I remember when Powell said: "Getting inflation sustainably back down to 2 percent is expected to require a period of below-trend economic growth as well as some softening in labor market conditions.". If you forgot about that, you can read more about it in this post.
But this question and argument has some risky spots. First, didn’t lower interest rates potentially get us into this unsustainable fiscal position? When rates were low and money appeared “free” didn’t that help to fuel a binge on fiscal spending? While slower growth might lower the interest expense component of the deficit, it would also seem to risk lowering tax receipts and also seeing increased spending through automatic fiscal stabilizers.
Personally, I’m not sure that a “growth scare” is the right answer to solving fiscal problems.
Nonetheless, this discussion reminds me of something we talked about, which was “Fiscal R-Star”. You can get a quick refresher of that discussion from this post earlier in the year.
The other thing that comes to mind, is that when you cut waste and fraud from any system, do you get a “febezzle” induced recession? You can read about “Febezzle” here, but Munger’s “Febezzle” describes a situation where an investment manager and investor both feel wealthier due to the illusion of stable financial gains, even though a portion of that income is actually wasteful or illusionary (fraud). When that waste is uncovered, it all falls apart. If you apply that concept to government spending, through something like DOGE, you could see the possibility of a similar dynamic. For example, if you assume it to be true that some government contractors and employees are receiving income from inefficient spending or fraud, those people are consuming and investing as if that income will be permanent. When wasteful spending is eliminated the result could be lower consumption, lower investment and perhaps declining asset prices (like real estate in certain areas). Of course the idea is that if there truly is wasteful or fraudulent spending then in the long-run the reallocation of labor and capital to more productive uses is a positive.
If you believe that the fiscal situation is concerning, it is a little scary to think about the last time either political party embarked on policies that were geared towards growth and discipline without a hard external shove.
In data, Consumer Confidence fell to 98.3 from a previous reading of 105.3, continuing a trend of negative economic surprises. Pessimism around future labor conditions was highlighted as a concern. The 5Y Auction seemed pretty good, especially when you consider that yields have been down solidly this week with the 5Y down almost 30bps in the last week.. Again the foreign demand seemed solid. Home prices continued to rise, though no one seems to actually know who is buying houses these days.
In politics, tariffs remain the economic topic du jour. Elsewhere, it appears that the U.S. reached some sort of deal with Ukraine around rare earth minerals and lastly apparently we might be selling citizenship via gold cards. I think that was all, but you never know given the amount of stuff that comes out of the Administration daily. You’ll have to follow a political blog to keep up with all that in detail.
The S&P posted a 4th straight losing day, closing at 5,955, led by losses in tech. The 2Y treasury yield is all the way back down to 4.10%, which sounds crazy but the 2Y was under 4% for most of the 4th quarter of 2024. The 10Y treasury yield is 4.30%, down from a local high of ~4.85%.
On the day ahead my guess is Nvidia earnings will trump the economic data, 7Y auction and the Fedspeak. We’ll see if the growth scare narrative gains further fuel post Nvidia.
XTOD: The email request was utterly trivial, as the standard for passing the test was to type some words and press send! Yet so many failed even that inane test, urged on in some cases by their managers. Have you ever witnessed such INCOMPETENCE and CONTEMPT for how YOUR TAXES are being spent? Makes old Twitter look good. Didn’t think that was possible.
XTOD: The weakness in today's market and the past few sessions underscore one of my concerns that is rarely discussed in the business media - market structure (i.e. the dominance of passive funds that worship at the altar of price momentum).
It is those (Index and Quant) funds (abetted by unprecedented inflows) when coupled with company buyback programs (they usually buy near highs) that generated the valuation reset (to the 96%-tile) over the last eighteen months.
The bulls, as I have consistently pointed out, ignored the high valuations - favoring the concept of a new paradigm of price earnings multiples. But now, they are all in the same long boat. Those funds know everything about price but nothing about value.
XTOD: They’re literally telling you their playbook and markets are just whistling past the graveyard. Fed is cutting at least 4 times this year imo. Homebuilders desperately need it.
XTOD: By the time everyone calls it a great business the exceptional returns are usually in the rearview. The time to buy is when it is misunderstood, undiscovered and under-appreciated.
XTOD: “Without courage we cannot practice any other virtue with consistency. We can't be kind, true, merciful, generous, or honest.” — Maya Angelou
https://x.com/elonmusk/status/1894173297786720718
https://x.com/DougKass/status/1894427301666017729
https://x.com/Investor_NICK_/status/1894149124846395885
https://x.com/iancassel/status/1894341045858537804
https://x.com/tferriss/status/1894446402014777465
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