Daily Economic Update: March 29, 2024

Markets closed for Good Friday.

Yesterday, 4Q2023 GDP was revised higher yet again, up to 3.9% and jobless claims remain crazy low.  As with some other commodities, like cocoa, gold is at record high.   Away from the market, FTX founder, SBF, was sentenced to 25 years, less than what many had speculated.

Despite the unambiguously positive economic news of late and stock market gains, earlier in the week, Blackrock's Larry Fink was extremely concerned about the state of U.S. retirement funds.  According to Reuters: "Fink said data from the U.S. Census Bureau's survey of consumer finances in 2022 showed nearly half of Americans aged 55 to 65 reported not having a single dollar saved in personal retirement accounts. "Put simply, the shift from defined benefit to defined contribution has been, for most people, a shift from financial certainty to financial uncertainty," he added."   Just a reminder that not everyone has benefited from recent economic gains.

Speaking of unequal gains, Ray Dalio was out with a piece this week titled In China: The 100-Year Storm on The Horizon.  In it Dalio references his big debt cycles and states: "It is quite typical for such booms to produce debt bubbles and big wealth gaps that lead the booms to turn into bubbles that turn into busts."  In China in particular Dalio discusses the history and how a convergence of forces, perhaps accelerated by Covid, coupled with a the domestic debt bubble bursting and increased international conflict has led China toward a more communist nationalist mentality.  Dalio states that: "History shows that in all countries through all times during these very difficult 100-year-storm-like periods, leaders go to much more autocratic policies because the alternative becomes great internal conflict and disorder, and typically there are forced changes of leadership that those in power fight against."  Dalio believes China needs a 'beautiful deleveraging' lead by debt restructuring coupled with easy money policies to avoid a lost decade.  He also sounds concerned about the prospects for wealth confiscation and the possibility that China tries to drag the U.S. into a 3rd war.

XTOD: Not sure what to make of this:  -25 Years for SBF sentencing  -Just about 100% recovery for FTX clients

XTOD: NYC’s Delinquent Property Taxes Soar Without Incentive to Pay  @business  #CMBS  

▪There’s an estimated $880 million in unpaid taxes this year

▪Cobble Hill, Brooklyn rental owes $52 million, city data shows

XTOD: A favorite quotation from Danny Kahneman: "Nothing in life is as important as you think it is when you are thinking about it." (Except Danny.)

XTOD: Dream big, start small, act now. Every small step counts towards your extraordinary future. 

Daily Economic Update: March 28, 2024

Another record high close for the S&P 500 and this time the gains weren't lead by AI stocks.  The S&P is now up ~10% on the quarter.  In fixed income land, bond yields fell with the 2Y down ~3bps to 4.57% and the 10Y down ~5bps to 4.18% as the strong 7Y note auction priced about 1bps through where WI issued was trading, making this a strong week for Treasury demand.

Fed Governor Waller's speech was titled There's Still No Rush, you probably didn't need to make it much past the title to get the gist.  "Adding this new data to what we saw earlier in the year reinforces my view that there is no rush to cut the policy rate. Indeed, it tells me that it is prudent to hold this rate at its current restrictive stance perhaps for longer than previously thought to help keep inflation on a sustainable trajectory toward 2 percent."  "I continue to believe that further progress will make it appropriate for the FOMC to begin reducing the target range for the federal funds rate this year. But until that progress materializes, I am not ready to take that step."..."In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data. "..."As a result, in the absence of an unexpected and material deterioration in the economy, I am going to need to see at least a couple months of better inflation data before I have enough confidence that beginning to cut rates will keep the economy on a path to 2 percent inflation. "

You may not have directly heard of Danny Kahneman or read his books (Thinking Fast and Slow is an interesting read, though I found it to be a tough read), but you're likely familiar with some of his work around heuristics, bias and ultimately his impact on the field of behavioral finance.  Kahneman passed away yesterday at age 90.  I don't know if Kahneman is best known for "prospect theory", but for those unfamiliar with the theory, it essentially says that individuals place different weights on gains and losses.  In the work of Kahneman and his long time partner, Amos Tversky back in 1979 they conducted a study in which participants were offered a choice of a sure gain of $500 or a 50/50 chance to either gain $1,000 or nothing at all, respondents overwhelmingly chose the "sure gain".  Correspondingly, when another group was asked to choose between a sure loss of $500 or a 50/50 chance to lose either $1,000 or nothing at all, a majority gravitated to the uncertain outcome.  It appeared to be that human nature is to prefer an uncertain loss to a certain loss but to prefer a certain gain to an uncertain gain. [aforementioned paragraph comes from a CFA Reading from 2007 on managing investor portfolios written by James Bronso, Matthew Scanlan and Jan Squires)

Further, author and former poker player, Annie Duke, references Kahneman's work on prospect theory and loss aversion in her book, Quit.  In it she discussed further work by Kahneman that involving coin flip propositions where a person starts in a $100 position and is offered a coin flip with a positive expected value of $110 that showed that people "are willing to give up extra profit to lock in the sure win.  They will pay to avoid their win evaporating with the flip of a coin, and the regret that comes with it."  The same experiment also started people off with a $100 loss position and offered them a coin flip with a negative expected value of $110 which showed that "people will indeed pay for the chance to recruit luck into the equation, which is the only way they can turn a sure loss around."

XTOD: My conversation with the legend, Daniel Kahneman.  Daniel was gracious enough to spend an entire afternoon with me the first time we met.  May he forever rest in peace.  https://fs.blog/knowledge-project-podcast/daniel-kahneman/

XTOD: One of the strangest things with tip culture is who does not get tipped.   Waiters yes, flight attendants no.   Uber Eats driver yes, UPS driver no.   Valet yes, front desk no.

XTOD: What turns an Austrian boom into a bust isn't slower credit expansion or disinflation; its real interest rates rising back to their "natural" levels. And my impression is that that's already happened.

XTOD: 16 sentences of wisdom from bond trader turned restaurateur, Sean Feeney, that will make you a better person, friend, and leader.

1. The most important ingredient is the one that’s left out.

2. The greatest gift is courage. Give someone the courage to be themselves.

3. Success is doing something every day for the rest of your life, happy to do it.

4. Everyone has genius inside them.

5. Truly showing belief in others will buy them a ticket to someplace they never knew.

6. Hospitality is creativity plus compassion.

7. “That’s just the way it is,” tells you there’s money to be made.

8. It is tempting to have something for everyone but there is preciousness in not filling demand.

9. Create a brand that people chase, don’t chase people with your brand.

10. Make others feel a part of something.

11. You are one of us, whether you work with us or you're dining with us.

12. Treating others well is good for business.

13. Finish the day, asking, “How did I impact someone in a positive way?”

14. Know what works and be honest with what doesn't and don't do that.

15. Block out all the noise and keep it simple.

16. Believe every day is a good day. But don’t think it’ll be easy.

https://x.com/ShaneAParrish/status/1773042318578200855?s=20

https://x.com/morganhousel/status/1773064353928913386?s=20

https://x.com/GeorgeSelgin/status/1773030503211295157?s=20

https://x.com/InvestLikeBest/status/1773040994801291298?s=20

Daily Economic Update: March 27, 2024

In a data heavy day, durable goods new orders both headline and core exceeded expectations, while shipments were below expectations and home prices rose more than expected.  The S&P Case Shiller home price index showed increasing home prices MoM generally in line with expectations and clocking in at a rate of 6.6% YoY.  The Conference Board's consumer confidence survey was slightly below expectations and showed “Consumers’ assessment of the present situation improved in March, but they also became more pessimistic about the future,” said Dana M. Peterson, Chief Economist at The Conference Board.  Despite some pessimism in the report, the data showed consumers continuing to reduce their recession odds and still consider jobs to be plentiful.

Stocks ended down for a 3rd straight day while cocoa prices hit new all-time highs.  Yield were down slightly with the 2Y at 4.60% and the 10Y at 4.23%.  We'll get some of Fed Governor Waller on the day ahead.

In tragic news, the collapse of the Francis Scott Key Bridge in Baltimore following a massive container ship losing power causing it to ultimately hit one of the bridge's support columns, is an abject reminder of uncertainty.  Investigations will continue to try to assess what could have been done to prevent this accident and what can be done to prevent these types of accidents from occurring in the future.  Certainly some lessons will be learned.  I wouldn't be surprised if we find that some of the problems in this disaster were tied to the topics of complexity and tight coupling, but time will tell.

I've written about the topic of uncertainty (and it's close cousin risk) a ton on this blog, you can find those instances here and further find the word "uncertainty" with a good old fashion Ctrl+F search on the page.

XTOD: It’s easier to be lazy than it is to fail.   As soon as you actually try you realize how little you have to do to beat the people who do nothing.  There are far fewer people who’ve failed than people who were too lazy to try.

XTOD: Is there a known law for a long-life of compounded positive reputation DESTROYED at end (Ala @nntaleb turkey’s life before thanksgiving)?.....Paraphrasing Buffett + PE’s Buffett (and Lux godfather) Carlyle’s Bill Conway “10 years to build a rep 10 seconds to lose it”....Coach Wooden nailed it:  Care about your CHARACTER over your REP, because it’s what you really are  REP is just what others think you are

XTOD: We put round pizza in a square box and eat it in triangles.

XTOD: Many different methods will deliver training results. The only two non-negotiable factors for success, though, are effort and consistency. Adaptation won't happen unless you force it.

XTOD: Is what I'm about to do today connected to what I'm going to value over the long-term?

Daily Economic Update: March 26, 2024

I wonder if there is a Reddit about trading Reddit shares? There probably is.  Reddit and shares of some AI stocks did well while the major indexes closed slightly lower.  Yields rose 3-6bps across the curve as Fedspeak from Bostic and Cook leaned slightly more hawkish against the usually dovish Goolsbee.  Bostic is on record calling for only one rate cut this year.  The 2Y at 4.63% and the 10Y at 4.25% as traders position for markets being closed on Friday as PCE data hits.

Meanwhile as we wait for PCE, it looks like two staples, chocolate and gasoline, will continue to be expensive.  Cocoa prices continue to reach new all-time highs due to supply shortages largely related to weather and oil prices are rising related to geopolitical supply concerns.  

Away from economics and markets, it was heavy in pop culture news:  P. Diddy investigated for human/sex trafficking, Ohtani says he never bet on sports and was stolen from, Trump couldn't post bond but gets more time, Huberman can't manage dating five woman at the same time, and the Terminator had a pacemaker put in. 

Today's we'll get durable goods orders (does all the Boeing issues - now with a C-suite shakeup ever show up in this data?) , home price data and some consumer confidence data.  We also have the 5Y Note Auction.

XTOD (Andy Constan - who to the best of my knowledge coined "H4L Island"...now leaving): FWIW I have left H4L island and expect NGDP to be lower than longer than expectations. I am sailing in the Economic Slowdown Sea.  The only destinations on my journey are Recession Island or Soft Landing island.  My guess is the former.

XTOD:  A few smart things I've read lately: https://collabfund.com/blog/smart-words-from-smart-people/

XTOD: Imagine working hard to get into a good university, studying to get into a competitive IB job, and toiling away for 90+ hours a week to earn $150-175k in comp after your first year, only to have teenagers yolo shitcoins with no inherent value and gain millions of dollars

XTOD: I don't think it's the price of being an A podcaster—there are many honest ones. It's the price you pay for selling yourself as someone you're not, and making millions off it by engaging in a form of deception that is supported by an oligarchy of deceivers, all of whom emerged in the wake of the pandemic. These were people who knew how to take advantage of other's vulnerability.  I don't feel bad for him.

Daily Economic Update: March 25, 2025

Sorry if this post is incoherent.  I wrote it with an experimental neuralink device while exercising "squatters rights" in a $2 million property in NY and taking Ozempic.

Who would you like to sue?  We've got shoppers suing Hermes because Birkin bags are rare, expensive and they won't sell them to just anyone, you need to buy a bunch of other stuff to prove you're worthy first.  On top of that we've got a suit against Starbucks because oat milk is a surcharge and some people are dairy intolerant (apparently lactose intolerance is recognized as a disability).  I have decided to follow on with lawsuits against every company in the food and beverage category because: (a) healthy food is generally more expensive than junk food and (b) I have a kid with celiac, which requires him to be gluten free.  Last I checked gluten free food is ridiculously expensive and not offered at every single restaurant. They shouldn't be able to limit my access to healthy food or charge more for gluten free food, right?  Capitalism and Supply and Demand be damned.

Last week was a nice week for equities despite Friday's down day.  The tensions around the terrorist attack in Russia and the failing ceasefire negotiations in Israel are reminders that there are plenty of geopolitical risks still out there.

We start the week with 2Y Treasuries at 4.60% and 10Y at 4.20%.  Anyone willing to trade a 2's10's Steepener here?

More inflation data on the week ahead with the Fed's preferred PCE measure on Friday.

On the week ahead:

Monday: Fedspeak, new home sales

Tue: Durable goods orders, home price indexes

Wed: Gov Waller

Thur: Jobless Claims and a 3rd read of 4Q2023 GDP, UofM asking people about gas prices

Fri: PCE, Powell

XTOD: Doing what everyone else thinks you should is a sure path to the same results as everyone else.

XTOD: Take pride in your effort, not your talents. Your talents are a gift, you didn't do anything to earn them. You should take pride in what you do w/ them. True excellence comes from combining gifts with dedication and effort. (Working & studying hard/practicing consistently)

XTOD: Resendo Tellez, a 27 y/o from Wasco, California was Arrested earlier today after an Incident occurred this morning in which he was a Witness to a Fatal Accident at an Amtrak Rail Station, which involved a Person being Struck by a Train and Killed, before Tellez decided to then take the Severed Leg of the Victim and was later Filmed by a Passerby as he attempted to Eat the Human Leg.

XTOD: Breaking News - Pete Rose is now claiming it wasn’t him.   It was his Translator ( pictured below) https://pbs.twimg.com/media/GJT_pbHXMAA34I6?format=jpg&name=900x900

XTOD: This week I reintroduced my Ultra-Millionaire Tax.   It’s time for millionaires and billionaires to start paying their fair share.

XTOD: the lowest earning 40% of americans pay no income tax  the top 1% of american earners pay 40% of all income tax

XTOD: Bitcoin: Crypto’s Original Use Case:  The coin that Warren Buffet called “rat poison squared” is now a $1.3 trillion global asset sought after by some of the largest financial institutions in the world—with the potential to disrupt a wide range of markets.

Daily Economic Update: March 22, 2024

I still can't believe no one asked Powell for his NCAA pick.  

Yesterday's jobless claims data proved you still can't get fired, while S&P PMI's showed continued expansion.  The news on the central bank front was slightly more interesting with the Swiss National Bank cutting rates by 25bps to 1.50% in a move that was not priced into expectations.  The BoE heled their policy rate at 5.25% but is more clearly moving away from a hiking bias and towards easing.

Even a DOJ anti-trust case against Apple couldn't keep the major indexes from continuing their bull run.

The 2Y yield rose to 4.64%, reclaiming some of the ground lost earlier this week, and the 10Y is 4.27%

We’ll get some Powell at a Fed Listens event today, which will likely be a non-event and everyone will be watching basketball or buying AI stocks anyway.

XTOD: I am concerned because I am hearing reports of a mass epidemic of a terrible 48-hour virus that has people not showing up for work or school today. Hope everyone is feeling okay!!! Take care of yourself, get your rest, nothing more important than your health.

XTOD: DOJ suit against Apple has five claims on monopoly maintenance. Antitrust Division alleges Apple:

1) Blocking super apps 

2) Mobile cloud streaming services

3) Excluding cross-platform messaging apps

4) Degrading non-Apple smart watches

5) Limiting third party digital wallets

XTOD: Some thoughts about the bond market treading water since the Fed meeting while risk markets rally ...  ----- The Fed cannot randomly pick some day and cut rates. If they do and the market thinks it is not serious about inflation, sell bonds. 

In 2022, the Fed hiked 75bps at four consecutive meetings. While they were doing this, inflation hit 9%. But the Fed was "on the case," and the 10-year yield peak was just 4.22%.

Contrast this with 2023. The Fed stopped hiking in late July 2023, when the 10-year yield was 3.95%. Even though inflation had declined from 9% to 4%, the market was "unsure" about the Fed's commitment to fighting inflation. Ninety days later, the 10-year yield jumped to over 5%, peaking in October 2023.

If the Fed is not serious about fighting inflation, when the market thinks it is a problem, it is not serious about owning the 10-year notes.

Fed dovishness only works if the market is convinced inflation is not a problem. Right now, it is unsure.

I long thought inflation was a problem (3% to 4% problem), and the economy is "no landing." So I think the market will resolve that inflation is at least an issue and that the Fed is not acting seriously about it, and it will start selling bonds.

XTOD: Microsoft CEO Satya Nadella to board members: 

"If OpenAl disappeared tomorrow, we have all the IP rights and all the capability. We have the people, we have the compute, we have the data, we have everything. We are below them, above them, around them."  Wow.

XTOD: “Welcome back to SportsCenter Presented by ESPN Bet, for more on the Ohtani situation we go to our FanDuel MLB Insider Jeff Passan at our DraftKings Studio in Los Angeles brought to you by Caesar’s Sportsbook. Jeff, how could something like this happen?

Daily Economic Update: March 21, 2024

 Yesterday the FOMC:

• Held their policy rate at 5.25-5.50%
• Raised their growth and inflation projections while keeping their median 2024 projection of rate cuts at 3 cuts.
• The median projection for Fed Funds did increase for 2025, 2026 and in the longer run.
• No changes were made to the balance sheet runoff, but they will likely need to slow the pace of runoff fairly soon.
• Powell was asked if the Fed will tolerate inflation above target for longer, but believes they are making good progress on inflation.  He refused to provide any answer around how long they will tolerate above target inflation, other than they'll get inflation down to target "over time".
• Powell said that the road to 2% will be "bumpy" but they don't really think that the story that inflation is coming back to 2% is changed by recent data.

The conundrum from yesterday's FOMC was that the Fed seems to see better growth and higher inflation over the balance of the year, yet might be willing to cut 3x this year anyway.  The Fed is also apparently willing to cut rates in the face of pretty loose financial conditions.  Ultimately this disconnect likely comes down things like estimates of the neutral rate and how you think about inflation data.  All things we've talked about in post over the past week (and forever).

Of course the Fed will remain data dependent and will judge the balance of risk to both sides of their dual mandate.

Equities were happy, with new all time highs and bond yields were lower across 2s, 5s and 10s.  The 2Y is now sitting around 4.60% while the 10Y is 4.27%.

On the day ahead we get BOE, March Madness begins (noon), Philly Fed, S&P PMI's.

XTOD: Powell has a zillion really good PhD economists slicing and dicing the inflation data, and if they're telling him Jan/Feb uptick is mostly noise, we should all take that on board.

XTOD: While I don’t disagree on the recent data, I recall that his zillion PhDs said to ignore inflation a few years ago.

XTOD: I agree the Fed staff "forecast" does not deserve notably more deference than anyone else's. But their ability to decompose exactly what is driving the data in real time is excellent.

XTOD: Nothing changed. Policy mistake then. Policy mistake today. Fed is gambling on layoffs kicking in full gear and UR going up. That’s not data dependency, that’s hope. And hope is not a strategy. At the first jump in claims, market will revert back to > 6 cuts in a blink.

XTOD: “Financial conditions have tightened significantly over the last year” - Powell 

Someone tell him that Unvaxxed Sperm coin is up 5000% this week.

XTOD: Some people find it very difficult to believe that you can hold these three thoughts in your head:

1. The Fed is making a mistake

2. I can profit from that mistake

3. Even though I can profit from the mistake its still a mistake and bad for society.

XTOD: Dodgers Star Shohei Ohtani’s Interpreter Fired, Accused Of ‘Massive Theft’

https://go.forbes.com/c/t2Sq

XTOD: You can't just walk into Hermès and buy a Birkin bag.  Instead, you need to have a history of buying other Hermès items.   In a class action lawsuit filed today, California consumers say that policy—tying the sale of Birkins to other products—is illegal.

FOMC Recap: What lessons can the Fed learn from March Madness?

 

Let's be realistic, in 24 hours no one is going to be talking about this FOMC meeting, after all tip-off to the round of 64 of the NCAA Men's Basketball Tournament, "March Madness", is less than 24 hours away.  What lessons can the Fed learn from March Madness?

There's just something about March.  Dating back to 44 BC and the assassination of Julius Caesar, March has been associated with turmoil and uncertainty.  Shakespeare's famous line "Beware the Ides of March" certainly continues to portend bad omens in today's popular culture.  Away from ancient Rome, March has indeed had it's share of ominous moments in financial market history, just to name a few: March 2023 saw the failure of Silicon Valley bank, March 2020 saw some of the largest single day moves in rates and stock prices during Covid, March 2011 was the Japanese earthquake and Fukushima disaster, March 2010 was the height of the Greek debt crisis, March 2008 was the collapse of Bearn Stearns...you get the point.  Nevertheless, it's easy to forget the specific dates or even that the aforementioned financial market events all happened in March.

"March Madness", the basketball version, has better marketing and is less forgettable than financial market history. Like the fortuitous events that have occurred in the month of March over history, the NCAA version of March Madness is often filled with unexpected events, upsets and Cinderella stories.  We can remember 16 seeds (UMBC and FDU) upsetting 1 seeds, we can remember Christian Laettner's "The Shot", we can remember the Cinderella runs of N.C. State, Villanova and others, as well as the many future stars who became household names as a result of their play on the biggest stage in college basketball. 

The Fed can learn many lessons from March Madness, including:

• It is impossible to be perfect:  The odds of completing a perfect bracket are a number that is incomprehensible.  The odds that the Fed can steer the economy to perfection by moving an interest rate both gives the Fed too much credit and creates an illusion that something as complex as the economy is that controllable.
• Plans are worthless, but planning is everything (Dwight D. Eisenhower): In Eisenhower's words, "There is a very great distinction because when you are planning for an emergency you must start with this one thing: the very definition of "emergency" is that it is unexpected, therefore it is not going to happen the way you are planning. So, the first thing you do is to take all the plans off the top shelf and throw them out the window and start once more. But if you haven't been planning you can't start to work, intelligently at least.  That is the reason it is so important to plan, to keep yourselves steeped in the character of the problem that you may one day be called upon to solve--or to help to solve."
  Every college coach knows that you have to take in the data, do your homework and come up with a plan to attack your opponent.  In the same vein, every coach knows that their team has to survive the proverbial punch to the face.  The biggest stumbles in March Madness occur when some top seeded team, faces a team that comes out with a different style than expected.  When that higher seed fails to make any adjustments, upsets often follow.  The Fed can learn that sometimes things don't go according to plan, it doesn't mean you shouldn't have watched the film, taken in the data, etc. it means that as you watch the film and take in the data you need to make your plan robust and be willing to revisit and adjust. Just as good coaches call time out and get to make adjustments at halftime, the Fed needs to remember that sometimes what they thought was going to work, doesn't work as planned.   Maybe the Fed should consider this as the take in current inflation data.  Sometimes you have to change your defense to stop the streaky shooter.  Maybe inflation is today's streaker shooter and the Fed needs to step up it's defense. To the Fed's credit they are often very good at making adjustments when it matters most.  

While there are many more lessons the Fed and financial market participants can learn from the NCAA tournament, the primary lesson is one of learning that the future is uncertain, expect the unexpected and that anything can happen.

I'll end there, but if you want a little more on uncertainty, risk management and the parallels to the NCAA tourney, read on...

Daily Economic Update: March 20, 2024

Another Fed Day is upon us. Attention will be focused on the "Dots" to see if the year end 2024 median projected Fed Funds rates will continue to show 3 rate cuts, consistent with the December projections or if the projections will be reduced to only show 2 rate cuts.  The other indicator to be watched is whether the Dots reflect any upwards drift in the Fed's projections of the long-run neutral rate (see yesterday's post). 

The force of the AI revolution is strong, sending stocks higher as yields await the Fed.   The 2Y remains around 4.70% and the 10Y around 4.30% ahead of the Fed. Yesterday, the BoJ's long awaited end to NIRP (negative interest rate policy) came to fruition, along with their end to yield curve control and their end to ETF and REIT buying.  All of this was seemingly already priced into the market, with the Japanese Yen actually weakening to over 150 against the USD. 

I think I'll have a FOMC recap later in the day, so feel free to check back.

XTOD:  NEW: Couple arrested in Florida after passing out drunk on the beach and losing their children.  Some people shouldn't reproduce.  Alyssia Langley and fiancé Timothy Stephens were arrested for child neglect, having alcohol on the beach and trying to escape the police after they were found passed out with no children in sight.  When the couple finally waked up, it became clear that they had no clue where their kids, 5 and 7, were.  After getting handcuffed, Stephens tried running from the police but was quickly stopped.  Luckily, the kids were later found at a hotel pool.

[I mentioned George Selgin's quest to debunk claims that banks create money and need no funding, see here ].  

XTOD: Well, it took a little longer than I had originally planned, but here is my (longish) essay defending the  oh-so passé claim that banks are savings-investment intermediaries against the très chic view that they fund their loans with keystrokes: https://cato.org/sites/cato.org/files/2024-03/working-paper-80.pdf

XTOD: Both MMTs and Rothbardians agree that ordinary banks can and routinely do extend credit without having to acquire and fund their lending with anyone’s real savings.  Now that I’ve given you ample reason to distrust the claim, find out just how wrong it is.

XTOD: This is worth a read for the monetary nerds out there. After the GFC it became popular for some to say banks and governments don't "fund" their spending from income or existing assets. Yes, banks and govts are creators of money, but they also rely on funding their spending.

XTOD: The great conservative insight is that order is really hard to achieve. It's really precious, and it's really easy to lose. — Jonathan Haidt

Daily Economic Update: March 19, 2024

Yields rose and stocks rose yesterday as encouraging data out of China coupled with better than expected home builder sentiment and of course, to make a trifecta you need something "AI" related in the news.  In yesterday's case, the AI related news was that iPhone's may integrate Google's Gemini (yes the same one that everyone was complaining about the other week).  The 2Y and 10Y yield are sitting around YTD highs at 4.74% and 4.33% respectively.

I wrote this before the BoJ, but maybe the day's excitement will be their first hike since 2007.

So while we wait for more exciting things, like the NCAA Tournament, and I guess the FOMC meeting (oh the suspense of the Dots), I thought I'd share some excerpts from recent economic related articles, all of which seem to imply that economist still have no clue about the current state of the economy and whether interest rates are restrictive.

Our first excerpt comes from the BIS and is on the natural rate of interest, r*.  As a reminder "The natural rate refers to the short-term real interest rate that would prevail in the absence of business cycle shocks, with output at potential, saving equating investment and stable inflation. Hence, the natural rate serves as a yardstick for where real policy interest rates are headed. It is also a benchmark for assessing the monetary policy stance “looking through” business cycle fluctuations. It can be conceived of as representing the intercept in a monetary policy rule, as in a “Taylor rule” (Taylor (1993)). Together with the long-run inflation rate, defined by the central bank inflation target, it pins down the long-run level of the nominal policy rate."  Now here's the interesting excerpts which to me ultimately conclude 

• Moreover, and less often appreciated, monetary policy itself could have a non-negligible effect on natural rates and perceptions thereof, through debt accumulation and beliefs about r*. As such, the recent reemergence of upside inflation risks inducing a tighter monetary policy stance going forward may have pushed at least perceptions of r* higher
• The uncertainty around r* estimates at the current juncture is very high
•  Some developments point to r* remaining at low pre-pandemic levels...trend real growth (though AI may boost that), increasing life expectancies.
• However, other developments point to a potential increase in natural rates...dependency ratios are increasing, fiscal deficits ballooned, the adoption of new technology requires increased investment and geopolitical fragmentation could reverse the global savings glut.
• Some recent studies point to the possibility that expansionary monetary policy may raise r*. Long-lasting positive effects on aggregate demand, so-called “hysteresis effects”, could boost innovation and growth
• By contrast, through the interaction with the financial cycle, prolonged expansionary monetary policy could lower r* over long horizons. This is because monetary policy has a major impact on debt and asset price dynamics. Prolonged monetary easing could therefore fuel debt accumulation and financial imbalances. This could push down r* because high debt burdens can weigh heavily on demand
• These findings caution against over-reliance on r* as a guide for monetary policy. The uncertainty surrounding r* suggests that it is a blurry guidepost for assessing the monetary policy stance and hence the tightness of monetary policy, in particular at the current juncture. In this context, it appears advisable to guide policy decisions based more firmly on observed inflation rather than on highly uncertain estimates of the natural rate. 

The second excerpts comes from Brad DeLong's article "The Mystery of US Interest Rates" and also deals with the neutral rate of interest.  Ultimately he concludes that maybe we're wrong about our estimates of the neutral rate.

• Rates today are far higher – around two percentage points – than the level anyone five years ago (before the pandemic) would have estimated the “neutral” rate to be
• An interest rate that everyone considers to be above the neutral level therefore reflects markets’ confidence that a recession – or at least a substantial slowdown – is only a matter of time. When that time comes, all will depend on whether the Fed recognizes the approaching weakness in time to cut rates and achieve a “soft landing.” This interest-rate configuration has now held for seven months.
• I suspect that the Fed is profoundly uncomfortable with interest rates substantially above what it confidently believes the neutral rate to be, especially now that inflation is very close to its 2% target. But it will not dare to shift out of reverse until it sees signs of slower job growth
• Three explanations could clarify the current situation. The conclusion that interest rates are in excess of the neutral rate could be based on an erroneous analysis. Or there could be an error in how we measure the state of the economy. Or, third, the Fed may have committed the Wile E. Coyote error.  Tackling these in reverse order 
• The near-consensus since the start of the pandemic has been that there are powerful fundamental factors keeping the neutral interest rate very low, and that there have been no major changes to those fundamentals. But if there is one lesson that I have learned in more than 40 years of trying to understand the business cycle, it is that there is no empirical regularity in the macroeconomy that can be trusted not to crumble beneath our feet in a remarkably short time.

The third set of excerpts comes courtesy of John Cochrane's post, "Inflation and the Value of Money" dealing with the problems of measuring inflation and the puzzle of explaining the role interest rates have played in slowing inflation.

• If we measured inflation as we did in the 1970s, the recent bout of inflation would have been even higher than the worst of the 1970s! No wonder the deplorables are ungrateful for Bidenomics
• The main difference is that the old measure counts the price and interest rate you have to pay to buy a new house as the cost of the house, while the new measure is based on what it costs to rent a house
• The new way is closer to right, if the question is to measure changes in the cost of living right now for the average person.
• The world isn’t static. The future matters. The right question might be, how much does it cost today to buy my lifetime consumption?...Buying a house locks in the right to live there forever. The cost of a lifetime of housing did go up, though today’s rents did not....If you want to know the cost of providing for a lifetime of consumption, higher asset prices and lower real interest rates mean that cost has risen. The consumer price index asks a different question. The lifetime consumption cost index would be a fun thing to calculate.
• Background:  Inflation came seemingly from nowhere to most analysts. Summers and I think it was perfectly obvious — drop $5 trillion from helicopters and inflation breaks out. For Summers, that’s simple AS/AD: deficit x 1.5 > GDP gap. To me (fiscal theory) it is central that people do not expect surpluses to pay back that debt anytime soon
• The puzzle for standard analysis is that inflation eased just as the Fed started raising rates, long before rates exceeded inflation, and with no recession. Adieu Phillips curve.
• What is the effect of interest rate rises on inflation? Most estimates say inflation goes up gently for a year or two after a rate rise, before falling gently (maybe). In this context, inflation easing one month after the Fed gently started raising rates is nearly miraculous. Talk shifts to “expectations,” somehow this time a few basis points of short rate showed everyone just how tough the Fed would be.
• Conversely, maybe this observation shows a resolution of the “price puzzle” that historic estimates show inflation rising a while after interest rate rises. Maybe that was all spurious, and inflation really does turn around just as interest rates rise. Getting models to generate a delay has been devilishly hard, and to this day most modern (rational expectations, new Keynesian, forward looking) models say that inflation jumps down the minute interest rates rise. Maybe the models are (whew!) right after all.

XTOD:  Being busy is a form of laziness—lazy thinking and indiscriminate action.  Being busy is most often used as a guise for avoiding the few critically important but uncomfortable actions.

XTOD: Calling CRE ‘Manageable’ Is Just Wishful Thinking  @business   Policymakers calling the roughly $1 trillion of commercial real estate debt coming due this year “manageable” may regret it....If today’s CRE situation is anything like the savings-and-loan disaster, we’re in for a lot of trouble. It culminated in the collapse of hundreds of lenders, the insolvency of the Federal Savings and Loan Insurance Corporation — which cost taxpayers many billions of dollars

XTOD: According to the Boston Consulting Group (BCG), data centers currently represent 2.5% of U.S. electricity consumption. [At higher end of estimates], data centers could move to 7.5% of all electricity. >60% of DCs in MISO, CAISO, PJM, & Southeast.

XTOD: This thing that I am unhappy about, is it actually hard to change or is it simply hard to have the courage to change it?

Daily Economic Update: March 18, 2024

FOMC week is upon us; statement, Dots, Powell presser.  With March Madness upon us and the Fed definitely on hold this meeting, I'm not sure anyone actually cares about this meeting.  At least for the week I'll venture that more predictive power will go towards completing NCAA Tournament Brackets than predicting Fed rate cuts.  Perhaps this is a good thing (see my last FOMC recap here).  Much like improbable upsets will bust many people's brackets, inevitably it will be some seemingly unpredictable event (war, pandemic, financial disaster), not the Fed, that will have the most potential to change the future economic path.

The conclusion to a speech by Ben Graham in 1963 may have summed up the challenge

"The investor must recognize that there are uncertain and hence speculative elements in any policy he follows — even an all-Government-bond program. He must deal with these uncertainties by a policy of continuous compromise between bonds and common stocks, and by adequate diversification. (Exception: He may put and keep most of his funds in shares of a promising business with which he is closely connected.) He must make a strong effort to have more money invested in common stocks at lower market levels (at least on the basis of cost) than at what he recognizes to be potentially high levels. Most important, he must maintain a philosophical attitude toward the inescapable variations in his financial position and the inevitable “mistakes” associated with these variations.

According to an old Wall Street story, when a certain broker was asked by a client to recommend issues to buy, he always asked in return, “What is your preference? Do you want to eat well or to sleep well?” I am optimist enough to believe that by following sound policies almost any investor — even in this insecure world — should be able to eat well enough without having to lose any sleep.

Speaking of the Fed, nothing in the inflation data should inspire much confidence for the Fed's battle with inflation.  Since the Fed loves anchored inflation expectations, the NY Fed Survey of Consumer Expectation showing consumers raising their expectations for future inflation at the three and five year horizons is probably concerning.  Away from the hard data, out in the real world (the one where you pay for gas, airfare, lodging, food, insurance, etc.) there still seem to be some rising prices - at least it seems that way to me anecdotally.  

Away from the Fed there will be plenty of other Central Bank activity with the BoJ, RBA, and BoE.  The most exciting of which is likely the Bank of Japan where there is a decently high probability that they end their negative interest rate policy.

On the week ahead:

Monday: nothing major, work on your brackets,  BoJ 11pm

Tuesday:  Housing Starts & Building Permits

Wednesday:  FOMC 2pm

Thursday:, BOE, March Madness begins (noon), Philly Fed, S&P PMI's

Friday:  Powell speaks at a Fed Listens event, but everyone will be watching basketball

XTOD: When James Madison was penning the First Amendment, I wonder if he thought:  "What we really need is a Constitution that protects the right of the Chinese government to spy on millions of Americans and control how they get information"

XTOD: The Atlanta Fed's gauge of sticky inflation has risen to about 5% on a 3-month annualized basis. Inflation is moving in the wrong direction for the Fed, so it's interesting that the market's base case is still that the Fed is going to cut rates by about 100bp by January 2025.

XTOD: My highest-conviction short is BX.  I have a position.

XTOD: Day 3 of 20 on the road talking to financial advisors and family offices about bitcoin.  Some initial take-aways:.....(skipping to #4) 4) One common theme in conversations (which is new compared to past trips) is a visceral concern about rising US debt levels.  Many advisors have clients who are worried about the US fiscal situation, and are using bitcoin as a release valve for that concern. I think the elections may be a catalyst to bring this concern to the forefront of people's minds.

XTOD:  Let me be blunt ...  Why do people use wealth managers?  Because they are rich! What is the wealth manager's main objective?  NOT TO MAKE THEM POOR.   Wealth managers and their customers do not stay awake at night thinking about how to make a killing. They already have. They stay awake at night, worried about losing it.  Understand this mindset before you make up more takes about rich people via their wealth managers FOMO-ing into crypto.  Yes, they will EVANTUALLY put 1% in crypto. But it will take many years and many cycles for this to become a reality.  Right now, I believe we are seeing " weak hands" piling in, such as asset managers trading accounts, small retail wanting to get rich (so they can give it to a wealth manager!), algos, and high-frequency hedge funds.\

XTOD (condensing a long post): We need to talk about Upper Middle Class Families in America  Or, what used to be Upper Middle Class....In most metros, a combined 100+ hours of work/week between the two of them affords them an even better *material* lifestyle than their parents had: nicer cars, bigger home, takeout meals, and better vacations (during which they check email constantly)  

Essentially, this cohort is now *Upper Class* in material goods lifestyle but not in leisure time....  It requires over DOUBLE the amount of working hours per household to get to this materially better but quality-of-life worse place.....We either:  1.  Work all the time, with a spouse who works all the time, to try and capture that elusive slight upward mobility  OR  2.  We pursue balance but fall behind into downward mobility   The end result?    We are collectively exhausted and feel a sense of aching nostalgia for the way things used to be   And our communities and mental and physical health are worse off for it

XTOD: Overcommitment is the enemy of happiness. Embrace the art of doing less. 

XTOD: 10/10 podcast episode with @ShaneAParrish  and Tom Gayner of  Markel.  https://t.co/vKv9vO0d7b

Daily Economic Update: March 15, 2024

 "Every choice has an impact on the Compound Effect of your life."

"Your biggest challenge is that you've been sleepwalking through your choices.  Half the time, you're not even aware you're making them!"

"It's the little things that inevitably and predictably derail your success. Whether they're bone-headed maneuvers, no-biggie behaviors, or are disguised as positive choices (those are especially insidious), these seemingly insignificant decisions can completely throw you off course because you're not mindful of them."

"..our need for immediate gratification can turn us into the most reactive, nonthinking animals around."

"Indulging in our bad habits doesn't seem to have any negative effects at all in the moment....But that doesn't mean you haven't activated the Compound Effect".

-Darren Hardy, various excepts from The Compound Effect originally published in 2010. 

Daily Economic Update: March 14, 2024

 

Experience, in the peculiar sense we teach them to give it, is, by the bye, a most useful word. A great human philosopher nearly let our secret out when he said that where Virtue is concerned “Experience is the mother of illusion”

              

   -C.S. Lewis, The Screwtape Letters (#28) - "Experience is the mother of illusion" is a paraphrase of a quote from Immanuel Kant: "For as regards nature, experience presents us with rules and is the source of truth, but in relation to ethical laws experience is the parent of illusion, and it is in the highest degree reprehensible to limit or to deduce the laws which dictate what I ought to do, from what is done"

Daily Economic Update: March 13, 2024

There's something wrong with the world today
I don't know what it is
Something's wrong with our eyes
We're seeing things in a different way
And God knows it ain't His
It sure ain't no surprise, yeah

We're livin' on the edge
Livin' on the edge

-Aerosmith 1993 Livin on the Edge  (current societal mood is nothing new)

Daily Economic Update: March 12, 2024

 "Well, ladies and gentlemen, we're not here to indulge in fantasy but in political and economic reality.  America, America has become a second-rate power. Its trade deficit and its fiscal deficit are at nightmare proportions.  Now, in the days of the free market when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because their money was at stake.  Today, management has no stake in the company! All together, these men sitting up here own less than three percent of the company...You own the company.  That's right, you, the stockholder.  And you are all being royally screwed over by these, these bureaucrats, with their luncheons, their hunting and fishing trips, their corporate jets, and golden parachutes."

        

-Gordon Gekko, Wall Street (the movie) 1987 (complaining about deficits and management is a timeless American tradition) 

Daily Economic Update: March 11, 2024

The Federal Reserve is in it's blackout period leading up to their March 20th rate decision.  The week ahead features an important (aren't they all important?) CPI data print on Tuesday,  followed by PPI and Retail Sales on Thursday and UofM consumer sentiment on Friday.

Like the Fed, every so often it's good to cut the noise out of your day, especially in financial markets news.  As Warren Buffet said in the latest Berkshire annual letter [referring to his sister): "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."

So like I did back in December 2023  for the remainder of the week, you'll get one quote/excerpt a day from whatever books, article, transcript, etc. I have laying around.

Speaking of NOISE, here are two quotes to consider to start your week:

"Noise, the grand dynamism, the audible expression of all that is exultant, ruthless and virile.... We will make the whole universe a noise in the end. We have already made great strides in this direction as regards the Earth.  The melodies and silences of Heaven will be shouted down in the end."

                            -C.S. Lewis, Screwtape Letter #22

"that’s the problem is our modern world, with all of its noise, produces a state of constant alert, and that is not optimal. And this would all matter less, but that amid that noise, there is also signal. In the realm of information theory, the term signal refers to the desired meaningful information. While noise is the unwanted interference, transposing this concept into our daily lives, the signal is the crucial work. It’s a heartfelt conversation. It’s the key insight. The noise is everything that distracts or detracts from that, and this constant exposure to noise makes it hard for our brains to filter out the essential from the non-essential. When bombarded by too many stimuli, too much noise, the brain struggles to identify and process the signal. You know the feeling. You’re trying to write a report, and your email notifications keep pinging, annoying emails interfere with the signal writing the report, affecting the quality of your decision-making and clarity, and all of this leads to mental fatigue or cognitive fatigue when the brain is overused. Similar to how our muscles tire after prolonged exertion, constant noise, and distractions demand the brain to switch tasks frequently.

You know what it’s called – context switching. Each switch uses up cognitive resources leading to rapid depletion of our mental energy. So this is why after not even a day but a few hours with constant interruptions, even if they’re minor, you can feel as exhausted as if you’ve done intense physical labor. The fatigue isn’t just about the mental effort of the main task but about the additional energy expended in managing and shifting between distractions, and the fatigue has a compounding effect. As you become more tired, your capacity to differentiate between noise and signal diminishes further, making you even more susceptible to distractions, which in turn increases fatigue. So there’s a vicious cycle that can severely impact mental wellbeing. "

 -Gregg Mckeown, podcast ep. 233 

Daily Economic Update: March 8, 2024

It's another JOBS Day in 'merica.   We'll start with new record highs for S&P and Nasdaq as investors cheer central bankers who sound determined to cut rates this year.  The 2Y is ~4.50% and the 10Y is ~4.09%  ahead of jobs.

As for the jobs report, the consensus is for a headline number of ~200K with the unemployment rate remaining at 3.7%.  The Average Hourly Earnings number might get additional scrutiny after yesterday's BLS data on productivity and unit labor cost data showed YoY compensation per hour at 5.1% (see page 6).   Whatever happens, blame the weather as GS research reports that nationwide snowfall declined substantially in February which might have caused an uptick in construction and leisure jobs.

Yesterday, as expected the ECB kept their key interest rates unchanged at 4.5, 4.75 and 4% for the main refinancing, marginal lending facility, deposit facilities respectively.  The ECB did revise down their inflation projections and expect to get to target inflation in 2025 (on a headline basis) while characterizing the growth in wages as 'strong'.  I guess we'll see if inflation falls as quickly as now forecast by the ECB, if it does it sounds like they'll be cutting by June.

In Fed land, probably the most memorable thing about Powell's testimony will be the questioning from John Kennedy of Louisiana around the allegations of sexual misconduct by bank examiners (see around 4:30 mark).  I get that the ultimate line of questioning had to do with the Basel III endgame in some way, but I'm just not sure what the FDIC has to do with Powell. Unfortunately or fortunately, social media has had their fun with this exchange and it will now be the only thing most people remember from this testimony.

The SOTU was about as expected based on pre speech media reports, with Biden taking an opportunity early in the speech to paint Trump as a threat to democracy at home and abroad. Record job growth featured prominently and there was a soft landing reference in the speech.

XTOD: Did u guys see that bro's expression in the back?  https://pbs.twimg.com/media/GIFPvMtbsAUHMoS?format=jpg&name=medium

XTOD: Powell: "Interest rates right now are well into restrictive territory. They’re well above neutral."

"We're far from neutral now."

XTOD: Oaktree’s Howard Marks says many companies are still "swimming naked" with debt maturities yet to hit. “The tide hasn’t gone out.”

XTOD: Goldman Trader: Back In 2000 Everyone Thought The Internet Would Run On Cisco Routers At 50% Margins... Until They Didn't

Daily Economic Update: March 7, 2024

Powell stayed on his talking point that the Fed needs to see more evidence that inflation will get to and stay at 2% target before cutting rates.  The market seemed to cheer on the fact that Powell at least doesn’t think the Fed will need to hike again. Even NYCB couldn’t derail a bit of a relief rally (looks like maybe some crony capitalism with the Mnuchin deal, who knows). The 10Y yield fell to 4.10% while the 2Y fell to 4.56%.

ADP comes in less than expected at 140K vs. 150K est.  As an observer the correlation between ADP and the Non-farm payrolls is weak at best, so I'm not sure how much stock markets place in the ADP number as a predictor.

The JOLTS data showed job openings falling slightly but beating consensus forecast.  Quits and hiring both fell slightly but remain robust.  Speaking of job openings there are plenty of post on LinkedIn where people are complaining that job post on LinkedIn are not really for jobs that exist, theorizing that many posting are made by companies simply to create the impression that the company posting is growing rapidly. This has lead some LinkedIn candidates to ponder whether anyone has actually been hired from a job posting on LinkedIn.

There have been a few interesting Fed related post on inflation and the level of interest rate policy.  One of the post was by the St. Louis Fed and seeks to analyze the output gap, how closely the economy is functioning to it's long-run production capability, and concludes that a a Taylor Rule would imply that interest rates should be at around 5% to react to the current output gap.   A second post was from the NY Fed discussing inflation expectations and completing the 'last mile' of returning inflation to target.  That post looks at New Keynesian models and concludes that bringing inflation down is dependent upon expectations for labor market conditions driven by macroeconomic policy.  What I find interesting in this post is the author's conclusions, which show scenarios where inflation doesn't return to the 2% target until 2025 at the earliest:

"The model predicts that further disinflation—the final mile—is likely to be gradual. It bears emphasizing that these are our model-based forecasts and not official projections.

What affects the speed of disinflation? In the chart below, the left panel presents three forecast scenarios for inflation based on possible future paths of the unemployment rate, shown in the right panel. When the unemployment rate rises faster than the baseline forecast, then underlying inflation reaches its long-run trend (red line) by the end of 2025 (gold line). However, when the unemployment rate moves sideways, then the pace of disinflation is slower (blue line)."

On the day ahead it's jobless claims and moar Powell. 

 XTOD: This guy put $260 into a meme coin named “Jeo Boden” 3 days ago…It’s now worth $433,000. I love this country.

XTOD: This. Emphasis on the years of upcoming capital spend needed to make up for 4 decades of outsourcing/asset light businesses/ "financialization" of returns. The US corporate pendulum will swing back from extreme Wall Steet efficiency closer to Main Street efficacy.

XTOD: The yen extended gains against the dollar to as much as 0.5% on news that the Bank of Japan has tacit approval from some government officials to end its negative interest rate policy in the near term: BBG

XTOD: Can’t get this chart out of my head. It points to a culture that is not just stuck but dead. 

If you abdicate your attention to addiction, you cease being 'you.' You’ve stepped into the pod, made yourself comfortable, said thank you.  https://pbs.twimg.com/media/GH_zVKeXoAERIrz?format=png&name=medium

XTOD: The modern HF industry went vertical on AUM when $SPY did nothing from the tech bubble top in 2000 until post the GFC in 2010.  The modern HF industry was destroyed when the $SPY went vertical from the GFC lows of 666 to 5000+ as it wasn’t needed anymore.    It was never about limiting vol and always about total return.

XTOD (John Cochrane gets into with MMTers): Easy. 27% rise in nominal GDP (Q1 2021-now) = 27% rise in real GDP, not 9% rise in real GDP and 18% rise in prices. MMT said "there is always slack," so printing money won't cause inflation. The experiment was just run.

XTOD: “How inexplicable it seems.   "If one sets aside time for a business appointment, a trip to the hairdresser, a social engagement or a shopping expedition, that time is accepted as inviolable.  

"But if one says: I cannot come because that is my hour to be alone, one is considered rude, egotistical or strange.”  ― Anne Morrow Lindbergh, Gift from the Sea

Daily Economic Update: March 6, 2024

A tough day for equities as major indexes fell more than 1%. Yields also fell 5-8 bps as investors reassessed their risk appetites, or at least that sounds plausible.  

Yesterday's ISM showed the service sector expanded for the 14th straight month with strength in activity and new orders and some softening in employment and prices.  The softening seemed to dominate the market’s sentiment, despite the fact that comments that ISM highlighted from respondents read fairly optimistic. 

Also weighing on risk appetite, apparently Apple and Tesla have sales problems in China.  How much of that is economic weakness in China vs. consumer preferences being influenced by nationalism vs. increased domestic Chinese competition (I saw that 60 minutes on China's EV industry and their robotics a few weeks ago).  

Crypto doesn't care about China (or maybe it does as it generally doesn't like authoritarian regimes and Chinese can use crypto to get wealth out of China).  I've written about crypto lately, but a bit more quietly Gold has hit new record highs.  Perhaps Bitcoin and Gold are driven by similar factors, both of which are driven by political economy questions.  True Bitcoiners are libertarian and techy who want a way to make uncensored payments with some assurance that no one will hyperinflate away the digital coin (though while Bitcoin is fixed quantity, nothing stops the proliferation of a thousand other cryptocoins).  Gold bugs generally believe that fiat currencies should be redeemable into a physical commodity, gold, which serves as a "medium of account" under a general premise that gold monetary units provide a more stable currency than fiat and are less prone to the political will to inflate (though a gold standard still requires political cooperation, especially if governments control the mints).

Speaking of gold and Bitcoin, Larry White of George Mason, was speaking about his book Better Money: Gold, Fiat, or Bitcoin? on MacroMusings back in August 2023 in his talk he mentioned the following as to why he believes Gold has characteristics that make it a better money than Bitcoin, specifically how gold supply expands as money demand grows, while Bitcoin supply does not:

That's the biggest point the book makes that in the long run, under a gold standard, the quantity of money grows as demand grows. And so you get this mean reverting characteristic that we talked about earlier where the purchasing power is pretty stable and predictable, not perfectly, but pretty stable and predictable, more stable and predictable than Bitcoin would be, more stable and predictable than fiat monies have turned out to be in practice.

...... But because the quantity of Bitcoin at any point in time is a vertical supply curve, over time, the supply curve shifts to the right slowly with the programmed increase in the supply, but the quantity doesn't respond at all to increases in the demand. All of the increase in demand goes into the price and none into the quantity. And so that makes it more volatile than a gold standard, both in the immediate run where the gold standard supply curve is not perfectly vertical, because you can convert non-monetary gold into monetary gold, but it's especially dramatically different in the long run where the supply curve for monetary gold is basically flat and the supply curve for Bitcoin is basically vertical, meaning you get a lot of volatility in the price and no volatility in the quantity. Whereas with a gold standard, it's the reverse. You get response in the quantity and stability in the purchasing power.

....So if fiat monies break down and people are looking for a better money, and to go back to the beginning of the book, as they had to do in Venezuela during the hyperinflation, it seems to me that gold is a better candidate. People would find it a better candidate.

On the day ahead it's ADP Employment, JOLTS, Beige Book and Day 1 of Powell.

XTOD: New Commentary The most important topic for Professional Investors is "The Cost of Carry" - what it costs to hold a position over time.  Today I detail this concept in layman's terms for civilians. 

https://convexitymaven.com/wp-content/uploads/2024/03/Convexity-Maven-The-Cost-of-Carry.pdf

XTOD: Is private equity actually worth it? https://t.co/kdAR1K89A8

XTOD: Berkshire Hathaway director Chris Davis on The Knowledge Project podcast:             

"Berkshire is run with the idea, from the very beginning, that the people that were invested in Berkshire had 100% of their net worth in Berkshire. 

That really does shape the culture there.  

It's not that [Berkshire] is afraid of risk, but the sort of risks it takes are risks that are manageable on the income statement. 

The idea of Berkshire really, really being built to last — that is profoundly true."

XTOD: When gold rises in your currency DESPITE positive real rates, the gold market is saying “Your government will have a debt spiral if real rates remain positive.” 

Gold began warning of this in late 2022; numerous other markets have since begun playing by this "new set of rules."

XTOD: Janet Yellen gives an important update regarding crypto  https://twitter.com/i/status/1764830154780717335

XTOD: Worth the read  The Loser’s Game   By Charles D Ellis  https://twitter.com/F_Compounders/status/1765091631370248200/photo/3

Daily Economic Update: March 5, 2024

Yields rose and stocks fell hit then fell from record highs to start the U.S. trading week.  Like most weeks, the narrative is that investors are awaiting word from Powell and economic data, this week being the Jobs report on Friday.  There are some other narratives about Chinese stimulus and how draining the RRP is de facto QE, etc. but for now the focus remains on U.S. growth and inflation expectations with many pundits continuing to push their equity calls higher and some moving to the no rate cuts for 24 camp.

Crypto and shitcoins don't need any excuses to rally, I mean we're buying a coins called "Dog Wif Hat and Frog Wif Hat", a coin called "Retardio" is up like 50%....sure, the technology, the spot etfs, the halving, the correlation of all-time highs with the release of Dune movies, etc....looks up definition of money...looks up definition of asset, closes books, burns CFA Charter. 

Maybe the definition of money that is in play for crypto comes from Aesop's Fables story of the miser [substitute 'crypto' for 'gold' in the story] which concludes that "The worth of money is not in its possession but in its use."   I still haven't seen any cryptocurrency that has a legitimate use case.  And don't say, 'but I can sell my alt-coin and use the money', that seems to imply what you sold wasn't money.  

Speaking of money, every couple of months a debate pops up on X/Twitter where someone claims that banks are not intermediaries as they create their own money.  The modern view is that banks don't need deposits to make loans, in fact it is making a loan that creates their own deposits.  I don't dispute that view, but where the debate seems to really heat up is essentially around the topic of how those loans are funded, which is the key to whether or not there is any intermediation going on when banks lend.  One person who gets really fired up on this topic is economist/professor George Selgin.   "A bank that is constrained by the “cost of funds” is an intermediary _ipso facto_. Banks that dob’t need to borrow from others to finance their own lending face no such cost. In this respect the 2014 BofE article is self-contradictory."...."Claiming that a bank "funds" its lending by taking advantage of its ability to create exchange media, is not much better than claiming that anyone with a blank check can fund her shopping by taking advantage of her ability to fill out the check for some positive amount. In the second case, the blank check isn't enough: the real "funds" available consist of the shoppers deposit balance. In the first, they consist of the resources the bank has to make good on the loan when the fact that it is drawn upon results in claims against it."  Feel free to follow @GeorgeSelgin on X as he'll probably be pissed off about this topic for at least another few days.

I've already spent too much time on Money today, guess we'll have to save the distinction between "inside" and "outside" money until another date.

Look on the bright side, I could have written about R-Star again, but fortunately the BIS did it for me https://www.bis.org/publ/qtrpdf/r_qt2403b.htm   They even threwin a Knut Wicksell reference.

XTOD: me explaining to my parents that I make a living by rearranging logos on powerpoint and doing basic math on excel  https://pbs.twimg.com/media/GHyjjq-WMAA9tg5?format=jpg&name=medium

XTOD [Andy Constan replies to some dude who lost money following his trades]: Lots of lessons here for everyone including me 

1) Most importantly.  Hold assets for long term passively with low fees

2) market timing is hard and most people can't do it.

3) Following others trades particularly when you cherry pick is silly

4) follow people you can learn from. 

5) big concern for 

@kevin_jawn that after all those lessons he has decided to follow only bullish accounts. If that's for market timing reasons review 1-3 and the remind your self about 4.  For me I am here to learn and teach and hold myself accountable by detailing my trades and performance.  The last 3 months have been bad. The career good.  I want follows from people on the same journey.  Don't be stupid.  I give my opinion on stuff. In the end it's not investment advice and you need to decide for yourself and do your own research.  Again review 1-5   Thanks for your tweet Kevin and the comments within.   I see flaws in your logic and worry about your ongoing process but proud of you that you are reflecting and thinking deeply about what works for you

XTOD: We have that policy now. The American Opportunity Tax Credit (AOTC) is usually described as a $2,500 tax credit per child in college. But it is mathematically identical to giving every household $5,000 but then assessing a penalty on non-college ones. The thought experiment does not answer the question of whether the AOTC is a good policy. But it is a useful way to reframe the question to ask yourself because every benefit sounds good but all of them are effectively a penalty on others. (This was inspired by the Wendy's "debate" where you had people saying that it is fine to give discounts in slow periods but unfair to have surcharges in busy periods--when those two are identical pricing policies just framed differently.)

XTOD: I grabbed coffee with a former colleague over the weekend. He works for a multifamily GP. They have (had?) a $100M fund with a family office. However, the fund can veto any deal. If they do, the GP can syndicate the deal. The fund was smart and declined to participate in most of the 2022 deals. So, what did the GP do? Everything you’ve been reading about in TRD, Bisnow, etc. Purchased properties in the Sun Belt with max leverage and floating rate debt. They raised the remaining capital from retail LPs. 

The acquisitions team was having a hard time getting deals to pencil. Luckily, the CIO was able to solve the problem! He increased the rent growth assumption and lowered the exit cap. Magically, they had a bunch of home runs on their hands. They bought 10 properties in 2022. Fast forward to today- most of the properties are bleeding cash. Even worse, their interest rate caps begin to expire in a few months. The situation is clearly spiraling out of control. I asked my former colleague, “Why haven’t you approached the lender yet to start discussions?” His response was that the CEO and CIO are afraid they’ll have to pay a “wider spread” in the future if they have a loan modification on their records.

These guys are living in an alternative reality.

XTOD: Worth reading, but I think this emphasizes “clock speed” a bit too much. The more fundamental issue for Google, as @bgurley  and  @altcap  pointed out in their excellent new pod, is that LLM-generated answers cost a LOT more to serve than a handful of blue links. And it’s not clear at all that the revenue will sufficiently offset those costs. The days of the search cash cow might be over.

XTOD [full Tweet from Marc Andreessen is very long]: The conclusion is obvious: OpenAI must be immediately nationalized.

XTOD: Check out this *beautiful* chart of consensus US growth forecasts for 2024. Not even a soft landing, just a brief refuelling.  https://ft.com/content/0d58cb77-c771-4b05-8e7b-fca2a53e4912

Daily Economic Update: March 4, 2024

We start the week with the Nasdaq at fresh all-time highs over 5,100.  Along with the Nasdaq strength, Bitcoin and altcoins have rallied solidly.  Weaker than expected manufacturing PMI and construction spending data, coupled with more concerns over CRE portfolios at regional and community banks helped pull down Treasury yields to end the week.  The 2Y starts the week at 4.53% and the 10Y at 4.18%.  

The latest NY Fed r-star estimates continue to show a declining estimate for r-star.  Arguably if the neutral rate of interest continues to fall and the nominal fed funds policy rate doesn't fall than Fed policy would become increasingly restrictive.   Interestingly the Fed estimates of trend growth show growth rising.  Back on August 23, 2023, I mentioned Knut Wicksell's theory that while you could not see the natural rate, you could see the impact of policies that kept rates above or below this rate by looking at trend growth rates.  So it's interesting to see a directional divergence between the Fed's trend growth estimates and neutral rate estimates at the same time that monetary policy is unchanged.  Admittedly I haven't dug into the data or the estimates, perhaps its a short-run vs. long-run difference, or perhaps r-star will follow trend growth higher.  Both Atlanta Fed and NY Fed 1Q2024 GDP forecast continue to show a 2-handle.  As readers of Scott Sumner might already know his opinion on the restrictiveness of Fed policy, which he stated again recently:  

"At no time in the past few years has monetary policy been “tight”. Indeed it’s been generally expansionary, which is why NGDP growth remains excessive."

On the week ahead we get the man in the orange hat from the Grateful Dead concert, AKA Jerome Powell testifying to Congress in his semi-annual Humphrey Hawkins address.  Powell's testimony will be to the House on Wednesday and Senate on Thursday.  Ahead of the testimony, the Fed already released their report which provides no new information.   We also get a JOBS Day Friday.

Today: No major data and only Harker on the Fed slate

Tue: Factory Orders, ISM Services

Wed: ADP, JOLTS, Fed Beige Book, Powell

Thur: Jobless Claims, moar Powell

Fri: JOBS Day in 'merica

XTOD: Cutting interest rates will not help $NYCB.  Fade STIR!  These guys paid the wrong price for Signature and then botched the booking of the loans either hiding their bad acquisition price or just being bad at booking/pricng stuff.  The 10K delay stinks of an accounting firm unwilling to provide their audit letter to the 10K. This sort of thing doesn't get resolved in 15 days despite the extension announcement.

XTOD (talking about Liz Warren): Just when you think her economics can’t get worse.  What percent was it last Thursday? Is 100% too much but 41% just right, or still too much? Maybe you should just set all prices? Please note that isn’t serious (though you’d like to I know).  When do corporations, or in fact mom and pop businesses, not charge what the market will bear? Is that gouging? What is gouging btw except progressive babbling? You want a new iPhone you pay apple the price it asks or you don’t. I know this is complicated.  Btw, you guys like to make fun of Trump’s populism, and I often share that opinion, but what you do all the time is utter populist nonsense. Just with a slightly more left wing spin (not that different actually as you both embody ends of the horseshoe).

XTOD:  “You’re born…you take sht…”   The best description about the difference between working and school I have ever heard…VP in my banking group:  “99% is Dean’s list at your overpriced college…it might even be an academic scholarship…welcome to the real world where 99% is simply 1% wrong…”  You want to complain about the hamster wheel…live in finance circles long enough and you meet people who make $2+ a year, have 1-2 kids and negative cash flow with a “middle class manhattan” lifestyle.  How many people commute 3 hours a day and miss all their kid’s stuff?    The socials have convinced everyone that it’s easy.  One of the hedge fund founders I worked for took just 10 vacation days in the first 10+ years of the fund.  The legend is that he was airborne when a major bankruptcy finally happened, landed and said to his spouse “this is why I can’t go on vacation…”  

…the point being…not only is the world so competitive that “lesser people” than you can beat you by outworking you…the truly scary thing is when people “greater than you” are willing to pay a price you are not.    Bill Gates’s dad ask him and Buffett to write down on a piece of paper what explained their success:  “focus” they both responded.  This life isn’t for everyone, and nor should it be… but the lie people tell themselves is that they can live in the “best” places and not pay the price…someone always has to pay…be if you, or the person you inherited your trust fund from.   The “facts of life…” from Layer Cake

XTOD: There are a few things I re-read every year. One is “Self Reliance” by Emerson. Here’s what stood out to me this time:   

There is a time in every man's education when he arrives at the conviction that envy is ignorance; that imitation is suicide; that he must take himself for better for worse as his portion; that though the wide universe is full of good, no kernel of nourishing corn can come to him but through his toil bestowed on that plot of ground which is given to him to till.  

A man should learn to detect and watch that gleam of light which flashes across his mind from within, more than the lustre of the firmament of bards and sages. Yet he dismisses without notice his thought, because it is his. In every work of genius we recognize our own rejected thoughts; they come back to us with a certain alienated majesty.  We lie in the lap of immense intelligence, which makes us receivers of its truth and organs of its activity. When we discern justice, when we discern truth, we do nothing of ourselves, but allow a passage to its beams. 

I must be myself. I cannot break myself any longer for you, or you. If you can love me for what I am, we shall be the happier. If you cannot, I will still seek to deserve that you should. 

Insist on yourself; never imitate. Your own gift you can present every moment with the cumulative force of a whole life's cultivation; but of the adopted talent of another you have only an extemporaneous half possession. 

The force of character is cumulative.

XTOD: To attain knowledge, add things every day.  To attain wisdom, subtract things every day.  - Lao-tzu 

Daily Economic Update: March 1, 2024

The much awaited Leap Year PCE data came in slightly above consensus estimates on the core MoM and YoY numbers at 0.42% and 2.85% respectively, the headline numbers were largely in-line. The data shows core services inflation continuing to outpace goods, as that trend/shift continues.  Perhaps the outlier was Personal Income at 1.0% for January vs. consensus of just 0.3%.  Seems hard to believe inflation will slow if incomes are hanging in there.  After all inflation is so under control we're worried about Wendy's "surge-pricing".

Stocks ended the month of February higher while bond yields rose on the month, as the market decreased the timing and amount of 2024 rate cuts.  The 2Y is around 4.60% and the 10Y around 4.25%. Remember 10Y under 4% and the 2Y around 4.20% to start the month???, me either.... It doesn't matter just buy Bitcoin.  

"..the failure to investigate, after all, everyone was happy.  The factories here and there in various cities that turned out the pieces [shitcoins], they made their profits. The wholesalers passed them on, and the dealers displayed and advertised them [all the new ETF players].  The collectors shelled out their money and carried their purchases [virtual wallets] happily home to impress their associates, friends, and mistresses [ex. Crypto Bros and Have Fun Staying Poor]."

"...it was fine until questioned. Nobody was hurt--until the day of reckoning. And then everyone, equally, would be ruined [especially Michael Saylor].  But meanwhile no one talked about it [about how they still can't explain a legitimate use for the coins]...they shut their mind to what they made, kept their attention on mere technical problems [the halving and whatnot]."

    - Frank Frink in Philip K. Dick's, The Man in the High Castle on Bitcoin (or on forgeries of pre-war artifacts and Gresham's Law - bad driving out the good and how normative/accepted fraudulent items became)

Speaking of bubbles, a little over a month ago I wrote about "Bubbles" here. As with all of my esteemed content, it tends to go mainstream in due time.  Like yesterday when Ray Dalio posted an article titled "Are We in a Stock Market Bubble?"  So let's see what Mr. Metrics had to say on the topic, he's never been accused of rigging those metrics anyway, right?

• Dalio defines a bubble as having: (a) high prices relative to fundamentals, (b) unsustainable business conditions, (c) hot money - people buying just because something went up (d) broad bullishness, (e) leveraged purchasers (f) speculative betting on the future by businesses via large forward expenditures.
• He decides that Mag-7 is frothy but not bubbly - and states the obvious that if AI doesn't live up to the hype those valuations could face significant correction.
• Of his aforementioned metrics he mentions that he doesn't believe we are in a bubble because current conditions lack: a broad bullish sentiment, purchases financed with high leverage and  buyers/businesses with extended forward purchases.

So there you have it, no bubble. We'll check in with Jim Cramer in a few weeks just to double check.

One stock that definitely wasn't in a bubble yesterday was Chemours, the chemical giant placed their CEO and CFO on leave over accounting concerns and associated concerns about 'tone at the top', that never sounds good.

On the day ahead it's ISM Mfg and Construction Spending.

XTOD {the essence of the compounding equation appears in all aspects of life}: Can you evaluate my workout program?  Question 1: "Can you do it consistently & not miss more than 2 workouts a month?"  This matters more than frequency, exercises, etc. as it helps determine these and other key variables.  This applies even more when evaluating meal plans.

XTOD: In some beautiful version of this universe, @RobinWigg  and  @CliffordAsness  co-wrote this masterpiece of condescension and disgust  Crypto factor investing. Really https://t.co/SX4spIWqSq

XTOD: This 1986 CIA analysis on the Japanese government's unwillingness to consider a fiscal expansion that might, among other things, boost Japanese wages while reducing the trade surplus, is absolutely fascinating:  https://cia.gov/readingroom/docs/CIA-RDP86T01017R000605930001-7.pdf

XTOD: We also now have four years of data on the elevated share of goods spending and the corresponding decline in the services share. Many economists expected these shares to normalize, but thus far, the goods share remains elevated relative to both pre-pandemic levels and trend. We cannot yet determine whether this is bona fide structural change, or whether the shares will eventually return to their pre-pandemic levels, but either way, it’s been an important and impactful development regarding shifting consumer preferences.

XTOD: Super core PCE inflation EXPLODED higher on a MoM basis to +0.596%, or basically the HIGHEST EVER (showing the @federalreserve  is NO WHERE NEAR restrictive, & NO WHERE near its goal of +2%). Yet, the Fed is talking rate cuts, and the market is cheering today's inflation data?

XTOD:  What happened to team transitory?