Stocks fell yesterday. The likely catalyst of the next market move is of course tonight's Mike Tyson v. Jake Paul fight.
In Fed-land. Fed governor Kugler says Fed needs to pay attention to both sides of their mandates, implying inflation hasn't been firmly defeated. Powell said he doesn't think "we need to be in a hurry to lower rates", which of course leads to questions as to why they started this rate cutting cycle with a 50bp cut. When asked how and when we'll know if we hit the neutral rate, he ambigiously answered that the best way to find the neutral rate is by moving carefully and possibly slowing the pace of cuts. He was asked, "why are we cutting rates?", his response was to "look at the labor market", that it's cooling and he stll still sees inflation's downward trend intact. Overall Powell comments appear to be taken by the market as somewhat "hawkish".
Powell combined with the data discussed below lead to a higher front end of the curve, the 2Y is 4.36% (up about 10bps on the week) and the 10Y up to 4.46% (up about 15bps on the week).
PPI came in line with expectations with services leading the way and core PPI slightly exceeding expectations. I’m always amazed when portfolio management services rise 3.6% as "Over one-third of the rise in the index for final demand services can be traced to prices for portfolio management, which advanced 3.6 percent." The BLS definition of portfolio management is:
"Price movements for this index are based on changes in the amount of revenue a mutual fund manager receives for providing investment advice. To track price movement for the index, data on management fees are collected. The management fee is most often based on a percentage of assets under management or a certain number of basis points."
Does this imply that rising portfolios are inflationary? In other words if people are paying AUM fees and asset prices are rising, it seems like this portfolio management component rises. Whether or not that has follow through to inflation, I guess is debated, but it touches on the "wealth effect" and "financial conditions".
Irrespective, it reminds me of one of my favorite Charlie Munger talks on the "Febezzle":
Munger’s “febezzle” occurs when an investment manager earns compensation from the rising value of the assets under management during periods of rising asset prices. In his example, the asset manager receives the “wasted” asset management fees and other stock compensation from the investors as income, making them richer, and the investor, despite paying the asset management fees, also feels richer. Both parties believe they are “virtuously earning income” and can sustain spending from what they believe is income but is in reality spending from a “wealth effect,” which dissipates if asset prices decline. Munger went on to bemoan the impact “febezzle” can have on the misallocation of capital to unproductive projects and foolish spending which cannot support the continued increase in values, the fall of which led to real and long-lasting macroeconomic consequences once the “febezzle” starts to unwind. Munger’s advice: “when the financial scene starts reminding you of Sodom and Gomorrah, you should fear practical consequences even if you like to participate in what is going on.”
In other data, despite continued announced layoffs the jobless claims data remains super benign.
On the day ahead it's retail sales data as the highlight.
XTOD: I doubt Fed Chair Powell will do another interview like this anytime soon. He struggled with some of the smart questions, often deflecting with historical explanations, and he confused the economics of different possible scenarios. His response to the question on a new monetary framework will likely leave many perplexed.
XTOD: Donald Trump picks Blackstone’s entire Real Estate Private Equity team as Secretary of Housing and Urban Development
XTOD: US Investment Grade Credit Spreads have moved down to 0.77%, their tightest levels since July 1998. US High Yield Credit Spreads have moved down to 2.61%, their tightest levels since June 2007. Investors are reaching for yield and behaving as if there will never be another default cycle again.
XTOD: Charlie Munger: "No matter how wonderful [a business] is, it's not worth an infinite price. So we have to have a price that makes sense and gives a margin of safety." "The reason that our ideas have not spread faster is they are [so] simple."
XTOD: "Each year Buffett is asked what’s the main difference between himself and the average investor, and he answers: 'Patience.'" — N. Sleep
XTOD: This hits different in today’s hustle culture. Burnout isn’t about working long hours or pushing hard. It’s about working in systems that drain your soul. Quote by @adam_chal https://pbs.twimg.com/media/GcRJ-wyWIAAXGNO?format=jpg&name=900x900
https://x.com/elerianm/status/1857165803444965755
https://x.com/litcapital/status/1857067696669462758
https://x.com/charliebilello/status/1856836728658518115
https://x.com/kejca/status/1857062365591678992
https://x.com/InvestingCanons/status/1857077316754506161
https://x.com/SystemSunday/status/1856690574444711960
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