Daily Economic Update: November 21, 2024

Why does it take so long to count votes in Cali?   The G20 wrapped up and to the best of what I read, didn't seem like there were too many major takeaways other than the usual dysfunction.

10Y remains range bound around 4.40% and the 2Y in much the same boat around 4.30%.  There doesn't seem to be an imminent catalyst that will cause a break out in either direction, though perhaps an escalation in Ukraine in the Middle East or a surprise Treasury Secretary pick could be such a catalyst in the near term.

High mortage rates, higher gas prices and rising inflation in the UK were all in the picture.  Stocks fell into Nvidia earnings.  The Hawk Tuah Girl thanked Michael Saylor for getting her into crypto, to which responses generally are in the realm of "emergency 100bp intra Fed meeting rate hike needed", and "has there ever been a sentiment signpost as big as this?".

After the bell Nvidia earnings beat estimates, but shares traded lower as of the time of this writing on what was characterized as disappointing guidance, whatever that means in the context of that stock.

In other news you likely missed, the Treasury Office of Financial Research put out it's 2024 Annual Report on Financial Vulnerabilities, you can read the full 111 pages here.  In full disclosure I did not read everything in the report, but some of the high level takeaways are that: 

• CRE credit remains a risk, specifically office and particularly at smaller banks
• Asset valuations are likely streched and the use of leverage and complex strategies is elevated
• Runs on money-like instruments are always a risk, including risks associated with stablecoins
• The debt ceiling poses risks as do basis trades in the Treasury market
• There are still areas where data is limited, such as Private Credit and other non-bank financial areas that could pose risks
• Technology comes with risks, including cyberattacks

Some quotes you can use if you want to impress your relatives with your financial market knowledge over Thanksgiving:

" Equity valuations and investor sentiment are high relative to historical averages, raising the risk of large, sudden price declines. In Treasury markets, the design of the U.S. debt ceiling is a major vulnerability. Exposures to some complex and opaque trading strategies are high"

" The increasing interconnectedness of digital assets with the traditional financial system is an emerging vulnerability."

" The cyclically adjusted price-to-earnings (CAPE) ratio for the S&P 500, for example, is 36 and in the 98th percentile of historical values"

" Trading liquidity in the Treasury market can become stressed in other circumstances as well. One potential source of stress is an abrupt unwinding of the Treasury cash-futures basis trade."

" The spreads on investment-grade and high-yield bonds are low by historical standards"

" about half as many employees are physically working in the office compared with before the COVID-19 pandemic"

" OFR researchers find that while PoS saves energy and provides for greater scalability of a crypto asset, it may be unstable because a significant drop in the crypto asset’s price may cause validators to exit their investments"

" The number of transactions occurring outside of the traditional exchange system, or off-exchange, is substantial"

" Nonfinancial corporate business debt contributed to financial instability at least three times during the past 40 years: 1989-91, 2000- 02, and 2007-09.17 Each episode featured a mix of unusually high borrower default rates and constraints on weaker firms’ ability to issue or renew debt. Often, the two interact and form a debt-default spiral. "

" The price of insurance, where insurance is available, is rising rapidly, especially in areas experiencing adverse climate events." "The researchers estimate that the average homeowner stands to lose approximately $11,000, or 4% of their home value and 34% of their home equity at the time of home purchase if prices change to reflect climate risk"

" The 2024 cyberattack on Change Healthcare (Change) illustrates how a cyber event that disrupts the business sector can transmit stress to the financial system."

" Since the 2023 banking turmoil, banks have increasingly used reciprocal deposits as a tool to expand FDIC insurance coverage and to reduce liquidity risk from runs. Through thirdparty reciprocal deposit network sponsors, such as IntraFi and others, banks swap customer deposits with one another to keep the amount in each account at or below $250,000. This makes it possible for a bank customer to hold tens of millions of dollars in insured accounts with a single relationship bank. "

"  Since private lenders are connected to the rest of the financial system through funding arrangements and shared credit exposure, their distress could propagate rapidly. The lack of data about private lenders’ portfolio risk and leverage may obscure or worsen vulnerabilities in the financial system"

" Vulnerabilities associated with stablecoins remain elevated. Issuers of the dominant stablecoins continue to invest a material fraction of their reserves in illiquid or volatile assets. For example, as of June 30, 2024, more than 12% of the assets that support Tether’s value were in Bitcoin, precious metals, and secured loans"

XTOD:  What makes superstars so powerful:- Can't substitute quality  (10 bad phones ≠ 1 iPhone)

- Innovation a public good - everyone uses the best ideas

- Top talent leveraged and clusters 

Result: Winner takes all (Rosen (1981, 1982)). POST LINK https://siliconcontinent.com/p/it-is-all-about-the-superstars....If you look beyond tech giants. US economy isn't that special: - Banking? Worse than EU - Insurance? Worse - Manufacturing? EU growing faster  But superstars change everything. 5 tech firms spend 2x more on R&D than entire EU public sector.

XTOD: Howard Marks' interview with Bloomberg just dropped: 

- Be less aggressive, but don't exit the market. Nobody can time the market. Instead, calibrate your behavior between aggressiveness and defensiveness.  

- You can be right about the events but wrong about how the markets react.  There are many speculations about the new administration, but the truth is, nobody knows how it will play out.  

- He doesn't think things are crazy high now and doesn't believe it is time to get out of the market.  

- China is trying to calibrate the right amount of stimulus. They're wary of overshooting.  

- Howard Marks sees the Chinese market as a bargain right now.   

- The problem with the property surplus will take time to be absorbed. It doesn't just disappear with new policies. He believes the government will do what it takes to digest these excess properties and implement policies to prevent this from happening again.   

- When people say China is uninvestable, it becomes music to their ears.

XTOD: Archegos founder Bill Hwang was ordered to spend 18 years in prison for fraud and market manipulation tied to the stunning 2021 collapse of his $36 billion family office, capping a case that riveted Wall Street.

XTOD: 10 observations about Michael Jordan and Kobe Bryant —from their trainer: 

1.  Everyone wanted to be like Mike. Mike did not want to be like anyone else.

2.  Stop adding. Start deleting. 

3.  Their minds were stronger than their feelings.

4.  You can't buy a map to the top.

5.  Motivation is entry level.

6.  They didn't allow themselves to be told what to think.

7.  If you can't master the fundamentals, you can't master anything else.

8.  They each possessed an unshakable confidence in themselves that never wavered.  

9.  When you're giving everything you have, making every sacrifice, and devoting every part of your life to winning, it's hard to tolerate anyone in your circle who isn't doing the same.

10.  The greats figure out what works for them, regardless of what everyone else does.

https://x.com/lugaricano/status/1859234385859318003

https://x.com/SteadyCompound/status/1859233577298473180

https://x.com/business/status/1859328858425594365

https://x.com/FoundersPodcast/status/1859228988725424167