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.
https://x.com/NewsLambert/status/1795446352354140304
https://x.com/tracyalloway/status/1795448845867831425
https://x.com/esaagar/status/1795439560484347936
https://x.com/kejca/status/1795436020231557164?s=46&t=D2AESCsaw42dAEzgmjXHQA
https://x.com/CalicoJoeMLB/status/1795265812942737670
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