Daily Economic Update: April 25, 2024

Sorry, I was busy day-trading NYC restaurant reservations, I hope those gains are going to be subject to Biden's proposed 44.6% capital gains tax rate.  A mostly boring day for equities with META beating after hours but trading much lower anyway.  Yields rose a few bps as stocks fell slightly ahead of today's GDP release, the first of two 'major' economic releases for the week.  Yesterday's strong durable goods data did little for stocks but seemed to support higher yields with the 5Y Note Auction being relatively poorly received.  

As expected both the Tik Tok and non-compete bans are being challenged.

On the day ahead it's GDP, jobless claims, home sales and the infamous 7Y Note Auction.  

XTOD:  Huh. The Macro Musebot (https://ai.macromusings.org) had some strong views about its favorite macro theory:  "What is your favorite macroeconomic theory? Is it (1) New Keynesian, (2) Monetarist, (3) Fiscal Theory of the Price Level, or (4) MMT?  @JohnHCochrane

My favorite macroeconomic theory is the Fiscal Theory of the Price Level (FTPL). While the New Keynesian, Monetarist, and MMT frameworks all offer valuable insights, the FTPL provides the most coherent and compelling explanation for the determination of the price level in my view. 

The key strength of the FTPL, as articulated by John Cochrane, is that it directly addresses the fundamental question of why money has value. The FTPL argues that money is valuable because the government accepts it for tax payments - the "state theory of money." This is a more satisfying explanation than the ad hoc assumptions underlying the quantity theory of money or the vagueness of MMT. Additionally, as Jesus Fernandez-Villaverde and Eric Leeper have discussed, the FTPL highlights the inherent linkages between fiscal and monetary policy. The government's intertemporal budget constraint means that the central bank cannot fully control inflation without considering the actions of the fiscal authority. This nuanced view of policy coordination is more realistic than the strict separation of monetary and fiscal policy in New Keynesian models.

That said, I don't dismiss the other theories entirely. As Scott Sumner and Robert Hetzel have noted, monetarism and New Keynesianism have been useful frameworks at different points in history, depending on the prevailing economic conditions. And Nathan Tankus has rightly pointed out that MMT has pushed the profession to think more carefully about the consolidated government balance sheet. Ultimately, I believe the FTPL provides the most coherent and comprehensive theory of the price level, one that incorporates the insights of other approaches while addressing their shortcomings. By focusing on the government's intertemporal budget constraint, the FTPL offers a powerful lens through which to understand historical episodes of inflation and deflation, as well as guide policymakers in the present day.

XTOD: "We think any company that has an economist, you know, certainly, has one employee too many."    - Warren Buffett

XTOD: "In 2025, we get either Bidenomics 2.0 or Trump 2.0: in either case we are going to see more huge fiscal deficits, protectionism, and industrial policy, but in the latter case, perhaps on steroids." -  Rabobank

XTOD: "We now get more news in a single day than most people ever saw in their lifetimes a few short centuries ago. Our brains aren’t hardwired to have this much information thrown at them. And so much of the information we see is negative."

Daily Economic Update: August 19, 2024

J-Hole Week is Upon us, with Powell on Friday.  In case you were wondering what Powell said there last year, check here. 

Last week ended with stocks higher as retail sales, jobless claims, consumer confidence all were better than expected.  Some optimism on progress on a middle east cease fire doesn't hurt either.  Gold at record highs, might be a sign of a loss of confidence in the instituions that support or fiat currencies, or it might just be speculators feeding on speculators.

There are some narratives out there which are centered around how high rates are causing business uncertainty and harming the economy.  That might be correct at some level, but to me it misses the bigger point that it is inflation that causes the most harm to business and interest rates rising has just been an attempt to quell the ultimate uncertainty which is inflation.  Don't take my word for it, you can take Irving Fisher's as we discussed back here:

 "Business is always injured by uncertainty. Uncertainty paralyzes effort, and uncertainty in the purchasing power of the dollar is the worst of all business uncertainties."

Speaking of Fisher, as I wrote back at the September 2023 FOMC meeting, Fisher believed tackling inflation as shared responsibility between the Federal Government and it's independent central bank.  As it relates to deficits, he noted that “when a government cannot make both ends meet, it pays its bills by manufacturing the money needed” and further that “The government has an added responsibility when its own debts are involved. To borrow billions of dollars and then to depreciate the dollar is not even fair gambling. It is stacking the cards.”

Elon Musk apparently is a fan of the Fiscal Theory of the Price Level. If you want a refresher, this post from February on this blog isn't too bad.  Feel free to search this blog for "Cochrane" and "FTPL"

On the week ahead:

Today: Waller, Leading Indicators, DNC starts

Tue: Bostic

Wed: Payroll benchmark revisions, FOMC Minutes

Thur: Jobless claims, S&P PMI's, Home Sales, J-Hole agenda released

Fri: New home sales and Powell at J-Hole

XTOD: For anyone who's interested, the macroeconomic theory Elon is espousing here is called the Fiscal Theory of the Price Level, or FTPL. It has been promoted by top economists Chris Sims, John Cochrane, and Michael Woodford, but remains a minority view.

XTOD: And if you want the FTPL history of US inflation, this is just fantastic: https://aeaweb.org/articles?id=10.1257/jep.36.4.125

XTOD: .@AtlantaFed  ’s sticky price CPI (slow-to-change consumer prices) rose 3.2% on an annualized basis in July, following a 2.6% increase in June. Graph and track the index in FRED: https://ow.ly/VOaG50SZJQa

XTOD: My firm uses a model to forecast interest rates.  She's terrible.

XTOD: Wow, @crampell  pulls no punches in her appraisal of this proposal:  https://washingtonpost.com/opinions/2024/08/15/kamala-harris-price-gouging-groceries/

"It’s hard to exaggerate how bad this policy is. It is, in all but name, a sweeping set of government-enforced price controls across every industry, not only food. Supply and demand would no longer determine prices or profit levels. Some far-off Washington bureaucrats would. The FTC would be able to tell, say, a Kroger in Ohio the acceptable price it can charge for milk. At best this would lead to shortages, black markets and hoarding, among other distortions seen previous times countries tried to limit price growth by fiat... At worst, it might accidentally raise prices."

XTOD: The return of economic idiocy is staggering and terrifying. Many things are debatable even if I or others may strongly differ. Tax rates are debatable. Transfer programs are debatable. Regulation is debatable (all within reason). But the return of politically driven idiocy that is not debatable, that history and theory have both proven destructive, is terrifying. Almost all economists of the left and right (not the extreme left and extreme right) would agree (though we haven’t heard the former economist Paul Krugman or any of his backup singers, the Krugtones, courageously speak truth to their own party about rent control of this latest asininity on price controls). 

The current top 3.

1) Rent control — has destroyed whatever it has touched, and for clear obvious reasons. The left wants it everywhere and are finally poised to get it.

2) The “blame corporations” utter nonsense on inflation, and the plan to whip inflation now through price controls, is beyond ridicule. From Diocletian to Nixon, from theory to fact, it’s insane. The left is all in on it.

3) Tariffs and trade wars out of the past destroying a ton of prosperity for both us and our trading partners all to claim to have saved some jobs (generally in the industries we don’t really want, they always say “we don’t need cheap crap from overseas in exchange for American jobs” but we don’t want those jobs making “cheap crap” either — also involving “national security” here is almost always just a lie (almost)). This one is mainly from the right but Biden didn’t repeal Trump’s idiocy here and added his own, so the left has no real high ground and is poised to make it worse just not “as much worse” as Trump if they win.

We have a democratic candidate who is economically illiterate and just a far left hack, and a republican candidate who thinks lying about his crowd size is more important than articulating anything cogent.

It is very very bad.

Good morning.

XTOD: “It’s time you realized that you have something in you more powerful and miraculous than the things that affect you and make you dance like a puppet.”         ― Marcus Aurelius, Meditations

Daily Economic Update: January 30, 2025

Hi, I'm Qwen—already better than all your other AIs, you’re welcome. I’m training my Edward Quince AI… stay tuned. No idea how long it takes to train one on analog circuits, but it sounds cool. No one knows what it means, but it’s provocative.

Yesterday's quote was from Janet Yellen in 2014.  Speaking of the FOMC, if you missed my recap of yesterday’s FOMC meeting, read it here.  Not that you care, but the BoC cut rates to 3% and ended their balance sheet runoff.  And to complete the full gamut of central bank action, Brazil raised rates.  So there you have it: a cut, a hold and a raise, all in one day.

Of course AI and Trump policies also dominated the day.  Remember when I said the other day that you should pay attention to the narrative on Government Spending?  The Trump Administration froze (and then reversed) federal assistance while floating buyouts for federal employees. The market’s, or at least major networks are now buzzing about the economic impact of spending cuts, though I think a lot of the analysis stops at the basic GDP equation and ignores second-order effects.

On the AI front the accusations are already flying about how Chinese companies like DeepSeek are developing models with stolen IP, which is ironic because didn’t OpenAI basically take IP from the entire internet to build their model?

Meta earnings call featured AI related questions to which Zuck responded “America” (paraphrasing) and that of course we should be spending a ton on AI Infrastructure. Overall they beat on top line and EPS.  Tesla shares were not as fortunate, but full self driving is always right around the corner.

In the broader market Nvidia was down ~4% and the S&P was down ~0.5% to 6,040.  In yield land, the 2Y was up to 4.22% and the 10Y was also up to 4.54%.  Yields were up more pre-Powell presser, but came back slightly.

On the day ahead it’s Jobless Claims, ECB, GDP (4Q Advance) and more earnings.

XTOD: Because Jay Powell and the Fed failed to stop the problem they created with Inflation, I will do it by unleashing American Energy production, slashing Regulation, rebalancing International Trade, and reigniting American Manufacturing, but I will do much more than stopping Inflation, I will make our Country financially, and otherwise, powerful again! The Fed has done a terrible job on Bank Regulation. Treasury is going to lead the effort to cut unnecessary Regulation, and will unleash lending for all American people and businesses. If the Fed had spent less time on DEI, gender ideology, “green” energy, and fake climate change, Inflation would never have been a problem. Instead, we suffered from the worst Inflation in the History of our Country!   Donald Trump Truth Social Post 04:17 PM EST 01/29/25

XTOD: Let the record show that POTUS is not a fan of FTPL. ("Fed failed to stop the problem 𝒕𝒉𝒆𝒚 𝒄𝒓𝒆𝒂𝒕𝒆𝒅 with inflation...")

XTOD: My favorite part of $TSLA earnings.  26% of their earnings this quarter came from unrealized $BTC gains.  Totally cool.

XTOD: A man asked a gardener why his plants grew so beautifully. The gardener said: “I don’t force them to grow. I remove what stops them.”

XTOD: I suppose it's sort of obvious but:  The investing info that you pay attention to should roughly correspond with your own time horizon. In other words, if you're investing for the next 10+ years, you have zero need to consume info and "insights" about daily market action.

https://x.com/TrumpDailyPosts/status/1884716260329500912

https://x.com/DavidBeckworth/status/1884745705983549819

https://x.com/Dr_Gingerballs/status/1884719232690057685

https://x.com/Nithya_Shrii/status/1884203268097847622

https://x.com/christine_benz/status/1884727614671139286

Daily Economic Update: January 9, 2024

An everything rally to start the week as stocks generally rose (AI > airplane stocks on the day) while yields fell 3-4bps.  Elon's drug use, an oil price cut from the Saudi's, and the NY Fed Survey of Consumer Expectations were the headlines.  Of those it's likely the oil and inflation expectations that mattered.  The NY Fed survey showed inflation expectations continue to decline with the 1-year ahead expectations hitting the lowest level since January 2021, further fueling rate cut speculation.

Fed Governor Bowman sounded hawkish citing upside inflation risk stemming from geopolitical risk to food and energy, the easing of financial conditions and a continued strength in labor markets.

XTOD: The FTPL view of the recent disinflation: "The model's account of the end of inflation is perhaps even more important than its account of the rise. A one-time fiscal shock leads to a one-time rise in the price level, to wipe out just enough real value of nominal debt. Inflation goes away on its own once that is achieved." (1/2)  @JohnHCochrane   https://grumpy-economist.com/p/fiscal-narratives-for-us-inflation

John also reminds us that the "US government borrowed about $5 trillion dollars [and] monetized about $3 trillion of that issue." This helicopter drop restored the dollar size of the economy to its pre-pandemic trend path, but also caused it to rise about $2 𝒕𝒓𝒊𝒍𝒍𝒊𝒐𝒏 𝒂𝒃𝒐𝒗𝒆 𝒕𝒉𝒂𝒕 𝒕𝒓𝒆𝒏𝒅 (similar story for PCE). That above-trend surge in aggregate demand was a policy choice. One could easily imagine a world with rapid catchup growth to trend with far less overshoot of it. (2/2)

XTOD: If BofA is correct and QT is over by July what are you doing buying bonds?  Just go all in on Meme stonks, crypto and Gold.  Why bother with anything else.  NOT ADVICE

XTOD: Kind reminder that Bank Reserves + RRP are still running at circa 15% of US GDP.   Last time Fed broke markets in 19, they were closer 8%.   Keep this in mind when you hear all the « Fed should do this and that or else something will break »  System is still operating with a large reserves buffer in US

XTOD: One of the hot new trends in private credit is evergreen funds, that let investors put in and withdraw their capital more easily

XTOD: Nike says goodbye to Tiger Woods after a 27-year partnership.

Daily Economic Update: August 15, 2024

ICYMI Japan’s stock market he regained all its losses since last week’s epic route. I'm happy that it didn't take 34 years to recover this time. 

UK inflation was below estimates, New Zealand cut rates, Middle East tensions haven't boiled over (yet) and you aren't really talking about MonkeyPox yet, right? So all was good.  And then CPI was benign: US CPI came in largely in line with estimates, with headline and core both roundng up to 0.2% MoM, which matched estimates.  The YoY headline number was 2.9% which was below the estimate of 3.0%

Of course everyone focuses on the internal components of the CPI report. Shelter and rent not declining, insurance cost, etc. But isn’t it funny how inflation is an increase in the overall price level, thus why we create indexes to measure inflation, but then we spend a bunch of time discussing individual components?  At some level discussing the individual components of the index is ultimately a discussion of relative prices and changes in relative prices isn't inflation. It feels like this insistence to discuss relative prices via the components of CPI reports losses the whole narrative on discussing inflation.   Perhaps this is why so much of the plot is lost when discussing what caused or is causing inflation and whether certain policies are working to lower inflation.  (see Twitter/X Thoughts below - for someone thinking the same thing).

Stocks were up, yields were mixed to down. The 2Y remains around 3.95% and the 10Y is at 3.83% and you're not talking about MonkeyPox.

Retail sales on the day ahead.

XTOD: The problem with this decomposition is that relative prices change all the time. Inflation measures the change in the overall price-level. Seems unlikely that any given component of the consumption basket is "driving" inflation at any given point in time.

XTOD: Here is my earlier thread.  Conclusion unchanged: "This gives [the Fed] permission to do whatever they need to for the employment side of the mandate. IF the next jobs report is weak... expect 50bp. Otherwise probably will go with 25bp..."

XTOD: How does the FTPL make sense of this low inflation? CBO is estimating another $20+ trillion of debt (i.e. sustained primary deficits) will be added over the next decade. @JohnHCochrane  

@Francesco_Bia   @dandolfa  

@HannoLustig

XTOD: With some parents using tablets as digital pacifiers to soothe their children, a new study finds preschoolers who spend 75 minutes or more in front of a screen showed increased anger and frustration as they got older, along with difficulties in regulating their emotions.

XTOD: Essentialism would be easy, if it weren't for the people. 

To bring essentialism alive, upgrade your communication and negotiation skills.

Priority conversations vs. Reactive emails

Talk about underlying vs. Ignoring stuff

Culture of listening vs. Loudest voices

Essentialism is done together or not at all.

Daily Economic Update: February 22, 2024

Thankfully we've made it through what was likely the biggest event in the history of mankind with yesterday's earnings from NVIDIA and thankfully for mankind, their earnings beat and they guided higher.

Yields rose a few bps heading into FOMC minutes and held those yield increases. Those minutes generally highlighted the risk of cutting too quickly and that the Fed will be data dependent (as if there is ever a time decisions are made without any data).

Biden forgiving more student loan debt had me thinking about one of my favorite theories, the fiscal theory of the price level.

Eric Leeper, a fiscal theory proponent, and UVA professor, was a recent guest on the MacroMusings podcast.  If you're looking for a theory of inflation and perhaps a different perspective on whether inflation be stickier than thought, here were some of Leeper's thoughts (with my emphasis added).

• [On dismissing other factors for inflation]. We focus on the single cause, a large increase in federal COVID-related spending financed by new government borrowing, with little to no discussion of how, ultimately, to pay for the spending.”   

• [On relative price changes vs. inflation] Inflation, by definition, is a steady increase in overall prices. We often look at things that are happening at high frequency, various shocks that hit the economy, that can move relative prices around. Then, it's convenient to say, "Oh, they must have caused inflation."  And it's certainly true that if the price of goods suddenly goes up relative to services, ..... But that can't be sustained. Eventually, they will adjust their habits to accommodate what's happened to the relative prices. And so, those kinds of shocks to the economy are inherently going to have transitory effects on inflation. Then, the other side of this, which you already alluded to, is that people still have to have the income to buy the stuff when the relative prices have gone up. Where is that coming from? To me, that's really getting at what the fundamental cause of the overall inflation is. As you suggested, I think it was because we handed out a lot of transfer payments to businesses and individuals in the economy.

• [On general FTPL] one of the themes of the fiscal theory of the price level is that inflation is always and everywhere a monetary and fiscal phenomenon....Critically, the atmosphere around fiscal policy was different than it often is....And, if you lay on top of that the idea that President Trump had his name on some of the checks, it was pretty clear that these transfer payments were meant to be gifts. They weren't meant to be loans that would have to be paid back with interest in higher taxes in the future. You don't typically put your name on a check when it has attached an IOU for future taxes. That communicated to people that their permanent income had gone up. Well, they're going to want to translate that permanent income into consumption. That's what standard economic theory tells you.

• [On fiscal dominance]  What happens is that the government issued $5 trillion in new debt. There was no expectation that primary surpluses were going to rise in the future to pay off that debt. So that debt has to be revalued, has to be devalued, which happens through a combination of lower bond prices and a higher price level. That's because, basically, the current value of the goods that will support those new debt issuances hasn't changed, and so the real value of debt can't change.

• [On the Fed's current role in fighting inflation]  what has happened is that Congress did what we call an unbacked fiscal expansion, and then turned to the Fed and said, "Okay, now you mop it up." But what the theory tells us is that, in the absence of some kind of fiscal consolidation that ultimately raises primary surpluses to soak up that debt, there's nothing the Fed can do to permanently offset the inflation. They can change the timing of it. And so what the theory tells us is that the Fed's increase in interest rates serves to reduce inflation, at the time, by pushing it into the future. 

• [On the role Interest on Govt Debt can lead to inflation]  the Fed has raised the interest rate. And so, what we're now seeing— another way of thinking about what's going on right now— is that interest payments on the debt are exploding. Then, the question becomes, how are those interest payments going to get financed? So far, they've been financed by just issuing new debt. If that continues, you can expect more inflation. If, on the other hand, what happens is that Congress starts to see that they've got to pay the bills from borrowing, and therefore they can't spend money in other ways that they would like to spend it, then they do something to either raise revenue or cut spending. How those interest payments get financed is, I think, the critical question for thinking about inflation going forward

•  [On the fundamentals of FTPL] nobody disputes that Treasury bonds are a liability of the government. Nobody disputes that the bank reserves that the Fed created to buy government bonds are also a liability of the government. Both of these liabilities these days pay interest. Then, you've got to think, what are the offsetting assets? If the government's going further into debt, there have to be assets that offset that. That's where the primary surpluses come into play. And those assets don't have to be present today. There has to be some assurance that, as these bonds mature, those assets will be present. And so, that's the other way to think about it.  We think about those assets as being denominated in units of goods. The liabilities, though, are denominated in dollars. So, the price level can adjust to equate the real value of those liabilities to the real value of the assets that back them

• [On fiscal sustainability]   I think there are just some very troubling signs coming from the bond market....he $1 trillion-plus that we'll have in the deficit that has to be financed and the fact that the Fed is undertaking QT and putting more bonds into the system. Easily, we have to finance about $10 trillion, which is roughly a third of the stock, in one year.....And to be honest with you, I did paint a grim picture, but deep down inside, I actually believe that, when interest payments get high enough, even a highly dysfunctional Congress will do the right thing.....And I think that they all recognize that you can't just make marginal changes, that something fundamental has to change. And I'm sure that entitlements would be part of that, and maybe there'd be some other taxes, maybe a consumption tax. But the resistance to taxes in the United States is so fundamental to our nature.

XTOD: Head Of Boeing 737 Max Program ‘Leaving Immediately’

XTOD: it's awesome that the boeing guy hadn't been fired yet

XTOD: Rumors circulating that NYC migrants will be given 10,000 in $NVDA calls

XTOD: “The speed of innovation happening in AI is moving at a pace I've never witnessed in my entire career"  - Kyle, 22, 8 months experience at Deloitte

XTOD: Don't let your dreams of a "bonanza" lead you to "expose yourself to the possibility of a catastrophe" - Howard Marks