Less Volatile…For Now
At least we finished last week with less volatility, but it remains unclear to me as to how much progress is being made on de-escalating the tariff induced trade war. Sometimes the headlines seem to veer towards negotiation progress with China and at other times it feels like both the U.S. and China are digging in for a protracted fight. And let’s face it, it’s really all about China.
We start the trading week with the S&P 500 coming off another losing week ending at 5,282. While the consensus seems to be that there has been no concerted foreign selling of Treasuries and the bar for Fed hikes sounds fairly high, the path for rates remains unclear. We enter this week with the 10Y at 4.33% and the 2Y at 3.80%.
Powell Rangers’ Arch Enemy
The Powell Rangers are constantly up against economic enemies, but no enemy may be bigger than Trump. While it’s nothing new, Trump has renewed efforts to potentially fire Fed Chair Powell.
While most legal scholars believe the President cannot simply fire a Fed Chair without cause, some argue Powell’s prior decisions such as holding rates low during the inflation surge could be construed as “cause.”
Of course this raises risk to the Fed’s independence, presumably something investors find a favorable characteristic of the U.S. monetary system.
I’ve provided my favorite definition on Fed independence, "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".
Whether or not I believe Powell has done a good job or not, I’m a believer in the importance of institutional credibility as a necessary ingredient to fostering the trust necessary for a stable business environment.
Speaking of Trust…
Which Voices Should You Trust?
I think I’ve seen about a million well researched pieces covering all things macro and while most are exceptional pieces, I’m not sure what anyone is supposed to do with all the research that banks and other strategists are putting out. Are investors just supposed to pick their favorite narrative? Are they supposed to research the researchers and read the views of those that seem to have the best track record?
A somewhat frequent reminder that providing you with a stream of data and opinion is a business, a business predicated on a demand by investors (including speculators) to be told by someone else what to do, at least according to Ben Graham.
Rather than try to discern which voices to trust, you can develop a better filter and try to discern what to tune out, how to stay out of the noise. So what should be in that filter?
Consideration of the motivations and incentives - do they have something to sell? Are they monetizing your views? We all know the primary motivation of many commentators is to drive demand, not necessarily to provide the most accurate insights.
Wariness of those voices offering certainty about the future - the notion that the financial future is not predictable is just too unpleasant to be given any room at all in the Wall Streeter's consciousness and rarely do you get the most difficult of all answers which is simply “I don’t know.”
A recognition of the limitations of forecasting - as Jason Zweig says, “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." Place less emphasis on predictions and more on understanding risk and reward. Uncertainty is a much more accurate representation of the world than that of any prediction.
An ability to distinguish between investing and speculating - as Robert Hagstrom says, “An investor thinks foremost of the asset first then the price of the asset afterwards...“A speculator thinks foremost of price first and then the asset later or not at all.” So much of financial debate is just people with different time horizons. Find voices aligned with your own time horizon.
Identifying blind parroting with no critical thinking - charlatans use vague, simple messages often wrapped in a well crafted veneer to make their messages alluring. If you can’t find or understand the reasoning behind their advice it’s probably not worth following.
After some solid filtering hopefully you are left with finding the voices that can share timeless principles.
Principles like…
Sticking To A Sound Process
Stay the course or react to a changing opportunity set? This is where the often glossed over step of forming capital market expectations comes into the picture. Forecasting is extremely difficult but there are numerous techniques that can be employed to develop expected returns for equities and bonds, including looking at historical returns, volatilities and correlations.
If this is a topic you’re interested in, NYU Professor, Aswath Damodaran provides his estimates on his website and shares them on X. His 2025 estimates of the equity risk premium have risen some of late, but remain below the long-term average.
Even if you feel confident in estimates investors might still be confronted with a question as to what to do about it.
Do you try to tactically tilt your portfolio or ride out your strategic allocation? Whatever the answer it should be grounded in objectives, constraints and risk tolerance.
Balancing risk without overreacting to noise. Repeatable disciplines beat panic.
The Week Ahead
Tariff headlines likely to overwhelm economic data releases. Still, durable goods and Treasury auctions could stir some market reaction. LEI’s will lead the soft data and Fedspeak is well Fedspeak.
Monday: Leading indicators
Tuesday: Richmond Fed and Fedspeak, 2Y Note
Wednesday: Flash PMIs, New Home Sales, 5Y Note
Thursday: Durable Goods, Existing Home Sales, Jobless Claims, 7Y Note
Friday: UofM
XTODs:
XTOD: Mom: How did we get so rich? Your dad turned 33 just as Ben Bernanke introduced ZIRP and then all the shitco software companies in his PE portfolio generated 4x MoM returns https://pbs.twimg.com/media/Go5v18MWcAA9kK8?format=jpg&name=900x900
XTOD: Scientists claim a new memory chip that’s 10,000× faster than today’s tech, with near-zero power and 100-year retention. If true, this isn’t just a tech breakthrough—it’s a global power play. Thread:
XTOD: Yale is rumored to be selling a $6B PE portfolio. As of June 2024, the endowment was $41.4B, so it’s roughly 15% of the endowment for sale. The last time I can find a disclosure of the portfolio allocation, LBOs were 17.5% and illiquids were 45% with a target of 50%.
XTOD: "Fed cut 50bps in Sept when stock market at record high, Atlanta Fed was forecasting +3% US GDP growth; Fed now determined not to cut rates after 20% market plunge, Atlanta Fed forecasting -3% GDP growth" - Bank of America
XTOD: Marcus Freeman said, "You waste time daydreaming about an uncertain future. Who cares?" "The future is uncertain. So focus on being the best version of you today."
No one wins tomorrow. They win today - one rep, one habit at a time.
https://x.com/amendandpretend/status/1913589867704893862
https://x.com/wmhuo168/status/1913327200444555637
https://x.com/modestproposal1/status/1913574996858782181
https://x.com/zerohedge/status/1913632365303271505
https://x.com/coachajkings/status/1913728818264641552
No comments:
Post a Comment