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% | 

https://x.com/kgreifeld/status/1779896965523726585

https://x.com/vtchakarova/status/1779940083652518348

https://x.com/JavierBlas/status/1779946754479100287