Yesterday shares of quantum computer related companies took it on the chin (down 40%+...don’t feel too bad though some names are still up 700%+ in the last couple of months) after Jensen Huang had remarked that quantum is at least 15 years away from being anything. Of course the broader market is also focused on what policies Trump might roll out, including talk of a national economic emergency that could be used to manage imports. Overall stocks were mostly flat.
In data, jobless claims at 11-month lows show you still can’t get fired. While ADP showed that maybe you won’t get fired, but the pace of hiring isn’t so brisk either, though yesterday’s JOLTS might show that turning towards more hiring. The term I find most endearing to the current job market is one I heard called “the great stay”. We’ll see what Job’s day brings on Friday.
In Fedspeak we had Waller expressing some optimism that inflation will resume its descent to 2% and that additional rate cuts will prove appropriate. The 30Y Auction was pretty good in my estimation. The FOMC minutes indicated the Fed is likely to slow the pace of rate cuts as they estimate they are closer to neutral. While the risks to the committee's employment and inflation goals were assessed as mostly balanced, there was sentiment that progress on inflation had stalled and could be more persistent.
The 2Y remains ~4.30% and the 10Y at ~4.69%.
Outside of markets, wildfires in Cali and a potential ice and snow storm in the southwest. Remember the 2021 Texas ice storm that triggered a power crisis due to freezing causing mechanical failures in the generation of electricity? Hopefully none of those issues for any impacted locations with this storm.
This blog is about economics and markets, so it’s of note that it was Jimmy Carter who appointed Paul Volcker as Fed Chair. Volcker recounts the time in his memoir chapter titled Attacking Inflation. In 1978 inflation was running at 13%, in early 1979 the Iranian Revolution led to gas shortages and the ability for the Carter administration to pass new policies was seemingly impossible. It was around this time Carter gave what would be referred to as his ‘malaise” speech, referring to the poor, divisive mood of the country. Not long after that speech Carter reshuffled his cabinet, removing Miller from Fed chair to Treasury secretary and ultimately setting the stage for Volcker. It’s not lost to history that this was not a politically popular appointment back in 1979, Volcker was a staunch advocate of a politically independent Fed. After Vocker’s appointment it wasn’t too long until Volcker resorted to an unscheduled FOMC meeting on October 6, 1979 (the Saturday before Columbus Day and during a Papal visit that had distracted news agencies) to raise rates and focus squarely on the supply of bank reserves via reserve requirements, allowing the Fed funds rate to be set by the market. This “Saturday Night Special” and subsequent interest rate hikes probably did little to help Carter’s re-election prospects.
In an effort to wrap up the discussion of “cycles”, today I wanted to focus on CAPE, or the cyclically adjusted price-to-earnings ratio. CAPE is a valuation metric designed to assess whether a stock market is overvalued or undervalued. It was popularized by economist Robert Shiller and is sometimes referred to as the Shiller CAPE ratio. CAPE is typically calculated for an index like the S&P 500. The calculation is often performed by calculating the real (inflation-adjusted) price of the index as well as the average of the last 10 years of real earnings per share and dividing this price measure by this earnings measure to derive the CAPE ratio. The purpose of using the last 10 years of earnings is to smooth out the fluctuations in earnings caused by the business cycle.
Those who adhere to the idea of cycles believe that CAPE can be a strong predictor of future stock market returns, a higher CAPE suggests lower returns, a belief predicated on mean reversion. Current measures of CAPE are in the high 30’s (38 according to YCharts) while some measures suggest the long term average CAPE is in the mid to high teens and measures in the 20s are more typical. The suggestion associated with the current level of CAPE is that markets might be in a stage of euphoria that has inflated asset prices and investors should proceed with caution.
However, CAPE is not without its share of critics, an oft cited criticism being that changes in accounting standards such as the adoption of mark-to-market accounting have increasingly distorted the earnings measures. Other concerns relate to a level of insensitivity to changes in business mix and capital structure over time as well as a concern that the measure inadequately accounts for the relative attractiveness of stocks vs. bonds.
As it relates to this latter criticism, there is a 19th century saying “John Bull can stand many things but he cannot stand 2 percent.” The meaning of which is that the average investor is easily dissatisfied earning low rates of return and the consequence of which is he has a propensity to speculate in an effort to earn more, often without thinking of the consequences. The relevance to today is directly tied to the level of interest rates in the economy and whether or not they are “restrictive” or remain “loose” encouraging speculation. And whether or not investor experience with years of low rates have permanently shifted risk premiums.
Will something like a large reconciliation package based by Trump potentially be a catalyst that moves yields even higher, propelling us to a new phase in a credit cycle or offering “John Bull” a rate of return on “risk-free” investments that he can sufficient stand? Which leads to the question of whether the stock market can stand a 10Y Treasury over 5%, or will 2025 risk a repeat of 2022?
As Cliff Asness wrote in his recent letter written from the perspective of the year 2035 looking back on the decade beginning 2025: “First, it turns out that investing in U.S. equities at a CAPE in the high 30s yet again turned out to be a disappointing exercise. Today the CAPE is down to around 20 (still above long-term average). The valuation adjustment from the high 30s to 20 means that despite continued strong earnings growth, U.S. equities only beat cash by a couple of percent per annum over the whole decade, well less than we expected.”
Will this be our fate? I don’t know.
XTOD: Would Greenland State University play in the SEC or Big10?
XTOD: Waller on the same page as Powell - noting that most of prices in core PCE are increasing at less than 2%. The segments that are not are imputed prices, which are perceived to be less indicative. The inflation problem is mostly over.
XTOD: I'll tell you a secret. It's the bond-equity correlation that drives term premia, not issuance (or QE). Trump's policies threaten new supply shocks, which would keep the correlation positive. Term premia should widen further if the worst of his policy ideas are realised.
XTOD: Don't know about you but I feel pretty badly about this stat: "The share of U.S. adults having dinner or drinks with friends on any given night has declined by more than 30 percent in the past 20 years." Here's the @TheAtlantic article on an awful trend in American life: https://theatlantic.com/magazine/archive/2025/02/american-loneliness-personality-politics/681091/?utm_source=newsletter&utm_medium=email&utm_campaign=the-atlantic-am&utm_term=The%20Atlantic%20AM
XTOD: Enough courage to get started + enough sense to focus on something you’re naturally suited for + enough persistence to stay in the game long enough to catch a few lucky breaks + a lot of hard work. There’s your recipe.
https://x.com/HarrisonKrank/status/1876728476490715233
https://x.com/FedGuy12/status/1877001286387654805
https://x.com/darioperkins/status/1876990044935786970
https://x.com/KenBurns/status/1876984398467264660
https://x.com/JamesClear/status/1877041330095874486
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