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?
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”
https://x.com/ClementsMoney/status/1812091104193311179
https://x.com/farnamstreet/status/1812099704252952848
https://x.com/kejca/status/1812159269128872285
https://x.com/JonErlichman/status/1811898798219604382
https://x.com/patrick_oshag/status/1811710026534244447
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