Daily Economic Update: February 29, 2024

Sure, why not have an extra day every 4 years? Yesterday stocks moved lower and bond yields fell a few bps. The 4Q GDP showed a 3.2% rate, revised down a tenth.  This leap year will feature the all important PCE data, whoa!  It will be important until the next important piece of data and on it continues. Government looks to have kicked the shutdown risk out a year.

Fedspeak continued the messaging of 'it's too soon to cut rates' post-FOMC narrative.  NY Fed's Williams said: 

“While the economy has come a long way toward achieving better balance and reaching our 2 percent inflation goal, we are not there yet.”

“I am committed to fully restoring price stability in the context of a strong economy and labor market.”

“As we navigate the remainder of this journey, I will be focused on the data, the economic outlook, and the risks, in evaluating the appropriate path for monetary policy that best achieves our goals.”

Given we have an extra day, a topic that seems to be coming up frequently of late is that of diversification and more specifically the role of bonds in an investment portfolio.  Diversification works best when assets have negative correlations.

I was reminded of this in a post by Joachim Klement where he discusses how it is possible that the correlations between stocks and bonds is what he calls "regime dependent", depending upon the expectations for GDP growth, inflation and interest rates.  In his post he provides:

"But as long as stocks and bonds have a negative correlation, we can at last reduce this higher volatility in a mixed stock/bond portfolio. And bonds have a negative correlation with stocks, don’t they? Don’t they? …please tell me that stocks and bonds have a negative correlation in the long run because that is the foundation of stock/bond portfolios recommended by asset managers and banks everywhere.

 Since the 1960s, the correlation between stocks and bonds has been either very low or even negative. This is the time when modern portfolio theory was born and when stock/bond portfolios became the workhorse benchmark against which to assess all other investment approaches.

But before the 1960s, the correlation between stocks and bonds was on average 0.5 to 0.6, much higher than any investor today expects it to be going forward. If the correlation between stocks and bonds is that high, the diversification benefits from investing in stocks and bonds are much smaller as these two asset classes increasingly move in lockstep.

Note that even since the 1960s there have been large swings in the 20-year correlation between the two asset classes. Notably, in the 1970s the correlation increased, before falling again in the 1990s.

Concluding that basically the fundamental premise of asset allocations could be questionable:

 Depending on the regime you expect and the assumptions on correlation you make, the allocation to stocks and bonds will be very different going forward. In a world of high correlation between stocks and bonds, the allocation to bonds will likely be smaller, unless you also expect the equity risk premium to be smaller (which again depends on your expectations for growth, inflation, etc.). In a world of negative correlation between stocks and bonds, the allocation to bonds will be higher, unless you expect the equity risk premium to be larger.

Klement's writing reminded me of an article that turned into a book by Seb Page of T. Rowe Price called When Diversification Fails.  In the article Page cites research showing the following:

Based on a precrisis data sample ending in February 2008, Chua, Kritzman, and Page (2009) documented significant “undesirable correlation asymmetries” for a broad range of asset classes. Not only did correlations increase on the downside, but they also significantly decreased on the upside. This asymmetry is the opposite of what investors want. Indeed, who wants diversification on the upside? Upside unification (or antidiversification) would be preferable.

 Page's article focuses mainly on how diversification fails most notably at times when investors need it most, especially during crashes (i.e. "left-tail events").  His article shows that hedge funds and private assets do little to solve the diversification problem. Ultimately the article provides:

Unexpected changes to  the discount rate or inflation expectations can push the stock–bond correlation into positive territory—especially when other conditions remain constant.

 "In an apocryphal story, a statistician who had his head in the oven and his feet in the freezer exclaimed, “On average, I feel great!” Similarly, as a measure of  diversification, the full-sample correlation is an aver-age of extremes. Conditional correlations reveal that  during market crises, diversification across risk assets  almost completely disappears. Moreover, diversification seems to work remarkably well when investors  do not need it—during market rallies. This undesirable asymmetry is pervasive across markets. Our findings are not new, but we proposed a robust approach to measure left- and right-tail correlations, and we documented the extent of the failure of diversification on a large dataset of asset classes and risk factors. The good news is that tail risk– aware analytics, as well as hedging and dynamic  strategies, are now widely available to help investors manage the failure of diversification."

XTOD: I (like most people!) have been skeptical of the 6, 5, or even 4 cuts priced in for the Fed, but now that we are priced to match the DOTS, I think further upside progress in yields will be much more difficult.  First test is PCE tomorrow--I could see a scenario where we get 0.5 Core PCE and yields end lower on the day. The market understands that inflation popped in January-- we don't need PCE to tell us that.

I feel that getting to fewer cuts than the DOTS is a lot more strenuous than removing cuts in excess of the DOTS.  

XTOD: $BOXX. It's not that simple. Strongly recommend Victor's piece.  As a partner at LTCM Victor knows arbitrage and risk from the pointy end.   His company ELM is now a leader in tax optimized beta investing. https://t.co/9P8Hql12oi

XTOD: NVIDIA and now BTC going parabolic.  Incredible.  The Federal GOV really should be taxing me more.  Maybe they should start investing in equities to make up for the deficit?  Now there’s an idea.

XTOD: More on privates!  Agreed. I’ve acknowledged this many times (https://institutionalinvestor.com/article/2bstqfcskz9o72ospzlds/opinion/why-does-private-equity-get-to-play-make-believe-with-prices). My issues remain: 

A) Once you say “I’m investing in volatile things but like not being told the truth as it makes it easier to stick with” I would’ve guessed the bubble would have popped and it wouldn’t work anymore. Clearly I’m wrong. Why I’m wrong is another question. 

B) Our job (well many of our jobs) is to explain such things to people and to encourage them to do better not to simply accept “hey we do dumb false things as we are weak knee-ed panickers.” Too often the truism you describe is taken too far to become an excuse for not doing the right thing. 

C) The very act of accepting this logic (hey volatility laundering is great!) almost definitely lowers future returns on the assets that provide the volatility laundering (you get paid for bearing a bug, you pay for a feature).

https://aqr.com/Insights/Perspectives/The-Illiquidity-Discount

XTOD: Press release: Barclays Bank PLC also served as liquidity facility provider to Blackstone. 

Barclays sheds credit risk to private credit firm —> private credit firm needs bank liquidity support, gets it from Barclays.   Banks continue to re-tranche themselves.

XTOD:  How seriously should we take stats like these on secession? IMO, as seriously as we take intensifying polarization, growing acceptance of political violence, and rising expectations of civil war. More in today's post: https://demographyunplugged.com/p/what-were-following-secession-population

XTOD: “When you go back and study people producing things of real value, using their brain, they were smart, and they were dedicated, and they worked really hard, but they didn’t hustle, and they didn’t work 10-hour days, day after day. They didn’t work all-out, year-round. They didn’t push, push, push until this thing was done. It was a more natural variation. They had less on their plate at the same time, and they glued it all together by obsessing over quality.”

— Cal Newport

Daily Economic Update: February 28, 2024

I decided to write this blog entry while eating an ice cream cone.  Yesterday stocks were up slightly. In the bond market the 7Y Note auction seemed solid clearing through where WI was trading with good end-user uptake.  Durable goods fell more than expected thanks to declining airplane orders (blame Boeing) but the core component was strong.  On the Fed front, Bowman isn't sold on the idea of cutting rates yet and added that they may need to raise rates if progress on inflation stalls or reverses. The 2Y finished the day at 4.71% and the 10Y at 4.31%..  

On the day ahead it's inventories and another look at 4QGDP.

I mentioned impact of fiscal policy in yesterday's post and in this post from last week.  Claudia Sahm is never quiet and she put out a piece declaring big fiscal policy as a big win.  In it she does acknowledge the role it played in causing inflation: 

" we would have had high inflation in the US without the Rescue Plan, too, though likely somewhat less....A key lesson from this crisis is that fiscal policy is much more powerful than monetary policy. With great power comes great responsibility. It’s a lesson that macroeconomists must learn and devote more time to the nuts and bolts of fiscal policy, even though it’s inherently more tied to politics than the Fed."

XTOD:  "The last time Americans spent this much of their money on food, George H.W. Bush was in office, Terminator 2 was in theaters and C+C Music Factory was rocking the Billboard charts. Eating continues to cost more, even as overall inflation has eased..." https://wsj.com/economy/consumers/its-been-30-years-since-food-ate-up-this-much-of-your-income-2e3dd3ed?st=xce0z9cp30fihg5

XTOD: “The total cumulative easing over the past four months ranks as one of the most significant periods of relaxing financial conditions since at least 1982:” https://pbs.twimg.com/media/GHX2hv6XUAAIdQq?format=jpg&name=medium

XTOD: Full story here :-  The fund sold its 29% stake in Manhattan’s 360 Park Avenue South for $1 to one of its partners, Boston Properties Inc., which also agreed to assume CPPIB’s share of the ‘Project’s Debt’  Moreover , this deal took place in last year end : https://bloomberg.com/news/articles/

XTOD: The godson and a childhood friend of Jam Master Jay were found guilty by a jury for the 2002 murder of the Run-DMC rap pioneer, who was fatally shot at his New York City recording studio in one of the most infamous killings in rap history https://reut.rs/42Xy3xT

XTOD: The world belongs to those who can keep doing without seeing the result of their doing.

Daily Economic Update: February 27, 2024

Yields rose slightly while stocks slipped slightly as markets await PCE data this week. Sales of new homes rose, but less than expected.  The 2Y note is yielding 4.73% and 10Y note is yielding 4.29%.  I guess we're also back to worrying about government shutdowns too.

The inflation puzzle/debate continues with two good reads over the last few days.  The first by John Cochrane here.  The key takeaways from Cochrane are that "If you don’t like my little fiscal theory model, we don’t have a good model of the most basic question, how higher interest rates lower inflation, without a contemporaneous fiscal tightening." and "The news is that without such contemporaneous austerity, higher interest rates don’t lower inflation at all in standard models. Intuitively, if the Fed raises interest rates, that raises interest costs on the debt. Taxes must rise or spending must fall to pay those interest costs. If not, no reduction in inflation."  As for monetary policy, "all monetary policy can do is to shift inflation over time. With short term debt, a model can get only inflation below the nominal rate by producing higher inflation later. With long term debt, a model can only get inflation to go down by accepting higher inflation later. I call this “unpleasant interest rate arithmetic”"  He concludes with what he considers as a better way of discussing the Fiscal Theory of the Price level: "what fiscal theory is all about. Slowly inflating away long term debt = rise in primary deficits + rise in real interest costs on the debt (or, a slow windfall to long-term bond holders = rise in primary surpluses + decline in real interest costs on the debt)."

The second article is courtesy of Barry Eichengreen here.  Eichengreen's article questions whether we've learned anything from this recent inflation episode given so much disagreement on the cause of inflation and what, if any, credit the Fed deserves in bringing inflation back down.  Eichengreen argues that the supply-factors only view and the Fed hasn't caused spending to slow or unemployment to rise views are "too simple", "Along with supply shocks, demand and expectations – factors that are fully within the capacity of the Fed to influence – played a role in America’s recent bout of inflation."  Like Cochrane above, Eichengreen hits on the role fiscal policy has planned in this inflation, wondering how much the fiscal impulse exploding and waning accounts for the rise and decline of inflation, "perhaps fiscal policy both caused the inflation problem and solved it."  He closes with crediting the Fed's communication as a factor in slowing inflation, "the credibility and communication channels of central-bank policy. The Fed signaled, beyond a doubt, that if inflation failed to come down, it was prepared to do more, even at the cost of higher unemployment."

XTOD: "Most people probably shouldn't do anything other than have index funds." ~Charlie Munger

XTOD: How do we know the nice downward inflation trend isn't because of Waller's dogged determination to remain patient with a rate cut?

XTOD:  American Couple Likely Dead After Yacht Hijacked, Police Say: What We Know And Still Don’t Know https://go.forbes.com/c/3xTP

XTOD: "What's your favorite sandwich?" “The spicy chicken sandwich from Chick-fil-A.” "Wrong!" https://pbs.twimg.com/media/GHRWBXkW4AAqU8B?format=jpg&name=medium

Daily Economic Update: February 26, 2024

Stocks will start the week coming off record highs.  The week ahead will feature PCE and the first revisions to 4Q2024 GDP.  Speaking of GDP, the NY Fed Nowcast forecast remains at 2.80% (real GDP for 1Q) while the Atlanta Fed GDPNow will be updated Tuesday.

The highlight of the weekend was the Berkshire Hathaway annual shareholder letter .  The letter starts with Buffett highlighting the impact Charlie Munger had on both his success and that of Berkshire Hathaway, calling him the "architect" of the company, a nod to Munger's love of architecture.  Buffett goes onto credit Munger with what was arguably the most important change in his investing philosophy, stating: "Charlie, in 1965, promptly advised me: “Warren, forget about ever buying another company like Berkshire. But now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices. In other words, abandon everything you learned from your hero, Ben Graham. It works but only when practiced at small scale.”   For more on Munger, see here.

As for the rest of the letter, here are what I consider to be the highlights:

• Buffett opens the letter by basically differentiating investors from speculators (a topic we covered here) whereby he believes in attracting "lifetime" shareholders as opposed to those locking for lottery tickets.
  
  
• Buffett also takes a jab at so called economic experts in the following lines (discussing his sister Bertie as a typical investor): "She is sensible – very sensible – instinctively knowing that pundits should always be ignored. After all, if she could reliably predict tomorrow’s winners, would she freely share her valuable insights and thereby increase competitive buying? That would be like finding gold and then handing a map to the neighbors showing its location. (again a topic we covered here).
  
  
• Buffett never misses a chance to bemoan accounting standards, "So sanctified, this worse-than-useless "net income" figure quickly gets transmitted throughout the world via the internet and media. All parties have done their job - and legally, they have."  Lamenting the mark-to-market accounting requirements impact on Berkshire's GAAP earnings.
  
  
• Buffett remains optimistic about the power of investing in U.S. based equities and the patient approach to investing, avoiding the noise. (we talked about optimism here and noise here)
  
  
• Buffett describes his continued investment philosophy in terms of owning businesses with strong fundamentals that can deploy additional capital at high rates of return in the future, he pulls no punches that he can't predict the winners and losers, but he hopes he can select a few of these business that are run by "able and trustworthy" managers.  Later in the letter he points to Coke and Amex as two such companies where patience has paid and how these two wonderful decisions can outweigh the many other mediocre decisions Berkshire has made over the years.
  
  
• Buffett states his realization that the size of Berkshire today makes it nearly impossible to double the net worth of the company in the near future stating "There remain only a handful of companies in this country capable of truly moving the needle at Berkshire...outside the U.S., there are essentially no candidates..."
  
  
• Buffett believes "Berkshire should do a bit better than the average American Corporation, and, more important, should also operate with materially less risk of permanent loss of capital.  Anything beyond "slightly better," though, is wishful thinking.  (Buffett is known to recommend passive index investing as being an acceptable strategy for most investors).
  
  
• Buffett lays out two investing maxims: (1) Wall Street will market whatever foolishness that can be marketed and will do so vigorously - they want activity (2) "Never risk permanent loss of capital" - you will be rewarded if you make a couple of good decisions during your lifetime and avoid serious mistakes.  Or to quote Munger: "Never interrupt compounding unnecessarily".  (In my opinion both of these maxims are clearly drawn from his mentor Benjamin Graham, you can see the groundwork laid in these Graham quotes: (a) "Nearly everyone interested in common stocks wants to be told be someone else what he thinks the market is going to do. The demand being there, it must be supplied."  and (b)  "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"
  
  
• Buffett as usual is very patriotic throughout his letter.  He refers to the things like the "American tailwind",  Berkshire's "allegiance..to our country", and Berkshire's goal to be "an asset to the country - and to help extinguish the financial fire [referring to any situation where the U.S. hits a financial disaster]".  Buffett also discusses the increased ownership stake in Occidental Petroleum, his ownership of railroads and energy assets all in patriotic terms.
  
  
• Buffett describes Berkshire as having "extreme fiscal conservatism" as a corporate pledge, holding a sizeable cash and T-Bill position and always being prepared for a period of economic paralysis while also never wanting to inflict permanent damage on any of their investors.  (I feel like you can see how engrained Ben Graham's margin of safety concept is in his thinking - always having a buffer that allows you to render an accurate forecast of the future as unnecessary.)
  
  
• Buffett concludes the letter, where he started with reference to his sister Bertie, imparting this piece of advice as it relates to the patient approach to investing: "in 1980...Retaining only the mutual fund and Berkshire, she made no new trades during the next 43 years. During that period, she became very rich..." "Millions of American investors could have followed her reasoning which involved only the common sense she had somehow absorbed as a child in Omaha"

In addition to the above, the letter provides an overview of Berkshire's core rail, energy and insurance businesses and an overview of the three managers who are responsible for overseeing Berkshire's business day-to-day.

On the week ahead:
Today: New Home Sales, Treasury Auctions 2Y and 5Y notes

Tue:  Durable Goods, 7Y Auction

Wed: 4QGDP (1st revision), Inventories 

Thur: Jobless Claims, PCE, pending home sales, Fedspeak

Fri: ISM mfg, construction spending

XTOD: The ridiculous images generated by Gemini aren't an anomaly. They're a self-portrait of Google's bureaucratic corporate culture. The bigger your cash cow, the worse your culture can get without driving you out of business. And Google's cash cow, search advertising, is one of the biggest the world has ever seen.

XTOD: This shall now be known as the Paul Graham Rule - absolute monopolies endanger themselves - they lose the self correcting imperatives of competition. Now layer on the greatest Innovator’s Dilemma in the history of business. $GOOG needs  @elonmusk  level course correction!

XTOD: Working in finance has completely ruined me. Literally got paid an amount that a few years ago I would have literally shed tears of happiness over, and it just feels like it's never enough.

XTOD: A Harvard professor asked millionaires how much more money they'd need to be 10 on the happiness scale.    Here's how each group answered:    $1 mm: Double  $2 mm: Double  $3 mm: Double  $5 mm: Double  $10 mm: Double    Folks, the hedonic treadmill is real

XTOD: Absolutely. I receive 5X the number of inquiries per month that I can consult with. Other advice-only advisers (non-asset management or product sales) have similar backlogs. The issue here isn’t people looking for advice, it’s people who are looking only for advice and don’t want to be forced into an AUM relationship or similar.

XTOD: If you were funded, with no strings attached, to pursue your obsession for 2-3 years, what would you pursue?   I wish their were more programs that funded this sort of thing. 

Nothing as infectious as someone’s passion coming awake after a long slumber

XTOD: “People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully.”    — Steve Jobs 

Diversity of focus leads to average results.  

One way to create advantageous divergence is to focus all of your efforts on the one or two best opportunities in front of you.  

A question to ponder:   What would it look like if you organized your life to maximize focus around the biggest opportunity you have?   What would you stop doing?

Daily Economic Update: February 23, 2024

New all-time highs for equity indexes as we all live in an AI simulation. Even Japan has now surpassed its 1989 peak, there is truly nothing AI can't do. Jobless claims continue to show that you can't get fired (I guess unless you work for one of the many companies that have announced layoffs..when, if ever, do those hit the claims data?) and existing home sales data shows you can sell a home even with 7-handle mortgage rates.

Have you stopped to think about how 76ers great Allen Iverson feels about all this AI hype? After all the man was the original AI.  I recently contemplated this and found that apparently others have thought about this too. Fortune wrote a satire piece back in 2018 on the topic.

Yields sit near 3 month highs as optimism around rate cuts continues to wane. 2Y at 4.71% up 50bps on the month.  

Speaking of yield, Matt Levine's article yesterday shed some light on the ETF ticker BOXX, which is designed to provide T-Bill returns (risk-free) but without generating taxable interest. Pretty cool if these guys really have figured out a way to get a risk free return with more tax efficiency.  How is that possible you ask?  The answer is in the name "Box" which is for "Box Spread".  Unfamiliar with options and the box spread trade, the NY Fed actually wrote about how they use these trades to estimate risk-free rates while eliminating "convenience yields".  In summary, from The Research Foundation of CFA Institutes Fundamentals of Options and Futures:

"The box spread is really a spread of two spreads—constructed by buying

a bull call spread and selling a bull put spread. The pair of option strike

prices for the put and call spreads are the same, with X2 greater than X1.

The box spread can also be thought of as two put–call parity pairs, one

long and the other short. 

The payoff profile for the box spread, shown in Figure E.6, is a constant,

X2 – X1, the same no matter what happens to the security price.

Because the payoff is constant, the four options should be priced to give

a net payoff equal to the riskless interest rate by arbitrage"

XTOD: Sad to share that I was laid off from Google today. I was in charge of making the algorithms for Gemini as woke as possible.   After complaints on Twitter surfaced today, I suddenly lost access to Hangouts and Google Drive, and my manager (he/him), texted me to let me know that i was fired.  

I’m getting 12 months of severance and after that I’ll decide what to do next (seeking $2.7m TC).  

What a journey these past 5 months have been learning about LLMs and AI!

XTOD: Me: I want to buy a GPU for gaming 

Nvidia: yep

Me: …and a crypto mining operation 

Nvidia: yeah nw we got you bro 

Me: also weird q but do you know where I can turn $100 into $100,000

Nvidia: buddy ur not gonna believe this

XTOD: Crazy.  Pelosi has now made 10 years worth of salary through her $NVDA trade. 

She's up ~$1,800,000 in just 92 days.  Her yearly salary is $175K.  That's 10x.

XTOD: This is absolutely crazy...An owner of an office building in LA is seeking approval to tear down the building and construct 30 EV charging stations   I don't know what's crazier...this headline or seeing office properties drop 80-90% in just a few years  The commercial real estate recession (primarily office) has gone from scary to a meltdown in many cities across the US and it seems as though the damage is permanent 

XTOD: Scientists grew a pair of testicles in a lab — and they offer new hope for male infertility https://trib.al/pAJul6d

XTOD: This puts a new spin on the phrase "grow a pair" lol

XTOD: Good news for Big 4 accountants

XTOD: Less > More     Slow > Fast      People > Things

Daily Economic Update: February 22, 2024

Thankfully we've made it through what was likely the biggest event in the history of mankind with yesterday's earnings from NVIDIA and thankfully for mankind, their earnings beat and they guided higher.

Yields rose a few bps heading into FOMC minutes and held those yield increases. Those minutes generally highlighted the risk of cutting too quickly and that the Fed will be data dependent (as if there is ever a time decisions are made without any data).

Biden forgiving more student loan debt had me thinking about one of my favorite theories, the fiscal theory of the price level.

Eric Leeper, a fiscal theory proponent, and UVA professor, was a recent guest on the MacroMusings podcast.  If you're looking for a theory of inflation and perhaps a different perspective on whether inflation be stickier than thought, here were some of Leeper's thoughts (with my emphasis added).

• [On dismissing other factors for inflation]. We focus on the single cause, a large increase in federal COVID-related spending financed by new government borrowing, with little to no discussion of how, ultimately, to pay for the spending.”   

• [On relative price changes vs. inflation] Inflation, by definition, is a steady increase in overall prices. We often look at things that are happening at high frequency, various shocks that hit the economy, that can move relative prices around. Then, it's convenient to say, "Oh, they must have caused inflation."  And it's certainly true that if the price of goods suddenly goes up relative to services, ..... But that can't be sustained. Eventually, they will adjust their habits to accommodate what's happened to the relative prices. And so, those kinds of shocks to the economy are inherently going to have transitory effects on inflation. Then, the other side of this, which you already alluded to, is that people still have to have the income to buy the stuff when the relative prices have gone up. Where is that coming from? To me, that's really getting at what the fundamental cause of the overall inflation is. As you suggested, I think it was because we handed out a lot of transfer payments to businesses and individuals in the economy.

• [On general FTPL] one of the themes of the fiscal theory of the price level is that inflation is always and everywhere a monetary and fiscal phenomenon....Critically, the atmosphere around fiscal policy was different than it often is....And, if you lay on top of that the idea that President Trump had his name on some of the checks, it was pretty clear that these transfer payments were meant to be gifts. They weren't meant to be loans that would have to be paid back with interest in higher taxes in the future. You don't typically put your name on a check when it has attached an IOU for future taxes. That communicated to people that their permanent income had gone up. Well, they're going to want to translate that permanent income into consumption. That's what standard economic theory tells you.

• [On fiscal dominance]  What happens is that the government issued $5 trillion in new debt. There was no expectation that primary surpluses were going to rise in the future to pay off that debt. So that debt has to be revalued, has to be devalued, which happens through a combination of lower bond prices and a higher price level. That's because, basically, the current value of the goods that will support those new debt issuances hasn't changed, and so the real value of debt can't change.

• [On the Fed's current role in fighting inflation]  what has happened is that Congress did what we call an unbacked fiscal expansion, and then turned to the Fed and said, "Okay, now you mop it up." But what the theory tells us is that, in the absence of some kind of fiscal consolidation that ultimately raises primary surpluses to soak up that debt, there's nothing the Fed can do to permanently offset the inflation. They can change the timing of it. And so what the theory tells us is that the Fed's increase in interest rates serves to reduce inflation, at the time, by pushing it into the future. 

• [On the role Interest on Govt Debt can lead to inflation]  the Fed has raised the interest rate. And so, what we're now seeing— another way of thinking about what's going on right now— is that interest payments on the debt are exploding. Then, the question becomes, how are those interest payments going to get financed? So far, they've been financed by just issuing new debt. If that continues, you can expect more inflation. If, on the other hand, what happens is that Congress starts to see that they've got to pay the bills from borrowing, and therefore they can't spend money in other ways that they would like to spend it, then they do something to either raise revenue or cut spending. How those interest payments get financed is, I think, the critical question for thinking about inflation going forward

•  [On the fundamentals of FTPL] nobody disputes that Treasury bonds are a liability of the government. Nobody disputes that the bank reserves that the Fed created to buy government bonds are also a liability of the government. Both of these liabilities these days pay interest. Then, you've got to think, what are the offsetting assets? If the government's going further into debt, there have to be assets that offset that. That's where the primary surpluses come into play. And those assets don't have to be present today. There has to be some assurance that, as these bonds mature, those assets will be present. And so, that's the other way to think about it.  We think about those assets as being denominated in units of goods. The liabilities, though, are denominated in dollars. So, the price level can adjust to equate the real value of those liabilities to the real value of the assets that back them

• [On fiscal sustainability]   I think there are just some very troubling signs coming from the bond market....he $1 trillion-plus that we'll have in the deficit that has to be financed and the fact that the Fed is undertaking QT and putting more bonds into the system. Easily, we have to finance about $10 trillion, which is roughly a third of the stock, in one year.....And to be honest with you, I did paint a grim picture, but deep down inside, I actually believe that, when interest payments get high enough, even a highly dysfunctional Congress will do the right thing.....And I think that they all recognize that you can't just make marginal changes, that something fundamental has to change. And I'm sure that entitlements would be part of that, and maybe there'd be some other taxes, maybe a consumption tax. But the resistance to taxes in the United States is so fundamental to our nature.

XTOD: Head Of Boeing 737 Max Program ‘Leaving Immediately’

XTOD: it's awesome that the boeing guy hadn't been fired yet

XTOD: Rumors circulating that NYC migrants will be given 10,000 in $NVDA calls

XTOD: “The speed of innovation happening in AI is moving at a pace I've never witnessed in my entire career"  - Kyle, 22, 8 months experience at Deloitte

XTOD: Don't let your dreams of a "bonanza" lead you to "expose yourself to the possibility of a catastrophe" - Howard Marks

Daily Economic Update: February 21, 2024

Today brings FOMC Minutes, Fedspeak, and a 20Y Treasury Auction and NVDIA earnings.

Yesterday was an overall a light news day, though stocks fell being led down by tech names, and yields rose slightly. 

To fill the void of no major economic date, I'm sharing a couple of recent post that caught my attention. 

The first being the Treasury Basis Trade, a topic you can google, but the trade leads to some concerns over Treasury market stability and resilience, a topic that was highlighted in Darrell Duffie's paper at Jackson Hole. 

Probably one of the better reads on the Treasury basis trade in a post by Steven Kelly here.  In discussing the article professor Brad DeLong wrote the following: 

The remarkable continued profitability of the Treasury Basis Trade tells us that the U.S. Treasury has profoundly misjudged what kinds of Treasury securities that market really wants to hold. Hedge funds are filling in the gap via a maturity transformation that substantially shortens the effective duration of Treasury-created assets—and are making an awful lot of money by doing so. What is the Treasury gaining by issuing long-term debt that Hedgies immediately transform into short-term debt? It is moderating the impact of short-term moves in interest rates on its monthly funding reports. Is that gain worth handing the profits for effective money creation over to Hedgies (and possibly creating some systemic risk in the case that the Hedgies get overleveraged and so out over their skies?).

We're all familiar with the Federal Deficit, but I thought this was next level thinking of one potentially overlooked ramification is whether attempts to raise revenue might mean ending some programs that many people are familiar with, like 401K's.  Per Allison Schrager's latest piece

I give the 401(k) another 10 years---tops.

Don't get me wrong. I love retirement accounts, and I think we'll still have them. But the tax treatment has a shelf life. It is expensive, mostly benefits the wealthy, and there is not much evidence it gets people to save more.

If it does not change behavior, people won't miss it so much, which means it is easier to get rid of instead just increasing taxes. And the government needs revenue. So say good buy to the tax deferral.

 You can also find my post about Allison's book here.

And of course we're all focused on what the Fed will do next and Scott Sumner shared his thoughts in a recent post.  In addition to expressing his views that in an efficient monetary policy system, he provides the following:

The Fed has now set rates at a level expected to produce a soft landing. If they overestimated the natural rate of interest they might deliver a hard landing, and if they underestimated the natural rate we might get no landing at all. In the latter case, inflation might stay stubbornly above target, requiring further rate increases.

Two years ago, almost no one correctly forecast the recent path of interest rates. The same could be said about interest rate forecasts in early 2020, or early 2019. I don’t know what will happen to rates over the next two years, but I have very little confidence that things will play out in the way the markets or the Fed currently expect. There could be surprises in either direction.

I see people cherry picking some obscure inflation metric which has hovered around 2% for 6 months. But price inflation is not the right variable to look at. In order to have lower interest rates, we need a slowdown in wage inflation and NGDP growth. If wage inflation gets stuck at 4.5%, then interest rates are headed higher. I still think it’s likely that wage inflation will slow, but recent price inflation moderation doesn’t reassure me at all.

In an efficient monetary regime (NGDPLT), policy errors in either direction would be equally bad. But we don’t have level targeting. In addition, recent policy errors have been in the direction of an excessively expansionary policy. For that reason, the damage from a somewhat overly expansionary policy in 2024 would be greater than the damage from a somewhat overly contractionary policy in 2024. The longer that wage inflation stays elevated, the more difficult it will be to bring it down.

XTOD: Inflation may be turning upwards, but cuts are still coming. The Fed views the world through the lens of real rates, and believes r* is unchanged post-pandemic. They may be overestimating the restrictiveness of policy, but that just means fewer cuts.

XTOD: Should you put all your savings into stocks? @BarryNalebuff  & Ian Ayres: Yes, with leverage!

@CliffordAsness : No!

XTOD (reply from Cliff Asness): If you are unwilling to lever you can at least have an interesting argument.  But if you’re willing to lever, to choose only equities vs a more diversified portfolio is hard to imagine.  https://aqr.com/Insights/Perspectives/Why-Not-100-Equities

XTOD: Life is a series of tradeoffs, and greater results usually require greater tradeoffs.  The question is not, “Do you want to be great at this?”  The question is, “What are you willing to give up in order to be great at this?

XTOD: Simply, the decision to buy is always yours. The decision to sell isn't.

Daily Economic Update: February 20, 2024

Stocks coming off the first losing week in this holiday shortened week.  It seems like market narratives are generally all about (1) if/when the Fed cuts and by how much, (2) CRE concerns and (3) whether all things AI might be a little bubbly.  The 2Y is 4.66% and the 10y is 4.32%. 

In M&A news the WSJ reported that CapOne will acquire Discover.

On the week ahead it's pretty light with the highlights as FOMC minutes, jobless claims and existing home sales.  There will be plenty of Fedspeak in the mix as well.

Tue: nothing major

Wed: FOMC Minutes, fedspeak

Thur: Jobless claims, fedspeak

Fri: Existing home sales

XTOD: it's wild how there's people working on creating artificial general intelligence, miniature nuclear reactors, space warfare technology, and new types of monkey nfts and all four of them believe they're working on building the future

XTOD: Man, these Zuck memes today have me dying laughing. It turns out there are a lot of things money can’t buy. Here are my favorite memes:

XTOD: A pair of Trump Golds just sold in size 11 for $7,500, the current record.   

Someone in Trump’s camp definitely had the right idea with limited edition, but missed on price.

XTOD: Chocolate prices are about to rise — and bars and boxes will shrink too — after wholesale cocoa prices jumped beyond their 46-year old peak, setting a record high

XTOD: "Success does not lie in sticking to things. It lies in picking the right thing to stick to and quitting the rest."

XTOD: Create an emergency fund equal to two years of living expenses and gradually increase it to five years as you increase your exposure to equities over time.  If you need to spend money and you can't, that is a risk

XTOD: With rare exceptions, most of the miracles of humankind are long-term, constructed events.  

Progress comes bit by bit.   The silent miracle of humanity’s march is this: step by step, year by year, the world is improving.

XTOD: Don’t forget to report your income from illegal activities and stolen property as you’re doing your taxes this year

Daily Economic Update: February 19, 2024 (President's Day)

Stocks and bonds are closed.  On this day in history, 1807: Aaron Burr was arrested for treason.  Burr, the VP of the U.S. from 1801-1805 had conspired to create an independent nation in the American Southwest and Mexico.  Burr was acquitted thanks to a narrow definition of treason by Chief Justice John Marshall.

XTOD: I don’t understand people who get bearish and express it by shorting SPX or Nasdaq.

Like God made the perfect shorting vehicle, it’s called Ark Invest ETFs. Like it’s literally called Ark Invest.

XTOD: Yeah, It’s really happening! Coming this summer. Full reveal in May #CFB25

XTOD: There’s a meaningful chance — maybe it’s 15% — that the next move is going to be upwards in rates, not downwards. The  @federalreserve  is going to have to be very careful. 

XTOD: XTOD: Yeah, It’s really happening! Coming this summer. Full reveal in May #CFB25

Daily Economic Update: February 16, 2024

Stocks rose and yields fell slightly as market participants continue to try to make sense of the economic picture. We also have technical recessions in UK and Japan. 

Yesterday's economic data looked mixed as Retail Sales fell more than estimated, Philly Fed and Empire Mfg both looked better than expected with strength in new orders and jobless claims seemed to indicate that you still can't get fired (despite seemingly ever company announcing layoffs).  Industrial Production fell more than expected, but hard to make sense of how much weather impacted the report and Business Inventories rose in line with estimates.

On the day ahead it's PPI as the headliner with appearances by UofM asking people about gas prices.

Does any of this matter?  Apparently there is some AI called SORA that can generate incredible videos from text and people are buying Super Micro Computer, Inc. shares. 

In making sense of all of the various data it seems that the interpretation of the strength of the economy may largely hinge on your interpretation of productivity and good old "R-Star".  One interpretation might be that the post-pandemic economy is fundamentally more productive than pre-pandemic.  That productivity might be driven by things like the rise of WFH which allows some otherwise marginalized workers to contribute (increase labor), perhaps immigration (legal and illegal), and technology.  It might also be that people just had to work more productively out of necessity.  Rising productivity would generally be disinflationary/deflationary and maybe it is indeed playing that role at the moment, but immediately post pandemic it was met with a wall of money via government spending and bank lending while hitting supply constraints. This could explain the rising real GDP and rising nominal GDP coupled with low employment.

I don't really know if the economy is more productive, but the productivity - interest rate - inflation nexus is a tricky one.  What I do think could be possible is that the post-GFC period of low real and nominal growth might turn out to be the anomaly.  If true, the unfortunate thing might be that so many of the current crop of investors and managers has only and ever lived and worked in the low rate, slow growth, "secular" stagnation world of the post GFC.  

A recent post by Dario Perkins on the TS Lombard blog seems to do a good job walking through a framework to analyze the post COVID world, in it:

6. What does this mean for the global economy in the 2020s?

• The Great Moderation is over. Periodic supply shocks will create additional volatility in inflation, which, in turn, will produce larger short-term gyrations in real GDP.
• Inflation will be somewhat higher, but this will be due mostly to upside volatility. It is hard to say exactly how much average inflation will rise, but an extra 100bps is reasonable. The more important point is about the “prevailing tendency” of inflation: we see a world where it is always threatening to break out to the upside rather than sink to the downside.
• Real GDP growth is likely to be higher, too, thanks to tighter labour markets (faster wage growth), a more expansionary fiscal-monetary mix and more rapid investment (in areas such as AI, decarbonomics, defence and the reconfiguration of global supply chains).
• Productivity probably improves in a higher-pressure economy, where companies are forced to work existing resources harder (rather than rely on cheap borrowing and low wages). We are already seeing signs of this in the US. Over time, technological diffusion, which was remarkably poor in the perma-lukewarm economy of the 2010s, should also accelerate, ending the so-called “productivity puzzle” of the post-GFC era.

XTOD: Worth mentioning that 24 years later, Cisco is still below its 2000 high.

XTOD: Rate cuts are feeling very distant. But hey, if stocks are ripping and the unemployment rate stays low, who’s mad beyond real estate developers?

XTOD: ICYMI: I wrote about our national hanging out crisis. In the last 20 years, averaging face-to-face socializing has declined ~30% among adults and ~50% among teens.   We've never been so alone. And it's driving us crazy. https://t.co/hIdXbVPovk

XTOD: Excelling at the small choices that compound over time perpetually leaves you in favorable circumstances.

XTOD: This is absolutely unreal...Abercrombie & Fitch has risen another 15% over the last few weeks and has now ~8x in less than 18 months  It's the best performing stock in the S&P 1500 Index, even outperforming Nvidia $NVDA by a huge margin  Absolutely no one could have predicted this epic turnaround for a brand that was largely seen as outdated  What a story

Daily Economic Update: February 15, 2024

It was a slow day for economic news, so we were left to wonder about this 'serious national security threat' which allegedly has something to do with Russian military capabilities in outer space, while also seeing the reality of dangers down on earth with the shooting at the end of the KC super bowl parade.

Of the little economic news there was both PPI revisions and UK inflation data seemed to give bond bulls some renewed optimism on the inflation front.

Retail Sales and Jobless Claims on the come.

XTOD: AirPods have only been out for 7 years, and the average person now defaults to throwing their headphones in as soon as they’re alone in public.  Walk through the grocery store, everyone has their headphones in. Same with the gym, or just walking around town. 

This feels like a dystopic tech trend that will only accelerate as AI improves and new products like the Vision Pro continue to come out.

XTOD: Vice Chair Barr: "A single bank missing its revenue expectations and increasing its provisioning does not change the fact that the overall banking system is strong, and we see no signs of liquidity problems across the system."

XTOD: Who Had 'Russian Nukes In Space' On Their Election-Year Disruption Bingo-Card?

XTOD: U.S. House Representative, Michael Waltz stated when asked why Chairman Turner decided to make the National Security Threat today Public, “If we don't Deal with this Issue Appropriately, if the Administration doesn't take Firm Action, this could be a Geostrategic Game-Changer. And that is why Chairman Turner took this Unprecedented Step.”

XTOD:  I was laid off from Lyft today. I was the Director of Finance in charge of reporting our margin expansion in our earnings release. 

I accidentally wrote 500 basis points when I meant to write 50 and our stock tanked after we issued the correction. 

Working at Lyft has been the most exciting first job to have after taking only one finance class in college and graduating this past Fall. 

Time for some rest and relaxation and excited for what comes next!

Daily Economic Update: February 14, 2024

I was going to take my wife out for Valentine's Day, but after yesterday's inflation print I just can't afford it. According to an article on Travel and Tour World (whatever that publication is - it still probably gets more readers than this blog, so who am I to criticize) 46% of American's say inflation will affect their Valentine's Day plans, but despite this 33% say it's worth dipping into credit card debt for a Valentine's Day gift.  Another 24% of American's don't plan to spend any money on a gift this year. The data appears to be from this WalletHub survey  

So when's the first rate hike?

It was in July 1996, per the FOMC Meeting Transcript, that the U.S. history of 2% inflation target was born:

MS. YELLEN. Mr. Chairman, will you define "price stability" for me?

CHAIRMAN GREENSPAN. Price stability is that state in which expected changes in the general price level do not effectively alter business or household decisions.

MS. YELLEN. Could you please put a number on that? [Laughter]

CHAIRMAN GREENSPAN. I would say the number is zero, if inflation is properly measured.

This exchange was part of a long Yellen exchange, in which Yellen argued for some positive inflation under the "greasing-the-wheels argument".  

Anyway, the point is, I don't think we're at a point that would meet Greenspan's general, non-numerical criteria, which would be a place where people generally don't think about inflation when making decisions.

 
If, and it's a big if, the Fed is able to do it's job of overseeing the financial system (again, it's a big "if"), then I'll be all-in on rate cuts the day the next CPI, PPI or PCE report isn't made into a national spectacle.  That's the day I will feel confident we have achieved price stability and that rates are risking being restrictive. 

In case you forgot why inflation is harmful, Irving Fisher can remind you here.

Bad day for stocks and bonds yesterday.  Fixed income doesn't like inflation and yields finished the day up 15-20bps with the 2Y at 4.66% and the 10Y at 4.33%.

XTOD: Ok, there’s a lot of bullshit making the rounds. Ex this, ex that, not so bad, blabla… 

This is a terrible print for the Fed. There’s no sugar coating it. They will need to react to it one way or another.  Supercore (that’s core services ex housing) is up a fucking 85 bp m/m. That’s what Fed likes to watch. That’s the largest monthly jump since April 22.  Shelter accelerated. Medical care, recreation and tuition all ripped.   First foregone conclusion: cuts need to be pushed back. For now it’s June for the 1st full cut. Might still be a bit too ambitious.   Second conclusion: now just above 90 bp of cuts FY 24, also way above the Fed guided 75 bp, which is starting to look a bit too optimistic.   Someone check on Claudia Sahm

XTOD: Core CPI comes in hotter than expected, 0.4% in the month of January--which is a 4.8% annual rate.  I'm not a big fan of second derivative forecasting but those of you who are should be worried. Annual rates:  12 months: 3.9% 6 months: 3.6% 3 months: 4.0% 1 month: 4.8%

XTOD: Now is the part where we shift from "See, it was transitory all along!" back to "This is really holding us back, we need to raise the target."  Get ready to start hearing it again, because it's coming!

XTOD: Inflation - it's like trying to lose 20lbs. The first 10 come off like butter. The last ten are a root canal.

XTOD: Because the proper benchmarks for volatility laundered returns are only other volatility laundered returns.

XTOD: I've become convinced that if Biden is going to actually run for president in an electorate where 90% of independents are worried about his age, he should say fuck it and talk about his age *constantly* but only in the context of Trump being 4 yrs younger and 4x crazier

Daily Economic Update: February 13, 2024

Thanks to Bill Ackman I'm trying to determine how my name will determine my destiny...we get it, his name equals his destiny as Billionaire Activist Man.  I asked Ackman what my name means and he replied,  "It's so obvious, Edward Quince equals educating people about the pear shaped fruits of investing."  I didn't have time to ask more, he was too busy on a WhatsApp with 50 other billionaires complaining about Harvard, so I'm left to wonder what he'd come up with for Taylor Swift? 

CPI Day, which will be calculated using updated seasonal adjustments and new weights for 2024.  Will the bond markets and the Fed get numbers that make them happy?  I suppose "good" is continued signs of disinflation and more specifically slowing in services and rents.

Yesterday's NY Fed Survey of Consumer Inflation Expectations showed: "Median inflation expectations were unchanged at the one- and five-year ahead horizons, at 3.0 percent and 2.5 percent, respectively, according to the January Survey of Consumer Expectations. Expectations at the three-year-ahead horizon declined to 2.4 percent from 2.6 percent. Perceptions of credit access improved notably, with a smaller share of respondents saying it is harder to obtain credit now than it was a year ago and a larger share reporting it is now easier. The share of respondents expecting tighter credit conditions a year from now also declined."   

More interesting to me is that there remains a high degree of inflation uncertainty and data showing consumers continue to believe there is a relatively high probability of inflation being above 4% in the next year.  

Other than that you can see if ARM shares continue to pop and see how much further Bitcoin can rise now that it's retook 50K.

XTOD: The fresh MBA grad who just landed a job at McKinsey arriving at your company’s office to present a pitch deck he copied and pasted recommending that your company should simply generate more revenue and cut expenses

XTOD: This week's anticipated data release is the January CPI  Wall Street forecasters expect the core CPI index rose nearly 0.3% from December, lowering the 12-month rate a touch to 3.8%

They see the headline index up 0.15% from November, dropping the 12-month rate to 2.9% (vs 3.4%)

XTOD: “Do we want NATO to pay more? Of course we do. But the last thing we’re going to do is side with a thug. Keep in mind, Putin kills his opponents,” Ambassador  @NikkiHaley   tells 

@FerroTV ,  @lisaabramowicz1  and me.

XTOD: FanDuel says it took in more than 14 million bets on the Super Bowl. Total amount bet? $307 million.

XTOD: If you’re glued together and honorable and get up every morning and keep learning every day and you’re willing to go in for a lot of deferred gratification all your life, you’re going to succeed. — Charlie Munger

XTOD: The Nvidia run up is funny but it’s even more funny when you remember Cathie Wood sold right before

Daily Economic Update: February 12, 2024

It was between this or the many memes of Kelce yelling at Reid

Why the day after the Super Bowl is not a national holiday remains a mystery. 

On Friday the S&P closed above 5K for the first time ever.  Yields continued to move higher over the last week. The 2Y is close to reclaiming 4.50% as the timing of rate cuts continues to get pushed back, while the 10Y is 4.18%.

The week ahead features CPI on Tuesday and Retail Sales on Thursday as highlights.

Today: fedspeak

Tue: CPI

Wed: Valentine's Day 

Thur: Retail Sales, jobless claims, 

Fri: Housing starts and building permits, PPI and UofM survey

XTOD: Heard from our NYC office that they went out to get bagels as a team today, some new analyst ordered a scooped bagel and the rest of the deal team beat the shit out of him and now we have an incoming lawsuit

XTOD: We’re all living through a great enshittening, in which the services that matter to us, that we rely on, are turning into giant piles of s**t. It’s frustrating. It’s demoralising. It’s even terrifying https://on.ft.com/48bnYyv

XTOD: "Margin of safety—you can also call it room for error or redundancy—is the only effective way to safely navigate a world that is governed by odds, not certainties. And almost everything related to money exists in that kind of world."  — Morgan Housel

XTOD: Positioning over predicting.

XTOD: "Then I get that feeling...which is, 'I don't care who reads this, I don't care what happens to this, this is mine, no one's taking it away from me, I am doing this at the expense of all other things.'"  (

@SomanChainani   on the  @tferriss podcast)  Beautiful. This is the definition of authenticity.

XTOD: Macro is Hard   "It’s fine to have views on the economy. It’s fine to listen to other people’s views on the economy. It’s rarely helpful to act on those views when it comes to your portfolio."  https://buff.ly/3Uz4XTm 

XTOD: Great summary by  @I_Am_NickBloom  “So the big-name CEOs and Politicians claiming WFH is damaging growth have got it 100% wrong. WFH is likely powering the current economic boom by increasing labor supply and productivity, while also improving personal and family time.”  Women plus flexibility is profitable. Who knows what I might have accomplished if I have had flexibility during my career. It would have been a lot easier and humane. TY Nick. 👏paying it forward in every way I can.

XTOD: Chernobyl's mutant wolves appear to have developed resistance to cancer, study finds. The wolves are exposed to cancer-causing radiation as they roam the wastelands of the abandoned city - with researchers finding part of their genetic information seems resilient to increased risk of the disease. https://news.sky.com/story/chernobyls-mutant-wolves-appear-to-have-developed-resistance-to-cancer-study-finds-13067292

Daily Economic Update: February 9, 2024

Another relatively strong/low jobless claim report, despite the incessant headlines of layoffs.  Yields rose a few bps as the S&P crossed but couldn’t hold 5K.   The 30Y Auction was also strong, marking a strong week for demand for U.S. govt. debt.  Otherwise Chinese deflation is out there and for now it doesn't seem like the decline in Chinese equities and the real estate crisis is at a level yet that will lead to any meaningful global risk aversion.  Perhaps the bigger question is what will the impact of ailing U.S. CRE (particularly office) be on some foreign banks and investment firms?

I was wondering why I couldn't get Snoop Dogg's cereal at Walmart, per CNBC: "According to the lawsuit, when it was placed on shelves, Snoop Cereal was popular and sold well. However, the products were quickly taken off the shelves, leaving shoppers wondering where to find them, the suit says."

XTOD: Have a buddy who is feeding workplace conflicts into ChatGPT and asking it to analyze the situation and propose his course of action based on the 48 Laws of Power 

He is definitely going to either be promoted or fired in the next 6 months. Excited to find out which it is

XTOD: Fed officials love to pretend they don’t wade into fiscal matters, but the Fed paying interest on reserves (IOR) *is deficit spending*. Hell, all Fed spending goes right out of the budget via reduced remittances. Not to mention the rate hikes themselves, obviously.

XTOD: Monetary & fiscal policy is linked via a consolidated government budget constraint. But IOR is not in itself  “deficit spending.” (It’s possible to pay IOR and run a surplus). Comments on post below are bizarre.

XTOD: MMTers: "We never said deficits don't matter...they can cause inflation if they push the economist past capacity" 

Congress: Here's $4 trillion over 2 years to push the economy past capacity. 

Economy: Here's 7% inflation. 

MMTers: "Look at this supply shock"

XTOD: Choose a career you love and you’ll never work a day in your life because that field probably isn’t hiring.

XTOD: Watching the Presidents press conference in real time, responding to the special prosecutor’s report alleging cognitive decline.  This was the worst possible moment to confuse Egypt with Mexico while answering a question on Gaza. 

Daily Economic Update: February 8, 2024

New all-time highs on the S&P.  The earnings picture to date has been pretty solid.  Yields ended the day slightly higher despite regional bank fears. The 10Y Treasury auction was strong with the largest stop thru when issued since last February.  Fedspeak generally held the line on the desire to see more evidence that inflation will get back to target before initiating cuts.  Continue to see various takes on Powell's 60 Minutes appearance, specifically around his calling the national debt unsustainable.  Those takes include views from the MMT crowds view that there is nothing unsustainable about the debt (but that the Fed should cut rates), and views of certain famed investors clamoring for how the Fed needs to cut rates to keep the deficit from continuing to grow (not to mention how they could really use low rates to sustain certain investments). 

I obviously don't know Powell (I once rode an elevator with Bernanke), but I wonder if he would agree with this quote:

“I define central bank independence in one sentence, it's the ability to raise interest rates when the Treasury doesn't want you to. And the Treasury almost never wants you to, because of the cost of the debt.” – Peter Stella 

On the day ahead it's jobless claims and the 30Y auction. Other than that I guess we'll see if the Tucker-Putin interview drops. 

XTOD: One of the biggest mistakes by finance idiots* is to conflate tail risk awareness with bearishness. 

Believing in Black Swans ≠ Permabears.  * Short for fucking idiots.

XTOD: BREAKING: The winner of the Nevada Republican Primary election is literally "None of These Candidates."  Over 61% of the votes are for "None of These Candidates."  This is double the 32% that Nikki Haley, the second place candidate, received.  Donald Trump was not on the ballot.

XTOD: Yet another example of monetary policy in action - rich people (credit scores >760) were taking out massive amounts of mortgage debt to bid up the price of housing until the Fed started tightening policy in early-2022 https://newyorkfed.org/medialibrary/i

XTOD: My undergraduate thesis was on this very question.  I argued that religions can be modeled as providers of social insurance, and that the US secularized after Europe due to our under-developed welfare state.  To test this, I showed that the post-'90s "secular boom" was associated with Medicaid expansions in prior years at both the state and census division level, particularly the '80s expansion to uninsured kids and the explosion in federal payments to charity hospitals after the '86 budget act. 

In essence, it seems like Medicaid crowded-out the social insurance function of religion for many parents, leading to a cohort of kids who grew up with weaker affiliation. As a secondary effect, the growth in federal payments also induced many sectarian hospitals to be bought-out by secular networks. There's a sizable literature showing a similar relationship holds cross-nationally as well as in micro, such as Dan Hungerman's work showing the negative impact of welfare expansions on church donations.  This was my first empirical paper and, while I remain concerned about spurious correlation, I think there's more than enough "there there" to at least make this mechanism plausible. I would love for someone with better stats abilities to try to replicate it using the latest data, as I agree with David that it is an important and still under-theorized question.

XTOD: The 32-year-old banker, whose satirical alter ego has gained a cult-like following on Instagram, reveals his identity in an FT interview: https://on.ft.com/3OuCiuH

Daily Economic Update: February 7, 2024

The S&P advanced as yields fell as the market digested rising consumer debt levels and Fedspeak.  The 3Y auction seemed decent with pricing thru where when issued was trading.   Mester seemed to indicate the Fed will cut this year, but that there's no reason to rush and likely no need to cut aggressively.  We get more Treasury supply today and Thursday along with more Fedspeak.

On this blog I think I've intentionally or at least subconsciously written about noise, narratives, and forecasting.  In writing about these topics, I have tried to highlight what I see as the challenges that come from simplifying the complex in such a manner that creates a false sense of certainty.  That's not to say that simplification cannot be an appropriate way to make an important message accessible, but rather to build awareness that the ability to create vague, simple messages often wrapped in a well crafted veneer that is alluring, is a trick employed by charlatans throughout history  to cement their wealth and power at others expense (see post on finfluencers and Mill's Civilization essay) .  Obviously with social media and AI, the ability for those who want to create cultlike followings and draw people into otherwise ridiculous ideas has grown and will continue to grow exponentially.  The risk of falling into the simple, vague, but alluring promises is particularly high in financial services and probably a risk we'd be wise to realize exist.

"For years the financial services have been making stock-market forecasts...they are sometimes right and sometimes wrong. Wherever possible they hedge their opinions...in our view...this segment of their work has no real significance except for the light it throws on human nature in the securities markets. Nearly everyone interested in common stocks wants to be told be someone else what he thinks the market is going to do. The demand being there, it must be supplied."  - Ben Graham

The tricks of today's charlatans are very similar to those played in the past, just now done easily with scale.  Awareness of the games played in crafting messages and building a following is a first step towards building a better understanding of potential tricks and determining the appropriate course of action from there.  In fostering awareness of the methods used by charlatans, author Robert Greene, whom I referenced in my FOMC Recap, has what he calls "The Science of Charlatanism Or How to Create a Cult In Five Easy Steps".   Those five steps are (with reduced commentary):

1. Keep it vague; keep it simple: promise something great and transformative, but use total vagueness.  People want to hear a simple solution will cure their problem.  If you explain in detail the benefits to someone, you will be expected to satisfy them, so avoid details.
   
   
2. Emphasize the Visual and Sensual over the Intellectual:  dazzle your followers with visual splendor, colorful charts, new technological gadgets - anything that creates a pseudo-scientific veneer. 
   
   
3. Borrow the Forms of Organized Religion to structure the group - talk and act like a prophet to hide the fact you are a dictator.  Ask people to sacrifice something to your cause (ex. sign up for your newsletter which gives you money).  Even better if you tier your community.
   
   
4. Disguise Your Source of Income - you must never been seen as hungry for money and the power it brings.  Never reveal your wealth comes from your followers' pockets.
   
   
5. Set Up an Us-Versus-Them Dynamic - make it so that any outsider who questions you or tries to reveal the charlatan nature of your belief system can now be described as an enemy.

I can't speak for everyone, but I see so many of those dynamics at play particularly in social media.  You too can probably think of various accounts in the finance "crowds" on X/Twitter or YouTube particularly where the topic is something to do with things like crypto, MMT, certain company's stock (ex. Tesla), "experts" explaining the recent moves in a market, predicting a soon to come recession or crash, people talking their own book, etc.  Once you're aware, you probably then think about where else some of these dynamics are involved in other areas of your life.

"Men are so simple of mind, and so much dominated by their immediate needs, that a deceitful man will always find plenty who are ready to be deceived."  -Niccolo Machiavelli

XTOD:  Great thread outlining the reality and uncomfortable truth behind the headlines and incessant CNBC pumps & promos  https://x.com/ttp_cap/status/1754917296638767318?s=20

XTOD: Adam Neumann just totally crushed the ZIRP era. Nobody close.

XTOD: When Barry Sternlicht was 32 y/o he started Starwood with Bob Faith and an assistant. 18 months later, after acquiring 8,000 MF units, he sold to Sam Zell’s Equity Residential REIT in return for 20% ownership.  By the time he was 37 they owned Starwood Hotels and Lodgings Trust, the largest Hotel REIT in the world with $20B AUM and 120,000+ employees across the globe.  Today Starwood Capital Group and affiliated entities manage over $120B in assets across the globe and have become the giant in the room.  Today’s episode is full of incredible stories of how they climbed to the top of the real estate world: 0:00 - AI & Hotels  6:34 - The Midas touch  8:16 - Scaling to 120k people in 7 years 14:00 - Shared Pair REITs  27:15 - Thoughts on Blackstone  35:25 - How to buy a REIT 39:45 - Taking a company from $1B in AUM to $10B   48:50 - How did you keep Starwood Capital moving while you stepped away?  58:22 - Selling Caesar’s Palace 1:07:53 - Thoughts on the market in 2024 https://twitter.com/i/status/1754852728344363340

 

 

Daily Economic Update: February 6, 2024

Better than expected ISM, with the prices paid component markedly higher, coupled with continued digestion of recent strong data and Powell's 60 Minutes appearance lead to a pop higher in yields.  Maybe markets are starting to come back around to the idea that the Fed won't be cutting 6-7 times this year.  The recent moves higher following last Friday's jobs numbers have the 10Y yield back to 4.15%, which marks a solid move off recent lows of ~3.80%.  The 2Y is almost back to 4.50% off recent low of 4.20%.

The last week has me wondering whether we've re-entered the end of summer/early fall of 2023.  It was during that time period that all of the talk from the Fed (including Powell's J-Hole speech) seemed to focus on uncertainty around estimates of the neutral rate of interest.  We'll have to wait for both the NY and Richmond Fed to update their estimates of the neutral rate.  Yesterday we had Kashkari out wondering if neutral rate has increased post pandemic https://www.minneapolisfed.org/article/2024/policy-has-tightened-a-lot-how-tight-is-it

On the day ahead it's Fedspeak starting at noon.

XTOD:  ISM Services 53.4, Exp. 52.0, Last 52.3  ISM Prices Paid explode to 64.0, Exp. 56.4, Last 56.7  When is the Fed hiking again?

XTOD: "Stock options is always an expense. Its in kind but Analysts reverse it. It's like a pizza store owner giving away free pizza because u can't supplement the wage because u can't pay them high enough wage. It's eating into profit & got to be factored in" 👌--- @AswathDamodaran

XTOD: There's a difference between "I don't have the time" and "This isn't a priority." It's okay to communicate the latter even though you always say the former. Be brave, friends. We're all protecting our time and attention.

XTOD: "By working faithfully eight hours a day, you may eventually get to be a boss and work twelve hours a day." — Robert Frost, American poet and winner of four Pulitzer Prizes

Daily Economic Update: February 5, 2024

I wrote this while wearing an Apple Vision Pro, while driving a Tesla Cybertruck...you're welcome.

Friday's job report was a blowout, leading to the question of what is the need to cut rates?  Average hourly earnings was also much stronger than anticipated.  Maybe Powell was onto something when he expressed a desire to see more data before confirming the Fed's policy was restrictive.   

Some recent data might lead one to wonder where the elusive "neutral rate" is these days. Powell was asked this in his news conference last week and uncertainty over the neutral rate is now a long forgotten topic, but was the topic of Powell's J-Hole address.  Continued strong GDP data and Atlanta Fed GDP estimates for 1Q2024 with a 4 handle, obviously lead to the question how does the economy keep expanding.  Economist Scott Sumner tackled this topic in his post, Why might I be wrong about trend GDP?   In basic terms, the economy can grow by doing more with the same amount of resources (i.e. Productivity) or by increasing real economic inputs (ex. labor).  Sumner hits on the potential grow impact from the politically thorny topic of  immigration as an under-looked factor that could be increasing real GDP (see Powell comments from 60 Minutes below...maybe Sumner was onto something)....Elon Musk was busy sharing his own opinions on immigration this weekend.

Powell stayed busy in the news cycle with a 60 Minutes interview and candidate Trump indicating he won't reappoint Powell if elected.  I mentioned the need for the Fed to maintain independence in a charged political environment in my last FOMC Recap.

If you didn't watch Powell on 60 Minutes, he stuck to the FOMC script, implying that March will be too soon to cut rates and that the number of cuts priced in could be on the high side.  That said, here's a summary of what I considered to be notable quotes (my emphasis added):

•  Right. And we have to, we have to balance those two risks. There is no, you know, easy, simple, obvious path. We have to balance the risk of moving too soon, which, as you mentioned, or too late. And there are different risks. We think the economy's in a good place. We think inflation is coming down. We just want to gain a little more confidence that it's coming down in a sustainable way toward our 2% goal……
• And I can't overstate how important it is to restore price stability, by which I mean inflation is low and predictable and people don't have to think about it in their daily lives…
• I would say it this way. It's really going to depend on the data. The data will drive these decisions..[As to imply there is ever a time that they don't depend on the data]
• We do not consider politics in our decisions. We never do. And we never will....You know, I would just say this. Integrity is priceless. And at the end, that's all you have. And we in, we plan on keeping ours. [Looks like Powell read my FOMC recap]
• Well, interesting, you know, we were being honest, and I was being honest in saying that we thought there would be pain. And we thought that the pain would likely come, as it has in so many past cycles, in the form of higher unemployment. That hasn't happened. It really hasn't happened...
• So, it, I would say this. In the long run, the U.S. is on an unsustainable fiscal path. The U.S. federal government's on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy. So, it is unsustainable. I don't think that's at all controversial. ...
• I don't think there's much risk of a repeat of 2008. I also think, you know, we need to be careful about making proclamations about the -- particularly about the future. Things have surprised us a lot. [First I'll tell you that there is no risk of 2008, but then I'll hedge by telling you I can't predict the future...and that we're often wrong] But no, on this, on this, I do think it's a manageable problem. I think we're doing a lot to manage it.
• I think we need to just remember that we have this dynamic, innovative, flexible, adaptable economy. More so than other countries.....the United States has been the indispensable nation supporting and defending democracy, security arrangements, economic arrangements. We've been the leading voice on that. And it is clear that the world wants that. And I would want the United States to know, people in the United States to know, that this has benefited our country enormously. It benefits our economy so much to have this role.
• We had a combination of rising labor force participation in prime-age workers, and we also had with that, we had a resumption of immigration. So, there was really no immigration net in or very little during the pandemic...But in 2023, we saw immigration move back up to the levels that would have been normal before the pandemic.....Because, you know, immigrants come in, and they tend to work at a rate that is at or above that for non-immigrants. Immigrants who come to the country tend to be in the workforce at a slightly higher level than native Americans do. But that's largely because of the age difference. They tend to skew younger...I will say, over time, though, the U.S. economy has benefited from immigration. And, frankly, just in the last, year a big part of the story of the labor market coming back into better balance is immigration returning to levels that were more typical of the pre-pandemic era.
•  I would say it this way. The economy's strong. The labor market's strong. Inflation's coming down. There's no reason why that can't continue. We're gonna try to use our tools to give the economy -- to continue to improve as inflation comes down. We'll give it every chance to do that. That's our plan. We don't have a perfect crystal ball about the future, and things could happen. But I do think the economy is in a good place, and there's every reason to think it can get better.

On the week ahead it will be ISM Services and Fedspeak.  And don't forget about geopolitics which Powell called the biggest risk in the near term.

XTOD: The hole in the border fence was way more interesting than Powell.

XTOD (reply): I disagree. He WANTS the subject of deficits to come up. And he WANTS the "politics" to be examined as well. His answer was strong. He knows the crossroads are coming, probably later this year. The Fed will have to decide whether to consider more QE to help Treasury sell debt.

XTOD: We generally don't need more data.  Just more insightfulness

XTOD: In the Fall of 2022 Powell was basically begging companies to fire ppl

We've added 4.1 million jobs since then and inflation is down 

Coming around to the idea no one really knows what truly drives the economy

And maybe monetary policy doesn't matter as much as we all think

XTOD: BARTIROMO: If things are so bad, how come the stock market is on a roll? 

TRUMP: Because they think I'm gonna be elected 

BARTIROMO: You think the stock market is rallying because people think you're going to be elected?

XTOD: James Clear: "I think about decisions in three ways: hats, haircuts, and tattoos. 

Most decisions are like hats. Try one and if you don't like it, put it back and try another. The cost of a mistake is low, so move quickly and try a bunch of hats. 

Some decisions are like haircuts. You can fix a bad one, but it won't be quick and you might feel foolish for a while.   That said, don't be scared of a bad haircut. Trying something new is usually a risk worth taking. If it doesn't work out, by this time next year you will have moved on and so will everyone else. 

A few decisions are like tattoos. Once you make them, you have to live with them. Some mistakes are irreversible. Maybe you'll move on for a moment, but then you'll glance in the mirror and be reminded of that choice all over again. Even years later, the decision leaves a mark. When you're dealing with an irreversible choice, move slowly and think carefully."  (From  @JamesClear 's 3-2-1 newsletter)