Mar-A-Lago disinflation accord
Just when you think you have a handle on things, the data drops, the Fedspeak hits, and you're left wondering if anyone really knows what's going on.
Speaking of things making a comeback, apparently the talk of the Mar-a-Lago Accord is back. For those who may have forgotten, or perhaps just blinked and missed it like so many other headlines, this idea surfaced earlier in the year and was described as a plan to devalue the U.S. Dollar and simultaneously get China to buy longer-dated treasuries. The earlier take was to take it seriously, not literally. It seems fitting that in an environment defined by uncertainty, even the geopolitical rumors have reruns. Volatility in Asian currencies in particular continues to be traced to rumors that weaker Asian currencies are part of trade discussions with the U.S.
Whatever the case, the markets caught a little whiff of cooperation this week—and paired it with today’s soft economic data, it was enough to send bond yields drifting lower and rekindle the disinflation camp’s hope. The S&P 500 ended at 5,916, the 2Y treasury yield fell to 3.96% and the 10Y treasury yield fell to 4.42%.
Let’s Talk Data:
Core and Headline PPI for April came in hot… but the other kind of hot. -0.4% and -0.5%, respectively—both negative, and both below forecast. That’s not a typo. That’s disinflation in the flesh. Goods prices are either easing or the data is glitching. Either way, it’s something the Fed will notice, or not. Let's not forget the nuances; some earlier PPI declines didn't fully pass through to PCE.
Retail Sales (ex-autos) were flat. Not horrible, but not healthy. Consumers might be pulling back, perhaps realizing they have to pay back credit card debt… or maybe just waiting for Memorial Day sales.
Industrial Production? Also flat. Not exactly the stuff of a booming economy. If anything, it adds to the pile of “slowdown, not crash” data that’s been building.
Jobless claims stayed benign, because this labor market just refuses to crack. Whatever slowdown we’re seeing, it’s not coming from the employment side—yet?
Adding another layer to this uncertainty, we heard from the Powell Rangers, specifically Chair Powell. He stressed the challenges the economy and monetary policy may face from persistent supply shocks.
Meanwhile, Powell’s Talking About a New Framework
In his latest remarks, Powell did something rare: he admitted the Fed’s framework might not be working.
“We will be revising our framework, including average inflation targeting, to be robust to many circumstances like frequent supply shocks.”
Translation: FAIT is out. Or at least getting a makeover.
The idea that we could just let inflation “average out” over time assumes a world of gentle demand cycles and steady supply chains. In other words, the 2010s. That world is gone. Powell even hinted that real rates may stay higher because inflation is more volatile now—a subtle but important shift. The Fed is now preparing for a future where inflation is not just cyclical, but structurally unstable.
Other Things That Might Need A Framework Review - Bank ALM
And speaking of things that might still be a problem, the Treasury OFR reminded us, why the unrealized losses on bank balance sheets might still be a problem
Banks still hold hundreds of billions in unrealized losses on their securities portfolios. The Fed raising the policy rate may be old news, but their effects—on bank capitalization, risk-taking, and credit growth—are still with us. And in case you forgot banks own a lot of securities that have long durations. “While unrealized securities losses alone may not have a direct impact on banks, they could amplify vulnerabilities when banks face stress and increase the chance of lack-of-confidence runs for some banks. While the Federal Reserve can influence short-term interest rates by adjusting the federal funds rate, long-term interest rates reflect financial market participants’ expectations of inflation and willingness to accept the risk of lending long term.”
Read here if you missed it.
Always Be Learning
So, what have we learned? PPI is down, retail sales and industrial production look soft, but the labor market is still tight. Powell acknowledges persistent supply shocks and potential inflation volatility while admitting the previous framework struggled with high inflation and needs revision. And those bank unrealized losses? Still sitting there, like a bad smell you can't get rid of.
It seems we're back to our favorite mantra: Nobody knows anything, and that's okay. The future is murky, the signals are mixed, and trying to predict it all is a futile exercise. Maybe the best approach is simply to embrace uncertainty, maintain patience, and focus on timeless principles of investing over futile prediction and market noise.
XTOD’s:
XTOD: The housing market has never been this unaffordable in U.S. history. With inflation-adjusted home prices setting a record over the last three years. We're now in the biggest housing bubble of all-time, and the only period that came close was 2006, before the big crash. Many people like to tell you "home values will never drop". But those people conveniently don't show you this graph. There is no historical precedent for how expensive today's housing market it is. And homebuyers know it.
XTOD: There are 2 major forces that frame the macro picture for real estate:
1) higher interest rates will cause real estate sector to underperform
2) These higher financing costs are highly unlikely to cause delinquencies to rise because commercial real estate has already gone through its period of adjustment and no consumer is selling their house they locked in at a sub 3% interest rates. So we are in a tension between these two forces.
XTOD: If $UNH is convicted criminally they would lose access to Medicare reimbursement for a minimum of 5 years. You can buy here but the stock is a zero if that happens.
XTOD: One way to stand out is to look for pockets of low competition. Wake up early—less traffic, fewer people. Go deeper or narrower in your field—less noise, more space.
People are drawn to where it is crowded. Look for the quiet spaces inside your areas of interest. Excellence often hides at the edges.
https://x.com/nickgerli1/status/1923047634496885066
https://x.com/Globalflows/status/1923047411330511247
https://x.com/StealthQE4/status/1923013569257337133
https://x.com/JamesClear/status/1923104043431494062
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