Daily Economic Update: April 30, 2024

 Yields fell 3-5bps as investors await the FOMC and other action this week.  Stocks started off the week strong with Tesla gaining approval for self driving/driving assistance in China. Oil fell on cease fire hopes and the Yen stabilized around 156 v. USD after a wild weekend where it had touched 160.

The Treasury Quarterly Refunding Announcement showed their estimates for the April - June borrowings at $41billion more than forecast back in January, while also projecting $847 billion in new borrowings in July to September quarter.  We'll get more details on the mix of Treasury issuance this Wednesday ahead of the FOMC.

On the day ahead it's Employment Cost Index data, S&P housing prices and Amazon earnings.

XTOD: Stagflation, you say? NY Fed's estimate of underlying inflation is basically flat at 2.6 percent 

XTOD: "Every person who is angry about inflation should go to their local planning board and demand more high-density housing in their neighborhood. That’s what we must have to be a vibrant economy. Housing is crucial."  -  @Claudia_Sahm

XTOD: "Apollo Accused in Lawsuit of Illegal Human Life Wagering Scheme"   Creditors to APO portcos have been subject to this for decades

XTOD: 🚨Holy Moly🚨 We're on course to spend $𝟎.𝟗 𝐭𝐨 $𝟏.𝟒 𝐭𝐫𝐢𝐥𝐥𝐢𝐨𝐧 on debt cancellation. That's more than we spent ALL higher education spending before 2020, and as much as we are on course to appropriate for TOTAL education over the next decade.  https://crfb.org/blogs/total-cost-student-debt-cancellation

XTOD: Look at each item on your to-do list and ask, "Is this truly necessary?”

Daily Economic Update: April 29, 2024

FOMC Wednesday with Jobs Day in ‘merica Friday will make for another busy week.  Last week was rocky for equities, but ended up being a strong week as tech came to the rescue.  Friday's PCE data showed sticky inflation with slowing savings and continued strong spending and income.  I should probably include an obligatory mention of the weak Yen and something about speculation of Chinese Yuan devaluation, so there, this sentence counts.

Trump apparently wants to reduce the Fed’s independence per a WSJ report (link to Reuters report on the WSJ report...more accessible).  Irrespective of the underlying rationale for this apparent proposal, at the end of the day I categorize this apparent news item as part of the larger meta issue which is broadly the giant experiment titled ‘Do deficits matter?’ One way to lower deficits might be to pay less interest, which is definitely an MMT view. 

I could be wrong, but I think the "deficit" issue is probably the biggest macro issue at present and the one from which narratives about other macro variables, especially inflation likely stem.  As an aside, author, Mark Higgins provided his thoughts on what he sees as "Three Financial Challenges for the United States in 2024"  which he subtitled: Inflation, War, and Unsustainable Spending, so I must not be too wrong.

Recent chatter about deficits reminded me of Ole Miss economist Josh Hendrickson's recent appearance on the Macro Musings podcast, in which Hendrickson discussed his work on the Treasury Standard and Global Dollar Dominance.  Some excerpts I found worthwhile to consider are as follows:

Hendrickson: So, if we think about seigniorage, in order to try to generate seigniorage— essentially, to do this effectively, to use this as a tool for emergency finance, you're not going to be just maximizing the seigniorage every single period. What you actually want to do is you want to create the biggest tax base possible. And so, when it comes to seigniorage, that means having the highest level of money demand possible. The way that you can do that is by committing to price stability during normal times. But then, when you go to war, or you have some national emergency or something like that, you need to spend a lot of money really quickly, then you can exploit that monopoly.

Hendrickson: And you exploit that monopoly while you have a large tax base. But, again, you've got to go back to that commitment to price stability afterwards, because otherwise, if people know that every time there's an emergency you're going to do this, then anytime that people anticipate there's an emergency, they're going to react. Then also, you're just going to reduce your tax base over time, because you're just going to have this record of always printing money, or always debasing the currency, or something like that, during times of war, and those effects are permanent. What you want to do is actually promise to reverse any of those effects that were experienced during the war once the war is over.

.......

The cost of the US Treasury security being the global reserve asset is that, as the world economy grows, what happens to the demand for reserve assets? Well, it grows along with that growth in the world economy, and so, if the United States doesn't provide that, if they don't provide a sufficient amount of Treasuries, then yields are going to go down.

Hendrickson: That tends to incentivize governments to borrow more. "Look, we're running these massive deficits, and it's not affecting our interest rates. Maybe we should run bigger deficits." The thing is, there are lessons from the literature on the international monetary system that essentially say that when you control the supply of this global reserve asset, and this asset is a debt instrument, well, you run into a problem, because the more and more debt that you run up— at a certain point, people are going to become concerned that you won't be able to pay back that debt without resorting to devaluation. But the thing is, is that the devaluation doesn't actually have to come first, right? All that has to happen is that people start to worry about devaluation, and they start acting on it. 

Hendrickson: They start selling their dollar-denominated assets, and then you have turmoil in international markets, and maybe the Federal Reserve has to intervene and buy some of these assets or settle down the Treasury market, which leads to expanding their balance sheet and leads to higher prices. And so, the point is that the system has substantial benefits. As long as the level of debt that the US has is sufficiently low, the benefits dramatically exceed the costs, at least for policymakers. We can debate some of the other secondary effects on the actual people of the United States, [but] for policymakers, as long as the debt level is low enough, they can sustain this indefinitely.

Hendrickson: The problem becomes, if debt gets sufficiently high, now the system becomes potentially, very fragile, and it becomes subject to self-fulfilling runs, and once it gets there, then we're talking [about] very costly consequences. And so, what I'm encouraging people to think about is that, yes, this foreign policy tool that we have might help us to impose sanctions. It might help us to do things— to harm people without actually having to engage in military conflict, but there are costs people might diversify away. Yes, having the global reserve asset might give the United States policymakers the ability to do all of the things that they want to do, but it's also potentially fragile, if debt levels get too high. So, there are always costs and benefits, and policymakers need to think about those things.

............ 

 I'm not going to say it's not sustainable. What I'm going to say is that it's not sustainable under certain circumstances, and we don't want to ever find ourselves in that certain circumstance.

Hendrickson: Policymakers need to be cognizant of that, and they need to be especially cognizant of that when they're thinking about deficits and when they're thinking about debt, because there is a point at which you can have too much debt, and then it becomes unsustainable. You don't want to find yourself in that position, but also, in terms of the secondary effects, it's not at all clear that this is beneficial to the United States as a whole.

If you're looking for a more in depth study of the history of the Treasury market, I would say George Hall might be the go-to.   His paper with Tom Sargent titled: Three World Wars: Fiscal-Monetary Consequences is worth a read (at least read the first paragraph and concluding remarks).   https://macromusings.libsyn.com/george-hall-on-the-history-of-the-us-national-debt-and-government-financing

On the week ahead FOMC and Jobs will dominate the data, while earnings will continue to be in focus:

Mon: No Major Data, I'd take a day off to get ready for Powell on Wednesday

Tue: ECI, home prices

Wed: ADP, Quarterly Refunding Composition, ISM Mfg., JOLTS, FOMC

Thu: Jobless Claims, Productivity & Unit Labor Cost, Factory Orders

Fri: Job's Day!  ISM Services, Fedspeak returns

XTOD: btw guys the Fed actually has 3 mandates, the one never spoken of is to have "moderate long-term interest rates"  just mentioning - in case any president thought rates were too high.

https://federalreserve.gov/aboutthefed/section2a.htm

XTOD: An interesting week ahead for the global #economy and #markets, including (but not limited to)…

  The release of the US monthly #jobs report, Eurozone inflation and GDP, and China’s #PMI’s; and 

  A 2-day policy meeting at the #FederalReserve.

By the end of the week, we should have some additional information on two of the three key questions for the US economy (and related spillovers for the global economy):

  How the #Fed is thinking about recent data, including the worse-than-expected #growth and #inflation numbers: and

  The extent to which the labor market can continue to support strong consumption at a time of greater weakness in the balance sheets of the more vulnerable segments of society.

XTOD: Had drinks last night with a friend who is retired CIO of a big Institutional CRE shop who's been investing in CRE for 40+ years and really made his first fortune on RTC. 

A few thoughts I thought worth passing along....He's seeing lots of new deals being underwritten on FORWARD INTEREST RATES which he sees as dangerous as the yield curve is downward-sloped.  "We always assumed refi rates would be around where they were at origination, NOT LOWER."   Not enough margin of safety in underwriting....I asked about Jon Gray of Blackstone's pronouncement that it's the right time to get back in to CRE: "He's talking his book.  He has lots of nervous investors both among public pensions and increasingly HNW.  Depends on sector, but generally we haven't hit bottom yet."

XTOD: Being smart  and being wise  are not correlated.

Daily Economic Update: April 26, 2024

Yesterday's 1Q2024 GDP report was "stagflationary" with lower than expected real growth (1.6% vs. 2.5% estimated) and higher than expected inflation (3.1% v. 3.0% estimated on headline, with Core PCE at 3.7% v. 3.4% estimated).   Of course everyone is pointing to the miss being driven by trade and inventories as making it somewhat less meaningful, but who knows.

Stocks fell over 1%, then rebounded some. Out on the curve hit highs not seen in 5 months with the 10Y over 4.70%.   Initial jobless claims broke the streak of printing 212K by printing 207K. 

After hours Google and Microsoft earnings helped improve sentiment.

On the day ahead we have the BoJ who is facing a super-weak Yen and the U.S. PCE report along with the UofM sentiment survey (asking consumers how they feel about gas prices...not really, but highly correlated).

XTOD: Microsoft’s yearly data center spend for the next few years is more than that of the Apollo program (yes, adjusted for inflation)

XTOD: Treasury Secretary Janet Yellen said the US economy 'continues to perform very, very well' and that she still sees inflation falling back to more normal levels

XTOD: GDP growth came in a bit below expectations at a 1.6% annual rate in the first quarter. 

But much of the slowdown was in non-inertial items like inventories (-0.35pp) and net exports (-0.86pp). The better signal of final sales to private domestic purchasers was 3.1%.

XTOD: If no revisions, and there will be some surely, today’s quarterly Core PCE implies a m/m up by almost 50 bp (48 bp to be precise) to be reported tomorrow - this is really bad (consensus and whisper are around 30 bp) and most likely warrant a language shift by JPOW on Wednesday 

Market shifted full price cut from Nov to Dec and residual probability of a 2nd hike is now down to just a third

XTOD: Sitting at Eden Rock conceiving of the most outrageous outcomes

It's hard to conceive of a US slowdown presently

We're no way near through the end of fiscal spend

I keep saying 2 for 2...

We won't see 2% inflation for 2 years

The fiscal transformed the US into the economic locomotive of the world

Great, but...

Arguably, the dollar standard was conceived under the conceit that the US economy would be a dullard

Today, instead, it's the locomotive of the world...

And it's reset the risk free rate to intolerable levels for the RoW

Somethings gonna break

But before then

Just like the late 1920s, 

There's a huge carry trade pouring money into US risk assets

Borrow in yen for zero, catch 5.5% on cash

Hell, 20% on risk asset price gains pa

Pay your yen back in stronger dollars

This money train is unstoppable

Then imagine the ECB cuts rates

They really need to...

And that carry trade is gonna be amplified to the moon.

The RoW needs lower rates

Will the Fed subjugate its domestic growth mandate

Will it be convinced of the need to coordinate an interest rate cut with the Europeans ?

A coup de whisky...

It's done so many times before

But it'll need convincing

Somethings likely to break

Can I remind you that the yen has devalued 40% 

40% !!

And US banks have huge unrealized losses on their hold-to-maturity treasury holdings and no one cares, no one asks for quantification, everything's gonna be alright, yeah ?

And we're 10 bps away from ten year treasury yields exploding higher

And 5 bps from the red cabbage accelerating its decline

Recap

US economic engine of the world

Global monetary system never conceived of this

Higher rates killing the collateral value of Treasuries

Not killing the velocity of US GDP growth

Something gonna break

Fed will cut in unison with the Europeans

Risk asset prices could explode higher

if you don't understand, go back to the beginning 

Daily Economic Update: April 25, 2024

Sorry, I was busy day-trading NYC restaurant reservations, I hope those gains are going to be subject to Biden's proposed 44.6% capital gains tax rate.  A mostly boring day for equities with META beating after hours but trading much lower anyway.  Yields rose a few bps as stocks fell slightly ahead of today's GDP release, the first of two 'major' economic releases for the week.  Yesterday's strong durable goods data did little for stocks but seemed to support higher yields with the 5Y Note Auction being relatively poorly received.  

As expected both the Tik Tok and non-compete bans are being challenged.

On the day ahead it's GDP, jobless claims, home sales and the infamous 7Y Note Auction.  

XTOD:  Huh. The Macro Musebot (https://ai.macromusings.org) had some strong views about its favorite macro theory:  "What is your favorite macroeconomic theory? Is it (1) New Keynesian, (2) Monetarist, (3) Fiscal Theory of the Price Level, or (4) MMT?  @JohnHCochrane

My favorite macroeconomic theory is the Fiscal Theory of the Price Level (FTPL). While the New Keynesian, Monetarist, and MMT frameworks all offer valuable insights, the FTPL provides the most coherent and compelling explanation for the determination of the price level in my view. 

The key strength of the FTPL, as articulated by John Cochrane, is that it directly addresses the fundamental question of why money has value. The FTPL argues that money is valuable because the government accepts it for tax payments - the "state theory of money." This is a more satisfying explanation than the ad hoc assumptions underlying the quantity theory of money or the vagueness of MMT. Additionally, as Jesus Fernandez-Villaverde and Eric Leeper have discussed, the FTPL highlights the inherent linkages between fiscal and monetary policy. The government's intertemporal budget constraint means that the central bank cannot fully control inflation without considering the actions of the fiscal authority. This nuanced view of policy coordination is more realistic than the strict separation of monetary and fiscal policy in New Keynesian models.

That said, I don't dismiss the other theories entirely. As Scott Sumner and Robert Hetzel have noted, monetarism and New Keynesianism have been useful frameworks at different points in history, depending on the prevailing economic conditions. And Nathan Tankus has rightly pointed out that MMT has pushed the profession to think more carefully about the consolidated government balance sheet. Ultimately, I believe the FTPL provides the most coherent and comprehensive theory of the price level, one that incorporates the insights of other approaches while addressing their shortcomings. By focusing on the government's intertemporal budget constraint, the FTPL offers a powerful lens through which to understand historical episodes of inflation and deflation, as well as guide policymakers in the present day.

XTOD: "We think any company that has an economist, you know, certainly, has one employee too many."    - Warren Buffett

XTOD: "In 2025, we get either Bidenomics 2.0 or Trump 2.0: in either case we are going to see more huge fiscal deficits, protectionism, and industrial policy, but in the latter case, perhaps on steroids." -  Rabobank

XTOD: "We now get more news in a single day than most people ever saw in their lifetimes a few short centuries ago. Our brains aren’t hardwired to have this much information thrown at them. And so much of the information we see is negative."

Daily Economic Update: April 24, 2024

A solid day for stocks with the S&P up 1% in regular trading as earnings season is proving solid. There was Elon optimism after the bell, as he promises more affordable vehicles and the every elusive robotaxi. On the data side, the flash PMI's showed some slowing, especially in manufacturing, while sales of new homes beat estimates.  In other news the Senate passed the Ukraine funding bill that includes Tik Tok ban. We also had FTC passing a vote on a final rule banning non-competes:

"Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date. Existing noncompetes for senior executives - who represent less than 0.75% of workers - can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them."

It will be interesting to see how this plays out and (a) whether it survives legal challenges and (b) whether it will lead to the amount of new businesses and increased pay that the FTC anticipates.

Aside from that you've got students looking for refunds from Columbia.

Today's data features Durable Goods and we'll get the 5Y Treasury note auction.  The 2Y was little changed and is 4.94% and the 10Y at 4.61%

XTOD: 🚨 Excited to announce we have launched the Macro Musebot! 🚨 Powered by insights from 400+ episodes of the Macro Musings podcast, this AI is your personal guide to the world of macroeconomics, monetary policy, and all our past guests! (1/n) https://ai.macromusings.org

XTOD: I dislike Taleb in a lot of ways, but his greatest contribution to knowledge is this Medium post, a chapter from SKIN IN THE GAME, about the intransigent minority. 

Explains Columbia, explains trans rights, explains every social issue we've been dealing with.  https://medium.com/incerto/the-most-intolerant-wins-the-dictatorship-of-the-small-minority-3f1f83ce4e15

XTOD: tbh sleeping in a tent on a city street seems like a pretty good life skill to practice for a humanities grad in 2024

XTOD: “This odd combination — higher stock valuations despite higher rates — has not happened in any period of Fed tightening going back to the late 1950s.”

XTOD: This is a HUGE policy change, if it’s right.  President Biden previously called for extending the tax cuts below $400k — which could cost $1.5 to $3.5 trillion.  Letting them expire would cost $0!!

XTOD: The best way to regulate anger is not to vent right away. It’s to calm down first. 

154 studies: Deep breathing, meditation & yoga are better antidotes to aggression than yelling, punching & running.  Anger management is about lowering your heart rate, not raising it. Relaxing reduces rage.  http://scientificamerican.com/article/feeling-angry-chilling-out-helps-more-than-blowing-off-steam

Daily Economic Update: April 23, 2024

A ho-hum news day. Stocks finally rose with tech names like Nvidia rebounding and yields rising.  No Fedspeak and perhaps some optimism that Middle East tensions won’t spark a larger regional conflict provided a somewhat supportive backdrop for markets.  

Yields await the major data of the week in the form of GDP and PCE.  Ahead of today's 2Y auction we have the 2Y at 4.97% and the 10Y at 4.61%.

On the day ahead it's S&P PMI's, New Home Sales and the 2Y Treasury Auction.

XTOD: The 10-year yield was 3.78% in late December. As this story notes, it hit 4.70% last week, almost a 100 basis point rise in four months.  The story asks if the 10-year yield can hit 5% as if this were a bold call. It's not.  Saying the 10-year will NOT hit 5%, or the yield rise has no more than 29 basis points left, is a bold call!  ---  This says a lot about sentiment.  It suggests that predicting the bond sell-off has no more than 29 bps left is still the safe call.  However, it is "tricky" to predict yields may rise another 30 basis points.  Bullishness still prevails.   Only when yields rise enough that everyone dusts off Jamie Dimon's 8% prediction from two weeks ago and proclaims him Nostradamus is it over.  

I think it happens when yields get above 5%. Then it is safe to be bearish.   So, almost there but have some work left.  https://wsj.com/economy/central-banking/path-for-10-year-u-s-treasury-yield-to-5-is-possible-but-tricky-e29be0c9?mod=latest_headlines

XTOD: america’s problems solved in one tiktok https://twitter.com/i/status/1782536475244150808

XTOD: is that Stephanie Kelton

XTOD (evidence that the tik-tok and Kelton are in action?) Today, my Administration is investing $7 billion in a new program called Solar for All that will enable over 900,000 low-income households to have solar on their rooftops for the first time.  Solar for All will give folks more breathing room – and cleaner breathing room at that.

XTOD: “A DCF is like the Hubble telescope - turn it a fraction of an inch and you're in a different galaxy.”  - Curtis Jensen

XTOD: Most insufferable man I matched with on Hinge was a middle-aged CRE guy.  Asked him to let me know the make and model of his car so I could have a guest parking pass preemptively printed for him. (We were meeting at my place and walking to a spot in midtown for drinks.) 

He says, "you'll know it when you see it." 

Already annoying as that doesn't help at all. My concierge cannot print a pass with this information.

Guy proceeds to show up in a base model Porsche with vanity tags.  

I cancelled the date.

XTOD: What commission-based profession has the best reputation?

Daily Economic Update: April 22, 2024

Stocks on a 6-day losing streaks, markets repricing the timing of Fed rate cuts (now looking like November), Bitcoin "halving" completed (this reduces the compensation miners receive for solving a challenging mathematical puzzle that allows them to propose a new block - which should slow the supply of Bitcoin and in theory increase the price), geopolitical tensions and tensions on college campuses, U.S. election chatter heating up, would seem to sum up the last week or so.

With Powell's seemingly "hawkish pivot" all of a sudden all the people who were in love with the Fed's forward guidance, dot plot, parading out every Fed President on TV, etc.,  all seem to be saying it's use case has run it's course.  Hmm...sounds familiar, see my commentary on the January 31, 2024 FOMC meeting here.   In it I shared my advice to the Fed:

my advice to Powell is to revisit Robert Greene’s book The 48 Laws of Power with specific consideration to the following of Greene’s laws:

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

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

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

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

Good news is there is NO Fedspeak this week as the Fed is on blackout.

On the week ahead GDP and PCE along with Income and Spending.  It's all tech earnings.

Mon: no major releases

Tue: S&P PMI's, new home sales

Wed: durable goods

Thur: GDP,  jobless claims

Fri: PCE

XTOD: Blackthorne: You think this is over?! You think the unprecedented escalation between Israel & Iran will end here—both sides content with flashy but ultimately inconsequential strikes? You're a fool! The rules have changed  Mariko: The Anjin is upset about the falling price of oil

XTOD: Every manager has the same 5 problems:  

- They can't get clear direction

- They need better people

- They lack the budget

- They don't have time

- They won't say "No" 

Fix those first. Everything else is a distraction.

XTOD: If you want to get rich quickly, the biggest factor is luck.   If you want to get rich eventually, the biggest factor is consistency.

XTOD: Complexity is overrated. Simplicity is underrated.  Analytical ability is overrated. Personal behavior is underrated.  Having a high income level is overrated. Inculcating a disciplined saving habit is underrated.

XTOD: A hired man, who is not a shepherd and whose sheep are not his own, sees a wolf coming and leaves the sheep and runs away, and the wolf catches and scatters them. This is because he works for pay and has no concern for the sheep.

Daily Economic Update: April 19, 2024

The equity losing streak continues.  Jobless claims continue to print the same number and Philly Fed data was solid, allowing yields to rise further, with the 10Y at 4.63% and the 2Y settling in at 5%.

Other than that people are still watching Netflix and I guess we'll be releasing gas from the strategic petroleum reserve this summer.

In other news Ray Dalio reminds us what he thinks good money is while also "not" recommending people by gold:

"Good money is both a good medium of exchange and a good storehold of wealth that is widely accepted around the world. The most globally recognized and accepted monies are the dollar......These monies are held in debt assets—i.e., they are debt-backed money—i.e., currency = debt. "

" Since debts are promises to pay money, when a government has too much debt to be paid, its central bank is likely to print money."

" Gold, on the other hand, is a non-debt-backed form of money.....Cryptocurrencies are also non-debt monies. I don’t know of any other types of non-debt monies...."    

"When the financial system is working well—which is when there aren’t debt and inflation crises and the borrower-debtor governments printing debt-backed monies are meeting their obligations and paying their interest without printing and devaluing money—debt assets and other financial assets are good assets to hold; on the other hand, when the reverse is the case, gold is a good asset to own. That’s the main reason that gold is a good diversifier and why I have some in my portfolio. "

On the day ahead it's just the dovish Goolsbee from the Chicago Fed.

XTOD: So market went from pricing 7 cuts for FY24 in mid January to pricing just ONE in Nov with dwindling odds of a second cut. Not sure if everyone realizes : that’s a very short timeframe for such a radical reversal. We had anticipated this (that’s what #bigflip2 was about). 

Yet it shows that the initial 7 were built on flimsy expectations, actually mostly driven by a policy error by JPOW in Dec 23.  

It should keep everyone on their toes when it comes to this new found certainty of higher for longer, probably driven by yet another policy error….  This game is not easy…

XTOD: Once RRP vol hits zero, liquidity will continue to drain from the financial system with continued Balance Sheet Runoff and Treasury issuance. The trend-line is pretty powerful. As it stands, there could be as much as $1.3T drained from the financial system by the end of the year

XTOD: It's a really interesting view that highlights how the military revolution of 14th-16th century redefined the state, its financing needs, and how trial & error led to central banking. As Josh notes, it is no accident that the state today maintains a monopoly on violence and a monopoly on money. Here is his article (2/5) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4759755

XTOD: MMT was taken for a test drive. They called it the “CARES Act.” The failed theory crashed into a wall & burned to the ground as MMT-ers doubled down with more “free” money igniting the mother of demand-pull inflationary spirals.  Other than that, the play ended swimmingly.

XTOD: “We are all born original, but many die as photocopies."  —Blessed Carlo Acutis, c/o 

@stephengadubato

Daily Economic Update: April 18, 2024

Another down day for equities as bets on rate cuts continue to get pushed out further into the future, with some strategist now pushing cuts out to 2025 and some bank strategist at UBS warning that the Fed may need to raise fed Funds to 6.5% by mid-next year.  Despite that sentiment, yields managed to fall and the 20Y Treasury auction was solid.  The 2Y is 4.93% and the 10Y is 4.59%.

In a Substack Note, Economist Brad DeLong, characterized what he sees as the current sub-era of post-GFC monetary policy as "waiting for a shoe- any shoe to drop".  He goes on to say that the Fed's current willingness to see long-term real interest rates rise as a sign that the Federal Reserve has:

"reached two conclusions: 

1. It no longer believes that considerations as to what it thinks r* is can guide monetary policy and its adjustment. 

2. The major risk is not a deep recession and a return to the zero interest-rate lower bound, but rather some sort of rebound in inflation and a consequent de-anchoring of inflation expectations."

Maybe it all comes down to R-Star.   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.

Away from Fed land, Howard Mark's had his latest letter published yesterday titled, 'The Indispensability of Risk' .  If you read this blog you can check out my summary on Mark's previous memo here.

As for the current memo it is based on the role of sacrifice in chess, as highlighted recently in a recent WSJ article, and how that can be applied to the world of investing.

• In chess sacrificing a piece can serve one of two purposes: (1) a "sham" sacrifice -  when one gives up a piece in order to obtain a concrete benefit that can be calculated and (2) "real" sacrifice - when giving up a piece provides no immediate or tangible benefit but may offer some strategic benefit.
  
  
• "The analogy to investing begins to become clear. Buying a 10-year U.S. Treasury note is a modest or “sham” sacrifice. You give up the use of your money for ten years, but that’s only an opportunity cost, and accepting it brings the certainty of interest income. Most other investments involve real sacrifices, though, where the risk of loss is borne in pursuit of “gains that are neither immediate nor tangible.”
  
  
• In chess players often intuit the level of risk and have to decide if making a risky move is worth it.
  
  
• In investing "Because the future is inherently uncertain, we usually have to choose between (a) avoiding risk and having little or no return, (b) taking a modest risk and settling for a commensurately modest return, or (c) taking on a high degree of uncertainty in pursuit of substantial gain but accepting the possibility of substantial permanent loss."
  
  
• While most investors understand that earning high returns, both in absolute and relative terms, requires bearing meaningful risk, they may take for granted that "The risk inherent in not taking enough risk is very real. Individual investors who eschew risk may end up with a return that is insufficient to support their cost of living."
  
  
• "There’s such a thing as the risk of taking too little risk. Most people understand this intellectually, but human nature makes it hard for many to accept the idea that the willingness to live with some losses is an essential ingredient in investment success."
  
  
• "You have to take a shot. Not every effort will be rewarded with high returns, but hopefully enough will do so to produce success over the long term. That success will ultimately be a function of the ratio of winners to losers, and of the magnitude of the losses relative to the gains. But refusal to take risk in this process is unlikely to get you where you want to go."

I know Mark's is a big Buffett fan and reference's what he sees as the basis for the success of Berkshire in this latest letter, but perhaps the memo is just another way of stating what Buffett recently summed up in the last Berkshire Hathaway annual letter:

"One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital. Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been – and will be – rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes."

Remember optimism and taking risk is not incongruent with "Margin of Safety".

XTOD: Sebastian Steudtner, a German pro surfer, rode a wave over 115 feet tall at Nazare, Portugal, a record breaking surf!

XTOD: How bad is  @CathieDWood  ? Over the last 5 years she has now returned -7% in $ARKK she trails the $SPX by 88% and $COMP by 107% respectively. Maybe think twice about shoving her face on TV again.

XTOD: Economics is an ecosystem and I love most or perhaps even all of it. Theorists. Empiricists. Government statisticians. Ivory tower academics. In the trenches think tankers. Investment bank economists. Government economists. Tweeters. And many more I didn't mention.

XTOD: Bank of England policy maker Megan Greene said developed economies including the UK face a “bumpy ride” as central banks squeeze out the final effects of the global inflation shock

XTOD: Clarity comes from cutting out the clutter.  Pinpoint your focus, relentlessly eliminate noise, and watch productivity soar.

XTOD: Tony Robbins believes that, in a lowered emotional state, we only see the problems, not solutions.   Let’s say you wake up feeling tired and overwhelmed. You sit down to brainstorm strategies to solve your issues, but it comes to naught, and you feel even worse afterward. This is because you started in a negative state, then attempted strategy but didn’t succeed (due to tunnel vision on the problems), and then likely told yourself self-defeating stories (e.g., “I always do this. Why am I so wound up I can’t even think straight?”).   To fix this, he encourages you to “prime” your state first. The biochemistry will help you proactively tell yourself an enabling story. Only then do you think on strategy, as you’ll see the options instead of dead ends.  “Priming” my state is often as simple as doing 5 to 10 push-ups or getting 20 minutes of sun exposure.  I often ask myself, “Is this really a problem I need to think my way out of? Or is it possible I just need to fix my biochemistry?” I’ve wasted a lot of time journaling on “problems” when I just needed to eat breakfast sooner, do 10 push-ups, or get an extra hour of sleep.  Sometimes, you think you have to figure out your life’s purpose, but you really just need some macadamia nuts and a cold fucking shower.

XTOD: In a world loud with information, mute the unnecessary.  Pinpointing the essential is a superpower.

 

Daily Economic Update: April 17, 2024

To paraphrase the line from the movie The Usual Suspect, the greatest trick Team Transitory ever pulled was convincing the world inflation was, well, Transitory....or something like that, anyway, clearly Powell doesn't believe the data shows inflation is sustainably moving back to 2% and is now messaging H4L.  NY Fed President Williams said he believes U.S. growth potential is around 2% or higher, which makes some sense given the ATL GDPNow estimate is 2.9% as of yesterday.  If U.S. real growth is indeed that high then policy is likely less restrictive than the Fed has believed.

Stocks found a way to power through and avoid deeper losses despite ending lower as yields rose. The 2Y yield briefly topped 5% and the 10Y sits around 4.66%.  Gold again at record highs and what's a Japanese Yen?  154 and change...yikes.

I've provided a ton of links to articles and blogs this week and over the course of this blog and as you can likely see there is really no clear consensus on what the Fed should be doing with their interest rate target at present. If you want a noted economist to say the Fed needs to cut rates soon you can find one, if you want one who says the Fed still isn't restrictive enough you can find one, if you want one who says the White House needs to reduce deficits to combat inflation, you can find one.

I probably find one of each form of economist everyday without even trying (sometimes from multiple post from the same few).  For example, Scott Sumner said yesterday:

The future course of the economy always involves a bit of guesswork. But it seems to me that the following two claims are pretty likely to be true:

1. Over the past three years, monetary policy has been far too expansionary.

2. It is likely that monetary policy is still a bit too expansionary, although I have less confidence in that claim.

He goes onto to discuss how nominal economic growth is reaccelerating and TIPS spreads widening while counseling the Fed to remain more restrictive while also expressing his belief that the whole way of doing monetary policy is wrong.

This is the point where economists discuss “what the Fed should do”, by which they mean where should they set the fed funds target. In my view, interest rates are not the right way to think about monetary policy, so I won’t recommend a particular rate setting. Instead, I’ll recommend making the policy regime more effective......1...The Fed should adjust their fed funds target daily, to the closest basis point (say using the median vote of FOMC members.) The Fed funds target should look like other market prices, like a random walk. New information should not make people expect a different level of NGDP in 2025, rather new information should show up as the adjustment in the fed funds rate required to keep expected 2025 NGDP on target.....2....The Fed thinks in terms of growth rates, not levels. That radically increases uncertainty about the future path of NGDP, and largely explains the wild swings in the financial markets in response to seemingly trivial adjustments in Fed policy.

The Fed is not reacting to unexpected swings in aggregate demand, the Fed is creating unexpected swings in aggregate demand, through its clumsy interest rate targeting system and lack of level targeting.

But if you want a different view, just hop on over over to Claudia Sahm who argues that inflation has largely been a supply side phenomenon all along (to her credit she does mention pent up demand and Covid-stimulus as factors).

 Identifying shelter and motor vehicle insurance as two primary sources of inflation now is not meant to ‘explain away’ inflation. Inflation is too high; understanding why helps identify the best policy response. Herein lies a bigger problem.

We are down to a few enemies in the fight against inflation. Unfortunately, the Fed’s ‘weapons’ are unsuited to address supply-driven inflation. Sustainability requires getting the excess inflation out of all the spending components. The Fed holding rates or raising them further would eventually put the economy in a recession. That might reduce the demand for other types of spending and bring down their inflation further, achieving the topline inflation of 2%. However, that does not necessarily solve the current problem, and it creates new ones.

Inflation is narrowing down to a few challenging areas. That narrowing reflects several victories in the fight against inflation, but what’s left has a big lesson. It’s time for policymakers outside the Fed to accept responsibility for inflation and, most importantly, do something. The Fed is in the mix, but it can’t fix this alone.

It's unclear to me what policies she proposes to fix inflation in car insurance, as that inflation seems to be driven by the fact that (1) cars cost more due to both size and inflation, (2) cars are now computers which also are expensive - inflation in many components and (3) natural disasters have lead to rising claims.  I would assume lowering the cost of actual cars and their component parts would lead to lower car insurance, but maybe I'm wrong.  I'm not sure the policy that prevents bad weather events....I have so much left to learn.

With all this focus on the Fed and inflation, is it wrong to think that this will all be funny to look back on when some "shock" hits the real economy down the line?

On the day ahead:  Fed Beige Book, Fedspeak

XTOD: After a massive outperformance in a short time and due to Jay showing up on H4L island we have  reweighted back to DS Beta. Net sold gold, tips, commods and equities and bought nominal bonds for our long only beta portfolio

XTOD:"After several days of rising tensions in the Middle East, Treasury yields are higher, not lower. This is a potent sign the wind has changed, and we are firmly stuck in an inflationary regime."  

@LondonSW

XTOD: Yes I still think 3 cuts this year.

XTOD: I had kinda hoped that the crypto market would learn finance, and prices would move back to present discounted value of dividends. But some of what has happened is that the stock market has learned crypto-pricing and some stocks are temporarily over-priced by hype and attention.

Daily Economic Update: April 16, 2024

Down day for the major equity indexes as geopolitics and rising bond yields weigh on sentiment.  Retail Sales data showed a consumer that won't quit with headline sales and core sales both exceeding expectations.  The 10Y yield crossed 4.60% and the 2Y continues its march towards 5%, almost getting their intraday but ending at 4.93%.

Speaking of geopolitics,  a few days ago, economist Noah Smith had a blog post titled "Americans are still not worried enough about the risk of world war" in which he was discussing the parallels between the start of WW2 and what is occurring throughout the world at present, in it:

So if you were living at any point in 1931 through 1940, you would already be witnessing conflicts that would eventually turn into the bloodiest, most cataclysmic war that humanity has yet known — but you might not realize it. You would be standing in the foothills of the Second World War, but unless you were able to make far-sighted predictions, you wouldn’t know what horrors lurked in the near future.

In case the parallel isn’t blindingly obvious, we might be standing in the foothills of World War 3 right now. If WW3 happens, future bloggers might list the wars in Ukraine and Gaza in a timeline like the one I just gave.

Or we might not be in the foothills of WW3. I think there’s still a good chance that we can avert a wider, more cataclysmic war, and instead have a protracted standoff — Cold War 2 — instead. But I’m not going to lie — the outlook seems to be deteriorating. One big reason is that China appears to be ramping up its support for Russia.

As for investors, writer, Joakim Klement has pointed out here that most geopolitical events can barely be recognized on a chart of long-term equity market indexes.

In any case, Cassandras that deal in geopolitical risks have long been a bugbear of mine. So much so that I sat down and wrote an entire book about geopolitics for investors which you can download for free at the CFA Institute Research Foundation.

One of the key messages was that most of the time, geopolitical events do not matter for investors.

.... That is, of course, until they do.... This brings me to the second key message of my book. Learning how to identify which geopolitical events matter and which ones don’t is key to being successful as an investor.  And this is where Cassandras who predict geopolitical crises always fail.

 Even if a geopolitical event escalates, an investor must be able to correctly separate the major events from the ones that don’t escalate to major events as these events unfold in real-time.

And if it turns out to be a major geopolitical event, key drivers of asset return like inflation, risk-free rates, or future cash flows must be permanently and materially altered to make an impact on the portfolio.

We rarely fall off a cliff. And investing based on the assumption that we will fall off a cliff is going to lose you money.

I guess Klement's advice is to be an optimist, described in my post here .  It doesn't mean you should ignore some principals of having a margin of safety.

On the day ahead it's Housing Starts, Building Permits, Industrial Capacity, Durable Goods and Fedspeak

XTOD: it’s so humbling how happy a 72 degree makes me. I thought I was more complex than this

XTOD: Israel’s response to the Iranian attack may be "imminent," an Israeli official said Monday.

Speaking after Israel’s war Cabinet met for several hours, the official said Israeli decision-makers believe it's important for any response to closely follow the attack. via NBC News

XTOD: Away from the Middle East crisis, cocoa prices keep climbing with the most active contract in New York surging today to a fresh all-time high of ~$10,700 a metric ton. Over the last year, cocoa prices are up ~270% | 

Daily Economic Update: April 15, 2024

 

 

Tax Day in 'merica. "If you take a walk, I'll tax your feet".  You can check out Stevie Ray Vaughn's cover as well. 

The weekend retaliatory attack by Iran and subsequent missile exchanges by Hezbollah and Israel will keep the risk of a broadening conflict front and center.

On Friday, the UofM consumer sentiment index came in below expectations, but showed increases in the year ahead and five year ahead inflation expectations.

Speaking of inflation and what the Fed has accomplished to date, a few interesting blog post over the last few days.  Both of the following post hit on the puzzle of interest rates and r-star.

The first, courtesy of Stephen Williamson, titled "Do Central Bankers Know What They're Doing" which posits:

• Williamson is a known 'Fisherian' or an adherent of 'Neo-Fisherism'.  What's that?
• It's based on the Fisher Effect, coined for Irving Fisher, and the basic equation that a Nominal Rate = Real Rate + Inflation
• If you turn this equation on its head, you can posit that a high nominal interest rate will cause inflation to actually rise over time (in other words the causation runs counter to what you tend to think), why?
• Because economist believe that nominal interest rates are 'long-run' neutral and do not change the real rate
• Back to Williamson's blog, he argues:
• PCE inflation is essentially at target and inflation expectations measured by break-evens are well anchored at target
• "So, the state of the U.S. economy, by these measures, appears to be as close to perfect as the FOMC might want, given its dual mandate, including its 2% PCE inflation target. Then, given that the median FOMC member still thinks the long-run nominal interest rate should be about 2.5%, if I had been asleep for 20 years, just woke up, looked only at these charts, and knew the 2.5% long-run estimate, I would wonder why the overnight rate was not 2.5% instead of 5.3%."
• "My best guess, though, is that the FOMC isn’t so worried about the actual inflation numbers as the state of the real economy. That is, the idea that the inflation rate is controlled by controlling the unemployment rate persists at the Fed, as it does at most central banks in the world, despite plentiful evidence to the contrary....Inflation came down with essentially no upward movement in the unemployment rate. The Phillips curve narrative persists, as it somehow allows monetary policy committees to achieve consensus, and it’s easy to explain to the public - however wrong it may be. Unfortunately, if central bank officials speak Phillips curve language for long enough, they start to believe it, which produces bad monetary policy."
• He posits that if the Fed truly believes the long-run real interest rate is 0.5% then maintaining this level of nominal rates will set the Fed up for above target inflation.
• " That is, if the policy rate stayed at 5.3% forever, and the long-run real interest rate is 2%, then we would expect inflation to come in at 3.3%, which is better than 4.8% under the FOMC consensus."
• "The bad news is that the FOMC, along with other central bankers in the world, may be setting itself up for persistent overshooting, just as central banks tended to undershoot their inflation targets from 2010 to 2020. That’s all part of the same phenomenon, which is not recognizing long-run Fisher effects - and this may set in sooner than people seem to think. Basically, consistent with all mainstream macroeconomic theory, a persistent increase in the central bank’s nominal interest rate target produces a long-run increase in inflation, not a decrease. What allows a central bank to hit its inflation target is a widely-held belief that the central bank will always revert to a nominal interest rate target consistent with its inflation target and Irving Fisher. If that widely-held belief falters, the game’s up."

The second post comes from Scott Sumner, who is an avid supporter of Nominal GDP Targeting.  His post titled "Time to Add Epicycles" discusses what he describes as the absurdity of 'reasoning from a price change' when talking about interest rates causing changes in other macro variables. 

• "Interest rates can change for multiple reasons, and the effects of the rate change will depend on the underlying factors that caused them to change."
• He goes onto discuss the 'frustrations' with current economic models and excuses such as "long and variable lags".
• "If interest rates rise because of tight money, then aggregate demand may decline. If interest rates rise because of fiscal deficits or booming immigration or strong “animal spirits”, then aggregate demand may rise. It depends."
• "Doesn’t the Fed determine interest rates? Well, it has a target, which it moves up and down in response to what it perceives as changes in the equilibrium interest rate. But is it leading the market, or following?"
• "All I can say is that the proof is in the pudding—apparently we are still not able to model that “natural” rate with any degree of accuracy. As a result, we end up reasoning from a price change.
• "Monetary policy is not interest rates, it is the market forecast of future NGDP."

And just to complete the trifecta, we get a post from John Cochrane titled, "Inflation Confusion"

which discusses a recent WSJ article and how the current administration is struggling with basic economics.

• Cochrane starts off with some basics around how relative price changes are not inflation and that by jawboning about inflation has been tried and failed.
• He goes on to complain about the administration's lamentation that there isn't much they can do about it:
• "Nothing one can do? We have, now admittedly, a deficit fueled inflation. One could start by not pouring more gas on the fire. Such as cancelling billions of student loan debt, never mind the Supreme Court and the quaint idea that Congress votes spending. The CBO reports “The deficit totals $1.6 trillion in fiscal year 2024, grows to $1.8 trillion in 2025, …” with a 3.8% unemployment rate. Even in the simpleminded Keynesian economics that dominates left-of center Washington, there is no excuse for such stimulus."
• "There’s nothing we can do except the one thing that we all know would work. So we’ll rearrange the teacups on the side tables of the deck chairs of the Titanic instead. Which means nothing we want to do."
• "The quote here reflects the standard Keynesian view, deficit = aggregate demand = inflation with a lag. But we’re pretty clearly now in the situation that expected systemic deficits are the problem. Germany stopped a hyperinflation in a month. A credible announcement of spending, tax, and growth reforms that put the budget on a sustainable track would do the job. Scaling back the IRA, Chips, student debt river in recognition of inflation would help a lot more than complaining about how many potato chips are in a bag. Even just saying we recognize that’s needed would help."
• He concludes his piece with a complaint that politicians care too much about what 'resonates with voters' rather than taking the action they could take to lower inflation.

On the week ahead we'll get a lot of corporate earnings, retail sales and plenty of Fedspeak:

Monday: Empire St. Mfg, Retail Sales, Fedspeak

Tuesday: Housing Starts, Building Permits, Industrial Capacity, Durable Goods and Fedspeak including Powell at 1:15pm

Wednesday: Fed Beige Book, Fedspeak

Thursday:  Jobless Claims, Home Sales, Leading Indicators

Friday: Just one Fed speaker (Goolsbee)

XTOD: "You don't need to worry about progressing slowly. You need to worry about climbing the wrong mountain."    @JamesClear

XTOD: “Notice that, while lots of people are happy to tell you about Golden Ages, nobody ever seems to think one is happening right now. Maybe that’s because the only place a Golden Age can ever happen is in our memory.”   – Adam Mastroianni

XTOD: AUCTION ALERT:  -345k sq ft office building in Baltimore  -Starting bid of $1.5M or ~$4 per sq ft  -68% vacant  You can officially buy office towers for less than a small condo in many cities around the US

XTOD: Then, things go pear-shaped. The economy goes into recession. You lose your job and your source of income. Also, the value of your portfolio goes down 50%. Things were really good before, but they are really bad now....What if there was a way to avoid this?....I call this THE LIFE HEDGE.  

Here is the goal:  In good times, your portfolio is mostly flat.  In bad times, it explodes higher.  Thus, smoothing out the volatility in your life. How do you do this?  Well, gold plays a large role, and so does bonds.  Maybe you have some shorts to go with your longs. Maybe you have some insurance in the form of put options.  The Awesome Portfolio does this, with 40% of your portfolio being allocated to gold and bonds...This is the way I've invested my money since 2008, and I haven't given up anything in the way of returns.  In 2008, I was long my career, long a bunch of LEH stock, and long the stock market. Lost my job, my income, and almost 50% of my portfolio overnight.  NEVER AGAIN.

Daily Economic Update: April 12, 2024

If I've learned one thing from the tv series Shogun and from the Ohtani saga, it's that you shouldn't underestimate the importance of your interpreter.  

Yesterday's PPI came in a little under expectations, providing a little reprieve for investors concerned about inflation, but not enough to reverse the recent move higher in yields.  As for inflation, Economist Brad DeLong posits: "My current guesses? A 40% chance that things are simply delayed by the long and variable lags, a 30% chance that I am in for a big surprise as it turns out that that the era of “secular stagnation” & permanently low equilibrium rates that place chronic deflationary pressure on the economy, and a 30% chance the “unknown unknowns” rule everything around us…"

In Fedpseak, both Williams and Collins again indicated that nothing in the data indicates a need to start adjusting monetary policy to one of lower rates.

The 30Y Auction wasn't quite as bad as yesterday's 10Y, but still tailed and had weak foreign demand, making for a rough week for Treasury issuance. 

Across the pond the ECB was on hold as expected: "The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.50%, 4.75% and 4.00% respectively."   ECB remains ready to cut but is "data-dependent".

And in shocking news a financial institution is being investigated for doing a poor job with AML.

Today we survey consumers about gas prices and expect that and their political opinions to tell us something about the future of inflation.  

XTOD: With the death of OJ, let's talk about how savage Norm McDonald was and risked his career at SNL when he would not let up on his OJ jokes.

XTOD: The current federal interest outlay is ~$1T per year, straight into financial portfolios. If you think that outlay is inflationary, imagine how inflationary it was last year when the U.S. stock market rose 30% from trough to peak. 30% is worth $12T to those SAME financial portfolios, ALL AT ONCE!  

The people who are arguing that rate hikes exacerbate inflation via the "interest income" channel are obviously wrong, but even if they were right, the ZIRP alternative they compare things to is not an alternative where you get to just subtract interest payments from private wealth & spending power, and voilà, you're done. You have to also ADD the effects of the extreme asset market melt-up that the policy would induce (and all the follow-on reflexive effects--scary to even think about).  

Just imagine how the system would respond right now if the Fed cut to zero amid the current inflation numbers! (or had held at zero all along, as the team transitory MMTers who traffic in this nonsense were demanding). 

The whole angle is just incredibly stupid. It only serves to corroborate the criticism that MMT is a political ideology that will say anything to justify aggressively loose policy, as opposed to a serious economic framework. Stop with it already.

XTOD: So, let's start with what I believe everyone still needs to understand ... The COVID lockdown/restart of the economy was the biggest ECONOMIC event of our lifetime. Bigger than the financial crisis. It changed the economy in ways we see but do not want to accept.

XTOD: Two's at 5 ...10's at 4.60   Stocks at 250 Twelve month forward EPS and a 20.8 PE

This is just fantastic pricing for a recession island destination bet.  I am still sailing the economic slowdown sea tied to the mast to avoid sailing to Soft Landing Island

XTOD: If you already live a comfortable life, then choosing to make more money but live a worse daily life is a bad trade. 

And yet, we talk ourselves into it all the time. We take promotions that pay more, but swallow our free time. We already have a successful business, but we break ourselves trying to make it even more successful. 

Too much focus on wealth, not enough focus on lifestyle.

Daily Economic Update: April 11, 2024

Shave a point off the equities indexes as inflation comes in hot.  So much for the myth that stocks are a good inflation hedge I guess.

As for CPI, core was 0.36% above the 0.3% expectation, headline was also higher than estimates.  Auto related items appeared to drive some of the above consensus reading...good thing no one needs to insure or repair their cars.  And the so called “super-core” inflation is looking not only sticky but rising.

As you might have expected it was a tough day to auction 10Y Treasuries, given 10Y yields saw double digit moves higher in yields.  The 2Y is nearing 5% at 4.96% and the 10Y is back over 4.50 at 4.54%.

Essentially every headline on the FOMC Minutes started with the words 'uncertainty' and the need for further 'confidence' that the data shows inflation will come back to 2%.  The line that some participants warned that  inflation "had been relatively broad based and therefore should not be discounted as merely statistical aberrations," 

We'll see what PPI does today.

XTOD: For currency-issuing governments, bonds are a policy choice, not an economic imperative. You can prune the debt tree by leaving reserve balances in the system (as central bank liabilities) instead of forcing them to convert to government bonds (liabilities of Treasury). 

https://on.ft.com/3UaSCEa

XTOD: Find myself in a virtually unoccupied middle ground on this issue. Yes, composition of the debt b/w (base) money & bonds is a policy choice. But "monetizing" the debt does not "prune" the debt tree--it simply relabels it (e.g., as interest-bearing reserves in the U.S.)  Swapping bonds for interest-bearing money mainly shortens the maturity structure of the outstanding supply of government securities. The total supply of debt (rather than its composition) and its path (relative to demand for this debt) matters more, in my opinion.

XTOD: Can we finally get a mea culpa from Krugman, MMT clique & other transitory truthers?

Would be congratulating themselves like crazy rn if data were good, despite 2 yrs too late.

PISS POOR analysis & forecasting, confidently issued w/ political motives & no actual insight. OWN IT

XTOD: “The 3-month annualized change in supercore inflation is now over 8% and accelerating… The 6-month annualized change is 6%, and the year-over-year change is 5%… We are sticking to our view that the Fed will not cut rates in 2024”  Apollo’s Torsten Slok

https://x.com/StephanieKelton/status/1778025062647357738

https://x.com/dandolfa/status/1778041930276041019

https://x.com/Jesse_Livermore/status/1778050504779608131

https://x.com/FerroTV/status/1778094795119907068

Daily Economic Update: April 10, 2024

CPI Day is upon us.  Expectations are for both headline and core CPI to rise 0.3% MoM.  Speaking of inflation, yesterday's NFIB Small Business Optimism provided the following:

“Small business optimism has reached the lowest level since 2012 as owners continue to manage numerous economic headwinds,” said NFIB Chief Economist Bill Dunkelberg. “Inflation has once again been reported as the top business problem on Main Street and the labor market has only eased slightly.”

I was as shocked as you, I didn't know inflation could be so problematic, in fact I thought it was business greed that was causing inflation.  How could business be harmed here?  

Maybe 'Money Illusion'?   

"Business is always injured by uncertainty. Uncertainty paralyzes effort, and uncertainty in the purchasing power of the dollar is the worst of all business uncertainties."  - Irving Fisher

Don't worry I'm sure crypto solves this or if not AI will.

Yesterday's 3Y auction wasn't super pretty with a 2bp tail, we'll get CPI and 10Y Note auction today.  Markets also keeping an eye on the geopolitical risk with tensions escalating in Gaza.

XTOD: TODAY IS THE MOST IMPORTANT CPI REPORT OF YOUR LIFE SO READ THIS THREAD🧵

XTOD: Is the U.S. deficit growth a problem which will necessitate YCC one day?  Maybe.  But talk to me when the yield curve is positively sloped by 250bp AND our currency is weak relative to other fiats AND our economy is in a recession.  Otherwise STFU about #YCC

XTOD: Here's a crazy stat that no one will believe.  The universal investment benchmark is the 60/40 portfolio of stocks and bonds.  What if you replaced the bonds entirely with gold....crazy right? 

Turns out it makes no real difference.

XTOD: Manley: "Lower mortgage rates would prompt more people to sell their homes, leading to more supply and potentially softer prices."

"Manley’s idea is a provocative one." That's provocative: "P-R-E-T-T-Y-S-T-U-P-I-D."

XTOD: Who are you riding with to take home the green jacket?

Daily Economic Update: April 9, 2024

One of those weeks where everyone is kind of waiting for inflation data.  Stocks fell slightly while yields rose again.  The 2Y is sitting right around 4.80% and the 10Y at 4.43%.  Market continues to reprice the number of rate cuts on the remainder of the year lower.

In the interim there is more student loan related forgiveness talk, this time using something through the Higher Education Act.  The plan reportedly would cancel up to $20K in interest for borrowers up to certain income caps and has several other categories of debt eligible for cancelation, including those whose loans have been outstanding for greater than 20 years.   

Yellen talks tough on Chinese banks for supporting Russia.  

On the inflation front, the NY Fed SCE showed consumers continue to have 1 year ahead inflation expectations of 3% and once again increased their 3 year ahead expectations.

On the day ahead it's NFIB Small Business Optimism and 3Y Treasury Note auction.

XTOD: Slide deck from Jim Bullard's talk on April 2, 2024 at the University of Miami.   Basic message: TR says Fed was too slow in raising policy rate and is now too slow in cutting.   https://docs.google.com/presentation/d/1Qi6jBL4htNvkXa7-7e1PRtJyAXtFQTPe/edit?usp=sharing&ouid=115002303683574113856&rtpof=true&sd=true

XTOD: Leon suddenly became the element Curb couldn't do without. New  mansions in new neighborhoods, a move to New York for a season, even a  five-year hiatus—Leon and his durags have persisted through it all. And  in the process, JB Smoove became one of Hollywood’s most prolific  comedic character actors.  https://gq.com/story/jb-smoove-hype?utm_brand=gq&mbid=social_twitter&utm_social-type=owned&utm_medium=social&utm_source=twitter

XTOD: The focus is on big name MLB elbows, but what should get as much attention/concern are 16-year-old studs having UCL reconstructions now. They'll be throwing 100+mph in the big leagues with old ligaments 10 years from now. That's how this perpetuates. We HAVE to think upstream.

XTOD: Warren Buffett: "[My dad] taught me that what's on your inner scorecard is more important than your outer scorecard. A lot of people are concerned with what the world will think about this or that — instead of what they themselves think about it." 

XTOD: No surprise:  "Brent Clark is often asked by other parents how he and his wife Anne nurtured Caitlin to become the basketball star that she is. 

His answer? Get your children engaged with as many different activities as possible, sports or otherwise."

Daily Economic Update: April 8, 2024

Eclipse Monday.

"I'm not the only one staring at the sun" ???  

  or "Black hole won't you come and wash away the rain" ???  

or "And everything under the sun is in tune But the sun is eclipsed by the moon"

Strong job data causes equities to bounce, setting off east coast earthquake on Friday…or something like that.  Correlation is not causation.  Now we have Eclipse Monday...

Jobs +303K, well above consensus with unemployment rate at 3.8% and average hourly earnings holding in there at a solid 0.35%.   Rate cuts?  We're talking about rate cuts? 

We start the week with coming off a losing week for equities and with the 2Y yield sitting 4.76% and 10Y yield sitting at 4.40%.  

Your goal for the week: think about such elusive concepts as R*, measuring productivity, and equity risk premium.  Good luck.

Another CPI report and PPI on the come.....just consider for a moment some thoughts from Nassim Taleb on what he calls the "Noise Bottleneck"....

"In business and economic decision-making, data causes severe side effects —data is now plentiful thanks to connectivity; and the share of spuriousness in the data increases as one gets more immersed into it. A not well discussed property of data: it is toxic in large quantities —even in moderate quantities....The more frequently you look at data, the more noise you are disproportionally likely to get (rather than the valuable part called the signal); hence the higher the noise to signal ratio....To conclude, the best way to mitigate interventionism is to ration the supply of information, as naturalistically as possible. This is hard to accept in the age of the internet. It has been very hard for me to explain that the more data you get, the less you know what’s going on, and the more iatrogenics you will cause."

Monday:  Try not to get blinded by the eclipse

Tuesday: NFIB optimism

Wednesday:  CPI

Thursday: PPI, Jobless Claims

Friday: Import Prices, Consumer Sentiment

XTOD: “Knowledge compounds almost in the same way that your money compounds. In fact, only when your knowledge compounds at a faster pace, your money is safe. To me, that is a very fascinating journey and rewarding life.”  — Li Lu

XTOD: “The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.”  — Morgan Housel

XTOD: Financial institutions operate by a kind of reverse Occam's razor.  

They have a large incentive to favor the complex and costly over the simple and cheap, quite the opposite of what most investors need and ought to want. - Jack Bogle

XTOD: 46% of people take less Paid Time Off than offered. I would’ve guessed the number is 80% tbh.   It’s a big problem for Americans either way. “Feel badly about co-workers taking on additional work.”

XTOD: Israel bombing Iranian embassy in Syria and now Ecuador invading (!) Mexican Embassy in Quito—feels like a lot of international law and taboos are being broken with very uncertain long term consequences.

XTOD: BREAKING - #Armenia's defence ministry reports numerous areas came under fire from #Azerbaijan last night, including areas around the villages of Movses, Chinari, Sotk, Verin Shorzha, Kut and Aravus. Troop movement reported near Ishkhanasar.

XTOD: Iowa-UConn WBB is ESPN’s most-viewed basketball game … ever. And it’s ESPN’s second-biggest audience for a non-football game … ever.

XTOD: The all-new 75th anniversary edition of this timeless Ben Graham classic will release on October 22, 2024.  640 pages of Graham's original book — "leaving his original text untouched" — alongside updated commentaries from Jason Zweig to explain how the Dean of Wall Street's wisdom still applies today.

XTOD: Nice review of "Getting Monetary Policy Back on Track" by Tom Hogan https://www.independent.org/publications/tir/article.asp?id=1926

Daily Economic Update: April 5, 2024

 

Another Friday, Jobs Day is here.  The consensus estimate is 200 to 215K depending on where you look, but the whisper number seems a little higher following this week's ISM manufacturing and Powell's comments on immigration. It seems no one believes that the number will come close to the 275K printed in the March headline.  As usual average hourly earnings and unemployment rate will both be closely watched.  No matter what the number you'll easily be able to find someone to tell you that it was due to the weather or that all of this data is of low quality these days due to survey responses falling.

Yesterday saw jobless claims rise slightly but still tracking historically low levels.  In Fedspeak, Kashkari said the quiet part out loud, that the Fed might not cut this year (if inflation stalls...which it kind of has).  Oil spiking probably doesn't help the inflation fight either.  Stocks fell and yields actually fell slightly as well.  Heading into Jobs day it's a 2Y at 4.65% and a 10Y at 4.31%.

XTOD: A lot of people seem to have a necessary level of stress, and when their life is going well they make up imaginary problems to fill the void.

XTOD: Am I heading back to H4L island  

Definitely not. That is consensus now.  I am sailing the economic slowdown sea and the sirens of soft landing island are beckoning and I am lashed to the mast and heading toward recession island which is deserted.  

Dead 

CDX protection buyers

Vol buyers

Equity shorts

KRE shorts

STIR buyers 

Litter the shores of recession island not a sole alive

XTOD: “Wasting your time doubting whether you’re going to be successful is pointless.”  ~ Kobe Bryant

XTOD: Essay: In trying to manage my ever growing list of passwords, I often find myself daydreaming about simpler times, when one could simply call a doctor’s office and speak to a short-tempered human to schedule an appointment  https://on.wsj.com/3TK5cZK

XTOD: Re: 4 Day Work Week: This is inevitable & so incredibly bullish for US economy. Everyone is insane workaholic but also everyone is doing at least a day's worth of busywork AI can do. And no one has any chill so what will they do with that extra day? Shop and buy things to fill the void

Daily Economic Update: April 4, 2024

ADP employment rises more than forecast, which coupled with strong employment components in the ISM manufacturing earlier this week have caused the forecast for Friday's Jobs numbers to appear to be revised higher.  ISM services data showed continued slowing in prices and employment, but still high levels of production.  

Powell basically said the same thing he's been saying, stressing data dependence and that the it's too soon to cut. Perhaps his comments on immigration might have been the only thing of note (see XTOD's below).

The earthquake in Taiwan is a reminder of the fragility of supply chains, given the reliance on TSMC for chips.  As the late Danny Kahneman said:

“Room for error is the only way to navigate a world that is impossible to predict.”

Reminds me of a guy named Ben Graham and his concept of "margin of safety" 

XTOD:  had coffee with the head of a large family office today, and he said something really profound that I’d never quite put together.   Paraphrasing: “Capital structure ripples through management and ultimately ripples through employee experience” 

If you work in a business run for cash flow, a PE-backed platform, a business run for growth or a business run for long term hold, your experience as an employee could not be more different.  

The cash flow capital demands low overhead, fast ROI, had little patience for capacity building.  

The growth capital spends aggressively to build the company of tomorrow, today. Nobody worries much about profitability.  

The PE capital is all about the exit, and everyone is managed aggressively quarterly to maximizing strategic value and EBITDA at time of sale.  

The long term hold capital worries about downside more than upside and tends to err on the side of conservatism. It’s a marathon, not a sprint.  

No one right way, but it’s worth remembering that it’s the capital that ultimately designs the game that everyone else plays.

XTOD: “The price spiral in assets nurtured a shift in personal values as embodied in an increasingly commonplace tendency among individuals and companies alike to worship money above all else“

XTOD: Powell leaning in on labor supply increase via migration. This seems to make NFP prints very asymmetric - strong prints are going to be dismissed as increased supply, but a hint of weakness leads to early/more cuts. IMO everything going to surge the moment NFP weakens

XTOD: Any amount of intelligence can be overridden by ego, insecurity, immorality, bad incentives, or impatience, usually in that order.

Daily Economic Update: April 3, 2024

Q2 continues to unwind some of the record gains in equity markets as stocks fell for a second straight day.  Tesla deliveries falling short of expectations weighed on those shares.  Bond yields rose yet again on better than expected factory order data (+1.4% vs. 1% est) and better than expected Job Openings (8.756mm v. 8.73mm est) .  The USD currency continued to be a wrecking ball against the rest of the world.  The 2Y is 4.70% and the 10Y is 4.36%

Interestingly very little ink has been spilled expressing any concern about the strength of the dollar and the burden that may place on EM economies that issue a lot of dollar denominated debt.  Back in December there was some talk of EM debt and at the time the Dollar had been weakening for several months and the expectation was for the Fed to begin cutting and the Dollar to weaken, but of late the Fed seems to be content to hold while many other central banks begin to cut, leading to a strengthening USD since mid-March.  Will the EM Dollar-denominated debt wall make headlines again? time will tell.

On the day ahead it's ADP, ISM Services, and Fedspeak with Williams and Powell.

XTOD: I’m stealing “hunting greatness”

XTOD: Moving toward goals is very different than running away from problems.

XTOD: "Sophisticated minds adopt simplified lifestyles; simplistic minds are drawn to overly sophisticated lifestyles." - Taleb

XTOD: Avoid these 9 mistakes

1. Losing sight of dreams and falling into work for work’s sake (W4W). 

2. Micromanaging and e-mailing to fill time. Set the responsibilities, problem scenarios and rules, and limits of autonomous decision-making—then stop, for the sanity of everyone involved.

3. Working where you live, sleep, or should relax. Separate your environments—designate a single space for work and solely work—or you will never be able to escape it. 

4. Not performing a thorough 80/20 analysis every two to four weeks for your business and personal life.  

5. Striving for endless perfection rather than great or simply good enough, whether in your personal or professional life. Recognize that this is often just another W4W excuse. Most endeavors are like learning to speak a foreign language: to be correct 95% of the time requires six months of concentrated effort, whereas to be correct 98% of the time requires 20–30 years. Focus on great for a few things and good enough for the rest. Perfection is a good ideal and direction to have, but recognize it for what it is: an impossible destination. 

6. Blowing minutiae and small problems out of proportion as an excuse to work. 

7. Making non-time-sensitive issues urgent in order to justify work. Focus on life outside of your bank accounts, as scary as that void can be in the initial stages. If you cannot find meaning in your life, it is your responsibility as a human being to create it, whether that is fulfilling dreams or finding work that gives you purpose and self-worth—ideally a combination of both. 

8. Viewing one product, job, or project as the end-all and be-all of your existence. Life is too short to waste, but it is also too long to be a pessimist or nihilist. Whatever you’re doing now is just a stepping-stone to the next project or adventure. Any rut you get into is one you can get yourself out of. Doubts are no more than a signal for action of some type. When in doubt or overwhelmed, take a break and 80/20 both business and personal activities and relationships. 

9. Ignoring the social rewards of life. Surround yourself with smiling, positive people who have absolutely nothing to do with work. Happiness shared in the form of friendships and love is happiness multiplied.

XTOD: Americans spent over $113 billion on lottery tickets last year, more than they spent on movies, books, concerts and sports tickets - combined.

Daily Economic Update: April 2, 2024

Yields rose and stocks fell to start the quarter, in a move that likely reflected the fact that Friday was a market close and thus the delayed reaction to PCE and Powell.  The 10Y yield was up double digit basis points to 4.32% and the 2Y yield was up ~8bps to yield to 4.71%

Speaking of the Fed, economist Allison Schrager weighed in on her blog with the following:

"Is it worth damaging an otherwise strong economy to get inflation from 3% to 2%? There is nothing wrong with 3%, other than the fact the Fed’s target is 2%. I know, credibility is important. But let’s be honest, when have they ever hit their target? Their credibility is about faith more than history. They were below target pre-pandemic and now just above. Maybe a wide range is a better idea, or we just admit the Fed does not have precise control over these things. Though I also worry that giving up now could destabilize expectations.

Sometimes we all need to believe something, even if it is not true. It makes for a stable(ish) equilibrium."

In yesterday's data, the ISM Manufacturing index was above estimates with strong internal components including jobs.  Construction spending was below estimates.    The Atlanta Fed GDPNow is up at 2.8% for Q1 while NY Fed's model is ~1.8%.

XTOD: First Case Of Bird-Cow-Human Transmission Of Bird Flu Reported In Texas

XTOD: Can someone explain to me how Trump Media is trading at ~$6B market cap with $4M in revenue and $58M loss?  How is this not in free fall lmao

XTOD: Bitcoin might be off its all time highs, but over the last 3 years it has outperformed the S&P 500 by over 20%.  April Fools! Actually, the S&P 500 has outperformed Bitcoin by over 20% in the last 3 years.  Thanks for playing!

XTOD: McKinsey is now offering staff 9 months severance if they agree to leave the company, in a bid to reduce headcount amid a huge downturn in professional services.

XTOD: People aren’t really looking to be economically stable before they start families; they’re looking to be existentially stable.

They will opt-out of important life decisions altogether because they are waiting for the day when they will feel like more of a confident person with a firmer sense of self before making a commitment—not knowing that it’s those very decisions and commitments which they are opting out of that would allow them to develop into the person they desire to be.