Daily Economic Update: October 31, 2024

Nothing too spooky in the markets this Halloween, we'll see if this morning's inflation data changes that, with the Fed's 'preferred' inflation metric, PCE, on the docket.   

ADP payrolls crushed estimates, but ADP is historically noisy and generally provides a poor read through to Jobs numbers on Friday.  The 3Q GDP data came in at 2.8% slightly below estimates but showed strong consumer spending and pulled down some due to weaker than expected fixed investment.  Oh and productivity is up and at the end of the day, productivity is king going back to Adam Smith's Wealth of Nations.  

The 10Y is back up to 4.30% and the 2Y is right around 4.20%.

UK Gilt yields fell following the budget, but when the market realized there was going to be a lot more supply, UK yields rose.  As some would highlight that simply the global quantum of sovereign debt being issued creates a condition where the supply could mean that U.S. debt has to offer higher yields to compete. What might be at risk of being over-looked is that so far the market has really not struggled to absorb debt issuance, especially U.S. Treasuries.  Remember that not too long ago people were talking about the risk of a "safe asset shortage", could it be possible that if at some point deficits are reduced that there might actually be a risk of creating a destabilizing shortage of safe collateral?  That's probably a problem for another day, but it really wasn't that long ago that it was a concern.  

Over in equities, EY resigned from their role as auditor of Super Micro Computer, while Microsoft and Meta earnings were met with kind of a 'meh', but mentioned AI so there’s that.  Their shares are falling ahead of today.  We'll get Amazon and Apple earnings after the bell today.

PCE is the highlight in data today.  Less than a week until political calls and text stop.

XTOD: Donald Trump riding in a trash truck, after Joe Biden calls Trump supporters “garbage.” 

XTOD: Former California Gov. Arnold Schwarzenegger criticized politicians but endorsed Vice President Kamala Harris in a lengthy statement posted to X on Wednesday

XTOD: British finance minister Rachel Reeves announced tax rises totaling 40 billion pounds, or 52 billion dollars — the biggest since 1993 — in a bid to upgrade health and education https://reut.rs/3NLuap1

XTOD: Celebrity is the most powerful currency in media, including financial media. It's more important than track record, novelty of insight, or ROI. 

Most people just want to hear the latest take from the person they know, even if that person's been saying the same thing over and over again for years and has been consistently wrong doing it. It doesn't make sense rationally, but it's how most people behave in practice, which is why so many podcasts and financial conferences feature roughly the same voices with the same opinions saying the same things, no matter what is happening in the world.  It's also easier for the producers of these media properties to source these voices. They have preexisting relationships with them, they know how to produce content around them, and who to sell it to.  It's a win-win for everyone involved in the "ideas industry" even if those ideas are the intellectual equivalents of waste water or bad milk.

XTOD: "My journey in music taught me that sometimes you don’t need to force it. For years, I tried to make beats fit my ideas. Eventually, I learned to let the beat lead and let it show me where it wanted to go. It’s like magic when you stop forcing things and just let it happen." -Killer Mike

XTOD: "You climb as hard as you can by just advancing one inch at a time—that's the secret of life."

— Charlie Munger

Daily Economic Update: October 30, 2024

Shares of DJT Media stock keep rising, which some see as "prediction" for an election victory. Bitcoin crosses $70K for first time since June. Gold continued to be strong and the Nasdaq hits new records.

After the close Alphabet beat with strong cloud revenue and talked up some AI efficiencies, like AI writing a quarter of their code.

 The 10Y hit its highest yield since July, but yields fell back after the 7Y auction was solid, with the 2Y at 4.11% and the 10Y at 4.26%.

In data, job openings declined to pre-pandemic levels, while hires, quits and layoffs were little changed.  The Conference Board Consumer Confidence was very good, hitting the best level of the year with consumers feeling very well about their jobs while remaining concerned about inflation   Perhaps that would seem to indicate the Fed should be focusing on inflation moreso than employment. 

There has been plenty of talk about the distortions in the upcomding payroll report, out this Friday, as the impact of hurricanes and strikes is expected to make for a murky picture.  With focus already seemingly shifting to jobs, we have 3Q GDP data and the Treasury Refunding Announcement out today.  Yesterday's ATL Fed GDPNow fell back under 3 at 2.8% as we head into today's data. Across the pond the UK budget will also be a subject of some focus, though it's not likely to be anything like the 2022 Liz Truss mini-budget debacle.

XTOD: Gold just hit a new all-time high. $2,785 per ounce. Who's buying? Central banks, BRICS, and billionaires. Who's not buying? Everyday Americans ... yet.

XTOD: The obvious risk here is that the perception of certainty of a Trump win is running very high, the corollary is that if that win does not materialize then the risk of a chaotic outcome - very underpriced right now - would become prevalent

XTOD: Bond traders "believe the range of outcomes for this general election is much wider than all other elections for which we have records (1988)...The market is pricing an 18bps rate movement on the days immediately after the election:" Harley Bassman https://convexitymaven.com/wp-content/uploads/2024/10/Convexity-Maven-2024-Election-Special.pdf

XTOD: “The size factor (small cap premium) isn’t dead. It’l just lives in private equity now (bc cos don’t IPO till after they’re huge)” - Pankaj Patel on quant panel at the Astoria Macro conf w ⁦

@alphaarchitect @choffstein @cullenroche ⁩ & Ben Lavine

XTOD: Of all the hot spots across global finance that were upended by the pandemic, few remain as fragile as the commercial mortgage-backed securities market. And within this market, the pain is most acute in a new breed of bonds, known as SASBs, that buildings like 1407 Broadway represent.  A Bloomberg analysis of almost every SASB tied to a US office property, more than 150 in all, revealed that creditors across numerous deals are on track to get only a portion of their original investment back. In multiple cases, the losses will likely reach all the way up to buyers of the AAA portions of the debt.

This is in large part because unlike conventional CMBS, which bundle together hundreds of property loans, SASBs are typically backed by just one mortgage tied to one building….. “The AAA rating is designed to be a debt security that would typically default less than once every 5,000 years,” said John Griffin, a chaired professor of finance at the University of Texas in Austin. “Yet, here we are not far from the financial crisis observing defaults,” he said, adding that “it does not appear that the major issues in structured finance have been fixed.” …

https://t.co/W6Zm5jr9wB

XTOD: When you are washing the dishes, washing the dishes must be the most important thing in your life... Live the actual moment. Only this actual moment is life. https://pbs.twimg.com/media/Ga7-pdxXEAACDBP?format=jpg&name=small  ~ Thich Nhat Hanh

Daily Economic Update: October 29, 2024

The commodities market opined on the Middle East by appearing to price out risk of further escalation between Israel and Iran, or at least further escalation that endangers energy assets.  The stock market was also happy ahead of key data and earnings reports from 5 of the Mag 7 this week.  Yields continue to rise with commentary tending to continue to believe at some level it's tied to increasing odds of a "red wave". Both the 2Y and 5Y auction were relatively weak, the 2Y had weak bid-to-cover and foreign demand and the 5Y tailed 1.6bps.  The 30Y mortgage rate is back to 7%, I don't think many saw that 100bp increase coming a month or so ago. 

Speaking of Treasuries, there's been a little bit of talk about the return of "term premium" to the long end of the curve.  As I mentioned back here, term premium in bonds is an excess expected yield over and above that expected short-rate path, which is compensation that investors get for bearing interest rate risk in a longer-term bond (additional compensation that the path of rates is not certain).  What's interesting is that back in October of 2023, term premium was a hot topic. There was definitely a view of some FOMC members that rising term premiums would do some of the work for the Fed reducing the need for additional tightening, how does that play now that the Fed is cutting?  At that time both 2Y and 10Y rates were over 5%.  Additional views on term premium range from a view that "term premium" is really just a code word for where inflation expectations are hidden to a view that the U.S. is losing it's exboritant funding privelege.

Whatever the view, it's still interesting that the steepness of the 2Y10Y is only 15bps, with the 2Y is 4.14% and the 10Y at 4.29%.  Is anyone in the term premium camp willing to bet on a bear steepening?

On the day ahead we have JOLTS and the 7Y auction as highlights in data and Alphabet on the earnings front.

XTOD: New: Airlines in the US are now *required* to give you a REFUND for a canceled or significantly delayed flight, automatically.   The DOT's "automatic refund provision" went into effect today. Good news for travelers with a month until the holiday rush begins.

XTOD: This 10yr UST trend has certainly not been kind to anyone in #RealEstate.  Equities continue to ignore yields.

XTOD: Channel 13 reports that the Israeli Security Cabient has made the decision to launch another Retaliatory Action against Iran soon, due to their Role in a recent Drone Attack by Hezbollah, which Targeted the Home of Israeli Prime Minister Benjamin Netanyahu.

XTOD: from $PLTR cofounder  @JTLonsdale “I’m fucking rich, Michael” 

“I would be fine to pay way higher taxes myself just to have a competent functioning society.

“I would pay a 90% tax rate if we could keep our society competent. If we could stop having illegals swarm into our country if we could fire unaccountable bureaucrats, if we could put systems in place to make our government competent, if we could stop having regulators harass and destroy and impune builders.

“I will pay whatever taxes that takes, I’ll pay 90% of my fortune. We need our country to be functional for my kids and grandkids and everyone else…”

XTOD: Cool story about Zuck teaching a class of middle school students about business (and life). He wrote 4 life lessons on the chalkboard: 

1) Love yourself

2) Only then can you serve others

3) Focus on what you can control 

4) For things you can control, never give up

\

Daily Economic Update: October 28, 2024

A busy data and earnings week is upon us while the election looms large.  The U.S. data highlights include GDP, PCE and Jobs. 

Heading into the week we already had the Israeli retailiatory strikes against Iran, which fortunately has not lead to obvious escalations.  The Japanese elections showed the ruling LDP party losing control, a blow to recently elected PM Ishiba, and the uncertainty may weigh on the Yen.

Despite the uncertainty the Nasdaq is at all-time highs.  The Goldman equity team is calling for the S&P 500 to deliver only 3% returns over the next decade due largely to high vlauations and high concentration, as such they recommend "investors should consider allocating to other indices that benefit from the strength of the US economy, earnings growth, and innovation but without the concentration risk, such as the equal-weight S&P 500 (SPW) and the S&P 400 (MID)."  It reminds me of something I wrote about mid last week, which is the broader debate around whether or not there are some companies and business models that have continually seen increasing returns to scale. 

Wherever you stand on the concentration issue, don't worry Blackrock and the financial industry has got your back, or at least is reaching into your back pocket for a share of your wallet.  Blackrock launched 3 new ETF's directly related to the concentration topic.  Per reporting from Reuters: "The iShares Top 20 U.S. Stocks ETF will offer access to the 20 largest U.S. companies...The iShares Nasdaq Top 30 Stocks ETF (QTOP.O), will let investors hold the 30 biggest non-financial stocks, including mega-cap tech. It has secured backing from the University of California's investing arm. The third product, the iShares Nasdaq-100 ex Top 30 ETF (QNXT.O),  will invest beyond the behemoths in the hopes of capturing the growth of relatively smaller tech firms."

With all the concentration discussion, it's interesting to think about the stat from Hendric Bessembinder's paper "Do Stocks Outperform Treasury Bills?"  from this X/tweet from Liz Ann Sonders earlier this year: "Out of 28,114 publicly-listed U.S. companies analyzed over past century, 25 best stocks have created nearly 1/3 of all shareholder wealth; put another way, just 0.1% of stocks have added over $17.6 trillion to investors’ wallets".   What's interesting is while concntration risk is often discussed, a major risk is not having exposure to those winners.  'Don't look for the needle in the haystack. Just buy the haystack! - John Bogle

On the week ahead:

Mon:  2Y & 5Y note auction

Tue: JOLTS, Home Prices, 7Y Note

Wed: GDP and Treasury Refunding Announcement

Thur:  PCE, initial jobless claims, 

Fri: Jobs Day in 'merica, ISM Mfg

XTOD: Six more strikeouts from Aaron Judge during the postseason and he’ll have more strikeouts in 50ish postseason games than Tony Gwynn had in 485 games to finish his career.

XTOD: The real risk to the global dominance of the dollar is not that surplus countries seek an alternative.  It is that the US itself will tire of running huge trade deficits that represent its absorption of the obverse of industrial and trade policies implemented abroad, and so take steps to reduce or even eliminate these deficits.

XTOD: 75 years after it was first published, Benjamin Graham’s ‘The Intelligent Investor’ still has valuable advice on taking risks without being an idiot https://bloomberg.com/news/articles/2024-10-25/benjamin-graham-s-the-intelligent-investor-is-worth-reading-75-years-later? utm_source=website&utm_medium=share&utm_campaign=twitter via 

@business

XTOD: The goal isn't money, it's to compound your knowledge, relationships, talents, mental clarity, toughness, it's to get closer to the most confident version of yourself as you get older. You will then sense what true wealth is about: freedom, peace of mind, love beyond yourself.

XTOD: “Money is multiplied in practical value depending on the number of W’s you control in your life: What you do, When you do it, Where you do it, and With whom you do it.”  — Tim Ferriss

Daily Economic Update: October 25, 2024

PMI and new home sales data were both better than expected.  With PMI's it was services leading coupled with rising outlooks for the year ahead that did the trick.  New home sales data looked robust with the average home price above $500K.  Jobless claims seemed to continue to show that there is very little in the way of firings.  Stocks held up well as earnings, including those of Tesla gave some reason for optimism.  The 10Y ended around 4.21% and the 2Y at 4.09%.

I guess the theme of the week has been people talking about deficits.  

As I mentioned back in Wednesday's post, the MMT crowd was likely going to want to have a word with all of those deficit hawks, and sure enough Stephanie Kelton was more than happy to X/tweet out a defense of deficits, which culminated with a link to a 2010 article by James K. Galbraith (son of famous economist John Kenneth Galbraith).  That link is here.   "To put things crudely, there are two ways to get the increase in total spending that we call "economic growth." One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors–public deficits or private loans–has to be in action."  You're welcome to make your own judgments on MMT, I've shared mine on this blog before.  

Outside of MMT, but sounding MMT-ish, financial advisor, author, Cullen Roche wrote this piece titled "We Need to Have a Talk About “Bond Vigilantes”"  in it he states: "government spending is 23% of GDP. That’s the same level it was at in 1982! And while it’s a large portion of aggregate spending we should remember that 77% of spending is coming from OTHER sources. In most cases, it’s much more efficient sources such as the most efficient corporate machine the human race has ever seen (corporate America).  Again, don’t get me wrong. When government spending explodes to 45% of GDP like it did in 2021 then big inflation can come from this because the government becomes the primary (reckless) spender in the economy. But that’s not the case today. Government spending as a percentage of GDP is about the same as it’s been for most of the last 40 years. So it begs the question – in an economy like the USA does the government drive inflation or is the government driving a small amount of inflation that is not as important as other factors in the economy?"  He goes onto posit major factors that drive the real economy.  

Lest we absolve the Fed from any role in the economy, there was former Fed Governor, Kevin Warsh on CNBC with some choice words for the Fed and their fight against inflation and questioning their recent rate cuts.  As I listened I was reminded of my favorite central bank quote:

“I define central bank independence in one sentence, it's the ability to raise interest rates when the Treasury doesn't want you to. And the Treasury almost never wants you to, because of the cost of the debt.” – Peter Stella

Anyway, I guess I'll conclude the week right we started, with the advice I shared on Monday.  In no way am I saying not to be concerned about deficits, the election, stock valuations, or whatever the current narrative presents, but rather:

"The easiest way not to be overly influenced by what other people think is to not be aware of what they think" - Shelby Davis

and that the only way to beat the market (which I'm not saying you should even aim to do) is to diverge from the market:

"the willingness to be lonley, the willingness to take a position that others don't think is to bright.  They have an inner conviction that a lot of other people do not have." - Michael Lipper describing Buffett, Soros and Templeton

and lastly that the four most dangerous words in the English language are:

"This time is different."

 On the day ahead it's UofM and Durable Goods.

XTOD: This economy stinks I just paid $128 to have someone else get off their couch, pick up my caviar for me, drive it to my house and drop it off at my doorstep  And they wanted a tip!?!? 

How am I supposed to live?

XTOD: Former Fed governor Kevin Warsh: The 50-basis-point cut had no basis in the data available at the time of the Fed's meeting.   "Maybe they're not data dependent. I do not want to be the person accusing them of politics ... but when you don't have a theory of the case and you don't follow it, it is easy to get that accusation and it is harder ... to defend them."  https://cnbc.com/video/2024/10/24/former-fed-governor-kevin-warsh-the-fed-doesnt-seem-to-have-a-serious-theory-of-inflation.html

XTOD: You can either be judged because you created something or ignored because you left your greatness inside of you. Your call.

XTOD: John Steinbeck https://pbs.twimg.com/media/GaqrpvpXcAAO6yo?format=jpg&name=900x900

Daily Economic Update: October 24, 2024

Stocks fell for a third straight day as yields rose again.  The narrative around the recent rise in longer term yields seems tied to increasing odds not just of a Trump presidency but of a Red Wave, making it more likely that deficits will increase in a faster manner than any scenario where there is division in government.  A red wave was also predicted back in 2022 mid-terms and failed to materialize.  The other cited catalyst for the recent bond selloff is around global deficit leading to increased supply that must compete for investor demand.

The 10y is right around 4.25% and the 2y is up to 4.10%.

The Beige Book showed the impact uncertainty plays on business with 15 mentions of election uncertainty. There was also low labor turnover and generally solid conditions across most districts.

Outside the U.S., the Bank of Canada cut 50bps to 3.75% as they see inflation as stabilizing at target.

Today is the big day for data with jobless claims, PMIs and home sale data.  Still awaiting Israel’s retaliation, lest we forget.

XTOD: Insane stat from the Wall Street Journal that there are like 12 million full-time influencers in the US right now. That’s  7% of the American workforce 

No way a bubble like that is at all sustainable

XTOD: 10 year interest rates are unchanged in the last 2 years and you have people on here saying the bond market is predicting USA bankruptcy. 

XTOD: “For me an economic approach must help me understand the world, and provide me with some useful insights (preferably about my day job — investing). On those measures, let me assure you that MMT thrashes neoclassical economics, hands down.” ~ James Montier (GMO)

XTOD: "Good times teach only bad lessons: that investing is easy, that you know its secrets, and that you needn’t worry about risk. The most valuable lessons are learned in tough times."— Howard Marks

Daily Economic Update: October 23, 2024

Yesterday was a bad day for McDonald's quarter-pounders and to have formerly headed Abercrombie and Fitch.  Second straight red day for equities.  Gold has now returned almost as much as the S&P over the last 12 months, which is kind of insane to think about.  In an essentially no data day, the IMF did revise up their forecast for 2025 U.S. GDP growth to 2.8%.  Nevertheless we couldn't make it a day without more warnings about the U.S. fiscal situation, this time from Paul Tudor Jones, who invoked his fear of a "Minsky moment" as it realates to a sudden recognition that the fiscal situation is "impossible".  

If you're not familiar with Hyman Minsky, I had recently summarized his "financial instability hypothesis" for someone as "calm plants seeds of crazy - you assume good news is permanent, are oblivious to bad news, ignore bad news, deny bad news, then panic at bad news, believe bad news is permanent, and ultimately repeat the cycle in the opposite direction.  Hyman Minsky thought the idea of eradicating recessions was nonsense - thus his financial instability hypothesis."

The term "minsky moment" was coined by PIMCO's Paul McCulley back during the Asian financial crisis, to refer to the tipping point in the economic cycle, often when "apparent stability begest ever-riskier debt arrangements, which further begat asset price bubbles. And then the bubbles burst, in something I dubbed a "Minsky moment."  In general the Minsky moment progresses in a forward fashion through three debt units:

“hedge” financing units, in which the buyer’s cash flows cover interest and principal

payments; “speculative” finance units, in which cash flows cover only interest

payments; and “Ponzi” units, in which cash flows cover neither and depend on rising

asset prices to keep the buyer afloat."

Once the moment occurs, it all works in reverse, with falling asset prices, higher risk premiums, lower leverage and economic contraction. How close is the U.S. sovereign to experience such a moment, I don't know?  I would venture to guess advocates of MMT would vehemently disagree with all this rhetoric.  If you're unfamiliar with MMT you can read my post here.

In other news, Howard Marks dropped his latest memo "Ruminating on Asset Allocation".  My takeaways:

• In a world where there are so many asset classes, his ephiphany of late is that "at bottom, there are only two asset classes: ownership and debt"
• It's an enormous difference to own vs. to lend.  Owners have no promise of return, lenders have a contractual "fixed outcome" assuming the borrower makes good.
• Choosing between the two is the most basic thing investors must decide.
• To anchor the decision, Marks' says you must first indentify a "risk posture", how much emphasis you want on preserving (defense) vs. growing capital (offense).  Calling this preservation vs. growth, mutually exclusive and a "inescapable truth in investing."
• The absolute level of risk must be conciously targeted and the level of risk in the portfolio must be well compensated.
• A higher expected return with further upside potential, at the cost of greater uncertainty, volatility, and downside risk? Or a more dependable but lower expected return, entailing less upside and less downside? The choice between the two is subjective, largely a function of the investor’s circumstances and attitude toward bearing risk. That means the answer will be different for different investors.
• Even after investors determine their "normal risk posture", they face a choice: they can maintain that posture all the time or deviate on occassions of market attractiveness.
• As "risk" incrases, not only do expected returns increase, but the range of possible outcomes becomes wider and bad outcomes become worse.
• "All ways of getting to a certain risk level will produce the same expected return."  There are no free lunches, in theory.  However, Marks' states "in reality, markets are not efficient in the academic sense of always being "right" and gains can be acheived through skill.
• He believes that it's difficult to advocate for investors to depart from their "sweet spot" in terms of risk level because many managers who are believed to possess alpha turn out not to.
• He concludes with a quick plug for investors to conisder the certain of allocations to credit at current levels, which he sees as returns of 7-10% (likely only obtainable in high-yield in private credit in my estimation)

Both Marks' memo and even thinking about "Minsky moments" are in someways still connected to what have been somewhat themes for the week. At a high level those themes are maintaining a level of intellectual humility and thinking about risk in the context of return goals. In the terms of Marks' memo their "offense/defense balance. For each individual or institution, this decision should be informed by the investor’s investment horizon, financial condition, income, needs, aspirations, responsibilities, and, crucially, intestinal fortitude, or their ability to stomach ups and downs."

On the day ahead it's home sales, Fed Beige Book and Canada eh?

XTOD: The Intelligent Investor newsletter.  https://createsend.com/t/d-8876921A5A4BB3532540EF23F30FEDED   Happy Ben Graham day, everyone!

XTOD: First Druckenmiller (the GOAT) and now PTJ…“All roads lead to inflation. I’m long gold. I’m long Bitcoin” - Paul Tudor Jones  Incredible how far Bitcoin has come.

XTOD: JPM Asset Management's chief global strategist David Kelly was asked at a reporter roundtable about risks to his current forecast.  He gave some great evergreen investing advice.

1.) It's always the risk no one talks about.

2.) Zoom out. It likely won't matter in the long run.

XTOD: Remember! pessimist sounds smart but optimist  makes money   Geo-political instability is temporary but commerce is the fundamental backbone of civilization  FII selling, Inflation, Recession all are expensive distractions for long term investors

XTOD: “The most valuable personal finance asset is not needing to impress anyone.”  — Morgan Housel

https://x.com/jasonzweigwsj/status/1848741927350374898

https://x.com/Geiger_Capital/status/1848739824531841456

https://x.com/_JoshSchafer/status/1848450188844888186

https://x.com/CivEngg_Adarsh/status/1847932541803577597

https://x.com/MoneyWisdom_/status/1848687915120853007

Daily Economic Update: October 22, 2024

Stocks fell and yields rose.  All of the worries were on display in financial media yesterday.  Stocks, well Goldman says you won't make money in stocks.  Bonds, well deficits.  Cash, well inflation.  Even crypto and gold didn't work for the day.  Investing is hard. 

We ended the day with the 2Y back up over 4 at 4.04% and the 10Y at 4.20%. 

There's an idea of market cycles and reversions to the mean, ‘trees don’t grow to the sky’.  Contrasting to that is the idea that the we're in a new age and there are some companies that have learned to scale at levels not seen before in history, a new Industrial Revolution, an exponential age with increasing returns to scale. 

In the "new" economic system the thinking is summed up in a 2019 in an essay called "Graham or Growth" by investor James Anderson:

"They have endured for decades even at massive scale. I don’t see this as a contention but as an observation. Ironically they’ve altered the patterns of stock market return sufficiently that the very utility of the ‘mean’ has been undermined. The mean is now so far above the median stock that our entire notion of the distribution of returns has to be reviewed. The first chance to reassess came with Microsoft over 30 years ago. The investment community has been slow indeed. We can react to economic data or quarterly earnings in seconds but adjusting our world view has proven far harder.

Separately, one can wonder what if the recent higher interest rate environment somewhat counterintuitively helped repair balance sheets, stopped the proliferation of "zombie" firms, and allowed for the reallocation of capital to more productive uses, thus helping fuel growth (an idea once posited by Claudio Borio).  

Further, despite all the deficits, what if we're poised for more growth than we think.  After all, in the fiscal theory of the price level: "I emphasize: fiscal theory says you get inflation if debt exceeds faith in a country’s long run ability and will to repay. There is no hard and fast debt/GDP limit. Argentina has debt crises at 40% debt to GDP. Japan lasted a decade at over 200%."  This John Cochrane substack post on debt sustainability is worth a read (in the last two paragraphs that's about as optimistic as Cochrane seems to get).

It’s all a lot to think about with political and geopolitcal risk abounding, so it’s important to have intellectual humility.

Jason Zweig recently described how Ben Graham’s concept of margin of safety was also meant to apply at the individual level, to yourself as an investor. In the personal context he posited:  "Do I know what I think I know? How do I know what I think I know?  What evidence is there that I might be wrong?... Why do I know something about this asset that other investors haven't figured out? Why exactly would I be right when all of them are wrong?  

Somewhat related to humility, Morgan Housel's latest post "A Message From the Past (Thoughts on Nostalgia) does a nice job of adding some perspective around the current environment.  In it:

"Are we now forgetting that at virtually every moment of the last 15 years, smart people argued that the market was overvalued, recession was near, hyperinflation was around the corner, the country was bankrupt, the numbers were manipulated, the dollar was worthless, on and on?

I think we forget these things because we now know how the story ends: the stock market went up a lot. If you held on tight, none of those past events mattered. So it’s easy to discount – even ignore – how they felt at the time. You think back and say, “That was so easy, money was free, the market went straight up.” Even if few people actually felt that way during the last 15 years.

So much of what matters in investing – this is true for a lot of things in life – is how you manage the psychology of uncertainty. The problem with looking back with hindsight is that nothing is uncertain. You think no one had anything to worry about, because most of what they were worrying about eventually came to pass.

“You should have been happy and calm, given where things ended up,” you say to your past self. But your past self had no idea where things would end up. Uncertainty dictates nearly everything in the current moment, but looking back we pretend it never existed.

Concluding with "The past wasn’t as good as you remember. The present isn’t as bad as you think. The future will be better than you anticipate."

And that's about as much optimism as you're going to get from me.

XTOD: The World Series between the Dodgers and Yankees is sold out and there are no tickets under $1,000 on the secondary market. 

XTOD: If there is not radical reduction of government expenditures, then, just like an individual who has taken on too much debt, America will become de facto bankrupt.  The interest on the debt is trending to rapidly absorb all tax revenue, leaving nothing for critical needs.

XTOD: The speculative public is incorrigible. In financial terms it cannot count beyond 3. It will buy anything, at any price, if there seems to be some “action” in progress. It will fall for any company identified with “franchising,” computers, electronics, science, technology, or what have you, when the particular fashion is raging. --Benjamin Graham

XTOD: Understand: the greatest generals, the most creative strategists, stand out not because they have more knowledge but because they are able, when necessary, to drop their preconceived notions and focus intensely on the present moment. That is how creativity is sparked and opportunities are seized. Knowledge, experience, and theory have limitations: no amount of thinking in advance can prepare you for the chaos of life, for the infinite possibilities of the moment. The great philosopher of war Carl von Clausewitz called this “friction”: the difference between our plans and what actually happens. Since friction is inevitable, our minds have to be capable of keeping up with change and adapting to the unexpected. The better we can adapt our thoughts to changing circumstances, the more realistic our responses to them will be. The more we lose ourselves in predigested theories and past experiences, the more inappropriate and delusional our response.

Daily Economic Update: October 21 2024

As we approach the election, increasingly we are inundated with experts expressing with much certainty their financial views.  This is often done with much confidence, yet generally short of much more than abstracted terms like increased volatility, horrible consequences, game ending outcomes, big down turns, etc.  Sometimes the discussions center around something of a paradox whereby without massive deficits the economy will fall into some disaster, yet with further deficits we are certain to end in disaster.  Other times it is about the yet to be felt consequences of the "lags" of monetary policies or some other topic which again has generally been on the radar for a long time now. 

Whoever the expert and whatever the view there is generally some explicit or implicit message that you must do something now.  Perhaps it's more wise to consider whether there is more wisdom below than what you hear there:

"We will continue to ignore political and economic forecasts which are an expensive distraction for many investors and businessmen." - Warren Buffett

 "Often we tell ourselves, “Don't just sit there, do something!” But when we practice awareness, we discover that the opposite may be more helpful: “Don't just do something, sit there!" -  Thich Nhat Hahn

 "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."  – Mark Twain.

We all know elections occur regularly, often an investor might experience multiple elections over the hold period of an investment.  We also know that the cost to insure against risk is generally not when it's being experienced, you probably want to buy the fire extinguisher before the fire.

The point is not whether the views of the experts are right, or to argue that you should bury your head in the sand, it's not.  The point is to more clearly know the difference between investing and speculating (discussed here and here and here) and to remember that even when experts tell you that you must do something around the election even in the vein of "risk management", that "risk management" is actually a process, one that is generally well served by understanding why you are taking any risk in the first place, a goal. Often good advice is to build a risk management culture.  Perhaps your risk management process coupled with new information that comes to light might lead to action, perhaps not, and likely not in some alarmist way.

With respect to risk management perhaps there is more wisdom here than in all the expert calls to do something you'll continue to hear:

"Taking a risk without a goal is just like getting in a car and driving around aimlessly expecting to wind up in a great place" - Allison Schrager

“[Risk management] is not just in responding to anticipated events but in building a culture and organization that can respond to risk and withstand unanticipated events. In other words, risk management is about building flexible and robust processes and organizations.”  - John Coleman

Of course as Jason Zweig noted:  

"All investors labor in a cruel irony: We invest in the present, but we invest for the future. And, unfortunately, the future is almost entirely uncertain. Inflation and interest rates are undependable; economic recessions come and go at random; geopolitical upheavals like war, commodity shortages, and terrorism arrive without warning; and the fate of individual companies and their industries often turns out be the opposite of what most investors expect.  Therefore, investing on the basis of projection is a fool's errand; even the forecasts of the so-called experts are less reliable than the flip of a coin. For most people, investing on the basis of protection - from overpaying for a stock or from overconfidence in the quality of their own judgment - is the best solution."

Thinking in terms of preparation over prediction, discipline and process over emotion, recognition of the folly of certainty are probably better mental frameworks than the soundbites designed to get clicks.

 In the words of Benjamin Graham in his classic book "The Intelligent Investor", Margin Of Safety is

 "in essence, that of rendering unnecessary an accurate forecast of the future".   

 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".

Anyway, that's my speil to start your week. 

We start a new week at new all-time highs, people still loving Netflix, a 2Y at 3.95% and a 10Y at 4.08%.  On the week ahead, it's earnings, Fedspeak, PMI's and Durable goods as highlights.

Mon: Fedspeak

Tue: probably rest

Wed: home sales, Beige Book, Bank of Canada

Thur: jobless claims, home sales, PMI's

Fri: Durable Goods, UofM final

XTOD: The McRib is back. BTC historically goes up >2x after the McRib returns. Don't fade the McRib.   Not financial advice.  https://pbs.twimg.com/media/GaMkC2qbUAAHl9Q?format=jpg&name=900x900

XTOD: From Edelweiss Holdings PLC Owners Manual - Anthony Deden's firm.   Excerpt from "Chapter 7 - Value is not a Number" https://pbs.twimg.com/media/GaLIQ1YW4AAdM4z?format=jpg&name=900x900

XTOD: GOLDMAN: "We estimate the S&P 500 will deliver an annualized nominal total return of 3% during the next 10 years (7th percentile since 1930) and roughly 1% on a real basis."

XTOD: Getting really into finance is bad for investment performance, past a certain point. You're fine with a simple investment program and chilling. You will outperform most other investors over the long run.  But - if you're really into finance you'll get shiny object syndrome.   "Oh, leverage that portfolio up. Oh, futures. Maybe I should hedge. Oh, I heard this guy on a podcast with a great macro take. Perhaps I should act on that. This commodity is at a 50-year low. This merger is gonna go through and the market is wrong. I should short China because demographics. I should go long China because valuation. This s*itco is net cash. Maybe this is the next Monster Beverage." etc.  That's why it's good to have a small account to get that stuff out of your system & scratch the itch so you don't screw up the boring portfolio that's actually gonna work.

XTOD: "Most of what I know about writing I’ve learned through running every day." Murakami

Daily Economic Update: October 18, 2024

Yesterday the ECB cut 25bps to 3.25% on their main deposit facility.  Lagarde commented that they haven't yet reached 2% medium term inflation target, further stating "We're in the process of "breaking the neck on inflation"".   Of course she also said they are going to be data dependent, specifying they are not data point dependent and of course they'll be flexible. The over emphasis from central bankers on phrases such as data dependent always leave me wondering if that means previously they weren't making decisions based on the data?  Perhaps Stanley Druckenmiller (and others) have been correct in stating that central banks were "trapped" by their forward guidance. 

Stateside, headline retail sales increased 0.4% MoM, up from August and above the consensus estimates.  When you strip out the volatile components like gas sales, it was 0.7% on the "core retail sales", the highest in three months.  That doesn't sound like an indication that monetary policy is restrictive.  Jobless claims fell as hurricane related distortions fell out.  Speaking of hurricanes they seemed to have impacted the industrial production data and as did the Boeing strike. 

Yields rose and stocks rose as TMSC restored optimism in the chips sector and NVIDIA hit new all time highs.  The 10Y is back around 4.10% and the 2Y remains a touch under 4 at 3.98%.  The Atlanta Fed GDP Now rose again and is now at 3.4% for 3Q.

On the day ahead it's building permits and housing starts and of course fedspeak.

XTOD: Peter Lynch: "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves."

XTOD: Economists who map the CPI and PPI into the PCE think core inflation for the Fed's preferred gauge will be around 0.26% in September, a touch below the Sept CPI (which was 0.31%) but the highest m/m reading since March

XTOD: "Money buys happiness in the same way drugs bring pleasure: Incredible if done right, dangerous if used to mask a weakness, and disastrous when no amount is enough."  — Morgan Housel

XTOD: The year is 2027. Blackstone has raised a $1 trillion fund to invest in Private Government Credit.  They promptly sign a deal with the US Treasury at a 6% yield.

Daily Economic Update: October 17, 2024

Equities had a solid recovery, as big bank earnings season has proved at least the largest financials are able to generate solid returns.  As we are awaiting retail sales and ECB (expected to cut another 25bps) the 2Y is 3.94% and the 10Y is 4.02% ahead of the data.  We had oil dip below $70 on WTI before recovering. Concerns over supply continue to dominate fear of attacks on oil assets that could impact supply (betting markets seem to be pricing in only a 21% chance of an Israel attack on Iran by Friday).  

In other news, there is an increasing narrative coming from betting markets and DJT stock that the market is pricing in a Trump victory.  Away from politics, we're going to use nuclear to power all data centers and unrelatedly, all of Florida is for sale.  There, you are caught up.

Setting that aside, for me the Druckenmiller interview, was the hihglight of the day.  You can find tons of takes on it, including plenty of people who honed in on his comments on politics, perhaps cherry picking some of those comments.  Setting that aside the two things I found most interesting were:

1. "We don't see any restriction whatsoever" (as it relates to monetary policy). He believes the Fed is acting very assymetrically, waiting forever to hike rates (13 months), only hiking 25bps at first and was trapped by their forward guidance, now they cut 50bps and signal they are restrictive, will they be trapped by their forward guiance again?  The risk is if they are wrong and inflation isn't killed, he believes it will have major implications for markets and perhaps the Fed's independence.
   
   
2. "I don't know what very short means, we shorted bonds the day the Fed cut 50".  He views the risk reward related to bonds as one where by being short you can see a scenario where yields rise 100s of basis points, while being long maybe yields fall 50bps.  Why?  He was taught the golden rule for bonds is that the 10Y yield should be equivalent to nominal GDP, which he believes is 5.5%.

On the day ahead it's Retail Sales and ECB action as the highlight. 

XTOD: ever since i was young i wanted to transform unstructured data into actionable business insights

XTOD: Very lucky to have Bethany McLean @bethanymac12  come to speak to us at the @StanfordGSB . One of my favourite sessions of the year. The best investors are able to perform the kind of investigative research she does.  A few points hit home:

1) The worst crimes in history have been committed by those who believe they are doing the right thing - yes, this is more philosophical than investing related, but it did hit me hard.

2) Just because financials have been signed off by auditors or regulators, doesn't make them right. The incentives for these parties just aren't aligned with drawing out the truth.

3) The key to good writing is clarity. The key to clarity is writing. Writing is an iterative process than forces me to face your my own lack of understanding and continue to work until I grasp it.

4) Low interest rates breed greed, and greed breeds fraud. I guess we better be on the lookout!

5) Believing in something that may not be entirely (or yet) true is the mark of a visionary or a fraud. What differentiates the two is often a case of luck or timing. Society needs visionaries and believers, but we need very healthy cynicism to avoid being fooled.

6) The hardest thing is to get started, or to take the first step. After that, the momentum can often carry you forward, even if you remain terrified!

Thanks Bethany for the great session!

XTOD: “You need to know if you're going to set up business in a country, that you can do it quickly, predictably, and that the stuff you produce won't just be taken from you. Venezuela lost that. Many places have lost that. Cuba didn't even allow it to begin with. The places that have really grown, like Japan, Singapore, South Korea, you know if you start a successful business, you'll be allowed to see it through.” -Tyler Cowen

XTOD: Think of it this way: There are two kinds of failure. The first comes from never trying out your ideas because you are afraid, or because you are waiting for the perfect time. This kind of failure you can never learn from, and such timidity will destroy you. The second kind comes from a bold and venturesome spirit. If you fail in this way, the hit that you take to your reputation is greatly outweighed by what you learn. Repeated failure will toughen your spirit and show you with absolute clarity how things must be done.

XTOD: “The game is a process of discovering: who you are, what you’re interested in, what you’re good at, what you love to do, then magnifying that until you gain a sizable edge over all the other people." - Li Liu

Daily Economic Update: October 16, 2024

Stocks fell from an all time high as chips and AI didn't win the day given ASML earnings.  Oil continued to fall on a lessening of concern around Israel's presumed attack agains Iran and increasing concern over China's economy which will dampen demand.  Falling oil prices helped Canadian inflation fall to 1.6% on a headline basis, I guess that's good, even though rent inflation runs at like 8% up there.  In geopolitics Trump called "tariffs" "the most beautiful word in the dictionary" and N. Korea is destroying roads between the themselves and S.Korea.

The NY Fed Mfg Index posted it's worst level since May driven by lower new orders, but it nonetheless posted solid employment component and rising prices paid.

The NY Fed Survey of Consumer Expectations showed an increase in consumers 3Y and 5Y inflation expectations. The survey also showed no major concerns on the unemployment or spending sides.  

We hear all the time from the Fed about the importance of anchored inflation expectations, nothing in this survey shows any unanchoring, but equally the readings continue to remain above target.  Some economist believe that higher inflation expectations can be self fulfilling as people demand higher pay and returns to shield themselves from inflation.

It's a light data day ahead before a full Thursday.

XTOD: How to read recent US-Israel leaks re: oil attacks

1) US-Israel have a deal for limited military strikes

2) Netanyahu says one thing -- but may do another

3) Netanyahu never intended to bomb nuclear / oil sites, but used the threat to get other US concessions

XTOD: Trump: "I've been a very successful businessman. ... I don’t think I should be allowed to order it, but I think I should have the right to put in comments as to whether interest rates should go up or down."

XTOD: Feel bad for any CRE investor/family that 1031 exchanged into one of these Walgreens thinking they were going to have a safe/secure asset for decades... not many could have predicted this a decade ago

XTOD: As bull markets are built up, the large and quick profits shown by common stocks as a whole are sufficient to dull the public’s critical faculty, just as they sharpen its acquisitive instinct.

--Benjamin Graham

XTOD: “A good bet in economics: the past wasn’t as good as you remember, the present isn’t as bad as you think, and the future will be better than you anticipate.” — 

@morganhousel

XTOD: The highest return on investment is in the things you don’t do.

Daily Economic Update: October 15, 2024

Stocks again at fresh all time highs, that's like 40+ times this year that they've set new highs.  Not bad.  Mr. Market was more optimistic than the day prior.  

I'm sure you were dieing to know who won the Nobel Prize in Economics well it was Daron Acemoglu, Simon Johnson, and James Robinson “for studies of how institutions are formed and affect prosperity.”  There work has provided influential research into the critical role institutions have played in long-run economic growth and development.  Their book "Why Nations Fail" contrasts extractive political and economic institutions, which impede growth, with inclusive institutions that support market economies and broadly shared prosperity.  In full disclosure I haven't read their book, so I'm only reguritating what I've learned of it from other sources, nonetheless it certainly is worth thinking about the importance of institutions in fostering prosperity in an age where politics and the Fed are so divisive. 

In Fed news, we had Gov. Waller with his Waller, speech here where the press keyed in on this line: "I view the totality of the data as saying monetary policy should proceed with more caution on the pace of rate cuts than was needed at the September meeting". The highlights:

• recent GDP/GDI revisions: These revisions suggest that the economy is much stronger than previously thought, with little indication of a major slowdown in economic activity.
• watch demand for goods: there is considerable pent-up demand for durable goods, home improvements, and other big-ticket items - couple that with lower interest rates and boom.
• labor market: moderation but not a deterioration. 
• inflation: feels like a rollercoaster, too soon to know if the last print is a noise or signal
• Taylor rules: one set says to proceed gradually, the other agressively with cuts. But Taylor rules are subject to subjective estimates of the 'stars'.
• Wallers 3 Scenarios to inform future cuts:
• Strong economy, no major labor concerns --> slow and deliberate cuts (probably less 50's)
• Inflation falls below 2% for some time and labor deteriorates --> front load cuts
• Inflation escalates even if due to supply shocks with no material labor concerns --> no cuts
• In the longer run: less clear the final destination/terminal rate

Waller still "think(s) the larger message of the SEP is that there is a considerable extent of policy accommodation to remove, and if the economy continues in its current sweet spot, this will happen gradually."  

He didn't sound like a guy looking to cut another 50bps quite yet.

In geopolitics we had the U.S. sending missile defense capabilities to Israel and Chinese war games around Taiwan.  That usually inspires confidence, but nonetheless oil continues a little lower as reports emerge that Israel is not planning to strike oil related infrastructure, at least for now.

Empire Mfg and more Fed stuff on the day ahead.

XTOD: It’s called private credit, T. Earnings are made up but the doc is fuckin’ tight and get this…these weirdos let us mark it at whatever the fuck we want.

XTOD: btw watched roughly 60 hours baseball in the last week plus and I don’t even know what I’m supposed to be buying from Strauss

XTOD: American Airlines will operate 1,600+ flights to the destination cities throughout each weekend of the final stops of Taylor Swift’s Eras Tour.

• Nearly 75% of passengers on those flights are female (+33% from a year ago for the same dates and destinations). • Roughly 60% of passengers are Millennial or younger (+30%) • About 40% of passengers are traveling in groups of two or more.  

XTOD: Channel 14 in Israel is reporting that the Israeli Retaliation against Iran will be Significant, not Moderate, and will likely cause Iran to Respond; with them further stating, “We need to prepare for a Significant Exchange of Blows, that might drag the Americans in, which Iran certainly would not want.”

XTOD: U.S. President Joe Biden has instructed his National Security Council to make it clear to Iran, that an Assassination Attempt against Former President Donald J. Trump would be seen as an Act of War.

XTOD: "If I make extreme changes, they are not sustainable. But moderate, incremental changes - they are sustainable."  - Tom Gayner (quoted in Richer, Wiser, Happier by  @WilliamGreen72)

Daily Economic Update: October 14, 2024

SIFMA bond market closure for Columbus Day while stock markets are open.   The 2Y is 3.97% and the 10Y is 4.10%.

Last week ended with stocks at all time highs.  Investors don't yet seem wary of the old proverb that "trees don't grow to the sky".  And why should they be wary, when you have seemingly unending demand for AI and the chips that power them, we've got events with robots, rockets that get caught by their launching towers, banks that earn money from the Fed irrespective of whether they actually do banking, politicians globally promising to stimulate everything, everywhere all at once. But I digress.

 Friday's PPI data quelled some inflationary fears, though energy prices were a big piece holding the overall reading flat month over month, which could reverse in the coming months with rising oil prices, the core reading was up 0.2% MoM which was slightly below expectations. The UofM data showed some softness in consumers confidence in the current conditions and their expectations for the next 12 months while also showing an increase in consumers expectations for the next 12 months.  Speaking of inflation data, China's inflation continues to slow, did China ever follow through with all of that stimulus investors loved a week ago?

For the week ahead we move on from inflation to retail sales and industrial production as well as corporate earnings.   The ECB meets and is expected to cut 25bps.  Thursday looks to be the big day for activity on the data front.

Over the course of last week, markets seemed to start to discount the probability that an Israeli response against Iran will be something impactful. 

Mon: Fedspeak

Tue: Empire Mfg, NY Fed survey about consumer inflation expectations, Fedspeak

Wed: nothing major

Thur:  ECB Decision, Retail Sales, Jobless Claims, Industrial Production

Fri: Building permits, housing starts, more Fedspeak

XTOD: Power is the worst drug on Earth and you have no idea how many addicts are running around.

XTOD: This but for the whole economy.  Not a joke either:  “Years of having financial engineers as CEO, rather than real engineers, finally catches up to Boeing…

XTOD: Sitting on the sidelines?  In money market accounts?    Nope, that’s smart money.   

Congrats, you’re in the cheapest part of the curve, with the least amount of interest rate risk. 

There are other cheap, safe, floating-rate assets that float off of this part of the curve.

XTOD: @AtlantaFed ’s sticky price CPI (slow-to-change consumer prices) rose 3.9% on an annualized basis in September, following a 3.5% increase in August. Graph and track the index in FRED: https://ow.ly/CTfp50TJcQ1

XTOD: "We should all just acknowledge that we operate within a fully managed financial system where the authorities have all of the tools to ensure that we never have a 2008-style crisis again or even a recession or recessionary conditions in markets again.  So, the big risks now don't really exist in the areas of the market that most people typically consider; rather, they're externalized to the political and social domain.  For example, the big risk I see is that a political party in Europe, the US, or some other major economy will recognize people's frustrations and anger about various issues like feeling left out or left behind, and will perceive central banks to be a major instrument responsible for propagating this accelerating gap, and decide to take away their power to use their tools on behalf of markets.  This is the type of thing that market participants need to price in, and these things don't just break out in one direction or another. When we do lose equilibrium, things break out fast and to a much larger extent than they used to. These are real risks that could generally derail the economy and financial markets…risks like the people wrestling control of the monetary system from the Fed, which is not on people's radars…"  @GestaltU   on  @HiddenForcesPod  (10/14/2024)

XTOD: The reason most people can’t walk away is simple: they operate from a scarcity mindset.

XTOD: You lack discipline because you fear success

Daily Economic Update: October 11, 2024

 Yesterday's CPI report was hotter than expected posting a 0.2% MoM and 2.4% YoY increase on the headline figures and a 0.3% MoM and 3.3% YoY increase in the core levels.  Car insurance, airfares, food and services were all contributors to the higher than expected readings.  The initial jobless claims data was higher than expected but is somewhat murky as it captured some increases due to Hurricane Helene and the Boeing strikes, but auto sector layoffs in Michigan seem a legitimate concern.  

The inflation print didn't do anything to re-inspire confidence in a 50bp cut in November.  Bostic even commented that he might be ok with standing pat at the next meeting. The recent move higher in yields lead to a strong 30Y auction, with strong foreign demand.  We ended the day with stocks backing down from all time highs, the 2Y yield actually falling a little, back under 4% to 3.98% and the 10Y climbing to 4.08%,

Speaking of inflation, the October 7 episode of Macro Musings podcast featured an interesting discussion of a paper titled: *Why Do Workers Dislike Inflation? Wage Erosion and Conflict Costs.* which the author, Jonathon Hazell describes as:

"employers don't automatically give workers raises when inflation is high. Instead, workers have to fight for these raises. That places them in conflict with employers. That's the key idea of the paper. It's bringing forward this notion of conflict. It's saying that when inflation is high, for nominal wages to catch up, to catch up with prices, people need to be doing conflict. That's difficult. That's painful."

and is furhter summarized in a quote from Vox's Dylan Matthews:

"Inflation is a tax on conflict-averse people who are bad at negotiating— me."

It's an interesting take on why people hate inflation so much, despite data showing that generally worker's raises keep pace with inflation over time and timely in the sense that you clearly have seen more worker strikes as a means to achieve pay increases since inflation has taken hold.  In other words inflation imposes an additional unmeasured cost on workers through this "conflict" channel.

Another interesting inflation related article comes courtesy of Mark Higgins substack post.  Mark as a financial market historian, blatanty views the Fed's 50bp cut as possible a "BIG Mistake" at least through the lens of history.  Mark cites the Aurther Burns Fed easing prematurely and, tieing that back to the idea of the "conflict cost" of inflation, how the failure to contain inflation lead to strikes that in some ways then made it harder to control inflation.  

Higgin's view is that the Fed is violating the most important rule established after the Great Inflation:

"The rule is quite simple: It is not enough for the Fed to merely extinguish the visible flames of inflation; they must also extinguish the embers that threaten to reignite it."

Futher characterizing the recent employment and CPI data as evidence that the "embers" remaining aglow.

Time will tell if Higgin's is correct and inflation will reignite, but for the day at least nothing in the data seemed to signal an "all clear" on the battle against inflation.

On the day ahead it's PPI and UofM in data and the threat of an Israeli retaliatory strike against Iran looms large.

XTOD: Israel’s public television just published an “inside-the-room” of the Biden-Netanyahu phone call. Major points: 1) Biden pushed against attack on nuclear / oil; 2) Israel’s current thinking is for a retaliation larger than what Biden would like | #OOTT

XTOD: Big takeaway from the CPI: Disinflation is still becoming entrenched. It was a touch above expectations, but nothing to panic about.   I've been saying this for over a year, but outside of a commodity boom it's hard to see how inflation surges again because the shelter disinflation is so firmly entrenched that something very significant would need to offset it.   Although imperfect, the NTR Index continues to forecast falling shelter prices. It leads by 12 months and is now at the widest spread since its creation. Shelter will continue to put downward pressure on CPI in the coming 12 months. Very hard to see inflation being a big problem in the next 12 months given this....

XTOD: Overall the same story as recently: IF you believe the last six months of numbers are correct and everything before that is outdated or anomalous then we're still in fine shape.  But if some of the last six months is anomalous (in reverse) then inflation is more of a concern.

XTOD: Why is the 10-year above 4%?   This summer, the economy was a party that was winding down. Then, Jay Powell showed up with some booze and China brought the snacks. Party is picking up!   The risk? Trump is pulling up in an Uber outside, wearing a Hawaiian shirt... and bringing cocaine!  The 10-year could be at 5% by January! Will stocks like that? I don't know... I don't think anyone wants to party that hard...

XTOD: “Any time I’m telling myself, ‘But I’m making so much money,’ that’s a warning sign that I’m doing the wrong thing.”   Looking back at his career, B.J. Novak noticed that he could have stalled in a number of places. Instead, he became very well known for The Office and other mega-successes.  

How did he repeatedly choose the right fork in the road? He attributes a lot of it to heeding the above rule of thumb.   If you find yourself saying, “But I’m making so much money” about a job or project, pay attention. “But I’m making so much money,” or “But I’m making good money” is a warning sign that you’re probably not on the right track or, at least, that you shouldn’t stay there for long.   Money can always be regenerated. Time and reputation cannot.

Daily Economic Update: October 10, 2024

This was written before Hurrican Milton made landfall, which will no doubt be devastating to many people, an apt reminder of what really matters.  But since this blog is focused on economics and markets, the recent hurricane activity will no doubt have ramifications for economic data going forward.

The FOMC Minutes seemed largely in line with Powell's post decision press conference and should the debate over exactly how restrictive monetary policy has been.  "Participants emphasized that it was important to communicate that the recalibration of the stance of policy at this meeting should not be interpreted as evidence of a less favorable economic outlook or as a signal that the pace of policy easing would be more rapid than participants' assessments of the appropriate path." The minutes also showed a lack of concern around the labor market as a source of inflation and an overall view that inflation was sustainably moving to target. Overall the minutes couple with the recent jobs report seem to support the idea of a 25bp cut at the next meeting, but we'll see what the CPI report shows today.

Not even the antitrust talk against Google could keep stocks from making new record highs for stocks. Bond yields continued to rise, oil continued to fall and for all the Bitcoin talk, it sold off on the day.   The 10Y Note auction tailed 0.4bps to where WI was trading, alloted at 4.066%, metrics didn't look great compared to the last auction which had a much lower yield and higher bid to cover.  How much of the backup in yields is tied to inflation concerns, election concerns or something else is tough to say.  Though we know that the MOVE index implies that yields will remain volatile through the election.  We ended the day with the 2Y at 4.03% and the 10Y at 4.07%.

Did you watch the Bitcoin documentary on HBO? I eventually did and personally didn't find it all that interesting and it didn't seem to change the world.  What I always find paradoxical in the crypto discussion is that they incessantly value their "currency" in terms of USD.  A basic thread of thinking is something like, think of how many dollars Satoshi must have if he has X million Bitcoin, imagine if he sells it all.  When the documentary speaks that way, to me it implies, that in order for his Bitcoin to be worth something he needs to trade it back into USD?  I'm sure I'm wrong in the intent of the framing, but I find it somewhat ironic nonetheless.

On the day ahead, CPI and jobless claims will be the all the rage and NY Fed President John Williams will speak at 11am.

XTOD: Proposed motto for a new social-media platform:  You don’t have to have an opinion on everything—and shouldn’t listen to those who do.  If only!

XTOD: Bond market worries of post-election panic... The #MOVE Index measures the Implied Volatility of a constant one-month bond option.  On Monday the election fell into this 30-day window. 

This jumped the MOVE from 100 to 124  The market is bracing for an 18bp rate change on the day(s) after the election.  Similar Equity options jumped by 20%, but have since given back most of that increase to only 9% higher.   As has been the case since mid-2022, financial risk is all concentrated in bonds, not stocks.

XTOD: the Credit Suisse group acquired by Apollo was not ready for the Apollo lifestyle: 

https://bloomberg.com/news/articles/2024-10-09/apollo-s-bet-to-take-on-banks-hit-snags-before-atlas-ceo-s-exit  https://pbs.twimg.com/media/GZdKUfWX0AAI7Bn?format=jpg&name=small

XTOD: The hallmark of expertise is no longer how much you know. It's how well you synthesize.

Information scarcity rewarded knowledge acquisition. Information abundance requires pattern recognition. It's not enough to collect facts. The future belongs to those who connect dots.

XTOD: Having good health isn’t everything, but not having it is.  Having money isn’t everything, but not having it is.  You don’t need 6-pack abs or a million dollars to be happy, but it is worth learning the fundamentals of fitness and finance.   They bring a margin of safety.

Daily Economic Update: October 9, 2024

I wrote this before the airing of HBO's documentary "Money Electric: The Bitcoin Mystery" where rumors have been swirling that the real Satoshi Nakamoto will be unvieled which will reportedly send "shockwaves" through markets and the election.  I guess I'll take the under on the impact of this documentary and side with Charlie Munger's sentiment on the importance of Bitcoin, perhaps best summed up in his quote: "It's like somebody else is trading turds and you decide, ‘I can't be left out.’"

Chinese stimulus hopes fading for now. Oil prices fell despite uncertainty around the Mid-East turmoil, but for now mixed messaging around the possibility of an Israeli attack on Iranian oil, coupled with a lowered expectations for Chinese stimulus might be helping to slow the recent price spike.  Speaking of uncertainty we have Hurricane Milton and uncertainty of the path as well as the secondary and tiertiary knock on impacts that could arise from the storm.  Lastly, on uncertainty, yesterday's NFIB Small Business Optimism highlighted this quote:

"Small business owners are feeling more uncertain than ever,” said NFIB Chief Economist Bill Dunkelberg. “Uncertainty makes owners hesitant to invest in capital spending and inventory, especially as inflation and financing costs continue to put pressure on their bottom lines."

This reminded me of a quote by legendary economist Irving Fisher, which I referenced here:

 "Business is always injured by uncertainty. Uncertainty paralyzes effort, and uncertainty in the purchasing power of the dollar is the worst of all business uncertainties."

Perhaps a feeling that the Fed is willing to let the inflation rate run a little hotter in order to provide more certainty for the labor market will paradoxically create instability for the labor market by causing business uncertainty due to inflation.  

Speaking of the Fed, Jamie Dimon spoke on BBG noting he thought the Fed was right in beginning to cut rates, but he really focused on structural issues such as regulation, deficits and geopolitics.

Bond markets didn't love the 3Y Note Auction with a 0.7bp tail and a poors showing from indirect bidders (generally foreign demand).  The 2Y is 3.97% and the 10Y is 4.03%.   Nonetheless equity markets were up, because tech only goes up.  The latest Atlanta Fed GDP estimate for 3Q is 3.2%, a number I don't think many expected for a year that has had a 5 handle interest rate policy.

On the day ahead the highlights will be the FOMC Minutes and the 10Y Note Auction.

XTOD: IOW, NGDP growth > 5%. Aggregate demand growth remains robust. No slowdown in sight.

XTOD (long but good read by Michael Pettis, here's 1 of 11) : 1/11 Adam Tooze suggests that "If your aim is restoring the competitive position of US industry, a large dollar devaluation would do more than a sprinkling of industrial subsidies."

XTOD: "Microsoft has become more cautious about paying for ever-bigger server  clusters for OpenAI as the cloud giant aims to ensure it won’t take a  loss on costly data centers that may not generate consistent revenue in  the coming decades"

XTOD: NEW FROM US:Roblox—Inflated Key Metrics For Wall Street And A Pedophile Hellscape For Kids  https://hindenburgresearch.com/roblox/ $RBLX 

XTOD: Lou Simpson: “The essence [of investing] is simplicity.” https://pbs.twimg.com/media/GZXWSwSX0AAHoRM?format=jpg&name=900x900

XTOD: Simplification is the art of organizing your life around purpose.

Daily Economic Update: October 8, 2024

Yields continued their march higher as markets reassess the stance of monetary policy and the outlook for growth and inflation.   Oil also continues to climb due to concerns in the middle east, where prospects of an Israel attack on Iranian oil loom large.  In equity land, ahead of the start of earnings season, NVIDIA helped keep indexes from experiencing larger losses than the 1% loss they experienced.

With corporate earnings and inflation data on the come as well as the backdrop of extreme weather and national and geopolitical politics, there will certainly be continued catalyst that could pose risks to whatever views are priced into markets over the coming weeks. 

Nothing major came out of Fedspeak, so we'll look to the day ahead with very little data and more Fedspeak.

XTOD: Musalem says his baseline outlook is for continued economic expansion over the next several quarters, supported by a gradual easing of monetary policy and accommodative financial conditions

XTOD: Amos Yadlin, a Former Major General in the Israeli Air Force as well as the Former Head of the Israeli Military Intelligence Directorate, stated earlier today on CNN, “The Israeli Attack on Iran will be something that has never been seen in the Middle East.”

XTOD: With the confusion around Fed policy and the upcoming CPI release, I was thinking about Powell’s focus on Supercore inflation during the tightening cycle (and particularly in his November 2022 speech).   It’s another example of how policymakers with a buffet of 100s or even 1000s of data points can pick and choose based on their prior taste for the direction of monetary policy. In November 2022, they were hiking, so they cared about Supercore. Now, they’re cutting, so they don’t talk about it anymore.  We hang on every new indicator they claim is important. Then they just pick some new ones. It’s fun. https://pbs.twimg.com/media/GZULPuXWsAALRE6?format=png&name=small

XTOD: Real talk. Am i getting screwed on taxes?   I pay 50% of everything I make to the Gov.  Is Kamala saying teachers, nurses and firefighters pay more than 50%?  I've asked my accountants for this super wealthy tax break and they cant seem to find it.

XTOD: The bond market is revolting against the Fed   This morning, yields on the U.S. 10-year bond soared over 4%. This continues a non-stop rise in yields following the Fed’s 50 basis point rate cut on September 18.  Normally, long term rates follow the path of interest rates in the overnight lending market, which the Fed controls. But this isn't a normal environment.   Consider last Friday’s "blowout" jobs report, which was entirely driven by the biggest government hiring spree on record outside of COVID-19. Whoever believes our economy is strong, must think borrowing unsustainable amounts of money, printing money to pay for those loans, and then hiring people to do wasteful government jobs is the path to prosperity. It isn’t.  The U.S. government is running deficits equal to 6% of GDP, and only generating 3% economic growth. In other words, if you remove government spending from the equation, America's economy is shrinking.  We are on our way to a Soviet-like collapse in our economy as more and more of everything we do – including our jobs – are controlled by the government. 

Mr. Market is starting to sniff this out. That’s why investors are dumping Treasuries and flooding into gold, stocks, and real estate at record high prices.  Meanwhile, we’re witnessing an entire presidential election campaign without either major party bothering to address the single most important issue at stake in our country: America’s unsustainable debt burden and the coming insolvency of the federal government.  It is only a matter of time now until, one day, the U.S. Treasury market suddenly realizes that no amount of printing will stop the collapse: there will be “no bid” for our country’s bonds. 

And on that day, everything you think you knew about America will be completely gone.

XTOD: In the first and comprehensive analysis of the candidates’ plans, we find Vice President Harris would add $3.5 trillion to the debt ($0 to $8.1t) and President Trump would add $7.5 trillion to the debt ($1.4t to $15.2t).   See https://crfb.org/papers/fiscal-impact-harris-and-trump-campaign-plans

XTOD: 'I had coffee with the head of a large family office today, and he said something really profound that I’d never quite put together.    Paraphrasing: “Capital structure ripples through management and ultimately ripples through employee experience”  If you work in a business run for cash flow, a PE-backed platform, a business run for growth or a business run for long term hold, your experience as an employee could not be more different.   

The cash flow capital demands low overhead, fast ROI, had little patience for capacity building.  

The growth capital spends aggressively to build the company of tomorrow, today. Nobody worries much about profitability.  

The PE capital is all about the exit, and everyone is managed aggressively quarterly to maximizing strategic value and EBITDA at time of sale.   

The long term hold capital worries about downside more than upside and tends to err on the side of conservatism. It’s a marathon, not a sprint.   

No one right way, but it’s worth remembering that it’s the capital that ultimately designs the game that everyone else plays.'  -Xavier Helgesen   My own personal add:  'The same owner/ownership group can go thru multiple capital structures depending on ambition, goals, & just where they are personally.   

Time frame being the easiest way to spot who's in what camp. And while you may not agree w/ their choices, understanding their time frame will at least give you understanding for why they are doing what their doing.'

Daily Economic Update: October 7, 2024

We start CPI week with the 2Y at 3.93% and the 10Y at 3.96%.  It is also the anniversary of the October 7th terrorist attacks on Israel, heightening tensions and risks for the day.

On Friday, headline jobs crushed expectations, coming in at +254K, prior revised higher.  Unemployment falls to 4.1% and AHE beats at 0.4% MoM.  About those rate cuts?  Immeadite reaction in bonds was a double digit rise in yields and market expectations for a 25bp cut at the November FOMC meeting. 

With respect to the Jobs report, there was some talk of the impact of college students dropping out of the workforce as they return to their schools as a factor in this report, but to me that sounds like something that happens every September and these economist should have already accounted for that in their estimates.  I guess everyone will have to choose their narrative, but for the month of September at least it looks like job growth outpaced the growth in labor supply.

As many readers know there is also a narrative that these data points are all lagging and that therefore survey data might be more relevant.  There was an interesting CFA blog post that attempts to identify what macroeconomic factors explain changes in business and consumer sentiment as measured in surveys.  Their finding is that a lot has changed post-Covid:

"By the post-COVID period, an increase in GDP did not lead to an increase in consumer sentiment. An increase in unemployment also had no impact on sentiment. In fact, only two variables out of eight had significant power in predicting the direction of consumer sentiment: inflation and the stock market returns."

Speaking of sentiment and inflation, I thought this quote from economist John Cochrane was good: "Expectations are conveyed by institutional structures."  You can read more about Cochrane's views on inflation and his fiscal theory, which he calls a theory of inflation which can also be the fiscal theory of no inflation, in his recent post here.

On the week ahead it's CPI week as the highlight.

Mon: Fedspeak

Tue: Small Biz optimism, Balance of trade, Fedspeak

Wed: Fedspeak, Inventories, 10Y Note, FOMC minutes

Thur: CPI, 30Y, moar Fedspeak

Fri: PPI, UofM prelim

XTOD: Higherer for Longerer island after one number is suddenly seeing a lot of fast ferry traffic from soft landing and recession islands. Aloha!

XTOD: I believe   the Fed will now end Balance Sheet Runoff sooner than  originally planned. They will cite an unexpected decline in bank reserves and end it at one of the next two FOMC meetings

XTOD: Maybe, just maybe, nominal income growing at 5% is a sign that labor markets were not cooling down.

XTOD: The problem is right there: highly skilled people can be used remotely. But you can't clean bathrooms, mow the lawns, plant trees, etc. with remote workers & rich countries are now structurally addicted to cheap unskilled labor. Structurally?  Size of houses, yards, etc.

XTOD: Tonight or tomorrow morning, think of a decision you’ve been putting off, and challenge the fuzzy “what ifs” holding you hostage. If not now, when? If left at the status quo, what will your life and stress look like in 6 months? In 1 year? In 3 years? Who around you will also suffer?