GDP report and Friday's PCE report. 

XTOD: Private Credit is Having a “Golden Moment” – Buy or Sell? I read whatever @LaurenceBSiegel  writes. I’d recommend you do too.  https://www.advisorperspectives.com/articles/2024/01/08/private-credit-golden-moment-buy-sell-laurence-siegel

XTOD: Former Federal Reserve policymakers Robert Kaplan and Eric Rosengren were cleared of legal wrongdoing in a years-long probe into their trading activity in 2020

XTOD: My boss arrived to work in a brand new Lamborghini  I said: “Wow, thats an amazing car” 

He replied: “If you work hard, put all your hours in, and strive for excellence, I will get another one next year”

XTOD: MY FIRST X VIDEO MADE OVER $250,000! 😲  But it’s a bit of a facade. Advertisers saw the attention it was getting and bought ads on my video (I think) and thus my revenue per view is prob higher than what you’d experience

Daily Economic Update: January 22, 2024

Friday's University Consumer Sentiment index far exceeded expectations with strength everywhere and slightly lower inflation expectations.   As people who have read this blog for a while know, some believe this report is highly negatively correlated with gas prices which are holding fairly steady at levels that are at least 10% lower than a year ago and well off the highs.  How continued tensions in the Middle East might impact oil, nat gas, and gasoline prices remains unknown, but the data shows the U.S. has somewhat stealthily become the world's leading producer of oil and gas.

Stock prices hitting all time highs despite rising yields.  The 2's10's un-inversion watch is getting real with 10Y yields only ~20bps below 2Y yields.  Entering a steepener (betting on an increase in the difference between long-term yields and short-term yields) trade back in March or July/Aug 2023 when the 10Y was yielding 100bps below the 2Y, looks like it would have been a pretty good trade. For the uninitiated a 2s10s Steepener trade can be constructed using interest rate futures (Treasury Note Futures...it can be traded with other products as well) in one of three ways: 

1. Duration Neutral - you Buy/Long 2Y Treasury Note Futures while simultaneously Sell/Short 10Y Treasury Note Futures with both legs of the trade sized to have the same Dv01 (generally you are short a lower quantity of 10Y note contracts than you are long 2Y note contracts).
   
   
2. Bull Steepener (you think short-term yields will fall more quickly than long-term yields) - you Buy/Long more Dv01 in 2Y Note Futures than you are Short Dv01in 10Y Note futures.  The idea here is you think the steepening of the curve will come from lower 2Y yields.  You run risk that the curve steepens but the steepening is a result of the 2Y falling moreso than from the 10Y rising.
   
   
3. Bear Steepener (you think long-term yields will rise more quickly than short-term yields) - you Sell/Short more Dv01 in the 10Y Note Futures then you Long Dv01 in the 2Y Note futures. The idea here is you think the steepening of the curve will come from higher 10Y yields moreso than lower 2Y yields.

A summary of this can be found here, courtesy of CFA Refresher Reading: Yield Curve Strategies

I'm not sure how much more room the steepening of the 2s10s curve has to run, but we've certainly have had plenty of years of experience with a "normal" yield curve shape where 10Y yields were over 100bps or more higher than 2Y yields.  If I had to build a case for why trading a steepener might not work well from here it would probably be a narrative that tied to a central bank policy that the market believes is overly restrictive, leading the market to price in higher 2Y yields and lower their future growth and inflation forecast leading to lower 10Y yields.  Alternatively a scenario where the Fed embarks on Yield Curve Control or QE could plausibly also lead to further flattening/inversion.

Of course if you strongly believed that the steepening would occur from just the 2Y yield going lower or from the 10Y yield going higher you could just make a bet simply on one leg of the above "steepener" trades.  And if you believe the Steepener has run it's course, you could trade Flatteners by reversing the direction of the trades above.

The week ahead features PCE, a look at 4Q GDP, Treasury Auctions, some PMI's and Bank of Canada and ECB rate decisions.

XTOD: So if you're a Davos class type — in finance, private equity, multinational business, certain think tank/academic/nonprofit types who depend on political connections — your gut instinct is to SURVIVE at all costs.  If that means a deal with the populist, well then...Suddenly we have — as at the start of this thread — Blackstone's CEO saying, "Hey... we can't afford another Biden admin. Maybe we should keep an open mind about alternatives..."  Or Jamie Dimon of JPMorgan saying "Actually, Trump WAS right after all..."  It's still early days, but you can see the line of thinking is taking form with some of the cannier Davos types:

"I want to survive and stay in the game, so it's time to dump progressives, neoliberalism, and woke stuff, and play ball with Trump."  Watch this space people.

XTOD: Theres no fucking way the Fed eases 150 bps into ATHs in both equities and RE, so if you are an RIA get ready to switch your bullshit narrative from 'Fed cuts' to 'The market can handle higher rates'.  No charge for the advice 

XTOD: The S&P 500 closed at an all-time high.  The Russell 2000 is still in a bear market*, down more than 20% from its high.  That's never happened before.

XTOD: Jill Biden trying to distract from her comments about Hunter’s drug abuse, and ending up under a giant banner reading “Hunter High,” is straight out of a VEEP episode

XTOD: 2008: Wall Street has a bust, the whole U.S. economy crashes 2023: Tech has a bust, the U.S. economy ignores it completely and does great  Finance is more systemically important than tech, which is why it should be regulated more.

XTOD: Like everyone else, at one point, I had zero readers and zero listeners. We all start out naked and afraid. Then your mom starts checking out your stuff, or perhaps a few friends give a mercy-listen, and the fragile snowball grows from there.

XTOD: Opening day is just 69 days away!

Daily Economic Update: January 19, 2024

Stocks advanced while yields were mixed with the 10Y crossing 4.15%.  Pakistan and Iran tensions add to the mix of uncertainties in the Middle East. Over in Asia there are increasing concerns around the Chinese economy.  But in continued good news in the U.S., you still can't get fired as jobless claims printed +187K well below the 200K consensus and remaining near historic lows.   Bostic, a dove, was somewhat dovish, but conceded: “I’m staying vigilant because, though inflation has been on a path toward the 2 percent target for some time, there are risks that could throw it off course.” 

Of course Central Banks need to be attuned to risks (and uncertainties), I wrote about this in my Fed report card.

It's worth considering:

“The world of calculable and controllable risk liberates — perhaps even helped by its triumphal claim of calculability — the moment of surprise.” - Urlich Beck

There was a series of articles by Thomas Meyer on the topic of "Radical Uncertainty" (the title of a book by John Kay and Mervyn King).  I had found and saved the above quote from Meyer's article some years back.  "Radical Uncertainty" being a nod to Frank Knight's description of a situation where there is no scientific basis for calculating a probability.   As Meyer writes,  the quote above encapsulates a theme that "Kay and King describe how modern society has succumbed to the illusion that uncertainty can be transformed into calculable risks."

Benjamin Graham opined on what to do when faced with uncertainty as follows:

"In the old legend the wise men finally boiled down the history mortal affairs into a single phrase, "This too will pass". Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY"

Author Peter Bernstein provided further advice:

 “In making decisions under conditions of uncertainty, the consequences must dominate the probabilities"

XTOD: If someone told you only a few weeks ago that Iran would be at war, you would have guessed Israel, the US, or perhaps Saudi Arabia; not Pakistan.

It is very, very hard to keep in mind that we're not good at predicting & even harder to incorporate it into a general policy.

XTOD: "The western world is in danger . . . because those who are supposed to defend the values of the west have been co-opted by a vision of the world that inexorably leads to socialism, and therefore to poverty.” Try to hear the whole of  @JMilei 's speech at the @wef  yesterday, a magnificent defense of individual liberty and the free market economy. https://youtube.com/watch?v=Pfcd0gWNIog

XTOD: Zero rate world: producers of the actual goods and services watched speculators of property and stock markets & influencers get so rich - to the point that the current economy rewards people doing certain behaviors that produce nothing - ie: above examples. Being productive is rarely rewarded under the current economic system.

XTOD: people are gonna keep finding frying pan charts and i think that’s beautiful

XTOD: Lex Fridman finally did a podcast I found interesting. He spent 6 hours interviewing a con-artist (many of his guest are con-artists, and he may be too) who explained the ins and outs of identity theft and mortgage fraud in detail I had not heard before.

Daily Economic Update: January 18, 2023

Yields rose again, with the 10Y crossing 4.10% and the 2Y crossing 4.30% as retail sales again beat expectations with brick and mortar retail spending and ecommerce spending both rising solidly.  Stocks continued to react negatively to rising yields.  A control + F search of yesterday's Beige Book  returns no results for the word "recession", a stat relayed by some commentator on Bloomberg (didn't catch his name), but is quite telling and quite juxtaposed with some of the market pricing for rate cuts.

There's a few long Twitter/X thoughts of the day below, one a "Xeet" from Richard Jarc who appears to be the writer of "UncoverAlpha" newsletter.  I'm not familiar with his research and if you've read this blog hopefully you know that I believe it's an extremely high bar for someone to produce research of any actionable value.  Nonetheless, his reason for selling Google shares had me thinking about something related to Google and that is the topic of Digital Amnesia, a term to describe the phenomenon that words looked up online are often forgotten almost as quickly as they are acquired.  You'll probably forget that word after you look it up ☺.   With all the new AI technology and GPT's will we ever need to retain any information?

Simon Winchester wrote a book Knowing What We Know where one of his fundamental arguments (pp. 338-339) is that "today's all-too readily available stockpile of information will lead to a lowered need for the retention of knowledge, a lessening of thoughtfulness, and a consequent reduction in the appearance of wisdom in society."  His point from there is that are some really important moments in history where wisdom or the lack thereof played a major role, positing that a greater degree of wisdom is required in making decisions that involve building something than destroying something.  That said he doesn't preclude the possibility that these new technologies actually allow us to be wise (see quote posted here back on December 26th)

XTOD: Imagine spending YEARS of your life studying markets, macro, etc. when you could've gotten the same (or better) result simply by buying a diversified basket of income-producing assets every single month.  Investing is one of the few fields where amateurs can beat experts.

XTOD: Jamie Dimon is spot on here… “I don't like how Trump said things, but he wasn't wrong about those critical issues. That's why they vote for him. People should be more respectful of our fellow citizens.”  Biden calling 75 million Americans “MAGA extremists” is not uniting us.

XTOD: I believe that there are five big, interrelated influences that are driving the changing world order and that they tend to evolve in big cycles. They are:

1. How well the debt/money/economic system works,

2. How well the internal order (system) works within countries to influence how well people within them work together,

3. How well the world order (system) works to influence how well countries work with one another,

4. The force of nature, and

5. How well humankind invents new and better approaches and technologies.

If you’re interested, I just shared a post looking at all five of them and their prospects for 2024, a year that will likely stand out because all these forces are approaching or are at the brink of seismic shifts. I look forward to your thoughts in the replies https://linkedin.com/pulse/2024-pivotal-year-brink-ray-dalio-fwgie/

XTOD (This dude's definition of a "Short Summary" leaves something to be desired, I'm interested to see what's left for the article...): I sold my $GOOGL position today.  I will be publishing an article explaining the reasons in the coming days, but in a short summary: 

$GOOGL was one of my biggest positions and has done well for me over the years, but I want to go on the sidelines right now. 

1.  Search is over 50% of $GOOGL's revenue, and it is becoming increasingly apparent to me that LLMs, when combined with the proper UI and flow, are a better solution to solving the core problem that Google Search addresses, which is answering a question. The other issue that is becoming clearer is that we will soon have LLM assistants who can answer different questions in many touchpoints we didn't have before. So, solutions for solving the problem of answering a question become accessible at almost every step.  Example: $MSFT Office and other products, WhatsApp, IG, FB, $AMZN, $AAPL Siri, not to mention a variety of startup products and apps, both on apps and platforms as well as hardware products. With it, the need for you to go "Google" something becomes smaller.

In the past, the main thing that kept the $GOOGL moat so strong was the fact that you couldn't make a Search engine so good because you didn't have enough data to make it good for it to compete with Google Search. But without users using your search engine, you couldn't get data. So the circle was complete. But now a lot of LLMs answer the questions as well as, if not better for some questions as a Google Search, and here is where the moat has gone, IMO. This opens up the gate for other big companies as well as startups to be able to compete for the basic need that search solves (answering a question).

2. $GOOGL has two paths when it comes to Search: either they cannibalize their Search business with Bard as a spin-off individual app/solution that can compete with "legacy" Search with a new LLM-type interface or let others do it and fight it while trying to enhance your "legacy" product but not quite providing the right customer experience because of trying to make your legacy product still relevant. While I believe it is likely that, in fact, in the long run, $GOOGL is the one that develops the best new LLM Search experience, the path to reaching that goal might be painful for shareholders as Search profits and revenue will take the hit in the transition as the new LLM surface at least in the short to mid-term cannot be monetized in the same manner as "old" Search can be.

When reading the book Innovator's Dilemma, the current situation at $GOOGL ticks so many of those boxes of the typical case.

The main reason for me still holding the position was that the valuation is not expensive but quite reasonable, but I found it to be the wrong reason.

When it comes to the ad sector, which will be a strong beneficiary, I believe my position in $META is better, and when it comes to the cloud industry exposure, I prefer getting it via $AMZN and $MSFT.

Again, I have nothing against $GOOGL, but at this point, I decided to go on the sidelines and let the thing play out and have my capital deployed elsewhere.

More details will be published in the article, which will be published next week.

XTOD: Out now - @andyverity's SHOCKING allegations about the manipulation of LIBOR during the Great Financial Crisis (& the cover-up since): 

- the scandal is way, way worse than originally reported

- "the real manipulation of interest rates" was orchestrated "by central banks on a much bigger scale than any of the traders who were jailed"

- evidence showing complicity of Bank CEOs and central bankers was suppressed by a team of prosecutors, including the FBI and CFTC (then lead by Gary Gensler, the current Chair of the SEC), who conducted show trials to appease public anger at bankers, sending a few 'rogue traders' behind bars while the much greater manipulation went not only unpunished but unacknowledged  

- during 2007 and 2008, nearly all banks were consistently lying about the true cost of borrowing dollars by "lowballing" (i.e. underreporting) their funding rates by 10, 20, 30, and in extreme cases, 1000s of basis points, which led to a massively depressed LIBOR (London Interbank Offering Rate) upon which most of the financial world relied for accurate pricing of real-time floating-rate loans and fixed-income products (upwards of $500 Trillion dollars were tied to LIBOR)

- there is compelling evidence that central bankers and bank executives at the highest levels not only were aware of this lowballing of LIBOR, but blessed it and, in some instances, even directed it

- after the Crisis (2010-2012), it was not this chronic "lowballing" that was punished, but instead individual traders who, from a legitimate range of possible cash offers, reported LIBORs that were favorable to their bank, to the tune of 1, 2, or 3 basis points (i.e. on a much smaller scale than the chronic lowballing) 

- while many, many cash traders who reported LIBOR must have been aware of systemic lying, only very few have documented proof of challenging the practice of lowballing, and fewer still who made the Federal Reserve aware of this problem. 

- one such cash trader was Peter Johnson, who as early as fall 2007 was calling reported LIBORs "so f***ing wrong" and who in January told an official from the Federal Reserve that the reported LIBORs were "absolute rubbish" because "the market so desperately wants LIBORs down that it's actually putting the wrong rates in"

- In a twist of fate, Peter Johnson was later accused and convicted of conspiracy to defraud, despite the fact that he was a primary whistleblower whose actions provided evidence of lowballing

- There is much, much more to the story. For more details, check out Andy's book, "Rigged: The Incredible True Story Of The Whistleblowers Jailed After Exposing The Rotten Heart Of The Financial System."

- Andy (not me) is the expert on this topic, and it is solely he (not me, certainly not my employer or sponsors) who is making these allegations. Andy is aided by a treasure trove of evidence which he has collected for over a decade and which is extensively covered in his book, and only a small fraction of which is mentioned in the interview. Andy does cite several phone calls however which we managed to add to the interview. 

- For a fuller  picture, read the sources cited in the description to the interview and listen to the tapes. For the complete picture, buy and read the book, which I recommend highly. Filmed on January 5, 2024.

Huge thank you to  @public  for sponsoring this interview!    

As usual, this interview can be viewed on @ForwardGuidance  podcast apps as well as on YouTube on the "@Blockworks_ Macro" channel. Spotify has video now 📽️ Enjoy 💯

Daily Economic Update: January 17, 2023

Stocks ended the day down. Treasury yields were a bit all over the place as NY Fed's Empire State Mfg Survey showed general business conditions index falling 29 points to -43.7, it's lowest reading since May 2020 (per @NYFedResearch on X), but Waller didn't seem to see any need for many rate cuts, stressing gradual cuts as his expectation.  The 10Y ended up well over 4% at 4.08%.  Meanwhile Canadian inflation runs hotter than expected.  

The Gov. Waller speech yesterday: referred to the recent growth, inflation and unemployment data as "almost as good as it gets"; he spoke of labor market rebalancing and how he was correct that vacancies would absorb the decline in labor demand without upsetting employment/unemployment, but that he now believes the Fed needs to proceed in a manner that avoids over-tightening;  he considers current financial conditions "restrictive", stressed the need to be confident that inflation will stay on a 2% path after reaching there that level; he believes rate cuts will be warranted so long as inflation doesn't rebound and that the number and timing of cuts is "data-dependent", but nonetheless should be gradual; he's watching for the scheduled CPI revisions that will come out as part of the Mid Feb CPI release to confirm inflation is truly easing quickly.

Today has Retail Sales, Industrial Production, Inventories and Beige Book.

Thursday: Philly Fed, Jobless Claims, Bostic

Friday: UofM ask consumers about gas prices, existing home sales and Daly

I enjoy observing and writing about the economy and the market, but I refuse to pretend I have any ability whatsoever to predict the future.  On top of that I have as a life goal to always be able to reply to any question about the direction of markets or the economy with a simple, yet powerful response of "I don't know and I don't care."  A few years ago, I presented an economic update to the CFA Society of Philadelphia and I titled each slide with a quote from Fred Schwed's Where Are The Customer's Yachts which seemingly sums up well what I have just described.

"For a considerable time now the writer has been viewing the activities of this street each working day, usually from the vantage point of a trading table"

"Although not a deep thinker myself, I have had a thousand separate lunches with those who were"

"he would be forced to admit the sad truth that a pitifully few financial experts have ever known for two years (much less fifteen) what was going to happen to any class of securities-and that the majority are usually spectacularly wrong in a much shorter time than that."

"In this case, the notion that the financial future is not predictable is just too unpleasant to be given any room at all in the Wall Streeter's consciousness"

"For one thing, customers have an unfortunate habit of asking about the financial future.  Now if you do someone the signal honor of asking him a difficult question, you may be assured that you will get a detailed answer.  Rarely will it be the most difficult of all answers-"I don't know".

Despite the fact that the financial services industry makes forecast, some right, some wrong, most couched in gibberish that gives the person a way to hedge if they are wrong, the very fact that the stream of opinion is omnipresent makes it easy to get caught up in the short-term and feel pressure to react. After all, providing you with a stream of data and opinion is a business, a business predicated on a demand by investors (including speculators) to be told by someone else what to do (credit to Ben Graham's writing for this phrase).  The incentives are such that adding noise, complexity and a constant pressure to do something is part of the business.  Morgan Hounsel wrote about this in a blog post Trying Too Hard in which he tells the story of Jon Stewart interviewing CNBC's Jim Cramer:

"Years ago Jon Stewart interviewed Jim Cramer. When pressed on CNBC content that ranged from contradictory to inane, Cramer said, “Look, we’ve got 17 hours of live TV a day to do.” Stewart responded, “Maybe you can cut down on that.” He’s right. But if you’re in the TV business, you can’t."

All of the above is by no means to say that people don't need or shouldn't seek advice about financial matters.  There are many instances where prudent advice is needed to be a steadying influence and prevent costly mistakes. Comprehensive financial planning, constructing investment policy statements, and strategic asset allocation all are differentiated from the noise of stock-tips, speculation and prediction, at least to me.

XTOD: People who don’t value their own time won’t value yours.

XTOD: “…the vision techno-optimists sell, of humanity sailing the stars, expanding ever outward to conquer the galaxy, that does sound pretty cool. Someday it may even happen, and I wouldn’t complain. But this vision is not a solution to the nihilism that has gripped our societies today; endless expansion and acquisition for the sake of expansion and acquisition is just another expression of nihilism.”

XTOD: You can think whatever you want about Milei, but taking Lufthansa flight to Davos while so many „ESG focused“ officials and executives come with private jets is exactly the right signal to send.

XTOD: First MrBeast video posted directly on 𝕏!

XTOD: $1 Car vs $100,000,000 Car!!! I’m curious how much ad revenue a video on X would make so    I’m reuploading this to test it. Will share ad rev next week 

XTOD: “Is the Fed falling prey to groupthink?” Peter Coy @petercoy @nytimes

 is asking the right question but I beg to differ with his answer. He suggests that members of Fed Board don’t cast dissenting votes from Fed chair because they consider forward guidance a powerful tool in conducting monetary policy and wouldn’t want to send confusing market signals. But when Fed admits that it is making decisions based on incoming data, meeting-by-meeting, the value of forward guidance is already compromised. Members submit individual estimates that are published as dot-plot charts, but the chair dismisses their importance in signaling future actions. Meanwhile, Fed Board members and rotating voting members of FOMC from district Fed banks are making more speeches than ever, sending disparate, even conflicting, messages about Fed intentions using nuanced statements. Interpreting it all requires an army of market analysts.  That is what presumed “consensus” delivers: mixed messages. Diversity at the Fed is needed, yes, but the kind that matters: intellectual diversity. Expecting skin color or gender to determine how someone processes data and transforms their analysis into effective monetary policy is the worst kind of stereotyping. Utterly superficial and demeaning. What’s needed is deliberate resistance to groupthink—not to be a professional contrarian but to raise issues others might be missing in an effort to avoid policy mistakes.

Daily Economic Update: January 16, 2024

To end last week PPI came in below expectations and the 10Y ended the week below 4%.  The real story is the situation in the Red Sea and Middle East more broadly, but lets not also forget that China is still upset with Taiwan (especially with DPP winning a 3rd presidential term, continuing to rebuke China). 

More broadly we're still at the part of 2024 where you get investment outlooks and predictions.  This reminds me of one of the central points from Ben Graham's The Intelligent Investor where he states:

"..every competent analyst looks forward to the future rather than backward to the past, and he realizes that his work will prove good or bad depending on what will happen and not what has happened.  Nevertheless, the future itself can be approached in two different ways, which may be called the way of prediction (or projection) and the way of protection." 

"Those who emphasize prediction will endeavor to anticipate fairly accurately just what the company will accomplish in future years...without paying too much regard to the level at which it is selling"

"By contrast, those who emphasize protection are always especially concerned with the price of the issue at the time of study. Their main effort is to assure themselves a substantial margin of indicated present value above the market price - which margin could absorb unfavorable developments in the future."

In the commentary provided by Jason Zweig that accompanies Graham's advice, Zweig provides the following:

"All investors labor in a cruel irony: We invest in the present, but we invest for the future. And, unfortunately, the future is almost entirely uncertain. Inflation and interest rates are undependable; economic recessions come and go at random; geopolitical upheavals like war, commodity shortages, and terrorism arrive without warning; and the fate of individual companies and their industries often turns out be the opposite of what most investors expect.  Therefore, investing on the basis of projection is a fool's errand; even the forecasts of the so-called experts are less reliable than the flip of a coin. For most people, investing on the basis of protection - from overpaying for a stock or from overconfidence in the quality of their own judgment - is the best solution."

Probably worth think about that as there is heightened attention to categories like inflation, interest rates, war, etc. at present. 

In other news, last week, NY Fed's Liberty Street Economics ran an article on the evolution of the FX market over the last two decades.  For those who have been involved in FX over the past decade or longer many of their observations are likely to resonate.  

• FX trading volume has exploded, led by the increased breadth of market participants and increased FX swap trading - much of which is short-term and rolled
• More volume is being internalized by dealers who match off internal customer flow
• Increase of electronic trading
• Rising complexity may have worsened price discovery
• Regulators have focused on mitigating settlement (Herstatt risk) and rooting out bad behavior, encouraging the adoption of the FX Code
• On the look ahead, the NY Fed believes we'll continue to see faster settlement, with T+1 for many trades starting this year, continued debate over the role of principal trading firms (aka high-frequency traders), and the possible impact of CBDCs

XTOD: Never forget: Corporal Wojtek, a Syrian brown bear, fought on the side of the Allies in WWII

XTOD: Columbia Business School professor Stijn Van Nieuwerburgh calls office real estate a train wreck in slow motion. He forecasts a 40% reduction in the value of New York offices. https://cbsn.ws/48O0WhI

XTOD: One narrative I frequently hear is that AI will remove some of the drudgery from people's jobs, which seems true enough. But one person's drudgery is another person's "stretch project" if they're in a job that's even more boring. I don't think we're talking about that enough.

XTOD: After repeated US strikes in the region, Iran’s ballistic missile attacks in Iraq/Syria tonight — partially very close to U.S. interests — are being seen as a message that Tehran is willing to wade into the regional conflict itself, not just via its proxies/allies

XTOD: I have presented the #TRADFI perspective on #Bitcoin Like this one:

".... making thousand of percent for something with no value in kind, no use as money by central banks and very little use as money for transaction ?

..... is just sheer speculation. At least they should admit it, it might benefit their trading.

We are all in for speculation to some degree, knowing it makes the situation better."

@GraphFinancials

XTOD: Bitcoin doesn’t “fix this”, any more than wooden nickels did during Weimar or briefly again in 1929.  They are a speculative bet on USD debasement and US insolvency that likely/may never come - but MOST don’t understand how to measure so they blindly follow the gospel that is bitcoin. 

Don’t get me wrong, there are great advocates, who also serve as preachers, and are not charlatans, whom I follow closely for their insights: @LynAldenContact  @CaitlinLong_

 And I will gladly agree that for an elite few they are a store of value and for a nascent few, they are an actual utility. And as such I hope #BTC continues. Just maintain some perspective…  As Lyn reminds: bitcoin trades in the billions each day. Bravo.   As I will remind: US dollars trade $7 trillion per day. 

It’s hard to unseat the incumbent without dollar collapse, and US insolvency. 

So that begs the question: As you HODL away your bitcoin, are you secretly wishing or expecting this? 

More to my point on bitcoin/crypto, as proxies for wooden nickels *should* the time arise to need them…And this is the MONEY QUOTE: “as soon as monetary order was reestablished they went to ZERO.”  @GraphFinancials    Bears reminding is all I’m saying.  KNOW WHAT YOU OWN AND WHY.

XTOD: "The returns don't come from the stock market they come from the corporation" is a great way to try and understand why Vanguard isn't into bitcoin ETFs but yet has no problem investing in cos that are involved w btc. Bogle just saw stocks and commodities as two VERY dif things. This is how he put it in one of my intvs w him which I touched on in my book....And to be fair Bogle bashed stock trading more than commodities btw, but tried to separate Investment Returns from Speculative Returns as a way to get ppl to understand why you should inv/not trade in stocks as well as keep your cool when things get really good or really bad.

XTOD: Great bosses know the secret: It's not just about what you do, it's about who's doing it. 

Shift from 'What's important?' to 'Who's important?'. 

Listen, support, grow together. Happy team, better results. A simple change in words, a transformative change in leadership. 

Daily Economic Update: January 15, 2023 (MLK Day)

Sharing a story told by author, journalist, podcaster, Cal Fussman regarding Dr. King's famous "I Have a Dream Speech":

Cal: [00:53:30] I have a story that really goes to show how there are these connections that are all around us. You don't even know that they're there if you're just seeing things from a distance. But I'll tell the story about the I Have a Dream speech. This is something that very few people know. I know it because I know the guy who actually has the paper that the speech was written on. And the words I have a dream are not on that paper. 

And so what happened was Dr. King was speaking at churches all over. And as he would speak, he would talk about this dream. It was part of his talks. And there was a gospel singer named Mahalia Jackson, who often went to the same churches and saying, while he was speaking, she knew, because of this continual connection, his whole repertoire. 

When this event was built in Washington, it was not really created for a church crowd. It was created for a huge American audience. And so Dr. King actually had somebody who he worked with write the first six paragraphs or so of the talk so that it was aimed at everybody. And then Dr. King wrote through the rest of the speech. And he got up to give the talk, and he's giving it, and it's going over okay. 

But if you're Mahalia Jackson, the gospel singer, who knows what's possible, you're looking out at the crowd and thinking, uh-oh, this is not going the way she had hoped. The crowd is responding nice and warmly and it's going well, but at about three quarters away through, and there's a ring of people behind Dr. King as he's giving the speech, he pauses for a second and Mahalia Jackson shouts out, tell them about the dream, Martin. Tell them about the dream. As soon as she says it, he pushes the speech aside and you hear I Have a Dream. 

Now you talk about connection, you talk about leadership. The whole movement was vitalized with those few words that would not have come out that day if it hadn't been somebody who was seated there, carefully listening to what he was saying, carefully watching the crowd. And remember, she's a gospel singer. She is a performer in a way. She knows what works. And she just stepped up and connected with him so that he could connect with everybody.

And it's just an example these connections are happening for us all the time if you pay attention to them. And obviously, Dr. King was because as soon as she said it, he understood exactly what she wanted to get across. And as soon as he went into I Have a Dream, everything changed. And not long after that, President Kennedy identified it as the I Have a Dream speech.

And the guy who got the speech, it is interesting. He was a student at Villanova visiting a friend's house. You just talk about connections here. His friend's father said, what are you guys doing over the next few days? And they said, oh, I don't know. And he said, why don't you go up to Washington and listen to Dr. King's speech?

So they went up. And this guy's name was George Raveling, and he was a basketball player at Villanova. So he's a big guy. One of the organizers walked over to him and said, you're pretty big. We need some extra security. Do you mind coming on stage when Dr. King is speaking and serving his security? And he said, sure. And so now he's on stage. King gives his speech. Afterward, he's been congratulated. He walks over to shake his hand and he said, do you mind if I have that speech? And Dr. King says sure and handed it to him. 

Now all this is just connection after connection after connection. But you have to recognize it the way Mahalia Jackson did or you have to ask for it the way George Raveling did. And now he is telling people like me the story.

Daily Economic Update: January 12, 2024

Yesterday bond yields rose then fell and stocks were lower but closed nearly flat following a CPI report which showed inflation hotter than forecast.  The 10Y ended  the day back under 4%.  Core CPI was 0.31% MOM vs. 0.3 est. and 3.93% YOY vs. 3.8% est.  Headline CPI was 0.3% MOM vs. 0.2% est. and 3.3% YOY vs. 3.2% est.  While shelter cost looked better than expected, healthcare cost and insurance cost were hot and car prices were strong.  Of course most of the commentary is how the hot components are backwards looking (and remember rent is always falling) and largely behind us, we'll see.  In labor news you still can't get fired as jobless claims were super low again.

On the day ahead PPI and bank earnings will be the highlights.

I wasn't expecting to be writing about MMT on a Friday, I kind of thought it was dead, but MMT made it into the FT yesterday with Stephanie Kelton's FT Interview .  Here are some of the takeaways:

• Kelton considers rising bond yields to be a subsidy for “people who already have money”.
• Kelton thinks the US should stop selling Treasuries to fund the federal deficit and governments everywhere ought to invest in public jobs programs so that workers who lose their jobs never become fully unemployed
• She thought inflationary pressures would abate on their own and believes MMT is being proven correct
• She thinks monetary policy gets too much credit and is actually an inflation accelerator
• A core component of MMT is that deficits don't really matter (technically MMT does believe they matter - but believe the size of deficits needs to be much larger than anyone generally thinks)
• Government bonds are unnecessary and only a tool to allow for an interest rate target (I think Alexander Hamilton may disagree here)
• Government deficits need to be at least as big as the US current account deficit, in order for the private sector as a whole to save.
• Kelton would: (1) stop managing interest rates and move to a permanent zero interest rate policy with no government debt (I wonder if she's read The Price of Time ?)  (2) Fiscal policy would be the sole demand management tool for the economy (3) Stop worrying about deficit neutral, but do think about inflation neutral (4) Offer a government job guarantee (BTW, the Soviets provide anyone a job, and that's pretty scary) (5) Take more action on Climate

I don't know what you think about MMT, but I've read Kelton's book, The Deficit Myth, I find the theory somewhat interesting, I think partly because I believe not enough attention is paid to fiscal policy.  That said, I find John Cochrane's Fiscal Theory of the Price Level much more compelling (it reaches a very different conclusion about the importance of govt.debt) and grounded in traditional economic analysis, supported by equations that can be used to test the theory, narrative histories, etc.

For the uninitiated in Kelton's book, my summary is as follows (largely captured in the article - which begs the question why did the book need to be so long?):

• In almost all instances deficits are good for the economy
• Taxes don't matter (other than to create demand for currency and to punish certain behaviors), the government can print it's own currency to finance all expenditures
• Inflation is governed by real resources and often economies are not maximizing those (i.e. not everyone is employed) so having the government run deficits when the economy's real resources are not maximized won't lead to inflation
• What we've been taught, that the government has to Tax and Borrow first to finance spending is wrong and backwards - the government doesn't need our money, we need it's money
• Spending has to come first or else no one would have any money to pay in taxes
• Taxes are used to get people to do work and to create demand for currency
• Borrowing is a choice of offering people a different form of money, it's not necessary
• Kelton tells of an illustrative example provided Warren B. Mosler (I do enjoy listening to Mosler when he's interviewed, he's an interesting guy) to illustrate the MMT worldview:
• Mosler wanted his kids to help keep the house and yard clean, etc.
• To compensate them for their time, he offered to pay his kids.
• They got 3 of his business cards if they made their bed, 5 for doing dishes, 25 for yard work
• At first the kids didn't do any chores and Mosler wondered why
• Then he had an epiphany, the kids didn't need his business cards.
• So he told the kids they didn't have to do any work, but at the end of each month they each needed to pay him 30 of his business cards, failure to do so would result in loss of privileges.
• Mosler had imposed a "tax" which now made his business cards worth something
• MMT contest the concept of a natural rate of unemployment or the need for some unemployment to keep inflation in check
• Bond sales just allow holders of green dollars to exchange them for yellow dollars
• The government doesn't have to accept the "market" rate, it can choose whatever rate it wants
• All government deficits are just nongovernmental surpluses - Uncle Sam's red ink is our black ink
• MMT's stance on trade is a little confusing, but I think their belief is to produce more at home
• Provide a job guarantee where those jobs could work on addressing climate

When I read the book, I couldn't help but think it all as a read on the need for a very big, centrally planned government agenda, supported by a regime of deliberate financial repression, substituting government for all private sector solutions.  It seemed to fail to address the possibility that at some limiting point people (both domestic and foreign) would no longer want to hold the government's currency (including loss of the dollar's "exorbitant privilege") because it's effectively worthless and at that point, yes, the government could require it for taxes, but effectively those taxes would just be a form of punishment that leads to no incentives for productivity and at some point the politicians who created this situation would all be voted out.  History shows people have always found substitutes for trading without making use of the fiat currency when needed (see Soviets or South America).  In other words it doesn't seem to be sustainable, at some point credibility would be lacking and the relationship between the government and those it governed would fundamentally change.  It's true if you can print your own currency you can't technically default, but fails to mention that there are consequences, like hyper-inflation, that are the same as default. It further fails to recognize that savings are a form of deferred consumption and that capitalist economies are proven at efficiently crowdsourcing dynamic solutions to problems of production that are fueled by market incentives. If you want the government to provide all jobs, what jobs and at what wage and what about skills mismatches, etc.

If you're interested in a full review of the book by someone more credible then I am when it comes to economics, John Cochrane's is worth a read https://johnhcochrane.blogspot.com/2020/07/magical-monetary-theory-full-review.html

XTOD: Bitcoin -- a project designed to allow the masses to bypass the use of conventional intermediaries -- now brought to you by none other than the intermediaries it was designed to replace.

XTOD: CPI bottomed last June. I don't know why this is so difficult for people to understand.  What's interesting to me is that today's inflation report is below the fold in the WSJ. Gotta look to find it. It's the only thing that matters to any professional investor today, and downplaying it like this is significant from a narrative-shaping perspective. On the left is today's WSJ inflation-splainer graphic, where they want to emphasize core CPI. On the right is last July's WSJ inflation-splainer graphic, where they wanted to deemphasize core CPI.  See the difference?
Also, look at the phrasing here. This isn't inflation picking up again. It's the downturn "stabilizing". It's an all-of-2023 thing instead of a first-6-months-of-2023 thing.

The truth is that disinflation stopped cold turkey six months ago.

XTOD: There is much talk about "sticky" CPI Owner's Equivalent Rest (OER) for December, printing 0.5% and pushing headline CPI to a beat of 0.3% for December. (3.4% YoY).  Many argue that this is "wrong" and that OER should be coming down.  They need to look at it correctly. 

Here is a chart of the cumulative changes of Zillow's Rental Index (black), OER in orange, and Rents of Primary Residence in red.  Zillow is the "real world." From 2013 (its creation) to 2021, it tracks closely with OER and RPR's cumulative changes.  Then, starting in early 2021, Zillow raced ahead of OER and RPR. In other words, OER and RPR are "undercounting" CUMULATIVE housing inflation.  OER and RPR should stay "sticky" to close the gap with the real world (Zillow).  We are in a "sticky" inflation world of 3% - 4% YoY inflation (December was YoY 3.4%).

XTOD: This is good. Just got off with my workout contact at a bank w/ 15b+ book. They claim ZERO problems.   I push back. How can you really have no problems? Didn't get a clear answer.  

Then I started talking about CREFC and how no one really talked about problems. 

He goes to me. "Man, if anyone says they don't have problems, they're full of sh!t". 

I laughed and said. YOU JUST TOLD ME YOU HAVE NO PROBLEMS

XTOD: Save more money than you think you need. Life is unexpected and your future tastes will likely be more expensive. Not worrying about money tomorrow is worth more than whatever you could buy today.

XTOD: Nick Saban: *retired at age 72*  Pete Carroll: *retired at age 72* 

Congressmen at age 97:https://twitter.com/i/status/1745310835583443258

XTOD: Nick Saban is 72 and still on top of his game. He's retiring.  Pete Carroll is 72 and just got pushed out of his job after consecutive winning seasons.  Bill Belichick is 71. He's only a few years removed from the playoffs. He's also being pushed out of his job. 

Three of the greatest football coaches of all time. But still, football coaches. 

And yet Republican and Democrat primary voters seem hell bent on making us choose between 78 year old Donald Trump and 81 year old Joe Biden to lead the entire country, neither of whom is as sharp mentally as any of the coaches I just mentioned. You people should be ashamed of yourselves.

Daily Economic Update: January 11, 2024

CPI day is here.  The consensus is for 0.3% MOM and 3.8% YOY increase in core and slightly lower prints in the headline numbers at 0.2% and 3.2% respectively.  I have no idea what the impact of Zuckerberg feeding his Hawaiian raised cows macadamia nuts and artisanal beers will have on current or future inflation.  

Yesterday, the spot BTC ETF's actually got approved (for real this time), the 10Y retook 4%, stocks rose and Matt Levine weighed in on some of his current favorite topics, Securities Fraud & Insider Trading, both while discussing Bitcoin ETF approvals and the Reddit thread: "Is it insider trading if I bought Boeing puts while I am inside the wrecked airplane? …"...classic stuff.

Yesterday, Japanese stocks hit a 34 year highs.  In his commentary to the 2003 edition of Ben Graham's The Intelligent Investor, journalist Jason Zweig used Japan as an example of why owning foreign stocks is advisable.  Zweig states: "It's the end of 1989, and you're Japanese. Here are the facts: 

• Over the past 10 years, your stock market has gained an annual average of 21.2%, well above the 17.5% annual gains in the United States
• Japanese companies are buying up everything in the United states from Pebble Beach golf course to Rockefeller Center; meanwhile American firms like Drexel Burnham Lambert, Financial Corp. of America, and Texaco are going bankrupt.
• The U.S. high-tech industry is dying. Japan's is booming.

    In 1989, in the land of the rising sun, you can only conclude that investing outside of Japan is the dumbest idea since sushi vending machines.  Naturally you put all your money in Japanese stocks. 

    The result? Over the next decade, you lose roughly two-thirds of your money.

    The lesson?  It's not that you should never invest in foreign markets like Japan; it's that the Japanese should never have kept all their money at home.  And neither should you. If you live in the United states, work in the United States, and get paid in U.S. Dollars, you are already making a multilayered bet on the U.S. economy.  To be prudent you should put some of your investment portfolio elsewhere - simply because no one, anywhere, can ever know what the future will bring at home or abroad."

One difference that I see between the 2003 story and today is that there are many more multinational companies listed in both the U.S. and foreign markets that generate at least a decently high proportion of their earnings from non-U.S. markets, which should provide some international diversification inherently.  Nonetheless it's a good reminder that we're always facing the unknowable future.

With the spot BTC ETF approved and the continued inundation of investment outlooks, perhaps it's a good time to revisit the distinction between investing and speculating.  Doing so makes you realize how difficult it is to separate investing from speculation.  Everyone thinks that the distinction between those two terms is so easy (go ahead take out a piece of paper and try to clearly define each term), partly, I believe, because most people don't want to believe that they're speculating.  The classic definition of investing comes from Benjamin Graham where he describes investing as "an operation, which upon thorough analysis, promises safety of principal and adequate return."  Graham makes clear that investing involves a true analysis of the company whose securities are being purchased and that in making such analysis you ensure you are confident that serious losses and would be willing to hold the stock even if you had no way of knowing its daily share price.

Another definition of investing that I believe deserves serious consideration comes from Martin Fridson whereby he states: "Having rejected the customary bases for distinguishing between investment and speculation, I realized that the distinction that actually mattered was between holding the market portfolio and holding any other mix of securities and weightings. I dubbed the latter behavior “subdiversification.” "One might subdiversify for a specialized purpose, such as matching assets to a particular set of liabilities. That strategy aims at eliminating uncertainty and cannot reasonably be regarded as speculation. If, however, an individual overweights certain securities and underweights others with an eye toward outperforming the market portfolio, that individual is speculating."

Back in 2013, CFA's Future of Finance Forum had a panel on the topic of investing vs. speculating. Robert Hagstrom, CFA offered up his assessment as “An investor thinks foremost of the asset first then the price of the asset afterwards...“A speculator thinks foremost of price first and then the asset later or not at all.” And perhaps he summed up the topic best, lamenting: "“How is it an accountant can tell me the difference between debits and credits; a lawyer can define the differences between a felony and a misdemeanor; and a doctor can tell me what is the difference between a bacterial infection and a viral infection but we in the financial industry cannot answer . . . what is the difference between investing and speculation[?]”

XTOD: *FED'S WILLIAMS: RATES RESTRICTIVE ENOUGH TO REACH 2% PRICE GOAL

*WILLIAMS:MUST BE CONFIDENT INFLATION HEADED TO 2% BEFORE EASING

*WILLIAMS: DON'T SEEM CLOSE TO POINT OF SLOWING ASSET RUNOFF

XTOD: Todd Combs on reading what others don't: I think most people would probably be surprised how few people actually read annual reports and 10ks and so forth...let alone trade magazines and so forth. Like, I still read trade magazines and they're a phenomenal source of information...get information just as a journalist would.

XTOD: What we have learned from all the recent regional (NY, Philly, Dallas, etc…) Fed Surveys (as the name indicates, these come from the beast’s mouth) is that wage indicators have been showing an inflection higher for a few months now. 

That means AHE are likely to reflect this in q1 and inflect higher.  

Which makes you really wonder, how in the face of this adverse odds did the Fed and JPOW chose to perform their dovish pivot, knowing damn well that they ran a high risk of yet another policy mistake. 

You could argue, one more, one less, what’s the big deal. And no one can blame you for it.

XTOD:  Did you know America is now producing more oil and gas than any other nation on Earth?

XTOD (epic Airbnb thread - something like 30 million + views):  For a fun game, let's do a tour of the unit @Airbnb  refuses to give me a refund for! I'm sure they'd hate if you liked it shared this, which seems to be the only way to get their attention.  Let's start with the entryway. Not off to a great start re: cleanliness. https://x.com/SureAsMel/status/1744876406020915672?s=20