FOMC week is upon us. People are seemingly up in arms that there is true uncertainty around whether the Fed will cut 25 or 50bps. Is this the slow end of a form of "forward guidance"? There's still a chance that Nikileaks puts out another piece cementing either 25 or 50 ahead of the Wednesday decision. Anyway it's a big central bank week with Fed, BoE and BoJ. The 2Y is 3.57% and the 10Y is 3.65%.
Where do things stand (economically speaking) going into the meeting? Well I think that very much depends on your narrative, but one thing we can probably all agree on is our economy is currently doing better than China's where stocks and bond yields are hitting new lows and even there manipulated data doesn't look great. Stateside, last week ended with stocks on a 5 day winning streak and are back near all-time highs. The UofM sentiment was above expectations and at a 4 month high. The survey showed a continued decline in inflation expecations 1 year out, but showed an increase in inflation expectations in the 5-10 year horizon. Of course, it's largely a survey about politics and gas prices, so who knows what it means.
Whatever the news flow, your time is still better spent reading this summary of Howard Marks recent video "How to think about risk" (you should watch the video).
Or, reading this article, "False Profits" from Jason Zweig about often promoted trading strategies.
Or, watching all the episodes of Industry while reading Matt Levine talk about investment bank analyst hours being a "floor, not a cap" which formerly "was “it’s about 100 hours a week, unless you need to work more,” and the new standard is “it’s 80 hours a week, unless you need to work more” and how AI will potentially be "making junior bankers’ lives easier in the short term, but undermining their development in the long term: They won’t learn, at a deep level, what drives returns on an LBO, because the AI does all the math for them. The apprenticeship model will break down."
Outside of the financial news there was another Trump assassination attempt, which is an apt reminder of risks in general and about election risk in the specific.
On the week ahead:
Mon: Empire St. Mfg survey
Tue: Retail Sales, Industrial Production and Capacity Utilization
Wed: Building Permits, Housing Starts and FOMC
Thu: BoE, jobless claims, existing home sales
Fri: BoJ
XTOD: Cashier at trader Joe's asked me what I do (I leave it at finance), and then asked if he should buy calls ahead of the rate cut.
XTOD: I get it that people lost money betting into the blackout period only to get rug pulled under their feet by Timmy, but I think this is a better place for FOMC. I don’t really get all the talk about them having absolutely to guide more to shift the odds of 25 bp or 50 bp into certainty.
They probably have odds exactly where they want them and they will now turn a decision that was fully priced into one that will carry a signal.
They will either out-dove or out-hawk the 50% and in that their decision carries important signaling vs being just a fully priced ritual where everyone second guesses small language tweaks.
I hope this is a structural shift in their communication going forward. Market needs to be kept on it’s toes.
XTOD: 7/ On risk management grounds, a half point cut is easy to correct for if inflation stays stubborn or the economy takes off; just don't cut again. A quarter point cut is harder to correct for if real data weaken further; it leaves the Fed further behind the curve. 8/ Probably the best argument for a quarter vs half is that when the Fed starts a new cycle, it usually starts small, because it likes the optionality a drawn-out series of small moves provides. (Brainard principle: when uncertain, move slowly.)
XTOD: The short-term crowd is always too distracted to notice the long-term crowd slowly compounding. An investor obsessing over daily economic data misses the big picture. A teenager chasing fleeting popularity neglects to develop genuine interests and skills. A co-worker stops paying attention to the details to chase attention. All chase false stimuli at the cost of lasting value.
Never try to win the moment at the expense of the decade.
XTOD: The need for certainty is the greatest disease the mind faces.
XTOD: There are a thousand different ways that you can "find a niche" and exploit it to make a ton of money, and yet not get any closer to living out your calling
https://x.com/liensofnewyork/status/1835020168717590844
https://x.com/INArteCarloDoss/status/1834916886720458829
https://x.com/greg_ip/status/1835397659860799707
https://x.com/ShaneAParrish/status/1835309801154154513
https://x.com/RobertGreene/status/1835060959494521049
https://x.com/lukeburgis/status/1834387985300607166
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