FOMC Recap: FOMC Trade Deadline Edition

• The Fed held their policy rate target range at 5.25% to 5.50% as expected
• The FOMC Statement made changes to indicate a moderation in the employment picture and a slowing in the inflation picture. Noting that they are attentive to risks to both sides of their dual mandate.
• Powell said the FOMC does not making policy decisions based on an outcome of elections that haven't happened yet.

With the MLB trade deadline passing on Tuesday, the FOMC faced their own decision deadline today. Like MLB GM's, FOMC officials know the importance of making decisions with their goals in mind.  In the case of a MLB GM the pinnacle goal is winning the World Series.  For the Fed the pinnacle goals are low and stable inflation, maximum employment and moderate long-term interest rates, or more generally stated, fostering economic health.  

Every FOMC meeting is like the MLB trade deadline.  Just as MLB GM's need to decide whether to add or subtract to small parts of their roster or to wholesale change direction, the FOMC needs to decide what to add or remove from their statement, whether to do more or less of something they are currently doing with their policy tools, or in times of crisis deciding to do something they've never done before.  Like MLB GM's and all of us, the FOMC is making their decisions with their goals in mind, trying to face reality as it is, and prudently balancing going for it now against the risk of harming the future.  MLB GM's and FOMC officials face the added task of communicating their decisions to the public in a way that manages expectations.

There is often a realization that what got the team to where they are today won't get them to where they want to be, that when things stop evolving they stop compounding.  Every coach and manager knows that small decisions can lead to big results, especially when those decisions lead to actions that are able to use time to compound (long and variable lags anyone?).  They also know that bad decisions can compound in a negative way.  

While MLB executives would like to believe they have one goal or priority, which is winning a championship, the reality for some (most) franchises is they have a dual or multiple mandates, like the FOMC, and have to balance competing priorities that can often be in tension.  In many cases we have to prioritize one goal over another.  In the words of Greg McKeown:

"The word priority came into the English language in the 1400s. It was singular. It meant the very first or prior thing. It stayed singular for the next five hundred years. Only in the 1900s did we pluralize the term and start talking about priorities."

Further it was once written (you can find it, but I won't bias it):

"No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other. " 

I'm no Fed sympathizer, but the decisions the Fed has to make are hard. The decisions we all make are made under uncertainty and hard.

The decision by the FOMC today to make statement changes reflects the reality of the recent economic data they have consumed since the last meeting.  By not making any change to the policy rate today, the committee feels that progress toward their goals remains on a path they find acceptable.

It's hard to know exactly what questions the committee asked themselves as they made their decisions, but hopefully they collectively reached their decision based on their honest assessment of the state of the economy, without interference of political or external pressures, in a state where they were less concerned with their personal futures, uninfluenced by past criticisms, and more concerned with recognizing their decisions impact a complex ecosystem and need to be made with an eye toward protecting the people from undue harm from their decisions.  That is probably good a lens to make any decision (you can find many of these principles embedded in Charlie Munger's investment decision making).

The modern world loves to cling to a belief that everything can be controlled. There is probably a hefty "illusion of control" we place in the Fed, despite the fact that macro-forecasting is impossible (see Howard Mark's last memo).  Perhaps Powell said it best today:

"Certainty is not a word we have in our business".

Rather than be anxious to find certainty from the FOMC, perhaps we should rejoice that it is uncertainty that sets us free.  The best we can hope for out of the Fed is sound decision making guided by principled questions.

Daily Economic Update: July 31, 2024

Month-end meets central banks with the BOJ overnight and the FOMC in the afternoon.  Yesterday's data started with a EU GDP data beat, though German growth was negative while their inflation was above estimates.  Stateside the JOLTS data showed jobs openings above estimates but measures of labor turnover in terms of quits, layoffs and hiring were below pre-pandemic levels.  The low level of quits may be a sign that employees no longer are seeing higher bids for their services away from their current employer.

The Conference Board's Consumer Confidence Index survey showed consumers still hate inflation and perhaps this commentary lines up with the JOLTS data: “Compared to last month, consumers were somewhat less pessimistic about the future. Expectations for future income improved slightly, but consumers remained generally negative about business and employment conditions ahead. Meanwhile, consumers were a bit less positive about current labor and business conditions. Potentially, smaller monthly job additions are weighing on consumers’ assessment of current job availability: while still quite strong, consumers’ assessment of the current labor market situation declined to its lowest level since March 2021.”

Likely more important than data were the Israeli airstrike in Beruit which killed a Hezbollah commander who reportedly had planned the attack that killed 12 in Isreal's Golan Heights.  The possibility of an expanding middle-east conflict may lead to further risk-off.   Add U.S. airstrikes in Iraq to the list of mid-east risk.  And let's not forget Elon vs. Venezuela. 

After hours MSFT was down after earnings dissappointed in their cloud business. 

On the day ahead we'll see if the FOMC provides any better sense on the likelihood of a September rate cut.  I might write a FOMC Recap, I might not. 

XTOD: BREAKING: The Magnificent 7 stocks have now erased a combined $2.6 TRILLION of market cap over the last 20 days.  That's an average of $125 billion of market cap PER DAY for 20 days sight.  Nvidia, $NVDA, alone has erased over $1 trillion in market cap since its high seen one month ago.  In other words, the Magnificent 7 have lost as much value as Nvidia's ENTIRE current market cap in 20 days.  That's also $200 billion more than every stock in Germany's stock market combined. 

What happened to big tech?

XTOD: The new labor market spider chart published by the @AtlantaFed   today shows a striking divergence between the private job openings rate and the private hires rate.Turnover (as measured by employee quit rates) has fallen YoY in all sectors, and is now lower than the 2015-2019 average rate in half of major sectors

XTOD: “Go for the pain of discipline because it weighs ounces. The pain of regret weighs tons.”  ~ Jim Rohn

XTOD: "You can either lower your goals to match your effort, or you can raise your effort to match your goals." (Coach K)

XTOD: Stop efficiently running meetings you shouldn't be holding at all.

Daily Economic Update: July 30, 2024

Equities rose ahead of central banks and tech earnings.  Treasury financing estimates showed the TGA will be drawn down to $700bln by 4Q and estimated borrowing is down slightly due to QT in Q3 and spending in Q4.  We get the mix of bills and bonds on Wednesday.  The 10Y yield was back under 4.20 and at 4.17% and the 2Y was at 4.39%.

The Fed isn't going to cut at this meeting, but nonetheless between now and the FOMC you'll hear plenty of arguments from those favoring cuts now and those opposed.  Camp "cut now" does have a lot of overlap with "team transitory" but it's not the exact same group. I'll try my best to summarize and over generalize the two views which you likely know already:

Team Rate Cut: we already have inflation coming back to target, given estimates of short and long-run neutral rates (r-star) policy is far too restrictive. The balance of risk is now skewed so far towards risking a recession that we need to cut now.

Team No Cut: inflation continuing to run above 2%, labor is not that weak, overall financial conditions remain quite loose (have you seen all-time highs in stocks? have you seen tight credit spreads?).  Quitting too soon risk a reacceleration of inflation.

Irrespective of where you might stand, it's interesting to wonder how much additional debate and frankly wasted energy has been caused by the Fed's forward guidance, by the constant appearances, and by a system of their own creation that has conditioned market participants to believe in two things: 1) the first cut will likely be the first of many and 2) the first cut is important in the sense that it means something like "we won the inflation fight and are now fighting to prevent recession". 

Overall market expectations for the Fed are that they'll note the progress in the fight against inflation, that risks in their dual mandate are balanced and that they don't need to see much more evidence on the inflation side before a cut. 

On the day ahead it's home prices and JOLTS.

XTOD: The eagle has soft landed. The New York Fed’s measure of underlying inflation is now just 2.06 percent. The Fed should cut rates now now now.

XTOD: Buy private equity into a Kamala Harris administration. 

XTOD: Blackstone President Jon Gray put out a video last week with a bullish view on commercial/multifamily real estate (sans office) and pointing toward more acquisitions in coming months. Some highlights:

"At the beginning of the year, we said real estate values were bottoming. And I would say now, six months later, after it’s pretty clear from the data that that’s occurred, we’d say real estate values are recovering – really with the exception of office buildings."

"We continue to see the cost of capital come down, and we’ve seen greater availability of debt."

"We’re seeing a sharp decline in new supply, and that of course creates a foundation for the recovery as well. We really think this is a good time to be investing capital. We’ve been doing it for the last six months in real estate, and I expect you’ll see a lot in the back half of the year as well."

XTOD: Hang around people who work hard, they will probably rub off on you. Hang around people who complain and hate, you will end up doing the same. Hang with individuals who talk about growth, you will develop the same mindset. Moral of the story? Check your circle. That’s your future.

XTOD: People wish for other people’s lives but not for their sacrifices. 

We wish for the prize but not for the price.

Daily Economic Update: July 29, 2024

It's like the olympics of central bank meetings this week with 3 central bank meetings (FOMC, BOJ and BoE).  Of the 3 CB's, the most interesting might be Japan, where a rate hike could still be in the cards.  The BoE and Fed are likely on hold, but BoE has decent odds towards a cut.   Friday's PCE data was largely in line with expectations and markets seemed to like the fact that Personal Income was lower than expected, so let's cheer people making less because it increases the chance the Fed cuts? Is that the narrative?

With Jobs Day on Friday, I thought I would reflect on how last week everyone was worried about recession because of rising unemployment.  Then Claudia Sahm of the Sahm rule wrote a lot of words that I think said, the rule is sending the right signals in terms of risk of recession, but it's complicated.  Got it!   And Goldman research said we shouldn't be too concerned with the rise in unemployment because in part (they had 3 reasons: (1)there haven't been layoffs (2) the Fed has plenty of room to cut and (3) there are temporary labor frictions) because people aren't losing their jobs:

"First, the recent rise in the unemployment rate breaks with the historical pattern in one crucial respect—there has not been an increase in the layoff rate, which remains historically low. This is important because it means the economy is not experiencing the usual vicious circle in which job and income loss lead laid-off workers to reduce their spending, leading to further job loss. The increase in the unemployment rate has instead come partly from a surge in labor supply driven by immigration, with which job growth has not quite kept up. But job growth is far from weak, and with final demand still growing at a robust pace, it appears set to remain fairly solid.

Overall economists as usual don't know and this time immigration is clouding the employment picture.

In the words of Vanguard founder John C. Bogle from his book "Enough.":

"Today, in our society, in economics, and in finance, we place far too much trust in numbers. Numbers are not reality. At best they are a pale reflection of reality. At worst they're a gross distortion of the truths we seek to measure.  But the damage doesn't stop there....By worshipping at the altar of numbers and by discounting the immeasurable, we have in effect created a numeric economy that can easily undermine the real one."

Internationally we have Israeli striking Hezbollah following a Hezbollah missile strike that hit a soccer field in Israel.  The rising tensions between Israel and Hezbollah in Lebanon risk expansion of conflict in the Middle East.  We also have a crazy story of two Mexican narco lords, one of the sons of El Chapo and the other known as 'El Mayo', were arrested in Texas.

On the week ahead the big U.S. data is FOMC and Jobs, but there are plenty of "important" data releases throughout. We also get more mega-cap tech earnings from 4 of the Mag 7 (Apple, Amazon, Microsoft and Meta).  

Monday: recover from the weekend and prep yourself for having to listen to pundits talk all week about central banks and jobs

Tuesday: Home Prices and JOLTS

Wednesday: BOJ (overnight) FOMC at 2pm before that ADP Employment

Thursday: BoE, Jobless Claims, ISM Mfg

Friday: Jobs Day, factory orders

XTOD: The Biden Administration is concerned that the Hezbollah Rocket Attack earlier on a Youth Soccer Match in the Town of Majdal Shams, could be the Spark which leads to an All-Out War against Hezbollah; with a Senior U.S. Official telling Axios, “What happened today could be the Trigger we have been worried about and tried to avoid for 10 Months.”

XTOD: A  disingenuous take is when someone predicting economic collapse says "I hope I'm wrong, I would love to be proven wrong here."  Of course there are some very smart pessimists but I think some fantasize about economic collapse because in a world where everyone is suffering they would feel better about themselves by comparison.

XTOD: Macro view

Financial conditions are NOT restrictive 

Growth will bounce

Inflation will stick at to high levels

Earnings estimates for 2025 will not be realized 

Fed won't cut in 2024

Treasury is stuck and will be forced to up coupon issuance

Long term bonds have no upside 

Equities are stupid rich

Positioning remains massively overweight long by long only and hedge fund shorts are moderate

XTOD: Today’s PCE report on inflation and spending was already baked into yesterday’s GDP report. They showed an economy, where discounting is luring consumers to open their wallets a little further, especially for big ticket items that often require financing.  

Still, there were new data in the report. Spending outpaced personal disposable incomes, and the saving rate fell to its lowest rate since December 2022. Consumers are leveraging home equity and other lines of credit to pick up their spending on everything at appliances, furniture and building material and garden stores. Much of those gains were in higher income households as those at the lowest rungs of the income strata have tapped the saving they amassed during the pandemic and then some.

XTOD: Teen Allegedly Derailed BNSF Freight Train For "Insane" YouTube Footage

Daily Economic Update: July 26, 2024

Summer Friday PCE data day.  What if PCE data for some reason is hot and market expectations for rate hikes are again repriced into further out in the future?

Stock narratives include: a tech re-rating around returns to AI, an unwind of Yen carry trades ahead of an expected BoJ hike, a potential slowing economy (the Dudley editorial) and political risk.  Ford shares were particularily hit hard citing warranty cost. Overall it was an up and down day in equities with S&P ending in a loss and Nasdaq down again.

In data GDP beat big,  coming in at 2.8% vs. 2.0% est. with higher than expected demand and higher PCE, but no one cared.  Durable goods orders were weak but seemed to be driven by airline orders and jobless claims continue to be super low.  The 7Y auction was solid, but yields rose from lows of day.  The 2Y ended at 4.43% and the 10Y at 4.24%.

PCE will be the headline today.

XTOD: Never mind GDP – the real shocker in the data today was the core PCE deflator (+2.9% SAAR in Q2 vs consensus views of +2.7%). Unless prior revisions were the culprit, the quarterly data suggest that the June core deflator will move in the opposite direction tomorrow as the CPI did – the risk now is +0.3% MoM (consensus at +0.2%).  This could well complicate the near-universal view that the Fed will start cutting rates by the Fall.

XTOD: This is your reminder that the Fed won't cut rates next week and won't cut rates by 50bp in September. My view remains they won't cut rates in September either fwiw.

XTOD: In case anyone doubted the role of carry trades on $NDX, here’s $JPY vs $NQ for the past 13 days:  https://pbs.twimg.com/media/GTWXSyRXIAANyD1?format=jpg&name=900x900

XTOD: “Beauty awakens the soul to act.”      ― Dante Alighieri

XTOD: “In a life properly lived, you’re a river. You touch things lightly or deeply; you move along because life herself moves, and you can’t stop it; you can’t figure out a banal game plan applicable to all situations; you just have to go with the ‘beingness’ of life.”   - Jim Harrison

XTOD: Charlie Munger: "The toxic people who are trying to fool you or lie to you — who aren't reliable in meeting their commitments — the great lesson of life is [to] get them the hell out of your life. And do it fast."

Daily Economic Update: July 25, 2024

Catching up on Dalio latest, he doesn’t believe it is the most likely scenario, but if Trump loses in a close race, he believes that it is probable we see some form of Civil War.  Unrelated to that view, at least we think, the equity markets had a rough day yesterday, led by a double digit decline in Tesla shares.  Despite the tech led sell-off in stocks, the yield curve steepened and the 2's10's inversion is down to just 13bps.  Both Goldman and ex-Goldman (Dudley) are now in the cut rates now camp.

Canada cut 25bps to 4.50% as expected, noted excess supply and cooling shelter cost.  The Canadian Dollar is nearing it's weakest in the last year partly driven by the interest rate differtential with the U.S.  In other international news, Netanyahu's visit to the U.S. to address Congress was met with plenty of protest in the D.C. area.    

In data, home sales fell, higher inventories, smaller trade deficit and better than expected services PMI data.  The current question based on the recent data is whether or not the economy is speeding up.  Don't believe me look at the various GDP forecast/nowcast, they've all bounced off a low from early July.

On the day ahead it's GDP 2Q, jobless claims and the 7Y auction...and politics.

XTOD (I need someone to buy me this): i choose to believe that the audience for this exists https://pbs.twimg.com/card_img/1815789118988709888/o1OaYGu5?format=jpg&name=900x900

XTOD: SCOOP: OpenAI may lose $5B this year & may run out of cash in 12 months, unless they raise more $, per analysis@theinformation

Investors should ask: What is their moat?  Unique tech? What is their route in profitability when Meta is giving away similar tech for free? Do they have a killer app? Will the tech ever be reliable? What is real and what is just demo?

XTOD: Karine Jean-Pierre just said that the President continues to believe that he can serve four more years and did not withdraw due to his diminished state. "It has nothing to do with his health." ...

XTOD: The Nasdaq and S&P 500 just had their worst drops since 2022 

XTOD: A stunning 10% of Cuba’s population — more than a million people — left the island between 2022 and 2023, the head of the country’s national statistics office said during a National Assembly session

XTOD: Blackstone Mortgage REIT Cuts Dividend as Distress Increases @business

 #CMBS $BXMT  ▪BXMT to repurchase $150 million shares to blunt dividend news

▪Muddy Waters’ Carson Block shorted the trust in December

XTOD: “Think of yourself as dead. You have lived your life. Now, take what's left and live it properly. What doesn't transmit light creates its own darkness.”           ― Marcus Aurelius, Meditations

Daily Economic Update: July 24, 2024

Sales of existing homes fell the most in 2 years as median home prices remain high and consumers feel the pinch of higher mortgage rates.  Stocks were slightly lower on the day as were yields lower. After hours Tesla and Alphabet earnings disappointed investors.

 The 2Y Auction saw very good foreign demand, printing over 2bps through where WI was trading.  The 2Y ended the day 4.50% and the 10Y at 4.25%.

In politics the Secret Service director resigned and away from politics part of Yellowstone park exploded itself and a whale jumped on a boat in New Hampshire. 

Flash PMI's and the 5Y Note Auction will be the highlights of the day ahead in data as Tech Earnings and Biden's 8pm address will also be in focus.  Outside the U.S. the Bank of Canada is also expected to cut rates for their second straight meeting.

XTOD: (long thread and a paper perhaps worth a read):  Summary: changes to Treasury's issuance policies have provided similar economic stimulus as a 1% cut in the Fed Funds rate, usurping core functions of monetary policy and blocking the Fed's efforts to restrain inflation and growth.....Let’s get into the mechanics: Treasury has an established rule of issuing 15% to 20% of debt in short-term bills rather than interest-rate-risk bearing intermediate/long-term debt (“coupons”).  They're violating this rule materially of late, issuing more bills and fewer coupons.  https://www.hudsonbaycapital.com/documents/FG/hudsonbay/research/635102_Activist_Treasury_Issuance_-_Hudson_Bay_Capital_Research.pdf

XTOD: Oil powers the machine everywhere. The economic machine. The activity machine. The war machine. The Machine. It is the substrate of power and might.  The uncertainty splintering the minds of many in the market could end in up with “oil as the next gold,” in the following way.

XTOD: An unusually large eruption of one of Yellowstone’s geysers occurred at Biscuit Basin moments ago.

XTOD: Want to know just how bad Delta's meltdown is?  The airline has now canceled 5,370 flights and counting since Friday.  That's more flights than Delta canceled in all of 2018 ... and all of 2019, too (5,343).  Two years worth of cancellations in less than five days.

XTOD: 6. Embrace Adaptation  

"Life is pretty simple: You do some stuff. Most fail. Some works. You do more of what works." ― Leonardo:

• Learn from both successes and failures.

• Stay flexible and open to change, continually adjusting your path as needed.

XTOD: BREAKING: The Biden administration's ban on noncompete clauses has been upheld in court, per MorePerfectUnion.

As of now, virtually all noncompete agreements with bosses will be banned and voided beginning September 4.

Daily Economic Update: July 23, 2024

 Stocks rose as apparently the Dems are the party of big tech and the Republicans are the party of small business, or something along that narrative came out of Jim Cramer’s mouth (I think).  The 10y finished at 4.22 and the 2y is 4.53 as markets continue to digest politics.

In other news I once took a Delta flight on a bus, true story, so I’m not surprised with headlines that they continue to cancel flights due to Friday’s tech outage.

On the day ahead it’s politics and home sales, 2y note auction and tech earnings.

XTOD: America is wondering whether their president is alive or dead and it’s like the third weirdest thing that’s happened in the past 9 days.

XTOD: Atlanta airport is jam-packed. Mothers w/ small children on the floor in the terminal. Line for customer service is 1/2 mile long. No rental cars. Few hotel options. People’ve been stuck here 3 days.

If there weren’t bigger national news- @Delta CEO would be dragged to testify

XTOD: Crowdstrike now -30% in just a month since Jim praised it. Legend

XTOD: The price of success is paid in private.

Visible triumphs are built on invisible toil.

Daily Economic Update: July 22, 2024

This blog was not impacted by the CrowdStrike outage, at least I don't think so.  It would probably take people actually reading it to know for sure. 

On Sunday Biden was unburdened by what has been and decided to drop out of the 2024 race and for now Kamala is the heir apparent.  Alternatively the headline could have been Biden Crowdstriked Out by Dems....or something like that.  Nonetheless we now know that rather than giving a speech in the Oval Office, it's X that is the world's most important medium.

With no real data today, I'm just going to refocus on the important topic of debate around climate change which is clearly, if you're on an electric boat and it's sinking and there is a shark 10 yards away do you stay on the boat and get electrocuted or test the shark?

Over in Asia, the PBOC cut their prime rates for 1y and 5y loans by 10bps.  In the Middle East things seem messy, remember the Red Sea?

On the week ahead:

Monday - listen to people speculate about politics

Tuesday - Home sales and PMI's

Wednesday - New home sales

Thursday - GDP 2Q, jobless claims

Friday - PCE.

XTOD: Conheads rejoice. It’s his time.

XTOD: This show. It’s always this show. https://x.com/i/status/1815093641133830514

XTOD: Aaron Sorkin says the Democrats should choose Mitt Romney as their Biden replacement: https://pbs.twimg.com/media/GTAthbwXYAAYCXa?format=jpg&name=900x900

XTOD: Billy Beane: I’m just saying you can't start Biden at President. 

Art Howe: Well, I am starting him at President. 

Billy Beane: I don't think so. He plays for Delaware now.

XTOD: People are acting like it’s a done deal that Kamala Harris will be the candidate, but that question seems pretty far from decided.

XTOD: The world is a large theater with a small exit door. The definition of the sucker is someone who focuses on the size of the theater, not the size of the door.

Daily Economic Update: July 19, 2024

 A tough day for stocks as megacap tech stocks lead loses again, but yesterday saw selling across sectors including small-caps.  How much is "profit taking", how much is [insert some narrative here].   The economic data was mixed, with jobless claims rising more than expected, but some noise due to the Hurricane Beryl.  The Philly Fed was better than expected and showed the prices paid component cooling.  As expected the ECB was on hold and really not noteworthy (at least to me).  Other than that everyone is subscribed to Netflix.   

Price action saw stocks down, dollar up and yields rising.  The 2Y is 4.47% and the 10Y is 4.20%.   Refer to Howard Marks peice yesterday as to why the correct answer to why things move the way they move in financial markets is "I don't know."  And that answer is even more true when you mix in politics and potential economic policies domestically and globally.

It's a summer Friday with no data of importance, but analysis of Trump's speech and speculation around Biden dropping out will likely dominate the news flow.

XTOD: Here's my current portfolio:

35% Stegosaurus

30% Velociraptor

15% T Rex

5% That sunflower-looking dinosaur that kills Newman in Jurassic Park

15% Bitcoin

Am I diversified?  https://pbs.twimg.com/media/GSxklP3XUAAE7U6?format=png&name=small

XTOD: Mortgage delinquency in the Black Knight series surges 13% M-O-M marking the largest M-O-M increase since April of 2020  

What does this say about the consumer?

XTOD: After a high dose of psilocybin, the brain desynchronizes at a massive scale, causing loss of our sense of self, time, and space. This may drive the burst of plasticity caused by psychedelics. The next day, brain activity has largely returned to normal, but an echo remains – a reset of circuits critical to the sense of self.  Our study is out today in  @Nature

 https://nature.com/articles/s41586-024-07624-5

XTOD: "Envy is inversely correlated with self-examination. The less you know yourself, the more you look to others to get an idea of your worth."

XTOD:  Some projects benefit from early action. If you're writing a book, it's easy to spend a lot of time brainstorming titles and dreaming up an outline, but it's better to simply write. The book discovers itself as you go. Yes, you'll need to go back and organize things, but this is easier to do once you have material. The key is to act first and then organize your thinking.

Other projects benefit from early planning. The best way to build a skyscraper is to plan carefully. If you start placing steel beams on day one, you're guaranteed to run into problems. It is harder to make changes once you've begun. You'll need to tear it down and start over again. The key is to organize your thinking and then act.

Do you need early action or early planning?

Daily Economic Update: July 18, 2024

Potential economic policies seemed to be a catalyst to push investors out of big tech and into small caps.  The narrative around the trade is that the large AI sensitive names might find it challenging to procure the hardware needed to fuel the growth that is priced into those stocks, while smaller companies tend to have more floating rate debt and could be direct beneficiaries of Fed rate cuts.  According to CNBC, it was the first time in over 20 years the Nasdaq lost over 2.5% while the Dow registered a gain.  Yields were little changed.

In more important news, Howard Marks latest Memo was released The Folly of Certainty.  A quick summary in the bullets below (You can probably find my recaps of some of the other recent memos here.)

• The premise: "how can anyone be without doubt."
• Macro-forecasting is impossible: (a) we don't know what's going to happen and (b) we don't know how the markets will react to what actually does happen
• The economist consensus has been wrong about the path of rate cuts and about the odds of a recession.
• He remarks about how some people have ended up capturing massive gains in the stock market based on a belief the Fed would be cutting rates.  Clearly the Fed didn't cut but stocks rose nonetheless.  In other words, they ended up right for the wrong reasons.
• "Markets swing more than economies and companies. Why? Because of the unpredictability of market participants' psyches or emotions."
• "Intelligence, education, access to data and analysis can't be sufficeint to produce correct forecasts.".  Quoting John Kenneth Galbraith, "There are two kinds of forecasters: those who don't know, and those who don't know they don't know."
• People underestimate the role of luck in making money. There is a specious association of money and intelligence.
• Have intellectual humility - realize you might not be sure, or you don't know
• Certainty in fields like politics, economics and investing is absurd.

After reading Marks', here are some reminders from this blogger (from post on this blog over the year +):

Uncertainty is an interesting word and one that is often conflated with "risk" in the financial setting and perhaps is a little confusing. I've found the following to be a helpful guide: "risk refers to all outcomes that can be insured against, uncertainty to those which cannot." And "..uncertainty as both Keynes and Knight define it, but which the mainstream denies: a situation where we have no scientific basis for calculating a ratio (probability)."  To further illustrate: "For example, if one smoker out of ten died of lung cancer, the probability of smokers dying of lung cancer is 10 percent. This set of numerical probabilities [cardinal probabilities] is the standard domain of risk as recognized by actuaries...At the opposite extreme is uncertainty...where we have no scientific basis for calculating a ratio."  Keynes (as reported by Skidelsky) sums this up as "The magnitudes of some pairs of probabilities we shall be able to compare numerically [cardinal probabilities], others in respect of more or less only (i.e. 'more or less likely', "ordinal probabilities), and others not at all [uncertainty]."  If you're ever interested in reading more about risk and uncertainty (and Keynes views on uncertainty), author Peter Bernstein's classic "Against The Gods" is worth a read.   

While uncertainty might be scary, Bernstein laments: "A tremendous idea lies buried in the notion that we simply do not know.  Rather than frightening us, Keyne's words bring great news: we are not prisoners of an inevitable future. Uncertainty makes us free."

Or as Frank Herbert said in the Dune series:   “to know the future absolutely! All of it! What fortunes could be made — and lost on such absolute knowledge, eh?” but “what a hellish gift that’d be. What utter boredom! Every living instant he’d be replaying what he knew absolutely … Ignorance has its advantages.” 

Given the uncertainty and the bombardment of noise in the current economic environment, I was reminded of two quotes in the famous wall street book "Where Are the Customers' Yachts?" by Fred Schwed: "In this case, the notion that the financial future is not predictable is just too unpleasant to be given any room at all in the Wall Streeter's consciousness" and "For one thing, customers have an unfortunate habit of asking about the financial future.  Now if you do someone the signal honor of asking him a difficult question, you may be assured that you will get a detailed answer.  Rarely will it be the most difficult of all answers-"I don't know".

A prudent way to navigate the inherent uncertainty in the world and economy is by maintaining some flexibility, a buffer, a margin of safety and a level of creativity in planning.  This flexibility isn't free, it's the extra turn of leverage not taken, it's the liquidity not deployed, or other analogous things, but it also provides a valuable option to change course when things aren't working out.  It creates a condition to increase the odds of survival and survival is what allows individuals and businesses to adhere to Charlie Munger's first rule of compounding: "The first rule of compounding is to never interrupt it unnecessarily".

On the data side, housing starts beat expectations lead by a beat in multifamily.  Building permits also beat expectations and industrial production beat after auto assemblies surged.  In Fed news, NY Fed Prez John Williams seemed to indicate that the data between July and September would be important for the Fed to gain more confidence on the fight against inflation, which would seem to potentially make a July cut a long shot.  Gov. Waller continued to express belief that we'll pull off a soft landing and also the need to see "a bit more evidence" over the next couple of months before penciling in a rate cut.

In the real world people still seemed to largely be employed, taking vactions, flying, dining out, etc. 

On the day ahead, it's ECB (expected to be on hold), jobless claims, Philly Fed and Fedspeak.  Markets will also look to parse and further react to overnight comments from VP nominee Vance.

XTOD: Part 1 Here is a contrary opinion on the emergence of Silicon Valley support for former President Trump. Which like all my opinions on here, probably won’t be popular.    It’s a bitcoin play.  

Not because the former President is a far stronger proponent of crypto. That’s nice. But doesn’t really impact the price of crypto. It makes it easier to operate a crypto business because of the inevitable, and required, changes at the SEC  

What will drive the price of BTC is lower tax rates and tariffs, which if history is any guide (and it’s not always ), will be inflationary. 

Combine that with global uncertainty as to the geopolitical role of the USA, and the impact on the US Dollar as a reserve currency, and you can’t align the stars any better for a BTC price acceleration

Part 2  How high can the price go. Way higher than you think.  Remember, the market for BTC is global.  And the supply has a final limit of 21m BTC, with unlimited fractionalization.  

Keep that in mind as you consider what happens if because of geopolitical uncertainty and the decline of the dollar as the reserve currency, BTC becomes a “safe haven” globally.  Which means that BTC could be what countries and all of us look to buy as a means to protect our savings.  

Crazy ? It already happens in countries facing hyperinflation.  

And if things really go further than we can imagine today (and I’m not saying they will.   Just that this has a possibility somewhere above zero) , then BTC becomes exactly what the Maxis envision.   A global currency

XTOD: The biggest outperformance of small-cap stocks over large-cap stocks, over a 5-day period, in history.

XTOD: The problem with this Trump ticket is that most these economic policies are predicated on proven to be totally inefficient measures like tariffs, devaluation, etc… 

I sure hope these are election rhetoric and that Trump will prove his usual opportunistic self by using the ideas to get voted in but not actually toying with implementation.

XTOD: “On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous.”  - Buffett

XTOD: Keep the goal. Change your mind about how to reach it.  One sign you’re getting in your own way is not changing your tactics when you’re not getting the desired result.

Daily Economic Update: July 17, 2024

Yesterday's data featured a sizeable beat in core retail sales causing many economist to increase their forecast for 2Q GDP.   STL Fed GDP forecast is now back to 2.5%.  Import prices were flat, possibly a good sign for inflation in the U.S. and our neighbor to the north saw falling inflation.  Fed Gov. Kugler signalled some cautious optimism on rate cuts this year. The market is pricing in a Fed rate cut by September.  The 2Y is 4.43% and the 10Y is 4.16%.  In equities the outperformance of small caps of late is catching attention, but nonetheless equities continue to win. 

On the day ahead we get housing starts, industrial production and Fedspeak including Waller. 

XTOD: Russell 2000 ytd gains as of one week ago: +0.9%  Russell 2000 ytd gains as of today: +12.5%

XTOD: kendrick lamar’s ‘not like us’ is now the best selling rap song of 2024 in the US🤯

XTOD: Home Run Derby Anthem singer Ingrid Andress announced that she’s checking herself into rehab

XTOD: Everyone needs one person in the group that can do a good Trump impression. This is on my 2025 to-do list if he wins.  https://x.com/gb1121/status/1813177959777231172

XTOD: “Hear Me…”   Mike Tomlin GOLD “It’s not what you are capable of; it’s what you are willing to do.  Plenty of people are capable.  Fewer people are willing.”   This message is the ultimate TRUTH in sports.   No Deposit - No Return

XTOD: It's not typical to see a Catholic priest behind a DJ booth. But it's where Guilherme Peixoto shines. He rose to fame playing electronic dance music near his village church. Now the 49-year-old is playing at some of the world’s best nightclubs https://reut.rs/3Y302M4

Daily Economic Update: July 16, 2024

 

Stocks rose, the yield curve steepened.    Powell indicated he's good to cut rates before inflation returns to 2%.  2's10's curve is now just 22bps inverted on Fed cuts and steepening on the long end due to predictions that if elected Trump's policies would increase deficits and inflation.  Trump named J.D. Vance is running mate and for some reason when I hear Vance I only think of The Office. 

Nothing on the earnings front is causing any major concerns at the moment. 

Retail Sales on the day ahead. 

XTOD: The Rapper 50 Cent is reporting in talks with Organizers about appearing at the Republican National Convention in Milwaukee alongside Former President Donald J. Trump.

XTOD: The inventory spike in Texas/Florida right now is breathtaking.  Active listings in these two states up to 249,000.   The highest level in the last 7 years. And they continue to go up like a hockey stick.   Don't be surprised if values in Texas/Florida are down by at least 10% by year end.  

Meanwhile - Northeast US is still in massive inventory shortage.

XTOD: Scoop: Biden WILL announce plan to cap rents at 5% nationwide, sources say  Would strip tax benefit from corporate landlords who dont comply  Plan, which likely requires D control of Congress, comes as Biden emphasizes populist econ ideas after debate  W/ @rachsieg   https://washingtonpost.com/business/2024/07/15/rent-cap-biden-housing/

XTOD: jokes aside JD is a great choice, former VC, and very good on crypto. Trump 2.0 is signaling a pro tech, pro silicon valley, pro american dynamism outlook.

XTOD: "Unless you buy a stock at the exact bottom (which is next to impossible), you will be down at some point after you make every investment. Your success entirely depends on how dispassionate you are towards short-term stock price fluctuations. Behavior matters."  — Joel Greenblatt

XTOD: The US isn’t a failed European country, it’s a working Latin American country.  If it fails, it‘ll look more like Mexico than Scandinavia.

Daily Economic Update: July 15, 2024

Addendum at the beginning: I wrote the part of this post about political risk on Friday after listening to a MacroMusings podcast about the U.S. safe harbor premium and prior to the events of Saturday.

PPI came in below expectations, but was mostly dismissed.  UofM consumer sentiment fell again and showed a small downtick in inflation expectations.  Perhaps more important for inflation were the comments from Jamie Dimon where he expressed a view that inflation and rates will remain higher than the market thinks.  The driver, deficits, spending on infrastructure, restructuring of trade and military expenses.  The other talking point on inflation is the impact of base effects as the year progresses.

With elections remaining a front and center topic, something that really isn't discussed is the question of how much risk premium (if any) is priced into U.S. markets.  In other words do investors perceive the U.S. as more risky today than they would historically and do investors consider either of the current candidates more risky than the other as it relates to the credibility of U.S. institutions and standing in the world.   The US safe harbor premium refers to the premium that investors are willing to pay for investment in the US due to factors like the soundness of US political institutions, the safety and liquidity of US Treasury securities, the US dollar's status as the world's premier reserve currency, and the emphasis on rule of law and free democratic elections.   

Whenever one trades, they trade against "what's priced in".  I think investors tend to trade the election based on things like tariffs, taxes/fiscal policy and regulation, but that is somewhat distinct from what might be termed a broader political risk described above.  Is there still 0 risk premium priced into U.S. markets for political risk, or is there some risk premium that could be harvested if it's mispricing the true political risk?  If political risk is rising and investors ultimately demand a risk premium in things like U.S. Treasuries, how much and when does it get priced in?  

On the week ahead politics will dominate with the RNC running to Thursday and Trump's VP pick a topic of interest.  In data Retail Sales will highlight and we'll get some Fedspeak domestically.  Internationally it's ECB and China's Third Plenum

Monday: Empire State Mfg, Powell, Daly

Tuesday: Retail Sales

Wed: Industrial Production, Fedspeak

Thur: ECB, Jobless Claims, Philly Fed, Fedspeak

Fri: Fedspeak

XTOD: We tend to be laser-focused on certain risks: stock market crashes, our home burning down, big medical bills, losing our job. But what if the risks we’re trying to contain aren’t the risks we get hit with?  https://t.co/7uyKHwmKot

XTOD: Re-reading is probably more important than reading. Seek to cognitively own a great book rather than just reading it.

XTOD: “Everybody struggles,” Charlie Munger told @BeckyQuick  last year. “The iron rule of life is that everybody struggles.”

XTOD: "Ease is a greater threat to progress than hardship.”   ~ Denzel Washington

XTOD: Persistence = energy + imagination + resilience + good judgement + focus on a goal 

One of my favorite  @paulg  essays 

And especially this simple line, an ode to the “life’s work” concept at the center of our investing “humans will work harder on a problem we love”

Daily Economic Update: July 12, 2024

Yesterday's CPI gave further credence to the idea of a September rate cut.  Headline CPI actually fell 0.1% MoM, bringing the YoY headline figure to 3%.  Energy prices, including gasoline, looked to be a big contributor to the fall in headline prices.  Both Core and "SuperCore" continue to show disinflationary trends.  Yields fell in response with the 10Y under 4.20% and the 2Y around 4.50%, both levels we saw near the end of Q1.   One debate on rate cuts is that stocks are at all-time highs and therefore financial conditions remain loose, therefore cutting rates might spur a second leg of inflation.

On the employment front, jobless claims came in very low, which doesn't seem to indicate much weakness on the labor front for the time being.

As it relates to equities, I think a view out there is that no matter what buy tech/AI.  Something like (a) if data is weak, the Fed will cut - so buy long duration equities (i.e. tech/AI) (b) if data is strong, the economy is strong - so buy tech/AI

As we head into the weekend, should I be concerned when both the Treasury Office of Financial Research and the St. Louis Fed both put out effectively the same research about banks exposures to commercial real estate?  Should I be more concerned when they seem to cite the fact that the small and mid-size banks have the most exposure to losses and further seem to conclude that I shouldn't be worried because at least that means it's not a major risk to the financial system as a whole?  As if the track record of the official sector accurately identifying the daisy-chain and layers of exposure is one that should provide me with optimism.

On the day ahead it's PPI as the highlight.

XTOD: I can't believe McDonald's single-handedly ended inflation w/their $5 meal deal  Only in America

XTOD: The cyclically-sensitive CPI deflated -0.4% MoM and has declined now for four months in a row.  The YoY trend in the prices most sensitive to shifts in the economy is now running at –1.1% from -0.9% in May and +2% a year ago.  How can Powell not be “confident” by now??  The Fed should get its head out of the sand and either cut rates on July 31st or strongly signal a move is coming on September 18th.

XTOD: JP should be "confident"!

1. Since NGDP growth stabilized after mid-23,

2. Inflation also stabilized and

3. Harmonized CPI, which differs from Headline CPI by excluding OER is just below the 2% target.

XTOD: Your toughest opponent isn’t your rival,  it’s your self-doubt. -Kobe

XTOD: This exchange between Warren Buffett and the late Charlie Munger is golden—lessons for building wealth and living a better life:

Buffett:  "Write your obituary and try to figure out how to live up to it. For business, You just want to make sure you don't make any mistakes that take you out of the game or come close to taking you out of the game. You should never have a night when you're worried about investing. You should spend a little bit less than you earn."

2 lessons Buffett said he learned from Tom Murphy:

"You can always tell someone to go to hell tomorrow."

"Praise by name, criticize by category."

Buffett continued:   "I've never known anybody who was kind that died without friends. But I've known plenty of people with money that died without friends."

Munger:  "It's so simple: you spend less than you earn. Invest shrewdly. Avoid toxic people and toxic activities. Try to keep learning all your life. And do a lot of deferred gratification.

If you do all of those things, you are almost certain to succeed.

And if you don't, you're going to need a lot of luck. And you don't want to need a lot of luck. You want to go into a game where you're very likely to win without having any unusual luck."

Buffett added:  "You need to know how people can manipulate other people and you need to resist the temptation to do it yourself."

Munger agreed vehemently:  "Oh yes, the toxic people who are trying to fool you, lie to you, or who aren't reliable in meeting their commitments—a great lesson in life is to get them the hell out of your life. And do it fast."

Buffett:  "And do it tactfully, too, if possible. But do get them out of your life."

Daily Economic Update: July 11, 2024

Another day, another dollar for the top dog with the gold flea collar - that's the S&P & Nasdaq which both set yet another all-time high.  Bet you can't guess what sector led the way.  Speaking of markets and high levels of stock concentration, etc. in reference to a CFA study showing that Gen Z has portfolios dominated by crypto and single stock holdings, economist Allison Schrager stated in her recent blog post, "Keep calm and diversify":

"Maybe markets have changed from when I learned that good investing involved going to a mall and buying stock in the stores that were crowded. I suppose financial education has never been great.

The last 20 years of markets were weird. If the market will be dominated by a few big, fast-growing stocks, maybe stock picking is a good idea and diversification is for suckers and fools. If the world is crazy, maybe a currency with no discernible value is a smart investment.

But I doubt it. A decade or two is a short time in finance, and no one market condition lasts forever. This is why good investing, not speculation, involves diversifying as much as you can. It is just efficient. As markets likely enter a more volatile phase from increased concentration, diversification will be more important than ever.....

I suppose a bear market will teach that hard lesson. Gen X and Millennials each came of financial age during bear markets—they are more risk-averse, maybe too much so. But I think we need to take a hard look at financial education, which often fails to include basic risk principles, rather than rely on people losing money and learning the hard way."

Powell stressed data, not political dependence on rate cuts.  I talked about the political risk to the FOMC in my January 31st FOMC recap sharing Paul Volcker's 1984 election season story.  When it comes to data, economist Brad DeLong asked: "Ok, Jay Powell: Precisely Which Inflation Numbers Do You Wish to See "More of"?   in which he posits that the only reason the FOMC is not willing to cut rates yet has to be a view that we don't know where the neutral rate (r-star) is, an argument he doesn't find compelling.

Yields were again little changed ahead of CPI data today.  The 10Y auction was a solid bp through where when-issued was trading and seemed to have solid stats overall.

In politics, now that George Clooney has called on Biden to step down from the Presidential race, all is likely settled. I think he holds that kind of sway and after a few shots of Casamigos most problems can be solved.

CPI dominates the day ahead.

XTOD: Few celebrities are closer with Obama than George Clooney - You can bet he ran this statement about Biden by Barack before it went public

XTOD: Are 70% discounts on office buildings enough? Oaktree’s Howard Marks isn’t sure. 

XTOD: Wallgreens stock did 20% CAGR for 41 YEARS  And then...  It fell almost 85% in just a few years.

XTOD: No amount of money can buy you integrity.

XTOD: Ergodicity might be the most underappreciated concept to truly comprehend success, risk and longevity.  It is not performance that is the most important factor for long-term performance but survival. True champions aren't just the fastest, but the fastest among those who endure. https://pbs.twimg.com/media/GSGDiaqawAAbhJQ?format=png&name=900x900

Daily Economic Update: July 10, 2024

 Another day, another record for the S&P as Powell says the economy is "no longer an overheated economy".  Powell was reluctant to get into the specific timing of rate cuts and remains 'data depedent', but there seemed to be more emphasis on downside risks to holding rates this high for much longer.  Markets increasingly believe a rate cut is likely this September, ahead of the November election. 

Of course stubborn inflation data could prove problematic, we'll get a look at CPI later this week.  Before that it's another day of Powell, today in front of the House.  We also get the 10Y note auction.

Away from Powell there seems to be an increasing chorus of people warning that stocks and in particular AI stocks are getting too rich (see GS).  As mentioned earlier this year, Bubbles are an interesting topic (reprinting from January 23, 2024 post):

As David DeRosa writes in his monograph Bursting The Bubble: Rationality in a Seemingly Irrational Market:

"Although it is not certain that anyone will be ever able to prove conclusively whether or not bubbles exist, research shows that many famous financial crisis that have been portrayed as bubbles were not bubbles at all."

DeRosa references Occam's razor, which calls for always seeking the explanation that makes the fewest assumptions possible, and Mark Rubinstein's The Prime Directive, which says that you should attempt to explain asset prices by rational models as reasons to search first for fundamental, rational explanations for asset prices before resorting to "bubbles" as the last resort. 

What makes things more interesting is that many calls for AI stocks being overvalued are being driven by fundamental views that capex spending is too high for the current and expected use cases, not to mention things like energy consumption and water usage.

XTOD: Arthur Schopenhauer: "Man can do what he wills, but not will as he will."   Modern medicine: "Hey, Arthur, ask your doctor of Ozempic is right for you."

XTOD: The infamous 'Warren Buffett Indicator' has officially hit 195% which is the highest in history - higher than the dot com bubble, global financial crisis, and the 2022 COVID crash

XTOD: Currently one of the most compressed periods for the $VIX in the last 10yrs. Dispersion has been at or under current levels during just a handful periods of time.

XTOD: DALIO: ".. I feel like I am faced with the choice between a strong, unethical, almost fascist Republican Party and a frail, untruthful, and enigmatic Democratic Party that is failing to make clear what they will do when their sitting president can no longer serve."

XTOD: Excitement is a better motivator than discipline. The people who appear to have an exceptional work ethic or remarkable discipline are often those with a genuine curiosity or interest in that area. The person who smiles is more likely to keep working than the person gritting their teeth.

Daily Economic Update: July 9, 2024

Markets await Powell and inflation data as well as the start of earnings season.  The latest NY Fed Survey of Consumer Expectations showed consumers generally lowering their inflation epxectations, while continuing to show persistently high levels of inflation uncertainty. Little changed in yield land with 2's at 4.62% and 10's at 4.27%

Other than continued speculation over Biden's future, French election fallout, the impact of Hurricane Beryl on oil and gas, I'm sure some Boeing plane had an issue, but beyond the usual, it was a pretty slow market news day (at least in my opinion).

On the day ahead, 10am is Powell in front of Senate Banking committee, 3Y Note at 1pm and Fed's Bowman at 1:30pm.

XTOD: BREAKING: The Federal Reserve is considering a 75 bps rate hike after seeing footage of Michael Rubin's white party in Bridgehampton

XTOD: This is one of the longest streaks ever without a 2% drop for the S&P 500.  Of course, looking back further in history this streak could last a lot longer than most think.

XTOD: The immaculate disinflation of 2H 2023 during a period of exceptionally strong nominal GDP was chalked up to a material step up in productivity (GDP/worker). It now seems clear this was in fact due to undercounting workers due to the surge in immigration.   Which led to some of our lowest core MoM CPI prints of this cycle. This is what got everyone excited about rate cuts for this year. If we overestimated productivity, by default we underestimated inflation in this period.   Immigration may have incorrectly flattered CPI progress.  The immigration surge is truly historic and is thus making analysis of the economic data more difficult than it normally would be. I think policymakers should take their time to figure out all of the impacts before making any decisions they may regret, in either direction.

XTOD: Back in January, Blackstone said it's buying Tricon (which owns 35,448 homes) The 

@commobserver  is now reporting that Tricon will absorb Blackstone-owned Home Partners of America (which owns 26,516 homes)  "The majority of HPA [Home Partners of America] staff are being asked to stay on through March 2025 and will receive retention packages that include their salaries, year-end bonuses and severance, plus payments to cover the extension of health care benefits and other outplacement support." 

XTOD: Clear writing and clear speaking are simply outputs of clear thinking.

XTOD: Opportunities in life come through people.    Who do you need to connect with to gain access to the opportunities you want?

Daily Economic Update: July 8, 2024

Friday's Job's Report showed a beat on the headline NFP, but downward revisions in the prior two months, as well as a increase in the unemployment rate to 4.1% and tepid average hourly earnings made the read of this report as "weak", sending yields lower.  Stocks only go up and to the right, but you already knew that.  September rate cut odds are building.  2Y is 4.62% and the 10Y is back under 4.30%.

Of course politics has been front and center both domestically and internationally.  Calls for Biden to step aside continued following his interview on ABC.   The second round of the French elections saw a defeat of the Far Right party led by Marine Le Pen, I'm not enough of an expert in French politics to opine, other than this was a reversal of results expected following the first round last Sunday and now looks like a left/centrist coalition will lead the National Assembly.

Other than that, I guess we'll have to learn whether or not 

On the week ahead inflation will highlight data, we'll sell a lot of bonds and Powell will do his semi-annual Humprhey Hawkins testimony:

Monday: No Major Data

Tuesday: Powell Testimony Day 1, other Fedspeak, 3Y Note

Wednesday; Powell Day 2, 10Y Note, more Fedspeak

Thursday: CPI, Jobless Claims, 30Y Note

Friday: PPI and UofM survey

XTOD: Somewhere on a sunny beach is a managing director asking their associate how things are going in the office.

XTOD: "I’m so glad Bobblehead George was a fan fave. No, I don’t get anything for it except joy that 35 years after putting on those glasses people are still enjoying our work.  The show was a gift from you to us. Thanks for keeping it alive. Serenity now."  - Jason Alexander

XTOD: Aswath Damodaran, NYU Finance Professor, on CNBC: Since the 7 large tech companies have cash flows and earnings, they can be viewed as value stocks. The equity risk premium at 4.11% is the lowest it has been since 2008, before the financial crisis indicating a possible correction

XTOD: To beat the market, you need the ability to identify the 2% of winners that drive gains, a severe allergy to big losers, near-perfect behavior, a reckless disregard for your own career, and a whole lot of good luck. The odds are stacked high against you.  @jasonzweigwsj  explains how its going this year: 

"Stock pickers are doing even worse than usual. In the first half of 2024, according to Morningstar, only 18.2% of actively managed mutual funds and exchange-traded funds that compare themselves to the S&P 500 managed to outperform it."   https://wsj.com/finance/investing/why-your-fund-manager-cant-beat-todays-stock-market-a5a14688

XTOD: Money should be used as a tool to live a better life, not simply something to make the spreadsheet happy.

XTOD: To do or not to do? To try or not to try? Most people will vote no, whether they consider themselves brave or not. Uncertainty and the prospect of failure can be very scary noises in the shadows. Most people will choose unhappiness over uncertainty.

Daily Economic Update: July 5, 2024

 I hope you spent the 4th imagining what can be, unburdened by what had been.  ISM services worst since the pandemic, ATL Fed GDP now down to 1.5%, you know recession, etc.  Jobs report today.  

Across the pond, Labour wins.

Why are you reading this? It’s a summer Friday, go touch grass.

XTOD: The most powerful productivity tool ever invented is simply the word “no”.

XTOD: Your friends all just came over and you ordered a bunch of pizza and Mountain Dew. You've fired up NCAA Football on your Xbox. No school tomorrow. The adults don't care if you stay up all night long. A perfect Summer evening. You are 43 years old. The year is 2024

XTOD: what if biden announces he wants Kamala to take over but then with his dying breath he tells his wife it should be Hunter and also there are dragon…

XTOD: Ah, the song of crack and hookers I see

XTOD: Life Hack : Friendships and Relationships are not about keeping score or getting something, they are about sharing time and space , creating moments and memories! The scrapbook of LIFE is all that matters

Daily Economic Update: July 3, 2024

On the 2Y Anniversary of the 2s10s inversion, a steepener trade is starting to work.  The bond market seems to now care again about fiscal issues and how tariffs could lead to sticky inflation.  Will this bear steepener hold, who knows.

In data, JOLTS showed more openings than expected, but downward revisions muddy the picture some as does the fact that the leading category of job growth is government (actually that's less surprising).  In Fedspeak, Powell said he continues to see disinflationary progress and is characterizing risk as two-sided, with concerns about softening in the labor market.   The 2Y remains near 4.75% and the 10Y near 4.45%.  Stocks enjoyed more new records.

Meanwhile researchers from the St. Louis Fed seem a little less sanguine about inflation:

"To conclude, the mean inflation expectation only rose from about 2% before the pandemic to 2.5% in May 2024. However, the standard deviation also increased substantially, and the skewness switched from negative to positive, signaling right-tail risks on inflation expectations. The analysis in this post suggests that both second- and third-order moments should be taken into account to make assessments about future inflation and their risks."

It's an early market close but before we get there you have to wade through the deluge of data which includes ADP Employment, Jobless Claims, ISM Services and Factory Orders.  At/after the close the Minutes of the last FOMC meeting come out.  Then after fireworks and the UK general election (which Labour is expected to win in a landslide), Friday will go right into the Jobs Report.

XTOD: Strip clubs are always the most leading indicator of all...good old RICK has absolutely collapsed, this has led 2 of the last two recessions. 

XTOD: LISTENING EARS, please.  The stock market corrects when the Fed actually CUTS rates.

Until then, as it pertains to recession:   3) Unemployment lags the 3rd most (it historically rises after recession has begun)  2) Inflation lags the 2nd most  1) The stock market lags the most

XTOD: The Japanese yen is at a 37 year low, it’s the best time to plan a trip to Japan.

XTOD: Kamala for nominee futures are skyrocketing right now, doubled since noon:

XTOD: Year to date returns. Pretty wild. 

S&P 500: +15.23%

S&P 500 Equally Weighted: +4.96%

S&P 600 Small Cap Value: -5.4%

XTOD: “Once you have enough for beans and rice and taking care of your family and a few other things, money is a story. You can tell yourself any story you want about money, and it’s better to tell yourself a story about money that you can happily live with.”  — Seth Godin

XTOD: “Courage is not simply one of the virtues, but the form of every virtue at the testing point.” — C.S. Lewis

XTOD: Always stick to what makes you weird, odd, strange, different. That’s your source of power.

Daily Economic Update: July 2, 2024

ISM Mfg was below forecast, showing weakness in price pressures and employment, but an increase in new orders. Construction Spending was also below forecast.  On the day ahead it's Powell and JOLTS data.  

It seems like it's been a quiet rise in yields over the last couple of weeks, but the 10Y has been up over 20bps since mid-June and is nearly back to 4.5% The move is the Yen has also been perhaps a little understated in the mainstream media but USD:JPY is over 161.

While the employment picture will be a major economic focus for the week, the political landscape is perhaps a bigger focus.  How much of an impact political uncertainty will have on how businesses investment is the question mark.  On the political front much of the talk has now shifted to Biden securing the nomination as early as mid July.

One place that nothing political or economic is stopping American's is travel.  TSA screenings continue to set records this summer.

XTOD: SECRETARY BLINKEN:  Well, look, I think China’s objectives are clear.  Over time, over the coming decades, they would like to be the leading country, the dominant country, in the international system militarily, economically, diplomatically.  That’s clear.  And if their vision for the world actually matched ours or matched many other countries, that would be one thing.  But they have a different vision, a different vision of what that future looks like https://state.gov/secretary-antony-j-blinken-at-a-conversation-on-u-s-foreign-policy-at-the-brookings-institution/

XTOD: Jill Biden is on the July cover of Vogue. Just dropped this AM. 

https://vogue.com/article/first-lady-jill-biden-august-2024-cover-interview

XTOD: I am seeing arguments in favor of hiring, for the highest ranking job in the country, someone completely incompetent at any human task, who would not even qualify for any single job in the same country --not one.   And don't tell me that things are not going downhill.

XTOD: Monkeys and Pedestals: It is a mental model that helps you quit sooner. It boils down to some very good advice.  

- Figure out the hard thing first.  

- Try to solve that as quickly as possible.  

- Beware of false progress.

XTOD: 82% (!) of the American population is headed on vacation this summer and 42% (!!) are going on multiple trips

XTOD: Which of your current habits is least aligned with the type of person you hope to become?

Daily Economic Update: July 1, 2024

"Success is not achieved by chance but through careful evaluation and timely adjustments. Just as a coach makes strategic changes at halftime, businesses and individuals must assess and recalibrate at the midpoint to ensure they hit their annual targets. It's the difference between merely hoping for success and actively engineering it."  (Not sure who to attibute this to, but it seemed fitting for the halfway point of the year. )

The beauty (or curse) of posting is daily is you can go back through everything from the start of the year.  In doing so and see all the things that everyone thought were so important, all the things we've already forgotten and perhaps just how much of the daily news is just noise.   I'm not saying any of the below were important or that we've forgotten all of these, some are timeless, but here are some unofficial 1H2024 highlights:

January:

• 7 rate cuts for 2024 
• Abercrombie and Fitch stock rally
• 10Y over 4%
• Boeing doors ripping open mid-flight 
• Japanese stocks hitting 34 year highs
• BTC ETF's
• China Evergrande is Bankrupt (finally)
• Liz Warren hates Jay Powell
• Will Taylor Swift make it to the Super Bowl from Japan?

Feb:

• Powell on 60 Minutes
• Where is the neutral rate?
• Walmart pulls Snoop Dogg's cereal
• Red Sea crisis
• Bill Ackman = Billionaire Activist Man
• Some report of a "serious national security threat" that we all forgot about
• AI Hype
• VisionPro while driving a CyberTruck
• Blowout jobs report
• BOXX etf
• Buffett's annual letter: "instinctively knowing that pundits should always be ignored" and "Never risk permanent loss of capital" - you will be rewarded if you make a couple of good decisions during your lifetime and avoid serious mistakes. "
• Data Dependent

Mar:

• There are no bubbles
• Dog Wif Hat, Frog Wif Hat, Retardio
• r-star
• Chinese Ev's
• NYCB
• John Kennedy from Louisiana questions Powell about sexual misconduct by the FDIC
• Data Dependent
• Inflation data worse than expected
• Shoei's interpretator
• Ozempic
• Reddit IPO
• Francis Scott Key collapse
• Waller, "There's still no rush"
• Kahneman dies

Apr:

• Dollar Strength
• Fed may not cut this year
• Jobs data crushes
• Earthquake
• Eclipse
• Student Loan Forgiveness
• The end of Curb
• 2Y at 5%
• Shelter and motor vehicle insurance
• r-star
• Bitcoin "halving"
• "hawkish pivot"
• tents on city streets and campuses
• Ban Tik-Tok and Noncompetes
• stagflation
• deficits

May

• Drake and Kendrick Lamar
• Peloton layoffs
• Bidenomics gets an "F" from Druck
• GameStop and "Roaring Kitty"
• $1,000 Beef Cases in Vegas
• Jamie Dimon still sees a lot of inflationary forces in front of us
• Bernanke and Blanchard believe people need to lose their jobs for inflation to fall
• China property market bailout
• Everyone's an equity bull, including Mike Wilson at ATH's
• Uncertainty about the degree of restrictiveness
• The Yen, the Yuan
• More questions around R-Star (see Waller)
• CRE (really an all year thing)

June

• Elections (Mex, France, UK, etc.)
• Rate Cuts (ECB, Canada, etc.)
• Divergence
• June 12th, the most important Wednesday in history, CPI and FOMC
• Electric boats and sharks “Do I stay on top of the boat and get electrocuted, or do I jump over by the shark and not get electrocuted?” 
• Hawk Tauh
• Grooming
• Presidential Debate - Biden nomination and election odds

Lot's of rumors that Biden is preparing to drop out and pointing to Harris as the Dem nominee.

Following the U.S. Presidential Debate and France's first round of election, the Ray Dalio essay "Pick a side, fight, or flee" might be required summer reading irrespective of where you are on the political spectrum.   

Friday's PCE report was largely in-line with consensus estimates with the personal income numbers coming in slightly above estimates.  UofM consumer sentiment was stronger than expected with year ahead and 5 year ahead inflation expectations declining slightly but still at 3%.  Yields finished the day higher and----quick mid-year recap

The week ahead is a weird one from a timing of economic data.  You get an early market close on Wednesday, July 3rd, a full close on the 4th and then Friday features the Jobs Report.

Monday: ISM Mfg

Tuesday: Powell 930am, JOLTS

Wednesday: ISM Services, Fedspeak, FOMC Minutes at 2pm (SIFMA Close at 2pm and Stocks Close at 1pm)
Thurday:  Celebrate U.S. Independence by watching the UK vote

Friday: Jobs Day in 'merica

XTOD: A Majority of U.S. Military Bases under United States European Command (EUCOM) in Spain, Germany, Italy, Bulgaria, Poland, and Romania have now been placed on Heightened Alert, with their Force Protection Condition (FPCON) being raised to Charlie, the Reason is still Unknown.

XTOD: Here's a Biden update from http://BillOReilly.com news headquarters.  The decision has been made that the President will quit the campaign.  Two reasons: Democrat internal polling says he cannot recover from the debate, and fundraising is drying up. (1/2)

XTOD: "The Party told you to reject the evidence of your eyes and ears. It was their final, most essential command."  -- George Orwell

XTOD: France has just confirmed my worst fears. Both extremes of the political spectrum are on the rise in Europe once again. France is just the litmus.   France’s snap election, first round: the center didn’t hold. 

Le Pen: 260-310

Left: 115-145

Macron: 90-120

XTOD: “Do not put faith in constant happiness, and fear most when all smiles upon you”

If life is about developing a virtuous and just spirit, then good fortune is a distraction...

Success can deceive us; we mistake worldly praise as virtue, and forget Goodness altogether