Daily Economic Update: May 31, 2024

We end May with the anticipated PCE (inflation) report.  Following yesterday's slide in yields on a GDP report that showed lower growth than previously reported, we end May with 2Y yields at  4.93%, down from 5.05% to begin the month and 10Y yields at 4.55% down from 4.68% at the start of the month.  Despite falling yields the 20% decline in Salesforce shares helped lead equities lower for a second straight day.  After hours news that the U.S. will slow exports of AI chips is likely to weigh on the most loved equities.

Yesterday's 1Q GDP report showed real GDP revised down to 1.3% from 1.6%, with consumption revised down and PCE component also revised down.  On the day ahead we'll get an update to the ATL Fed GDPnow for 2Q, where the last estimate was currently sitting at a strong 3.5%.  The NY Fed's nowcast will also be updated today and is much lower at 2.04%.

Away from the data (I’m not touching political news here)…..the STL Fed had a research piece out on Commercial Real Estate that seems to state the obvious issues already well known to the market and probably could have been a post on X/twitter: 

• A 'wall of maturities' with $1.7 trillion of CRE loans expected to mature between now and 2026
• Borrowers may be refinancing into higher rates and weakening fundamentals (especially for office)
• A discussion of NOI by real estate sector, noting that higher inflation has raised operating cost as has rising insurance cost, both eroding NOI
• If you didn't know the office sector is having problems, now you do.
• " stress in the commercial real estate market is likely to remain a key risk factor to watch in the near term as loans mature, building appraisals and sales resume, and price discovery occurs, which will determine the extent of losses for the market."

On the day ahead PCE is the main event.

XTOD: Pending home sales, a leading indicator, plunged 7.7% in April to the lowest level since the economy was in pandemic-lockdown recession mode in April 2020. Nice to see how ineffective Fed policy is, right?

XTOD: It's hard to understate just how unprecedented the scale of US fiscal stimulus is at the moment. Not only is the deficit massive for a non-crisis period, but its financing is almost entirely via very short-term issuance, which has never been the case before in a non-crisis time.

XTOD: Hello stagflation.   The US GDP growth for the first quarter of 2024 was revised downward from 1.6% to 1.3%.   This figure, less than half the growth of the third quarter of 2023, which was 3.4%, paints a stark picture of our economic trajectory.  The slowdown in economic growth hinged on consumers spending less this past quarter. That is understandable. Consumers are facing record credit card, auto, and mortgage debt. Consumer prices rose by 3.3% during the first quarter of 2024. 

The Fed can't control supply-side or event-driven inflation. Commodity prices are rising. Higher-for-longer rate policy has increased debt burdens for individuals, businesses, and the government. Banks are sitting on more than half a trillion dollars of unrealized losses.  

None of that suggests economic growth will beat inflation any time soon.

XTOD: Real GDP (annual rate) revised down to 1.3% in Q1, originally 1.6%. GDI was 1.5%.

Inertial components strong:

--Consumption +2%

--Business fixed investment +6.0%

--Residential +15.4%

--Real final sales to domestic purchasers +2.8%

XTOD: Ex-NY Fed's Bill Dudley: "I think r* is a lot higher than the Fed recognizes, which means the central bank isn’t doing enough to fight inflation...Perhaps the Fed’s mantra, instead of 'higher for longer,' should be 'higher indefinitely.'"

XTOD: Charlie Munger: “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.”

Bob Robotti: "It is difficult to maintain patience when managing other people’s money.... The decision to remain patient is an active decision, no less important than buying or selling a security."

XTOD: Here are six practical lessons and actionable ideas from our conversation with Morgan Housel:

1. Aim for financial independence, not just growing wealth. When you can wake up and do whatever you want to do, that's a sign of success.

2. As you make more money, it's okay to spend more money. But people get into trouble when their spending outpaces their income growth. You can move the goalposts, just not too fast.

3. Wealth accumulation is about being average for an above-average period of time.

4. Don't be a slave to FOMO. Stick to your investment strategy, and don’t be swayed by others' short-term gains.

5. The duration of your investment is more critical than the size of your returns.

6. Personal finance should be personal. Make financial decisions based on your personal goals and values, not on societal pressures or what others are doing.

Focus on what makes you and your family happy, and use money to do that more. https://t.co/0aYuxDJYGf

Daily Economic Update: May 30, 2024

A rough day for stocks, despite NVIDIA being up again.  American Airlines took it on the chin despite data that shows Americans are traveling in record numbers.  Global inflation readings and another poor treasury auction caused some concerns and led to higher bond yields.  The Fed's Beige book showed some pessimism with rising uncertainty and greater downside risk despite reporting that national activity continued to expand in April and through mid-May.   Treasuries ended the day with steeper yields with the 2Y still under 5% at 4.98% but 10's at 4.62%

Speaking of the Fed, they get a Goldman alum joining the ranks as Beth Hammack will replace the retiring Loreta Mester as the next President of the Cleveland Fed.  I didn't spend too much time on the internet, but I'm sure the internet had nothing to say about that.

It seems like every couple of weeks there is some catalyst that leads to higher yields, which sets off some cycle of investors questioning the drivers of higher yields and whether they will feedback into the real economy and drag down stock prices.  From there the collective generally looks to the next inflation or employment print to provide the answers that seem elusive at the moment.

We'll get jobless claims, another look at GDP and inventories on the day ahead.

XTOD: NVDA 2024 = CSCO 2000.  I mean, it is exactly the same thing.

XTOD: Franklin Templeton's Sonal Desai sees 10-year yields settling in above 5% for the longer-term, in part due to the fiscal deficit.

XTOD: Whatever reservations folks might've had about the optics of hiring another Goldman alum into the Fed's top ranks would be presumably diminished by Hammack bringing significant heft on financial plumbing and markets to a committee/board that has been seen as light in those areas

XTOD: As per Taleb’s minority rule, political parties are coalitions of single-issue voters and not collections of centrists. You win by rewarding your supporters with targeted handouts.

XTOD: When trying to make sense of the world, it helps to remember that everyone out there is just doing their best......to advance their own interests.

XTOD: The longer you’ve had strength, the harder it is to lose strength. 

XTOD: ‘Bruce, if I run any more, — and we're still running — ‘if I run any more I'm liable to have a heart attack and die.’ He said, ‘Then die’ 

It made me so mad that I went the full five miles. Afterward I went to the shower and then I wanted to talk to him about it. I said, you know, ‘Why did you say that?’ He said, ‘Because you might as well be dead. Seriously, if you always put limits on what you can do, physical or anything else, it'll spread over into the rest of your life. It'll spread into your work, into your morality, into your entire being. There are no limits. There are plateaus, but you must not stay there, you must go beyond them.’”  - John Little, “The Art of Expressing the Human Body” (1998)

Daily Economic Update: May 29, 2024

The news yesterday was centered around consumer surveys, Fed's Kashkari, poor 2 & 5 year auctions and of course AI fueling another NASDAQ record despite rising yields.  The 2Y is nearing 5% and 10’s crossed 4.50 to 4.55%.

Yesterday's Conference Board Consumer Confidence readings were above consensus forecast both for present situations and expectations index, with the expectations index "was below 80, the threshold which usually signals a recession ahead.".   Also in the report was data showing consumers increasing their 1y inflation expectations while "The Perceived Likelihood of a US Recession over the Next 12 Months rose again in May, with more consumers believing recession is ‘somewhat likely’ or ‘very likely’. This contrasts with CEO assessments of recession risk: according to our CEO Confidence survey, only 35 percent of CEOs surveyed in April anticipated a recession within the next 12 to 18 months.

While much has been made of recent soft data underperforming hard data (i.e. survey data saying the economy sucks while GDP and employment data saying otherwise.  Goldman researchers hypothesize:

 "We hypothesize that the 2020-21 Covid shock led economic agents to widen their conception of what constitutes “unchanged” business conditions. Shell-shocked from the economic volatility of the pandemic recession and its fits-and-starts recovery—economic agents may have redefined their definitions of “unchanged” to encompass a broader and potentially higher range of economic activity growth."

Economist and blogger, Claudia Sahm also wrote about consumer survey data recently, she argues people are currently better off than they were prior to Covid but are more angry about the economy than ever.  She discusses how people are confused about inflation and in my opinion seems to get a little upset that people don't understand the technical definition of inflation.   Some selected quotes:

"No. Words have meaning. Here is the definition of inflation:"  "The gap between people’s assessments and reality is huge." "The best I can do here is say that people are angry and scared of what’s around the corner. They are constantly told that they should be angry and scared. When asked about basic economic facts, they blast all that anger and fear at the questions."

One important thing to keep in mind when it comes to talking about things like the economy is that as humans we struggle to speak about things that cannot be perceived by the 5 senses and most (all?) economic topics fall into this category.  When we are dealing with things that we can't directly be experienced by the 5 senses we talk about them as if they could be seen, touched, heard, or in other words we have to use metaphors.  Words like growth, development, inflation, etc. are metaphors to help us understand things by reference to things we've actually experienced. We've seen a ball be inflated, we've seen a plant grow, etc. When it comes to the word "inflation" it is likely that we have also metaphorically associated it with things like an "enemy" or evil "genie", so it doesn't seem terribly surprising people who now see that word more than ever have negative feelings about it.  As Claudia opines, do this mean survey's capture more than people's feelings about the economy, I'm not sure.  Maybe the survey's are actually showing how disappointed people are about the economy because they see words repeated in media for which they have strong negative opinions of in a metaphorical sense.

Away from the data yesterday we had Fed's Kashkari arguing that we need "many more" positive inflation prints before the Fed will cut rates, he also didn't rule out raising rates if inflation is stubborn.

Economist Alison Schrager had a post in which she argues that "we're never going back to 2019 interest rates."  She is clear that this doesn't mean the Fed won't cut rates ever (even to 0%) but that we'll be in for higher rate environment than existed pre-covid. The reasons: (1) higher r-star and (2) higher bond risk premium due to higher and more volatile inflation and much more debt being issued.

"But it’s not all bad. We’ve had periods of highish (if you call 5% high) rates and lots of growth. Capital will be more expensive, and we probably won’t lavish unlimited capital on anyone who has a tech idea anymore. But that can also mean a healthier and more balanced relationship with risk and a more thoughtful allocation of capital. A zero-rate environment always felt unnatural, even if it was mainly due to market forces."

She goes on to bemoan how private markets are now talked about as nearly risk-free and concludes that discussion with this:

"Many people think risky markets are riskless these days. That’s what happens when you have ten years of zero rates. Even the biggest names in finance forget what risk means. I, for one, welcome higher forever; the madness needs to end."

Time will tell if Alison is correct, but it's interesting to wonder how much pricing in there has been, if any, for an era of higher cost of capital.

In the meantime home prices and AI don't care about the cost of capital.

XTOD: U.S. home prices, as tracked by Case-Shiller, rose +1.3% between the February '24 and the March '24 reading.  That's a new all-time high—national home prices are +2.7% above the 2022 peak 

Year-over-year: +6.5%

XTOD: Nvidia’s share of the data center compute market has grown from about 15% five years ago to circa 80% today, via Goldman Sachs:

XTOD: Microsoft Data says that US office workers are spending 300% more time in meetings today compared to 2020

 XTOD: Markel CEO Tom Gayner on how interest rates are like an inverse form of curfew (on speculation):

"When I graduated from UVA, our first mortgage was something like 15%. It was insane. Every penny we had went to that mortgage. A 15% interest rate is like having a 6 p.m. curfew. When you come home from school, you barely eat a little supper and you're done. You do your homework and you go to bed. There's nothing [else].

Well, as interest rates came down and went from 15% to 10%, maybe that's a 7:30 or 8:00 p.m. curfew. You could come home and go outside and play with your friends a little bit, but nothing really bad was going to happen.

As interest rates kept going lower and lower, the curfew got later and later. To the point where we got to, in effect, 0% interest rates [and] negative interest rates in Europe. That's like no curfew whatsoever. And [with] no curfew whatsoever, bad things can happen."

XTOD: In honor of Angel Hernandez retiring, I am making a thread of my favorite fuck up’s of his throughout the years  Enjoy, and please feel free to add your favorite as well.

Daily Economic Update: May 28, 2024

With the Nasdaq at all-time highs, the week ahead sets up as follows with PCE on Friday as the highlight.

Tue: Fedspeak, home price index, consumer confidence, 2Y & 5Y Treasury Auctions

Wed: Beige Book, moar Fedspeak, 7Y Auction

Thur: Jobless claims, 1st revisions to 1QGDP, inventories

Fri: PCE

Friday featured Waller questioning the level of R-Star.  Are you starting to feel like the Fed just goes in / talks in circles?  Recent data has showed measures of expected inflation moving higher.

I thought the following summarizes the current situation quite well, courtesy of Marcus Nune's blog post titled: "Misunderstanding the Macroeconomy" which you can find here.

"The present situation can be summarized thus:

• a permanently higher 2% price level path
• a permanently higher 5% NGDP level growth path
• the same RGDP level gowth path.

The Fed is, once again, focused on inflation and how to “manage” its “beloved” instrument, the policy interest rate.

If the Fed is “true” to AIT, it will have to bring inflation below 2% for some time. This will also bring the price level to a lower level. Therein lies the danger. Looking at what happened in 2008, to bring the price level down (even if not all the way to the previous level, which, as was mentioned in the “AIT Primer” box above, is not required), the level of NGDP will have to fall. A (maybe) deep recession is the most likely outcome!

The Fed is “scambling” to understand its options. A recent speech by Governor Waller, who wants “several months of good inflation data before lowering rates” is concerned about “what is the neutral interest rate”.

To my knowledge no one has ever pinned it down, with estimates not only varying wildly, but also enclosed within very large confidence bands. As a guide to monetary policy it is quite useless! Since the economy is not anymore in a "low interest rate environment" (which was an important motivator for the change in the Fed monetary Policy framework of August 2020), the Fed is trying to guess how high should interest rates be in the "new environment". Fed talk about rstar is not the "attractor" but the "distractor"!"

I feel like I've been on a theme for a minute (see my last two FOMC recaps), or a career, about uncertainty and the desire for precision where none can be found.  I came across this quote in an unusual place and one far afield from finance and economics (perhaps where people in finance and economics should spend a minute - away from finance and economics, outside of excel and DSGE models, etc.)

" Our natural inclination is to be so precise– trying always to forecast accurately what will happen next– that we look upon uncertainty as a bad thing.....we do not know what a day may bring forth...This is generally said with a sigh of sadness; it should be said as an expression of breathless expectation."  

See this post from September 14, 2023 for more.

XTOD: At the beginning of the year, the market was pricing six Fed cuts this year, six ECB cuts, and five BoE cuts  Today, the market is pricing two-and-a-half cuts by the ECB and the BoC, one-and-a-half cuts by the Fed and the BoE -Torsten Slok

XTOD:  I think it’s about time pompous idiots who think they are the economic  intelligentsia stop talking about polled consumers as a bunch of peasants who cannot be allowed into the pantheon of economic punditry for smelling like hay. Most of you farts have built careers being consistently wrong about everything. Am sure the common man knows better.

XTOD: Really interesting speech by @federalreserve  Governor Chris Waller on R-star. This speech should put to bed the claim that R-star no longer relevant. Au contraire, it is very much alive and well! A short 🧵on his speech (1/n) ...Governor Waller then list the reasons he sees for why treasury yields have trended down: (4/n)

1. "The first factor is the liberalization and globalization of capital markets starting in the 1990's."

2. "The second factor causing demand for Treasury securities to grow more than supply was the large buildup of official reserves that started after the reforms that followed the 1998 financial crisis in Asia."

3. "The third factor driving prices up and yields down for Treasuries and similarly affecting r* is sovereign wealth funds."

4. "The fourth factor that is thought to have influenced Treasury yields and r* over the past couple of decades is the aging of the population in the United States and around the world."

5. "The fifth factor that increased the demand for Treasuries came from many new financial regulations implemented after the 2008 global financial crisis."

He notes these 5 factors on the treasury demand side have not and probably will not meaningfully change. What is changing and may affect R-star is on the supply side of treasuries: the expected and growing path of future primary deficits. (Sounding a little FTPLish, no?) (5/n)

XTOD: Peter Thiel: AI is bad news for people for math skills and society is going to shift in favor of people with strong verbal skills.

XTOD: Clarity comes from subtraction. Remove the noise to hear the essentials speak.

Daily Economic Update: May 24, 2024

Yesterday was a tough day for equities despite the previous evenings NVIDIA earnings.  The stronger than expected flash PMI's seemed to be part of the culprit as the hotter than expected reading likely pared with yesterday's "hawkish" FOMC Minutes led to higher yields.  The 10Y creeps back towards 4.50% off a local low of ~4.35% and the 2Y creeps back towards 5% off a local low of ~4.80%.

As for PMI's both manufacturing and services beat expectations and hitting fastest in 2 years, with services leading.  The concern for bond yields was that the input price readings rose sharply in May, "the rate of inflation accelerating to register the second-largest monthly increase seen over the past eight months" and in commentary provided by S&P: " What’s interesting is that the main inflationary impetus is now coming from manufacturing rather than services, meaning rates of inflation for costs and selling prices are now somewhat elevated by pre-pandemic standards in both sectors to suggest that the final mile down to the Fed’s 2% target still seems elusive.”

On the day ahead it's durable goods orders, UofM sentiment and Fed speak.  Ok, you can go back to AI, tariffs, elections, data-center power usage, deficits, MMT, the Yen, the Yuan, wars, and whatever else is on your mind.

XTOD: First loss on an AAA-rated slice of a CMBS deal since 2008 right here - backed by 1740 Broadway in NYC.  https://bloomberg.com/news/articles/2024-05-23/cmbs-buyers-suffer-first-loss-on-aaa-debt-since-financial-crisis by @ArroyoNieto  &  @natalexisw

XTOD: I’m always amazed that mainstream ratings agencies are able to hand out AAA ratings to single-asset loan CMBS (given that diversification is the supposed to be the bedrock of securitisation)

XTOD: We did it everyone, magnificent 1!

XTOD (See DARK MATTER): "Economics profession, they've been - they've been confident in various formulas, but economics is not physics. The same formula that works in one decade doesn't work in the next. Economics is a difficult subject."  Charlie Munger

XTOD: US to China: We raise tariffs on you. China to US: we lower yuan.

XTOD: From the DOJ complaint: “Ticketmaster Tax” "Whatever the name of the fee and however the fees are packaged and collected, they are essentially a “Ticketmaster Tax” that ultimately raise the price fans pay."

XTOD: "If you are not enthusiastic about your job, one-third of your life goes to waste." —Ingvar Kamprad (founder of IKEA)

Daily Economic Update: May 23, 2024

Stocks fell (in the normal trading, but NVIDIA reported after hours), yields rose as FOMC Minutes (meeting ended May 1, 2024), skewed hawkish, see bullets below, but the TLDR is perhaps best summarized by these two statements: (1) "many participants commented on their uncertainty about the degree of restrictiveness. These participants saw this uncertainty as coming from the possibility that high interest rates may be having smaller effects than in the past, that longer-run equilibrium interest rates may be higher than previously thought, or that the level of potential output may be lower than estimated and (2) Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.

And did anyone else think that the fact that the Staff expects inflation to fall back to 2% by 2026 to be a bit of a long timeline?

NVIDIA beat across the board and announced a 10 for 1 stock split effective June 7th.  Snowflake earnings appeared to be really good too.  AI continues to appear to be an unstoppable force or something. 

Across the pond PM Sunak is calling for elections July 4th.  

Add Bird Flu to 'risk to your outlook'.

On the day ahead it's jobless claims and flash PMI's.

FOMC Minutes Recap - probably worth skipping to XTOD's

• Financial Markets and OMO:
• data pointed to inflation being more persistent than previously expected 
• the rise in longer term yields appeared to be due to higher real rates and higher risk premium
• short-term inflation expectations rose, but longer-term inflation expectations were well anchored
• reserves remained abundant
• Staff Review of Economic Situation
• good growth, slowing inflation and better balance in labor markets
• Staff Review of Financial Situation
• recapped market data, mentioned geopolitical situations
• credit remained available despite some tightening of conditions but noted that credit standards continued to tighten for CRE
• the Staff characterized the vulnerabilities of the financial system due to high asset prices as 'elevated'
• Staff Economic Outlook
• The economy was expected to maintain its high rate of resource utilization over the next few years, with projected output growth roughly similar to the staff's estimate of potential growth. The unemployment rate was expected to edge down slightly over 2024 as labor market functioning improved further, and to remain roughly steady thereafter.
• PCE inflation was expected to be close to 2% by 2026
• The Staff cited upside risk to inflation and downside risk to growth
• Participants Views 
• some debate over the impact of seasonal patterns and the impact of volatile categories had outsized impact on inflation readings vs. the view that inflation increases had been broad based
• attuned to inflation risks and still expect that inflation would return to 2% over the medium term, taking longer than previously thought
• some discussion of new leases at lower rents ultimately passing through to lower inflation
• despite participants noting some positive factors that could lower inflation, 'Several participants commented that growth of aggregate demand would likely have to slow from its strong pace in recent quarters for inflation to move sustainably toward the Committee's goal'
• Discussion of the impact of immigration on wages and growth
• Discussion/disagreement on productivity, with some believing recent productivity growth will not persist, while others believing it will be sustained in light of things like AI
• Noted the dichotomy of how lower income households were being hit hard by higher rates while wealthy households appeared to be benefiting from easy financial conditions
• Overall attuned to how higher rates could impact financial stability, but believed that other tools should be used to combat financial stability risky without impact policy rates
• many participants commented on their uncertainty about the degree of restrictiveness. These participants saw this uncertainty as coming from the possibility that high interest rates may be having smaller effects than in the past, that longer-run equilibrium interest rates may be higher than previously thought, or that the level of potential output may be lower than estimated.
• Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate. Committee Policy Actions

XTOD: The minutes not only made mention of "various" participants willing to consider hikes, they also removed the sentence below about rates being at their peak.

XTOD: Great work Mike Wilson

XTOD: Imagine believing you're running a restrictive monetary with stock markets liquidity goosed up to 188% market cap to GDP.

XTOD: "Commodities protect against structurally higher inflation and diversify better than bonds. A portfolio with 40% exposure to commodities outperformed a traditional 60/40 mix with less downside risk."  - BofA

XTOD: Question: What if I don’t want to wait for the monthly CPI release to see what inflation’s up to? Answer: Look at the price changes specifically for sugar and sweets, which are closely correlated with overall CPI https://ow.ly/l43H50RPoyv

XTOD: Investing in yourself is the key to achieving financial freedom.  Whether it's learning new skills, starting a side hustle, or taking care of your physical and mental health, investing in yourself has the highest ROI.

Daily Economic Update: May 22, 2024

S&P 500 hits a new record.  Yields were down slightly, but overall it was another quiet day.  Gov. Waller says that in the absence in higher unemployment, he needs to see several more good inflation prints before cutting rates.  He did seem to downplay the need to raise rates further and the easing of financial conditions.  Waller joins a chorus of Fedspeak that all seem to say they need to see more data before being willing to cut rates will also holding a view that policy is restrictive and just needs more time.  We’ll see what FOMC Minutes, though now stale, have to provide that might be of any interest.

Away from Fedspeak is always and everywhere AI.  The latest buzz in AI news seems to be the threatened lawsuit by Scarlett Johansson against OpenAI where she asserts that after she turned down providing OpenAI permission to use her voice they essentially trained an AI personal assistant to sound just like her.

You'll get to hear plenty about AI today with Nvidia earnings on the come today.

And away from AI you have Biden planning to release another million barrels from the SPR to help ease gas prices ahead of the 4th of July.  Some might argue this doesn't quite get at the heart of the high price problem, but others could argue that the administration has been a pretty good oil and gas trading firm.

On the day ahead we get FOMC Minutes and new home sales along with Nvidia earnings.

XTOD: Some more fallout from the Freddie multifamily probe: The agency has placed valuation & appraisal firm BBG Real Estate under review, and says it will not accept any deals where BBG's Jon DiPietra is involved. See screenshots attached...In November, Freddie rocked the MF world when news broke that had placed Ralph Herzka's Meridian under investigation over an allegedly dodgy loan deal. There's been a lot of turmoil since, w sister agency Fannie blackballing title firms (riverside,Madison)

XTOD: This Craigslist ad for a 1999 Toyota Corolla is a masterclass in copywriting.  https://x.com/amandanat/status/1792943756951584929

XTOD: The Fed survey of economic well-being is out; some changes at the margin, but the basic story remains that Americans say they're doing mostly OK, their local economy isn't too bad, but the national economy is terrible 1

XTOD: Bill Miller on the value of simplicity:  “For every company, there are a few key investment variables. The rest of the stuff is noise.”   “Are things getting better or worse? If they’re getting better, then I want to understand what’s going on.”

XTOD: It makes relatively little difference whether the Fed targets 2%, or 3%, or 0%, inflation. The bigger difference is that between any inflation target and an aggregate spending (e.g., NGDP) target, which lets the inflation rate vary with aggregate supply innovations...Some of the Fed's biggest errors have stemmed from its failure to stabilize spending when supply innovations made doing so inconsistent with inflation targeting. It would be a shame if it missed yet another opportunity to take the stable spending alternative seriously.

Daily Economic Update: May 21, 2024

Is Morgan Stanely's Mike Wilson switching from market bear to bull a sign of the top or should we just give the guy some credit for being able to change views?  After all, "“When the facts change, I change my mind - what do you do, sir?” ― John Maynard Keynes

What do people do when there is no inflation, employment or growth data to obsess over?  I guess they listen to Dimon express pessimism despite his stock price being up pretty massively the last 2 years or they catch up on Matt Levine's writing about Red Lobster's BKO, or they hear Loretta Mester and Bostic imply higher for longer.

Tuesday's is another light day for economic data, so you'll have to read about copper, gold, shrimp, cybersecurity, whoever announces something involving AI (see AI PC's), wars, hear the same Fedspeak, etc.

XTOD: Jamie Dimon: "We do know the consumers are running out of excess money.  Small businesses are running out of excess money. We don't know when it's going to end, but it looks like sometimes early next year..."

XTOD: A record 55% of fund managers surveyed this month by Bank of America say global fiscal policy is too stimulative. Easier monetary policy and tighter fiscal policy could be positive for US 30-year Treasuries: BofA's Michael Hartnett

XTOD: Details from Red Lobster’s bankruptcy filing are wild and so much mismanagement:

▫️$1B in debt, $30m in cash   ▫️Previous PE owner sold land and leased it back to Red Lobster at “above market rates” ▫️$20 Endless Shrimp cost it $11m but the interesting part is that one of the chain’s owners is Thai seafood firm Thai Union (which also owns Chicken By The Sea) and it may have used Endless shrimp to dump its own shrimp supply through the 578 restaurants in North America  - Thai Union became the only Red Lobster shrimp vendor, overcharging for shrimp and skipping quality reviews (Thai Union has written off its $500m+ investment) ▫️Red Lobster has had 5 CEO in the last 5 years (!!!)

▫️Sales down 30% since 2019

XTOD: BofA: The bar for hikes is high, but cuts are still a way off... Also, we reject the "stagflation" narrative that has resurfaced recently. The consumer spending outlook is solid.

XTOD (If you want a long thread on shipping...I don't): Global containerized ocean freight prices are surging to levels not seen since the pandemic supply chain crunch. Some key trade lane rates are up 140% since mid-December and increasing by the week. What’s happening, why, and what it means for businesses needing products moved? 

XTOD: The fact that inflation is mostly in services means that these disruptions probably haven't added to inflation yet. Which is why they're so worrying -- it means a supply shock is coming and hasn't been felt yet.

XTOD: What is the cost of inaction? What is your status quo costing you, and how can you make the pain painful enough to drive you forward?

XTOD: You just have to be willing to look like an idiot while you figure it out.

Because once you figure it out, everyone else looks like an idiot for doubting you.

Daily Economic Update: May 20, 2024

Are my daily economic updates best read from the bottom up?  

Friday featured the Chinese property market bailout. It's been a good month for equities.  The week ahead is light on economic data so Fedspeak and the Minutes of the FOMC meeting will likely be the highlights as will Nvidia earnings.

Mentioned in Friday's post, the recent Blanchard and Bernanke paper on the last mile of inflation seemed to advocate a very Phillip's Curve dominate mentality, that unemployment will have to rise before inflation can return to target.  I thought this post from NGDP Targeting proponent Marcus Nunes, citing comments from economist George Selgin, laid out some interesting thoughts in retort to Blanchard and Bernanke.  You be the judge of the merits of the arguments.

4.83% on 2s and 4.42% on 10s is where we start the week in fixed income. 

On the week ahead:

Monday & Tuesday: Fedspeak

Wednesday: Existing Home Sales, FOMC Minutes

Thursday:  Jobless Claims, flash PMI's, New home sales

Friday: Durable Goods, consumer sentiment and Waller

XTOD: 1. Tweet triggered by some of the discussion following the publication of my new paper with Ben Bernanke. To clarify an important point. Finding that pre-pandemic era inflation was mostly due to relative price movements, especially the relative price of commodities, and that the labor market played a limited role, does not settle the issue of the role of aggregate demand and monetary policy in generating the inflation.  2. It may well be that part of the increase in commodity prices reflected higher world demand for commodities, triggered in part by lose monetary and fiscal policy, in particular but not only US fiscal policy. 3. Indeed, if one believes that individual commodity prices reflect a common aggregate demand component together with largely commodity specific supply shocks, one can use a principal component analysis to extract this common aggregate demand component. We did this in Bernanke Blanchard 2023. https://shorturl.at/s9IGs , Figure 5.  The conclusion that it indeed played an important role, at least until the end of 2022.

XTOD: GOLDMAN'S PASQUARIELLO: ".. a handful of the biggest money managers I know have recently made strong arguments for ongoing durability in the US economy.  if there’s a common thread across them, it’s the momentum behind spending on AI, infrastructure, onshoring and defense.  I agree with the broad thesis and will register that GS is calling for Q2 GDP growth of 3.2%, while the 

@AtlantaFed  is predicting 3.6% .. it stands in contrast to the ongoing pessimism I see in the press and hear on the street (specifically regarding the consumer, which I don’t agree with)."

XTOD: 7/7  When the Fed starts cutting rates at an all-time high, the stock market is signaling that the Fed is not restrictive and/or inflation is not a problem. If the market thought the Fed was restrictive and/or inflation was a problem, it would not be at a new high. So, when easier money comes, stocks boom.  But when stocks are not at an all-time high, the market signals a problem. Easy money is either not a fix or contributes to that problem, like spurring inflation. In this case, stocks struggle to break even.  Finally, if the Fed cuts a year before a recession, the signs of a recession were most likely evident, like an inverted yield curve in 2019, crashing housing prices in 2007, or the tech stocks deflating in 2001.   In this case, the Fed cut attempts to reverse this trend (read: panicking to stop the recession), and it is unsuccessful.   Conclusion  The problem with thinking rate cuts would produce lower spending is rooted in the belief that rate cuts are like candy raining down from the sky. Rate cuts only produce pleasure and never pain. So, cut rates, watch inflation fall, and stocks can boom.  It is not that simple. If markets do not believe interest rates are a problem, cutting them could produce an adverse outcome. In this case, stocks might boom and supercharge inflation via a demand-driven wealth effect. Right now, the markets do not yet see inflation as completely stamped out. Cutting rates could spur fears of more inflation and drive interest rates higher.

XTOD: It takes a special kind of elite intelligentsia to suggest that rate cuts would ease inflation. 

An out-of-control externally funded fiscal deficit drove inflation skyward, inflation is now becoming embedded in expectations, and the “contrarian” position is that the central bank should be dovish to — tame inflation.  Spiking interest payments that jack the Gini coefficient and raise inequality because the 0.1% collect rates while peasants pay them is not inflation. It’s Brazilification.  You know how I have mentioned over and over on recent podcasts that the US asset mgmt industry has absolutely zero knowledge or concept of EM-ification and what this means for assets? Consider this clip Exhibit A. 

Behold your financial leaders in action, ladies and gentlemen….the CIO of fixed income at the world’s largest asset manager. FIXED INCOME! 

Rieder has zero concept what he is signing up for. If he is indeed representative of intelligent financial leadership in America, I know *exactly* what to do with all this, and I’m here for it.

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

XTOD: There are 4 types of wealth: 

1. Financial wealth (money)

2. Social wealth (status)

3. Time wealth (freedom)

4. Physical wealth (health)

Be wary of jobs that lure you in with 1 and 2, but rob you of 3 and 4.

XTOD: “Sometimes when I reflect on all the beer I drink, I feel ashamed. Then I look into the glass and think about the workers in the brewery & all of their hopes and dreams. If I didn't drink this beer, they might be out of work and their dreams would be shattered"

Babe Ruth

Daily Economic Update: May 17, 2024

Dow ~40K, risk assets doing well, people apparently ordering $1,000 Beef Cases in Vegas nightclubs, all against a backdrop where Fed officials stress higher for longer and as some people worry about the consumer.  Macro is hard.  

"There are better things to be doing than watching the ticker all day, swinging from bull to bear, obsessing over stuff no ne will remember in five years.  Lester Freeman said it best on The Wire: "A life, Jimmy, you know what that is? It's what happens while you're waiting for moments that never come." - Joshua Brown (Ritholtz Wealth Management)

Speaking of The Wire, remember that last October I started every post with a quote from The Wire?  Those quotes were probably contain more wisdom and value than any commentary on the most recent CPI data. 

In data, which data didn't seem to matter, jobless claims were low and perhaps under-looked was the rise in import prices which seems weird given dollar strength, but I didn't investigate.  Away from the data in Fedspeak Barkin said it will take more time for inflation to come back to target and Mester echoed much of the same citing the fact that the economy is strong and the Fed risk little by keeping rates higher for longer.  Bernanke and Blanchard basically came out and said people need to lose jobs for inflation to come down, kind of what Powell said when he said "there will be pain" in the fight to get inflation back down.

Jamie Dimon believes there are a 'lot of inflationary forces in front of us' but that he believes the markets are failing to properly price risks to a soft landing, including that of higher rates due to higher inflation.

Dimon isn't in the business of predicting rates per se, when he does, he's often wrong, but I do believe he has a track record as a prudent risk manager.  When it comes to risk management, remember, 'The price of long term stock market returns is uncertainty and volatility.' - Morgan Housel.   And I think what you can learn from everyone wiser than me is what the late great Peter Bernstein said: "survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn."

On the day ahead, it's Friday.  Maybe re-read the quotes above.  The leading indicators and Gov. Waller can wait.

XTOD (this doesn't sound fun): 2. As the effects of supply shocks have subsided, tighter labor markets, and the resulting rises in nominal wages, have become relatively more important sources of the remaining inflation in many countries. What happens in labor markets will largely determine the cost of the “last mile”. In several countries, including the United States, curbing wage inflation, and returning price inflation to target may require a period of modestly higher unemployment

XTOD: If you don’t eat, don’t have a home and don’t have a car, inflation is gone  The homeless are seeing deflation here! Time to cut rates  The homeless can jet from tent village to tent village with a pretty decent discount though! Happy days

XTOD: Compounding is great, except when it comes to inflation...

▪ Inflation hasn't fallen in a single month since Jan 2021

▪ YoY inflation hasn't dipped below 3% in 37 consecutive months

▪ Prices are up 19.5% in less than 4 years, wiping out 1/5th of the Dollar's purchasing power 

Welcome to compounding inflation

XTOD: Starwood’s $10bn property fund taps credit line as investors pull money via ⁦ @FT

⁩ #CMBS https://www.ft.com/content/1b0ce791-e387-4ea4-852a-14d59b3ced1f?sharetype=blocked

XTOD: Show me a person who has never failed, and I will show you a failure of a person. What we learn from failure, and what we do with that knowledge, is what matters –– and it's what makes us who we are.

Daily Economic Update: May 16, 2024

CPI downside surprise allows risk assets to reach new record highs (I'm working on my poetic prowess).  Taking stock of stocks S&P at 5,308 with records for Nasdaq and Dow as well.  Does one CPI print coming in lower than estimate after 3 straight higher than expected prints really mark a new trend? Does it matter Powell says no hikes ever again or something like that and he’s never pivoted, right? (Remember “we’re along way from neutral” in 2018? )

Headline CPI came in at at 3.4% YoY and 0.3% MoM vs. consensus of 3.4% and 0.4%. The MoM Core reading at 0.3% v. the 0.4% est and prior seemed to be what caused the market to rejoice. Slowing primary and owners equivalent rents, declining car prices were highlighted but there still seem to be some persistent inflation in personal services, healthcare and car insurance

Retail sales were unchanged coming in below consensus and showed a decline in the control group.

Still lots of chatter expressing concerns about labor market and loan delinquencies, guess time will tell.

Yields fell 10bps with markets pricing in about 2 rate cuts, with some pulling forward their forecast for the first cut to come in July.  The 2Y is 4.73% and 10Y is 4.34%.

On the day ahead it is jobless claims, housing starts, building permits, import prices, industrial production and capacity utilization on the data front and Fed's Williams as the highlight of Fedspeak.

You can start looking forward to a Presidential debate in June.

XTOD: Forecasters got this month exactly right. Monthly core CPI inflation rate eased off a little from the last few months but still high.

Annual rates:

1 month: 3.6%

3 months: 4.1%

6 months: 4.0%

12 months: 3.6%

Bottom line: A relatively dull report that won't change anything. Inflation is still too high. A tiny bit of easing but no surprise there--there never was any reason to believe underlying inflation was anything like the 4.5% pace we had been seeing in recent months.

XTOD: Ed Yardeni: “If the Fed does start to lower interest rates that could create a meltup” on the S&P 500, meaning “we’d blow right through 5,400 in a heartbeat, and we could very well get to my target of 6,000 for the end of next year by the end of this year.”

XTOD: BMO: “.. it has become clear to us that we underestimated the strength of the market momentum .. As such, we are increasing our 2024 S&P 500 price target to 5,600, which currently represents the highest forecast based on the latest Bloomberg strategist survey. .. the market is behaving in a similar fashion to 2021 and 2023 – years where we did not give enough credit to the strength of market momentum, something we are trying to avoid this time around.” [Belski.

XTOD: The bull case for stocks for year end.  It's a magical place where term premiums stay at zero. 30 yr bonds yield 4% AND earnings grow 11% a year this year and next. That level is 6350 or a 19% return.  It would require earnings growth AND multiple increases from 21.2 to 23.5 $SPY

XTOD: At my hedge fund, I pay an analyst to walk around parks in Austin, SF, and NY and ask these people who are tanning at 2pm on a Tuesday where they work.  We then short the stock.We’re up 728% this year.

Daily Economic Update: May 15, 2024

CPI Day is here, the anticipation is palpable. Unless you care more about meme stocks, anything involving AI, crypto meme coins, longer term ramifications of geopolitics, tariffs, the 2024 election, sports, your family, etc. (hopefully not in that order)...this is the day you've been waiting for all week.

PPI came in hot, maybe those consumer and business inflation surveys mentioned yesterday were onto something. Headline PPI was up +0.5% MoM above the 0.3% est. with services up 0.6%.  A lot of attention seems to have landed on the 3.9% increase in the cost of portfolio management.  Markets going up, leads to portfolio management fees go up and that is in PPI.  That gives a new sense of how/why "financial conditions" matter.  Remember when the Fed said they were relying upon financial conditions tightening to do some of the work for them, has that happened?  Even yesterday Powell said that he thinks about monetary policy through its "effect on financial conditions more broadly and on the economy".  Judging by PPI, I guess the answer to whether financial conditions are tightening is found by asking your financial advisor, after all they are likely making more money because your assets are up.

In other Fed news, both NY Fed and STL Fed had reports out that express some concern in rising credit card delinquencies, something to add to your list of things to keep an eye on.

Powell kept the script on being data dependent as it relates to "higher for longer" and that he isn't ready to prejudge whether inflation will remain persistent going forward.

On the day ahead it's CPI, Retail Sales and moar Fedspeak.

I guess I'll get back to drawing pictures to animate and Tweet out in an effort to cause certain stocks to moon, I'll report back when complete.

XTOD: The market is beyond satire, you can’t make it up

XTOD: Here's   what should be done to address inflation: cut government spending, lower overnight rates, and remove the excess liquidity that's still sitting in the RRP facility.

XTOD: I just imposed a series of tariffs on goods made in China:  25% on steel and aluminum,  50% on semiconductors,  100% on EVs,  And 50% on solar panels.  China is determined to dominate these industries. I'm determined to ensure America leads the world in them.

XTOD: And are lumber tariffs next? This is not the path to a healthier economy!

XTOD: Don't understand how "protecting/hiding" our companies from the global competitive reality helps America "lead." In contrast, it will make our companies weaker by limiting their fitness. It will also drive further inflation.  Certainly the lobbyists in DC are happy w/ outcome.

XTOD: People talking abt election odds should be paying attention to the fact that the (actuarial) probability of at least one of the 2 main presidential candidate dying over the next year is ~12%**plus or minus adjustment for current health.

XTOD: Time is the greatest ally of compounding and confers exponential powers upon those who think and act long term.   n is the only element in the compound interest equation that exists in the exponent and is the numeric that the entire expression is raised to the power of.

Daily Economic Update: May 14, 2024

Aside from the fun times with GameStop meme trading as "Roaring Kitty" resurfaced on X for the first time in 3 years, it was a pretty quiet market days with all eyes towards inflation data with PPI today and CPI on Wednesday.  If you're curious about GameStop, Andrew Tate (I thought he was in jail) vowed to never sell the GameStop shares he bought today, no matter what, "PERMA DONATIONS TO THE CAUSE AGAINST THE SYSTEM".  I'm not sure exactly what that means, but time to revisit my post from January on finfluencers and civilization https://edwardquince.blogspot.com/2024/01/daily-economic-update-january-29-2024.html

Yesterday's NY Fed Survey of Consumer Expectations showed increasing median inflation expectations at both the 1Y and 5Y ahead horizons to 3.3% and 2.8% respectively.  Consumers also showed confidence in their job prospects.  Separately the Cleveland Fed's Survey of Firms Inflation Expectations also showed CEO's and executives raising their 1Y ahead inflation expectations, in this case up to 3.8% from 3.4% back in January.  Inflation is so under control that everyone thinks it's not under control, crazy reverse, psyops I'm sure.

If trading meme stocks and inflation data isn't your thing feel free to join the discussion over bat speed and swing length.

On the day ahead it's PPI at 830am and Powell at 10am as the highlights.

XTOD: Yeah so basically GameStop is so back, it’s wild. RoaringKitty just tweeted a random photo after 3 years and that was seen as a bullish signal so the stock ripped 100% and so did other meme stocks. You should get in before we head to the moon haha I’ll send you my robinhood link

XTOD: $GME has already traded almost a third of its outstanding shares and it's not even noon. 97.7M shares traded so far of 306M shares outstanding.

XTOD: In the coming decades, all of East Asia’s main states will experience an era of depopulation, making it more difficult for them to generate economic growth, mobilize armed forces, and extend influence abroad, writes Nicholas Eberstadt.

https://trib.al/bonL4w5

XTOD: You either grow into your potential or you keep living the same six months over and over again.   The difference is how many hard conversations you’re willing to have and how fast you have them once you realize you need to.

XTOD: The depth of your understanding is reflected in the simplicity of your explanations.

Daily Economic Update: May 13, 2024

Last week was a good week for equities, despite Friday's UofM report showing further concerns about inflation with rising year ahead inflation expectations (likely due to gas prices).  Speaking of inflation, on the week ahead it's all about CPI.  The internet and fintwit was ablaze with creating a CPI coffee controversy, with the BLS supposedly removing coffee from the CPI.  The story was based on this https://www.bls.gov/cpi/additional-resources/discontinued-series.htm  however all indications that coffee is very much still in CPI and is an incredibly small component. 

Anyway,  we'll see what CPI brings unless something else comes along to change the narrative.  Lest we forget about two wars, including an apparent assassination attempt against Zelensky in Ukraine.  Or the Kendrick Lamar v. Drake beef for that matter (apparently the Biden campaign used Lamar's diss track "Euphoria" in a campaign video and Lamar's "Not Like Us" broke a Spotify streaming record to become the most streamed American hip-hip song in a single-day with 6.59 million).

If you're not into following Kendrick vs. Drake diss tracks, you could read the latest posts from John Cochrane's Substack called  "Fiscal Tidbits".  As a starting point, remember, "Fiscal theory does not say that deficits cause inflation. It only says that the fraction of deficit people do not expect to be paid back, either by higher future surplus or by lower future interest costs, is inflationary."  In the first post there is an interesting thought on how at higher levels of debt, deficits have a lower impact on inflation. 

"surpluses relative to debt drive inflation. Given deficits and expected surpluses, more debt means less inflation. Your intuition about debt being bad is also correct, because it typically means it will be harder for a country to promise future surpluses to pay off deficits. Beware in reading history, or judging whether more debt makes inflation more likely, just what is actually held constant and what is not".....

"The interest cost is important. 1% interest rate means 1% of GDP primary deficit at 100% debt to GDP. It means 2.5% primary deficit at 250% debt to GDP. That’s a reason that, contrary to last point, more debt means more inflation danger. It means more exposure to interest rate changes."

Taking stock we have 2Y yield at 4.87% and 10Y at 4.50%.  The last Atlanta Fed GDP Now is at 4.2% vs. 2.23% for the NY Fed GDP Nowcast and the Cleveland Fed Inflation Nowcasting has inflation still running above target.   

On the week ahead it's:

Monday:  Fed Jefferson

Tuesday: NFIB Small Business, PPI,  Powell speaks at 10am

Wed: CPI, Retail Sales and Fedspeak

Thur: Jobless claims, Housing Starts, Philly Fed, Fedspeak including Williams

Friday: Leading indicators, Fed Waller

XTOD: The birth rate is the first indicator of a people’s hope. Without children and young people, a country loses its drive for the future.

XTOD: I think one of my biggest fears is that the ‘fake economy’ just collapses over my lifetime.  As in after 40 years of escalating corporate BS and proliferation of prestigious makework “Strategy Director” and ppt-making jobs, society collectively just realizes it’s all pointless

XTOD: Only one investor can say their competitive advantage is "I'm smarter than everyone else" and it's clear that was Jim Simons.

XTOD: I am gonna go full-on plunger on Blackstone.  That stock is a zero.

XTOD: Here’s how I think of this concept.   Govt “money printing” or deficits add a money-like instrument to the aggregate domestic economy. This money printing also creates a liability for the aggregate domestic economy. Money (in financial asset form) is always an asset and liability.  

The key question is whether the subsequent spending of that instrument has a multiplier effects which results in the creation of the real resources that make it inflation neutral.  

Like all debt creation the answer is more complex than just “debt/money creation = inflation”.  

But Lyn is correct. It creates a surplus of money and all else equal this would be inflationary. All else isn’t always equal of course. Reality is messy.

.XTOD: Money is emotional, not rational. That's why debt is often the result of deep-rooted mindset issues, not income levels.

XTOD: That was the most remarkable inning I have ever seen in person.

5:24 PM: Paul Skenes pulled in the 5th after allowing two hits. 6-1 PIT.

5:26: Kyle Nicolas comes in and gets two quick outs.

5:28: HBP loads the bases.

5:29: 4 pitch BB. 6-2 PIT

5:31: 4 pitch BB. 6-3 PIT

5:33: 4 pitch BB. 6-4 PIT

PITCHING CHANGE

5:37: 5 pitch BB: 6-5 PIT

5:40: Infield single. 6-6 CHC

5:41: Game delayed by rain

PITCHING CHANGE

8:01: Game resumes

8:03: 4 pitch BB. 7-6 CHC

8:04: 5 pitch BB. 8-6 CHC

8:05: Inning ends

Daily Economic Update: May 10, 2024

As expected the BoE was on hold, though confidence in rate cuts coming as soon as June increased. In the U.S. jobless claims seemed to get the message that people (see Jim Bianco here) were concerned that the data was manipulated after many prints at 212K in the data set, so this time they spiked up to 231K.   The 30Y Auction was strong, easing concerns about market demand for longer-term debt (for today at least).  Yields moved lower and stocks moved higher, but I'm not sure anyone cares much until next week's CPI data.  2Y is around 4.80% and 10's are around 4.45%.

On the day ahead, UofM sentiment is the highlight.  Markets will continue to watch the situation in Gaza and the possibility that the U.S. will cut off certain weapons shipments if Israel invades Rafah.

XTOD: You will never find one answer to what makes you happy. There are many answers, and they change based on your current state.  People need to relax, but if all you do is sit on the beach, it gets old. People find meaning in work, but if all you do is work, it gets exhausting. People benefit from exercise, but if all you do is exercise, it gets unhealthy.  Happiness will always be fleeting because your needs change over time. The question is: what do you need right now?

XTOD: "Girard’s theory of mimetic desire describes our fundamental compulsion to want what others want or have. 'We don’t even know what our desire is. We ask other people to tell us our desires'...'you desire stuff exclusively because other people desire it.'"

XTOD: This ad is (unintentional) perfect metaphor for today's creative dark age: compress organic instruments, joyful/imperfect machines, tangible art, our entire physical reality into a soulless, postmodern, read-only device a multi-trillion $ corporation controls what you do with

XTOD: The MMT people's disgraceful attempt at a "gotcha" on Jared Bernstein should warn us away from their movement. But what's far more dangerous is their idea that governments can pay for their spending by increasing the money supply. That way lies disaster.  https://www.noahpinion.blog/p/the-macro-arsonists

XTOD: MMT works so long as nominal rates can be held at zero This is the bind that our Japanese brothers find themselves in The collateral bedrock of global money creation is presently set at 5.5pc

They need to raise rates But their debt load makes this impossible They can huff and puff and bluster and intervene But they are the Ohbayashi Maru A stricken vessel in a universe of MMT far, far away

And I don't think their currency is coming back

XTOD: “The world will ask you who you are, and if you don’t know, the world will tell you.”

~Carl Jung 

Daily Economic Update: May 9, 2024

Yesterday the Swedish central bank cut their benchmark rate by 25bps to 3.75% in what some believe will be the first of many developed country central banks to cut rates this year.  On the day ahead we'll get the Bank of England rated decision, they are not expected to cut rates.  

Stateside, the large 10Y Treasury Auction tailed by a full basis point, the 13th of the last 15th auction to tail, perhaps showing that the market appetite for longer dated treasury paper has some fragility, but we'll see what the 30Y auction does today.  In Fedspeak, it's been more of the same kind of data dependent talk that everyone has become accustomed to of late.  Yields rose a couple of bps and stock grinded out another day of gains on the Dow and was nearly flat on S&P.

In other news Howard Marks dropped his latest memo titled The Impact of Debt.  It is his second "short" memo, following up on his last memo which I reviewed here. Readers will know I enjoy Marks' work and have covered some of his other recent memos here and here.  Perhaps my favorite Marks' quote is "Leverage doesn’t add value or make an investment better. Like everything else in the investment world other than pure skill, leverage is a two-edged sword – in fact, probably the ultimate two-edged sword. It helps when you’re right and hurts when you’re wrong."  

In this most recent memo Marks' reference the work of someone else I very much enjoy reading, Morgan Housel.  Here are some takeaways:

• "It's the presence of debt that creates the possibility of default, foreclosure, and bankruptcy."
  
  
  
• "Does that mean debt is a bad thing and should be avoided? Absolutely not. Rather, it’s a matter of whether the amount of debt is appropriate relative to (a) the size of the overall enterprise and (b) the potential for fluctuations in the enterprise’s profitability and asset value."
•  This reminds me and reminded Marks of one of my favorite Marks' memos https://www.oaktreecapital.com/docs/default-source/memos/2008-12-17-volatility-leverage-dynamite.pdf?sfvrsn=c7bc0f65_2
  
  
  
• "As Housel puts it, “ as debt increases, you narrow the range of outcomes you can endure in life.”
  
  
• The reason for taking on debt is simple, it's cheaper than equity, allows you to 'bet' more and when you're right you end up winning more.
• Of course when you're wrong you lose more...
  
  
• And this is where Marks' makes his mark in the memo: "But levered portfolios face a downside risk to which there isn’t a corresponding upside: the risk of ruin. The most important adage regarding leverage reminds us to “never forget the six-foot-tall person who drowned crossing the stream that was five feet deep on average.” To survive, you have to get through the low points, and the more leverage you carry (everything else being equal), the less likely you are to do so. "
  
  
• And in referencing Housel referencing Taleb, Marks' provides "It’s the isolated “tail events” that saddle levered investors with the greatest losses" and "One is thus capable of unwittingly playing Russian roulette – and calling it by some alternative “low risk” name. " and " as illustrated by recent events, we rarely consider outcomes that have happened only once a century . . . or never."
  
  
• So where does that leave things with regards to Marks' views on using leverage:
• "investors should usually use less than the maximum available. Successful investments, perhaps enhanced by the moderate use of leverage, should usually provide a good-enough return – something few people think about in good times."
• The risker the asset, the less leverage you should use and
• Adhere to Buffett's "Margin of Safety"

What's "Margin of Safety", there are many good definitions you can find that I've written on this blog, but I think this sums it up: think creatively and be open to things unfolding in ways different from what they expect....flexibility comes with a cost....retain the option to change course when our plans go awry and have the humility to follow through. 

On the day ahead it's BoE, jobless claims and 30Y Auction.

XTOD: There are many people here with serious gifts and talents—intelligent, witty, thoughtful—and those talents constitute a great power. Unfortunately, most choose to use that power in stupid and/or dangerous ways: the sharp-tongued pundit on here wreaking insecure havoc on everyone that disagrees with him in the slightest way; or the amount of time and energy thinking of funny memes for cheap engagement.

I often imagine what good is being lost to the world—what great good could be added to the world—if these same people used those gifts and talents, that power, to build others up and do something productive. 

What books will never be written?

What genuine words will never be said?

What time and attention is not given to a spouse that is given to a social media critic?

XTOD: If you do things you don’t enjoy for long enough without understanding why you’re doing them, you develop the bad habit of doing things you don’t enjoy without understanding why you’re doing them. And you end up with a lot of people who are miserable at work.

XTOD: Want to understand what's going on in the commercial real estate market right now, especially office properties?  Watch what's happening with 1440 Broadway.  The $400 million loan backing 1440 Broadway helped push up the serious delinquency rate for office loans to 7% in April, its highest level since early 2017,  https://bloomberg.com/news/articles/

XTOD: What I want 2 understand is where all the ratings agencies downgrades are. Crickets. Even CRE CLOS-- where the losses to the AAAs stand a real chance of repeating the 2008  meltdown that saw Our Heroes taking the "First." They LITERALLY claimed a 1st Amendment pass to avoid suits

XTOD: DavidBeckworth

𝘔𝘺 𝘱𝘳𝘰𝘮𝘱𝘵 𝘵𝘰 𝘊𝘭𝘢𝘶𝘥𝘦 𝘈𝘐: can you imagine a world where the combination of (1) big data and (2) AI enables the Federal Reserve to become more automated and less reliant on human beings? 

@pmarca

 𝘊𝘭𝘢𝘶𝘥𝘦 𝘈𝘐 𝘙𝘦𝘴𝘱𝘰𝘯𝘦:

Yes, I can envision a world where the combination of big data and advanced AI technologies enable the Federal Reserve's decision-making processes to become more automated and less reliant on human input. Here's how this scenario could potentially unfold:  

𝗕𝗶𝗴 𝗗𝗮𝘁𝗮 𝗜𝗻𝘁𝗲𝗴𝗿𝗮𝘁𝗶𝗼𝗻: The Federal Reserve could leverage big data analytics to integrate vast amounts of economic data from various sources, including financial markets, banking systems, employment statistics, consumer spending patterns, and global economic indicators. This comprehensive data integration would provide a real-time, holistic view of the economic landscape.

𝐀𝐈-𝐃𝐫𝐢𝐯𝐞𝐧 𝐌𝐨𝐝𝐞𝐥𝐢𝐧𝐠 𝐚𝐧𝐝 𝐅𝐨𝐫𝐞𝐜𝐚𝐬𝐭𝐢𝐧𝐠: Powerful AI algorithms and machine learning models could be trained on this extensive data to analyze economic trends, identify patterns, and make accurate forecasts about inflation, employment, economic growth, and other key indicators. These AI models could continuously learn and adapt, improving their predictive capabilities over time.

𝐀𝐮𝐭𝐨𝐦𝐚𝐭𝐞𝐝 𝐏𝐨𝐥𝐢𝐜𝐲 𝐃𝐞𝐜𝐢𝐬𝐢𝐨𝐧𝐬: Based on the insights derived from AI-driven modeling and forecasting, the Federal Reserve's decision-making processes related to monetary policy, interest rate adjustments, and other interventions could become increasingly automated. AI systems could recommend optimal policy decisions based on predefined objectives and constraints, minimizing the need for human deliberation and decision-making.

𝐂𝐨𝐧𝐭𝐢𝐧𝐮𝐨𝐮𝐬 𝐌𝐨𝐧𝐢𝐭𝐨𝐫𝐢𝐧𝐠 𝐚𝐧𝐝 𝐀𝐝𝐣𝐮𝐬𝐭𝐦𝐞𝐧𝐭: With real-time data feeds and AI-driven monitoring, the Federal Reserve's policies and interventions could be continuously evaluated and adjusted based on changing economic conditions. AI systems could dynamically adapt policies to maintain economic stability, without the delays associated with human decision-making processes.

𝐑𝐞𝐝𝐮𝐜𝐞𝐝 𝐇𝐮𝐦𝐚𝐧 𝐈𝐧𝐯𝐨𝐥𝐯𝐞𝐦𝐞𝐧𝐭: While human oversight and governance would likely still be necessary to some extent, the day-to-day operations and decision-making processes of the Federal Reserve could become significantly less reliant on human input. AI systems could handle the bulk of data analysis, modeling, forecasting, and policy recommendations, with human expertise focused on setting overarching objectives and ensuring the system's integrity.

However, it's important to note that such a scenario would also raise concerns about transparency, accountability, and the potential for unintended consequences or biases inherent in AI systems. Careful governance frameworks, ethical considerations, and robust monitoring mechanisms would need to be in place to ensure the responsible and trustworthy deployment of such AI-driven systems in critical economic domains like central banking.

Daily Economic Update: May 8, 2024

Druck gives Bidenomics a F.  The RBA was on hold at 4.35% and much like the Fed stressed the need to be more convinced that inflation is going to settle back into their target range.

Today the 10Y Auction will be the focus.

XTOD: This tweet (which may be a joke) concentrates all the logical errors presented in Fooled by Randomness. "I was playing Russian Roulette for 1 billion. I asked for advice. Was recommended to stop. Had I not listened I would have won 1 billion."

XTOD: A structural limit on private credit's ability to replace banks: fundraising.  The lack of runnable deposit funding looked like an advantage in 2023. But a financial system's first and foremost job is to manufacture deposits.

XTOD: 2024 is the year of compute  2025 is going to be the year of energy as the transmission grid struggles to keep pace with the insatiable demand for POWER

XTOD: The best outcomes don't come from perfection. They come from a mindset of positioning that can not only handle but take advantage of uncertainty. …. When you want to win tomorrow, accurately predicting the future matters. When you want to win in the end, staying in the game matters more. 

Positioning isn't about perfect solutions; it's about handling uncertainty and staying in the game.

Daily Economic Update: May 7, 2024

It sounds like the possible cease fire between Israel and Hamas isn't immediately coming to fruition, especially as Israel launches new attacks.  Nonetheless continued optimism around rate cuts helped equities gain some ground while treasuries were little changed ahead of this week's auctions.

If you haven't followed the story of the BofA investment banking junior analyst who apparently died from being overworked, it's an interesting one, see XTOD's below.

Somewhat under the radar is the Fed's upcoming strategic policy review, the one that last gave us "FAIT".  I thought this line of thinking below, that John Cochrane laid out at a recent Hoover Institution Conference titled Getting Monetary Policy Back on Track,  was very much in line with some of what I mentioned in my last FOMC Recap.

Ignorance. Finally, we should admit that neither we, nor central banks, really understand how the economy works and how monetary policy affects the economy. There is a complex verbal doctrine that bounces around central banks, policy institutions, and private analysts, asserting that interest rates have a relatively mechanical, reliable, and understood effect on “spending” through a “transmission mechanism” that though operating through “long and variable lags” gives the Fed essentially complete control over inflation in a few years. The one thing I know from 40 years of study, and all of you know as well, is that there is no respectable well-tested economic model that produces anything like that verbal doctrine. (More here.)  Knowing what you don’t know, and that nobody else does either, is knowledge. Our empirical knowledge is also skimpy, and the historical episodes underlying that experience come with quite different fiscal and financial-structure preconditions. 1980 was a different world in many ways, and also combined fiscal and microeconomic reform with high interest rates

On the day ahead it's another light one with the 3Y Treasury Auction likely being the highlight.

XTOD: At this time, we are being told that no strike has played out and that the mood on the floor is very somber.   Additionally, there’s some questions on the accuracy of the WallStreetOasis account who posted this thread....Strike or No Strike, we ultimately need reform on the street.   Work hours need to improve across the board.   In regards to this topic, we will only defer to follower submitted, non-anonymous information for future updates.

XTOD: The death of the BofA associate from overworking is tragic and touched a nerve.  The typical reaction is usually: “guys, take care of yourselves, it’s not worth it, it’s just a job”.  But it’s not that simple.   I was there. I know.  Imagine you work hard all your life, you land a dream job that opens new doors you never thought existed.   Imagine you don’t have a Plan B.  You’ll work hard to make it work. 

Failure is not an option.  So who’s fault is it for the tragic death?  It’s not the associate’s fault.  It’s his Boss’ fault. It’s the company’s fault.  I left my job in Investment Banking as soon as I had a plan B.  

A few months later, my former boss ended up in hospital. He almost died from over-working.   I can’t say I was surprised.  My message is this:

- If you are a junior, avoid toxic bosses.

- If you are senior and have juniors working for you, their well-being is on YOU.

XTOD: Didn't think it was possible, but this is actually worse than the Blackstone video  https://twitter.com/i/status/1787093247728218519

Daily Economic Update: May 6, 2024

 Between the FOMC and the NFP (Jobs Report) missing expectations and all of a sudden we're back to talking rate cuts.  The ISM Services report on Friday was also week, coming in below 50, though somewhat concerning was the prices paid component, coming in well above expectations.  Over the course of last week the 10Y fell from a high of ~4.70% back to ~4.50% and the 2Y went from a high of ~5.50% down to 4.83%.  Of course the move lower in yields was positive for stocks, for now at least.

On the week ahead it will be light economic data, so the BOE rate decision and Fedspeak will be in focus.  You'll also get a whole week to read up on how immigration is impacting the economy, whether it is helping to cool inflation, and whether any post-election clamp downs on immigration could lead to a resurgence in wage pressures.

If you missed it, FinTwit was the video of Jared Bernstein attempting to answer a question on MMT https://twitter.com/i/status/1786272981058220187    Every couple of weeks MMT seems to make it's way back into view.  

Separate but somewhat related, here are some quotes for thought.

Courtesy of Mark Higgins:

"Persuaded as the Secretary is that the proper funding of the present debt will render it a national blessing, yet he is so far from acceding to the position, in the latitude in which it is sometimes laid down, that “public debts are public benefits,” a position inviting to prodigality and liable to dangerous abuse, that he ardently wishes to see it incorporated as a fundamental maxim in the system of public credit of the United States, that the creation of debt should always be accompanied with the means of extinguishment. This he regards as the true secret for rendering public credit immortal."  -  

ALEXANDER HAMILTON, first U.S secretary of the Treasury (1790)

 And courtesy of George Hall:

"What a Government spends the public pay for. There is no such thing as an uncovered deficit. But in some countries, it seems possible to please and content the public, for a time at least..."  - John Maynard Keynes, 1923, A Tract on Monetary Reform, p. 62.

Anyway, why does a government want a monopoly over currency, see here 

XTOD:  To recap this week ...  On Wednesday the question to Powell was if they would hike. On Friday, we are asking if they cut this summer.  Any bets on what next week brings?

XTOD: This is absolutely priceless. And probably the most frightening clip you'll ever watch on the people in charge of the US economy.  Jared Bernstein is literally the Chair of the Council of Economic Advisers, the main agency advising Biden on economic policy https://twitter.com/i/status/1786272981058220187

XTOD: While the U.S. government could finance all its spending without borrowing or collecting taxes, those are two ways for it to get the public to abstain from acquiring real resources.  The alternative of pure money creation, on the other hand, has the government bidding against the public for the economies scarce resources, which, depending how much the government seeks to spend, can drive prices up....Once aggregate spending suffices to achieve full employment (I use the term the usual way), the "real resource constraint" binds. At that point further money-financed  G is inflationary. Borrowing becomes a non-inflationary alternative....They are, no less than money creation, devices for increasing the government's command over, or share of, the economies scarce output....So, while "mainstream" economists may not express themselves well on these subjects, especially in live interviews, it doesn't follow that there is a vast gap between the mainstream understanding of gov't funding options and MMTs supposedly distinct arguments.

XTOD: The govt is always bidding against the public (& vice versa). Taxes reduces private sector ability to bid (keeping prices lower). Bonds have similar effect.

XTOD (this guy had a lot to say in response):  Lots of people chuckling but nobody suggesting an answer, at least in language that normies can understand..... lots of people will tell you this story, but they will forget to mention one important thing: there are several billion humans going to work every day working for 8 hours or so. Working. Creating value (products and services). And so total value of everything in the world is increasing every day. There are new buildings and roads and chairs and cars and noodles and milk and YouTube videos and mobile phones and computers and people are able to get back to work because someone has cured them from a disease.   This is why it's not really a Ponzi Scheme. Money is circulating and new money is constantly being added, but real value and assets are also constantly being added. There is real input to the scheme, human labor.....So what is the problem then? The problem is that the world economy, specifically the US economy, is borrowing more than it is going to able to pay back and that it is producing. ..How does this end? It ends in hyperinflation and collapse of the dollar. Nobody will want to buy US debt anymore because US is irresponsible. The trust will be lost.

XTOD: I wonder how many people know these “buybacks” are mostly unpaid taxes distributed to investors in US 🤔  In the case of $AAPL profits are kept offshore in 0% tax countries like Ireland, then $AAPL issues bonds in #US to finance these buybacks and when the bonds mature they use offshore cash to repay them saving the 30% tax rate owed to uncle sam (that triggers only if profits are directly “repatriated” as cash) and all other countries involved in particular in #Europe

XTOD: Just how many people are taking the weight-loss drug Wegovy? 25,000 are starting it each week in the U.S., maker Novo Nordisk said this morning. That’s 5x as many as at the beginning of this year - and more than the capacity of Madison Square Garden. The company says it would be more - but they’re working to increase supply. https://cnn.com/2024/05/02/health/wegovy-weight-loss-drug-new-prescriptions/index.html

XTOD: "Warren Buffett thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price."

XTOD: "You have to be in love with the subject," says Buffett. "You can't just be in love with the money."  He adds that everyone should find out what his or her brain is best suited for — and then pound away at it.  Buffett loved reading Moody's manuals. But that is not for everyone.

Daily Economic Update: May 3, 2024

 Another Jobs Day in 'merica is upon us. Except maybe not for her as Peloton lays off another 15% of their workforce.

Market is looking for a headline jobs print of around 250K, though immigration, a topic Powell discussed this week, is a major wildcard with the possibility for an upside surprise and recently considered a major source of divergence between headline payrolls from the CES/Establishment Survey and the data on Unemployment and Labor Force Participation which comes from the Household Survey and is based on census data.  Anyway, feel free to ask a real economist.

Yesterday's nonfarm productivity showed a 0.3% mom increase and a 2.9% YoY increase, but as (or more) importantly increased by 4.7% which was above estimates.  In jobless claim data, apparently approximately the exact same number of people file for claims every week.

Stocks traded higher and bond yields fell.  The 2Y is 4.88% and 10Y is 4.59%.  Apple’s earnings and $110bln buyback led to further equity gains after hours as we head into payrolls.

On the day ahead it's Jobs, PMI's and bring on Fedspeak, including NY Fed's Williams at 815am.

XTOD: The last 13 weeks of initial unemployment claims. It finally moved off 212k, but barely.  

Again, we are a $30 trillion economy with over 160 million workers. Unemployment insurance is a state program, meaning there are 50 states with 50 rules, 50 different ways to sign up, and 50 websites. Filling out these forms takes work. That alone should give a variability of more than a thousand or two a week.  Unemployment insurance is highly seasonal; little things like a holiday on the week make a difference (see around Feb 16, President's Day, and March 29, Easter).  Yet, given all this, these numbers barely move.  I'm not accusing anyone of anything. Rather I would like someone from the BLS (who collects the data, seasonally adjusts it, and releases it) to offer an explanation for the lack of volatility.  (This is a screenshot from Bloomberg; it must have glitched as April 12 is missing. That was also 208k, same as this week.)

XTOD: The last several weeks have been remarkable in that a series of considerably firmer #inflation, #wage and #economic data points have dramatically re-rated the market-implied probability of 

@federalreserve  policy rate cuts by year end.

XTOD (I think he read my Dark Matter post...): Amount of attention, digital ink spilling and coverage the FOMC gets is totally out of proportion with the level of signaling it carries. These guys are systematically wrong and literally have no fucking clue what they are doing or where they are heading. They don’t have a plan and keep getting punched in the sack. When inflation was staring right in the face their informed view was not to think about thinking about hiking rates. When inflation set on it’s largest, possibly structural, surge of the last half a century, they labelled it transitory and carried on with unholy QE while driving real rates into deep negative territory. When inflation was about to get sticky and re-accelerate they touted victory in their infamous Dec 23 dovish pivot. Now they have no clue and are saying as much, just waiting for the next data punch. Next is after denying stagflation, to call it transitory. Not sure Trump setting monetary policy would do much worse to be honest. Hell a monkey would do better. And never any accountability.

XTOD: Jerry Seinfeld on why he still works hard: "Because the only thing in life that's really worth having is good skill. Good skill is the greatest possession. The things that money buys are fine. They're good, I like them, but having a skill - I learned this from reading Esquire magazine. They did one issue about Mastery. This is a very Zen Buddhist concept: pursue mastery. That will fulfill your life. You will feel good. I know a lot of rich people. They don't feel good - as you think they should and would - they don't. They're miserable. So I work because if, you don't, in standup comedy, if you don't do it a lot, you stink."

https://x.com/biancoresearch/status/1786017610871849053

https://x.com/INArteCarloDoss/status/1785958043361972685

https://x.com/RickRieder/status/1786032627130282229

https://x.com/NeckarValue/status/1786044600131404081