Daily Economic Update: March 11, 2025

Can you smell what The Rock is Cooking?

The Rock is a precipitous fall in equities, and the smell? That’s the whiff of stagflation. You caught it in the latest NY Fed SCE report::

•  “Median inflation expectations increased by 0.1 percentage point (ppt) to 3.1 percent at the one-year horizon”, 

• “The share of households expecting a worse financial situation one year from now rose to 27.4 percent, its highest level since November 2023.” 

•  “The mean probability that the U.S. unemployment rate will be higher one year from now—jumped up by 5.4 ppt to 39.4 percent in February, its highest reading since September 2023.”

A real feel-good story. And that smell might make you puke.

Worst Day of The Year For Equities

Not a banner day for growth investors, especially Tesla bulls. TSLA is now down nearly 50% from recent highs.

T-Bill and Chill seems to be the winning strategy so far this year.

Not Investment Advice but - “This too shall pass”

According to legend, the wise men finally boiled down the history mortal affairs into a single phrase, 'This too will pass’.  

What’s an investor to do?  

• Keep a long-term perspective focused on your personal goals.

• Understand that downturns are normal—and history favors the patient.

• Focus on underlying value and build in a margin of safety rather than chasing price action. 

• Remember: nobody can predict the future. 

• Adopt intellectual humility—be wary of anyone claiming certainty.

This has been the stance of this blog since the beginning. Warren and Charlie said it best:

“In order to succeed, you must first survive.”

“Never interrupt compounding unnecessarily.”

Smart.

With the Fed on blackout, we’ll see what leaks out of the Administration mouthpieces and what the JOLTS data brings next.

Do Central Bankers Run the World?

Imagine the U.S. public electing a former Central Banker to be President. In Canada, they basically did—granted, Mark Carney was head of the Bank of England, not Canada.

Still…

Central bankers should be easy targets in any campaign after the last 20 years.

Do Inflation Expectations Matter?

Quick history lesson:

Back in 2021, Jeremy Rudd at the Fed wrote a paper trashing the New Keynesian idea that inflation is driven by expectations. Rudd argued that “anchored expectations” became an excuse to adopt policy mistakes.

He suggested that real-world factors—like actual inflation and economic conditions—might give a better understanding of inflation dynamics.   Something to chew on while you read every inflation survey this week.

The Only Honest Answer:

“I Don’t Know.” It’s the right answer to just about everything in the markets.

Since I don’t know, I’d be happy to hear your takes in the comments - have at it.

I’d write more about the day ahead, but my blog experienced a “massive cyber-attack”.

XTOD’s:

XTOD: In our view, the market is discounting the last leg of a rolling recession, which will give the Trump Administration and the Powell Fed many more degrees of freedom than investors expect, setting up the US economy for a deflationary boom in the second half of this year!

XTOD: The S&P 500 just erased 9 months of gains in only 12 trading days...Markets can handle bad news, but not uncertainty.

XTOD: Plan appears to be more government at the border (trade and immigration) less government inside the border (doge and taxes). Rebalance the economy from the public sector to the private sector.   There’s obviously a price to pay for that. How big? I don’t know. How much pain are they willing to tolerate? More than people thought.

XTOD: I think it’s obvious that Twitter’s problem is Elon Musk working remotely and being too focused on DEI issues.

XTOD: Your ultimate success is governed by your ability to tolerate the uncertainty on the path to get there. The one who can tolerate the most uncertainty is the one who will eventually win.

https://x.com/CathieDWood/status/1899180530404413859

https://x.com/Stocktwits/status/1899232407967920380

https://x.com/FerroTV/status/1899153699299287229

https://x.com/RobinWigg/status/1899150850573955534 https://x.com/SahilBloom/status/1899078997503365361

Daily Economic Update: January 21, 2025

For the rest of the week, I’m going to start my post with a quote from the same book. If you can guess the book without the help of Google or AI, post your reply in the comments.

“Of course after a while, I heard a lot of calamity howling and the old stagers said everybody - except themselves - had gone crazy. But everybody except themselves was making money. I knew, of course, there must be a limit to advances and an end to the crazy buying of A.O.T. - Any Old Thing - and I got bearish.”

With the inauguration in the books and the craziness that is the Trump and Melania memecoins ($Trump and $Melania) on many minds, perhaps it’s only fitting that earnings will be the highlight of the week.  I say fitting because clearly there is a lot of money that has gravitated to ‘investments’ that have no earnings.

At least as it relates to equities, in theory there should be a relationship between GDP and equity returns.  That relationship is one where higher economic growth translates into higher earnings per share (EPS).  There is a model called the Grinold-Kroner model that provides a relationship between nominal GDP to expected equity returns.  Essentially higher growth provides higher earnings growth, higher dividend yields and research also indicates higher P/E ratios, as investors are willing to pay more for each dollar of earnings in a growing economy. Of course the relationship between GDP growth and EPS can be strengthened and weakened by dilution. Another popular model is the “Fed Model”, popularized by Ed Yardeni.  While that model doesn’t explicitly tie valuations to nominal GDP growth it focuses on the inverse of the P/E ratio, or E/P, the earnings yield of the stock market.  The “Fed Model” compares the earnings yield of the stock market to the 10-year yield on government bonds. A positive value indicates the stock market is under-valued, and vice versa. The valuation spread is seen as equivalent to the expected ERP (equity risk premium). If you consider earnings tied to nominal GDP growth, then you can see how stocks can be more attractive to bonds in a situation where earnings are growing and bond yields are stable.  Whether that is the environment we’ll find ourselves in, I have no idea.

I mention all of this because on Friday the IMF upgraded their growth forecast for the U.S. by 0.5% to 2.7%.

We could spend the week talking about equity valuations, shitcoin valuations, speculations and scams, but we’ll start with a topic that continues to get a decent amount of press and that is the stock and bond correlation, which falls under the concept of diversification.  

The basic idea of diversification as a core investment principle is that you can reduce risk by spreading investments across different assets that are not perfectly correlated. Bonds typically provide a way to diversify exposure to stocks because they often move in the opposite direction of stocks, an inverse correlation that is often seen during crises when investors seek “safe havens”.  One of my favorite research articles was a work called "When Diversification Fails” by Sébastien Page and Robert A. Panariello.  The paper highlights that diversification often disappoints when investors need it most, as correlations tend to rise during certain downturns.  While bonds can often be the best diversifier during traditional “flight to safety” crises, there are certain macroeconomic environments where bonds may not live up to their expected role, one of which is when inflation and interest rates drive market volatility.  During periods of high inflation both bond and stock prices may decline simultaneously, think 1970s and 80s and 2022.  Central bank policy can also impact the correlation, think about policies during the GFC, etc.  There was also a period during the Covid crises where investors were forced to sell safe bonds to fund margin calls, leading to losses on bonds and stocks at the same time. The point is that the correlation between stocks and bonds appears not to be static and can be somewhat regime dependent.

Over the last couple of decades there has also been somewhat of an increasing chorus of certain investment minds who believe that investors should largely eschew bonds and focus entirely on equities. A recent paper, "Safe Equities: An Alternative Allocation to Bonds" by Stephen Penman and Julie Zhu argues that a portfolio of carefully selected equities, identified through fundamental analysis as having low risk to future earnings, can offer a viable alternative to bonds for diversifying a portfolio and mitigating downside risk, particularly during equity market drawdowns.  The paper draws on empirical evidence that bonds have failed to provide negative correlation to stocks during periods of drawdown and contend that “safe equities”, those with low downside beta and positive skewness can be a better alternative to bonds as a diversifier.  Interestingly the way the authors believe safe equities should be used is that investors should short safe equities to fund a long position in risky equities, creating a zero-net investment strategy.  Using “safe equities” as the “hedge” results in a lower return when equities rally, as compared to long-only risky equities, but the losses on the short position in “safe equities” will mitigate some of the losses on the “risky equities” in down markets.  It’s a strategy that seems to be predicated on some differences in “beta” of the two equity baskets and a belief that this cost of insurance is better than that of using a traditional 60/40 portfolio.  I’ll have to give it a deeper read and more thought, but I thought it was an interesting concept.

In the week ahead it’s really earnings as the focus with a light week for data.

Thursday will bring jobless claims, Friday will bring S&P manufacturing PMI’s and the final read of the UofM sentiment survey.  We also get the BoJ rate decision, an expected hike. 

Of course Trump’s policies will be front and center….for the next 4 years.

We enter the week with the 10Y at 4.63%, the 2Y at 4.30%, the DXY at 108 and the S&P 500 at 6,022.

XTOD: Southern Taiwan hit by 6.4 magnitude quake, TSMC evacuates some factories http://reut.rs/3PInlpm

XTOD: Senior Trump Advisors have reportedly prepared between 100-200 Executive Orders that President-Elect Donald J. Trump is expected to sign on Monday at the U.S. Capitol immediate following the Inauguration, and then at both Capitol One Area and the White House later in the Afternoon. The Orders are expected to cover many Campaign Promises made by Trump, possibly including:

-Delaying the TikTok Ban for up to 90 Days

-Tariffs of up to 25% on Products coming from Mexico and Canada

-Declaring a National Emergency on the U.S-Mexico Border

-Closing the U.S-Mexico Border

-Directing the U.S. Military to construct additional Infrastructure on the U.S-Mexico Border  

-Designating the Mexican Cartels as Foreign Terrorist Organizations

-Reinstating a Ban on Transgender Military Service

-Rescinding any DEI Policy put in place by the Biden Administration

-Repealing several Policies on Electric Vehicles

-Repealing several Polices related to the Green New Deal 

-Remove certain limits on Offshore Oil Drilling on Federal Land

-Declaring a National Emergency on Energy 

-Orders on the Mass Deportations of Illegal Immigrants

-Ending Birthright Citizenship

-Reestablishing the “Remain in Mexico” Program

-Pardons for Hundreds if not a Thousand of those who participated in the January 6th Protest and Riot

XTOD: From my Surprises for 2025 on @thestreetpro  .... * An extremely leveraged cryptocurrency market represents potential systemic  risks. It is my view that cryptocurrency is "the mother of all bubbles" perpetuated by a  number of factors (including the rejection of fiat money) and developing digital  narratives -- many of which have a weak foundation of logic. The absurd notion that the  limiting of supply of bitcoin is as stupid as it is damning -- as there is no limit to the  supply of other cryptocurrencies. To us, the sheer market size of Bitcoin and other  cryptocurrencies is a manifestation of the risks.   When the cryptocurrency markets implode, which is my baseline expectation, the  contagion effect will likely be pronounced on all of the capital markets.

XTOD: "You have a part that only you can play; and your business is to play it to perfection, instead of trying to force fortune. Our lives are not interchangeable. Equally by aiming too high and by falling too low, one misses the path to the goal. Go straight ahead, in your own way."

https://x.com/Reuters/status/1881432800575869203

https://x.com/sentdefender/status/1881138348062040476

https://x.com/DougKass/status/1881137666395164732

https://x.com/TheEudaimonist/status/1881012683824300408

Daily Economic Update: November 15, 2024

Stocks fell yesterday.  The likely catalyst of the next market move is of course tonight's Mike Tyson v. Jake Paul fight.

In Fed-land.  Fed governor Kugler says Fed needs to pay attention to both sides of their mandates, implying inflation hasn't been firmly defeated.  Powell said he doesn't think "we need to be in a hurry to lower rates", which of course leads to questions as to why they started this rate cutting cycle with a 50bp cut.  When asked how and when we'll know if we hit the neutral rate, he ambigiously answered that the best way to find the neutral rate is by moving carefully and possibly slowing the pace of cuts.  He was asked, "why are we cutting rates?", his response was to "look at the labor market", that it's cooling and he stll still sees inflation's downward trend intact.  Overall Powell comments appear to be taken by the market as somewhat "hawkish".   

Powell combined with the data discussed below lead to a higher front end of the curve, the 2Y is 4.36% (up about 10bps on the week) and the 10Y up to 4.46% (up about 15bps on the week).

PPI came in line with expectations with services leading the way and core PPI slightly exceeding expectations. I’m always amazed when portfolio management services rise 3.6% as "Over one-third of the rise in the index for final demand services can be traced to prices for portfolio management, which advanced 3.6 percent."  The BLS definition of portfolio management is: 

"Price movements for this index are based on changes in the amount of revenue a mutual fund manager receives for providing investment advice. To track price movement for the index, data on management fees are collected. The management fee is most often based on a percentage of assets under management or a certain number of basis points."

Does this imply that rising portfolios are inflationary?  In other words if people are paying AUM fees and asset prices are rising, it seems like this portfolio management component rises.  Whether or not that has follow through to inflation, I guess is debated, but it touches on the "wealth effect" and "financial conditions". 

Irrespective, it reminds me of one of my favorite Charlie Munger talks on the "Febezzle":

Munger’s “febezzle” occurs when an investment manager earns compensation from the rising value of the assets under management during periods of rising asset prices. In his example, the asset manager receives the “wasted” asset management fees and other stock compensation from the investors as income, making them richer, and the investor, despite paying the asset management fees, also feels richer. Both parties believe they are “virtuously earning income” and can sustain spending from what they believe is income but is in reality spending from a “wealth effect,” which dissipates if asset prices decline. Munger went on to bemoan the impact “febezzle” can have on the misallocation of capital to unproductive projects and foolish spending which cannot support the continued increase in values, the fall of which led to real and long-lasting macroeconomic consequences once the “febezzle” starts to unwind. Munger’s advice: “when the financial scene starts reminding you of Sodom and Gomorrah, you should fear practical consequences even if you like to participate in what is going on.” 

In other data, despite continued announced layoffs the jobless claims data remains super benign. 

On the day ahead it's retail sales data as the highlight.

XTOD: I doubt Fed Chair Powell will do another interview like this anytime soon.  He struggled with some of the smart questions, often deflecting with historical explanations, and he confused the economics of different possible scenarios. His response to the question on a new monetary framework will likely leave many perplexed.

XTOD: Donald Trump picks Blackstone’s entire Real Estate Private Equity team as Secretary of Housing and Urban Development  

XTOD: US Investment Grade Credit Spreads have moved down to 0.77%, their tightest levels since July 1998.  US High Yield Credit Spreads have moved down to 2.61%, their tightest levels since June 2007.  Investors are reaching for yield and behaving as if there will never be another default cycle again.

XTOD: Charlie Munger: "No matter how wonderful [a business] is, it's not worth an infinite price. So we have to have a price that makes sense and gives a margin of safety."  "The reason that our ideas have not spread faster is they are [so] simple."

XTOD: "Each year Buffett is asked what’s the main difference between himself and the average investor, and he answers: 'Patience.'"  — N. Sleep

XTOD: This hits different in today’s hustle culture. Burnout isn’t about working long hours or pushing hard. It’s about working in systems that drain your soul. Quote by @adam_chal https://pbs.twimg.com/media/GcRJ-wyWIAAXGNO?format=jpg&name=900x900

Daily Economic Update: October 22, 2024

Stocks fell and yields rose.  All of the worries were on display in financial media yesterday.  Stocks, well Goldman says you won't make money in stocks.  Bonds, well deficits.  Cash, well inflation.  Even crypto and gold didn't work for the day.  Investing is hard. 

We ended the day with the 2Y back up over 4 at 4.04% and the 10Y at 4.20%. 

There's an idea of market cycles and reversions to the mean, ‘trees don’t grow to the sky’.  Contrasting to that is the idea that the we're in a new age and there are some companies that have learned to scale at levels not seen before in history, a new Industrial Revolution, an exponential age with increasing returns to scale. 

In the "new" economic system the thinking is summed up in a 2019 in an essay called "Graham or Growth" by investor James Anderson:

"They have endured for decades even at massive scale. I don’t see this as a contention but as an observation. Ironically they’ve altered the patterns of stock market return sufficiently that the very utility of the ‘mean’ has been undermined. The mean is now so far above the median stock that our entire notion of the distribution of returns has to be reviewed. The first chance to reassess came with Microsoft over 30 years ago. The investment community has been slow indeed. We can react to economic data or quarterly earnings in seconds but adjusting our world view has proven far harder.

Separately, one can wonder what if the recent higher interest rate environment somewhat counterintuitively helped repair balance sheets, stopped the proliferation of "zombie" firms, and allowed for the reallocation of capital to more productive uses, thus helping fuel growth (an idea once posited by Claudio Borio).  

Further, despite all the deficits, what if we're poised for more growth than we think.  After all, in the fiscal theory of the price level: "I emphasize: fiscal theory says you get inflation if debt exceeds faith in a country’s long run ability and will to repay. There is no hard and fast debt/GDP limit. Argentina has debt crises at 40% debt to GDP. Japan lasted a decade at over 200%."  This John Cochrane substack post on debt sustainability is worth a read (in the last two paragraphs that's about as optimistic as Cochrane seems to get).

It’s all a lot to think about with political and geopolitcal risk abounding, so it’s important to have intellectual humility.

Jason Zweig recently described how Ben Graham’s concept of margin of safety was also meant to apply at the individual level, to yourself as an investor. In the personal context he posited:  "Do I know what I think I know? How do I know what I think I know?  What evidence is there that I might be wrong?... Why do I know something about this asset that other investors haven't figured out? Why exactly would I be right when all of them are wrong?  

Somewhat related to humility, Morgan Housel's latest post "A Message From the Past (Thoughts on Nostalgia) does a nice job of adding some perspective around the current environment.  In it:

"Are we now forgetting that at virtually every moment of the last 15 years, smart people argued that the market was overvalued, recession was near, hyperinflation was around the corner, the country was bankrupt, the numbers were manipulated, the dollar was worthless, on and on?

I think we forget these things because we now know how the story ends: the stock market went up a lot. If you held on tight, none of those past events mattered. So it’s easy to discount – even ignore – how they felt at the time. You think back and say, “That was so easy, money was free, the market went straight up.” Even if few people actually felt that way during the last 15 years.

So much of what matters in investing – this is true for a lot of things in life – is how you manage the psychology of uncertainty. The problem with looking back with hindsight is that nothing is uncertain. You think no one had anything to worry about, because most of what they were worrying about eventually came to pass.

“You should have been happy and calm, given where things ended up,” you say to your past self. But your past self had no idea where things would end up. Uncertainty dictates nearly everything in the current moment, but looking back we pretend it never existed.

Concluding with "The past wasn’t as good as you remember. The present isn’t as bad as you think. The future will be better than you anticipate."

And that's about as much optimism as you're going to get from me.

XTOD: The World Series between the Dodgers and Yankees is sold out and there are no tickets under $1,000 on the secondary market. 

XTOD: If there is not radical reduction of government expenditures, then, just like an individual who has taken on too much debt, America will become de facto bankrupt.  The interest on the debt is trending to rapidly absorb all tax revenue, leaving nothing for critical needs.

XTOD: The speculative public is incorrigible. In financial terms it cannot count beyond 3. It will buy anything, at any price, if there seems to be some “action” in progress. It will fall for any company identified with “franchising,” computers, electronics, science, technology, or what have you, when the particular fashion is raging. --Benjamin Graham

XTOD: Understand: the greatest generals, the most creative strategists, stand out not because they have more knowledge but because they are able, when necessary, to drop their preconceived notions and focus intensely on the present moment. That is how creativity is sparked and opportunities are seized. Knowledge, experience, and theory have limitations: no amount of thinking in advance can prepare you for the chaos of life, for the infinite possibilities of the moment. The great philosopher of war Carl von Clausewitz called this “friction”: the difference between our plans and what actually happens. Since friction is inevitable, our minds have to be capable of keeping up with change and adapting to the unexpected. The better we can adapt our thoughts to changing circumstances, the more realistic our responses to them will be. The more we lose ourselves in predigested theories and past experiences, the more inappropriate and delusional our response.

Daily Economic Update: October 21 2024

As we approach the election, increasingly we are inundated with experts expressing with much certainty their financial views.  This is often done with much confidence, yet generally short of much more than abstracted terms like increased volatility, horrible consequences, game ending outcomes, big down turns, etc.  Sometimes the discussions center around something of a paradox whereby without massive deficits the economy will fall into some disaster, yet with further deficits we are certain to end in disaster.  Other times it is about the yet to be felt consequences of the "lags" of monetary policies or some other topic which again has generally been on the radar for a long time now. 

Whoever the expert and whatever the view there is generally some explicit or implicit message that you must do something now.  Perhaps it's more wise to consider whether there is more wisdom below than what you hear there:

"We will continue to ignore political and economic forecasts which are an expensive distraction for many investors and businessmen." - Warren Buffett

 "Often we tell ourselves, “Don't just sit there, do something!” But when we practice awareness, we discover that the opposite may be more helpful: “Don't just do something, sit there!" -  Thich Nhat Hahn

 "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."  – Mark Twain.

We all know elections occur regularly, often an investor might experience multiple elections over the hold period of an investment.  We also know that the cost to insure against risk is generally not when it's being experienced, you probably want to buy the fire extinguisher before the fire.

The point is not whether the views of the experts are right, or to argue that you should bury your head in the sand, it's not.  The point is to more clearly know the difference between investing and speculating (discussed here and here and here) and to remember that even when experts tell you that you must do something around the election even in the vein of "risk management", that "risk management" is actually a process, one that is generally well served by understanding why you are taking any risk in the first place, a goal. Often good advice is to build a risk management culture.  Perhaps your risk management process coupled with new information that comes to light might lead to action, perhaps not, and likely not in some alarmist way.

With respect to risk management perhaps there is more wisdom here than in all the expert calls to do something you'll continue to hear:

"Taking a risk without a goal is just like getting in a car and driving around aimlessly expecting to wind up in a great place" - Allison Schrager

“[Risk management] is not just in responding to anticipated events but in building a culture and organization that can respond to risk and withstand unanticipated events. In other words, risk management is about building flexible and robust processes and organizations.”  - John Coleman

Of course as Jason Zweig noted:  

"All investors labor in a cruel irony: We invest in the present, but we invest for the future. And, unfortunately, the future is almost entirely uncertain. Inflation and interest rates are undependable; economic recessions come and go at random; geopolitical upheavals like war, commodity shortages, and terrorism arrive without warning; and the fate of individual companies and their industries often turns out be the opposite of what most investors expect.  Therefore, 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. For most people, investing on the basis of protection - from overpaying for a stock or from overconfidence in the quality of their own judgment - is the best solution."

Thinking in terms of preparation over prediction, discipline and process over emotion, recognition of the folly of certainty are probably better mental frameworks than the soundbites designed to get clicks.

 In the words of Benjamin Graham in his classic book "The Intelligent Investor", Margin Of Safety is

 "in essence, that of rendering unnecessary an accurate forecast of the future".   

 A prudent way to navigate the inherent uncertainty in the world and economy is by maintaining some flexibility, a buffer, a margin of safety and a level of creativity in planning.  This flexibility isn't free, it's the extra turn of leverage not taken, it's the liquidity not deployed, or other analogous things, but it also provides a valuable option to change course when things aren't working out.  It creates a condition to increase the odds of survival and survival is what allows individuals and businesses to adhere to Charlie Munger's first rule of compounding: "The first rule of compounding is to never interrupt it unnecessarily".

Anyway, that's my speil to start your week. 

We start a new week at new all-time highs, people still loving Netflix, a 2Y at 3.95% and a 10Y at 4.08%.  On the week ahead, it's earnings, Fedspeak, PMI's and Durable goods as highlights.

Mon: Fedspeak

Tue: probably rest

Wed: home sales, Beige Book, Bank of Canada

Thur: jobless claims, home sales, PMI's

Fri: Durable Goods, UofM final

XTOD: The McRib is back. BTC historically goes up >2x after the McRib returns. Don't fade the McRib.   Not financial advice.  https://pbs.twimg.com/media/GaMkC2qbUAAHl9Q?format=jpg&name=900x900

XTOD: From Edelweiss Holdings PLC Owners Manual - Anthony Deden's firm.   Excerpt from "Chapter 7 - Value is not a Number" https://pbs.twimg.com/media/GaLIQ1YW4AAdM4z?format=jpg&name=900x900

XTOD: GOLDMAN: "We estimate the S&P 500 will deliver an annualized nominal total return of 3% during the next 10 years (7th percentile since 1930) and roughly 1% on a real basis."

XTOD: Getting really into finance is bad for investment performance, past a certain point. You're fine with a simple investment program and chilling. You will outperform most other investors over the long run.  But - if you're really into finance you'll get shiny object syndrome.   "Oh, leverage that portfolio up. Oh, futures. Maybe I should hedge. Oh, I heard this guy on a podcast with a great macro take. Perhaps I should act on that. This commodity is at a 50-year low. This merger is gonna go through and the market is wrong. I should short China because demographics. I should go long China because valuation. This s*itco is net cash. Maybe this is the next Monster Beverage." etc.  That's why it's good to have a small account to get that stuff out of your system & scratch the itch so you don't screw up the boring portfolio that's actually gonna work.

XTOD: "Most of what I know about writing I’ve learned through running every day." Murakami

Daily Economic Update: October 10, 2024

This was written before Hurrican Milton made landfall, which will no doubt be devastating to many people, an apt reminder of what really matters.  But since this blog is focused on economics and markets, the recent hurricane activity will no doubt have ramifications for economic data going forward.

The FOMC Minutes seemed largely in line with Powell's post decision press conference and should the debate over exactly how restrictive monetary policy has been.  "Participants emphasized that it was important to communicate that the recalibration of the stance of policy at this meeting should not be interpreted as evidence of a less favorable economic outlook or as a signal that the pace of policy easing would be more rapid than participants' assessments of the appropriate path." The minutes also showed a lack of concern around the labor market as a source of inflation and an overall view that inflation was sustainably moving to target. Overall the minutes couple with the recent jobs report seem to support the idea of a 25bp cut at the next meeting, but we'll see what the CPI report shows today.

Not even the antitrust talk against Google could keep stocks from making new record highs for stocks. Bond yields continued to rise, oil continued to fall and for all the Bitcoin talk, it sold off on the day.   The 10Y Note auction tailed 0.4bps to where WI was trading, alloted at 4.066%, metrics didn't look great compared to the last auction which had a much lower yield and higher bid to cover.  How much of the backup in yields is tied to inflation concerns, election concerns or something else is tough to say.  Though we know that the MOVE index implies that yields will remain volatile through the election.  We ended the day with the 2Y at 4.03% and the 10Y at 4.07%.

Did you watch the Bitcoin documentary on HBO? I eventually did and personally didn't find it all that interesting and it didn't seem to change the world.  What I always find paradoxical in the crypto discussion is that they incessantly value their "currency" in terms of USD.  A basic thread of thinking is something like, think of how many dollars Satoshi must have if he has X million Bitcoin, imagine if he sells it all.  When the documentary speaks that way, to me it implies, that in order for his Bitcoin to be worth something he needs to trade it back into USD?  I'm sure I'm wrong in the intent of the framing, but I find it somewhat ironic nonetheless.

On the day ahead, CPI and jobless claims will be the all the rage and NY Fed President John Williams will speak at 11am.

XTOD: Proposed motto for a new social-media platform:  You don’t have to have an opinion on everything—and shouldn’t listen to those who do.  If only!

XTOD: Bond market worries of post-election panic... The #MOVE Index measures the Implied Volatility of a constant one-month bond option.  On Monday the election fell into this 30-day window. 

This jumped the MOVE from 100 to 124  The market is bracing for an 18bp rate change on the day(s) after the election.  Similar Equity options jumped by 20%, but have since given back most of that increase to only 9% higher.   As has been the case since mid-2022, financial risk is all concentrated in bonds, not stocks.

XTOD: the Credit Suisse group acquired by Apollo was not ready for the Apollo lifestyle: 

https://bloomberg.com/news/articles/2024-10-09/apollo-s-bet-to-take-on-banks-hit-snags-before-atlas-ceo-s-exit  https://pbs.twimg.com/media/GZdKUfWX0AAI7Bn?format=jpg&name=small

XTOD: The hallmark of expertise is no longer how much you know. It's how well you synthesize.

Information scarcity rewarded knowledge acquisition. Information abundance requires pattern recognition. It's not enough to collect facts. The future belongs to those who connect dots.

XTOD: Having good health isn’t everything, but not having it is.  Having money isn’t everything, but not having it is.  You don’t need 6-pack abs or a million dollars to be happy, but it is worth learning the fundamentals of fitness and finance.   They bring a margin of safety.

Daily Economic Update: July 18, 2024

Potential economic policies seemed to be a catalyst to push investors out of big tech and into small caps.  The narrative around the trade is that the large AI sensitive names might find it challenging to procure the hardware needed to fuel the growth that is priced into those stocks, while smaller companies tend to have more floating rate debt and could be direct beneficiaries of Fed rate cuts.  According to CNBC, it was the first time in over 20 years the Nasdaq lost over 2.5% while the Dow registered a gain.  Yields were little changed.

In more important news, Howard Marks latest Memo was released The Folly of Certainty.  A quick summary in the bullets below (You can probably find my recaps of some of the other recent memos here.)

• The premise: "how can anyone be without doubt."
• Macro-forecasting is impossible: (a) we don't know what's going to happen and (b) we don't know how the markets will react to what actually does happen
• The economist consensus has been wrong about the path of rate cuts and about the odds of a recession.
• He remarks about how some people have ended up capturing massive gains in the stock market based on a belief the Fed would be cutting rates.  Clearly the Fed didn't cut but stocks rose nonetheless.  In other words, they ended up right for the wrong reasons.
• "Markets swing more than economies and companies. Why? Because of the unpredictability of market participants' psyches or emotions."
• "Intelligence, education, access to data and analysis can't be sufficeint to produce correct forecasts.".  Quoting John Kenneth Galbraith, "There are two kinds of forecasters: those who don't know, and those who don't know they don't know."
• People underestimate the role of luck in making money. There is a specious association of money and intelligence.
• Have intellectual humility - realize you might not be sure, or you don't know
• Certainty in fields like politics, economics and investing is absurd.

After reading Marks', here are some reminders from this blogger (from post on this blog over the year +):

Uncertainty is an interesting word and one that is often conflated with "risk" in the financial setting and perhaps is a little confusing. I've found the following to be a helpful guide: "risk refers to all outcomes that can be insured against, uncertainty to those which cannot." And "..uncertainty as both Keynes and Knight define it, but which the mainstream denies: a situation where we have no scientific basis for calculating a ratio (probability)."  To further illustrate: "For example, if one smoker out of ten died of lung cancer, the probability of smokers dying of lung cancer is 10 percent. This set of numerical probabilities [cardinal probabilities] is the standard domain of risk as recognized by actuaries...At the opposite extreme is uncertainty...where we have no scientific basis for calculating a ratio."  Keynes (as reported by Skidelsky) sums this up as "The magnitudes of some pairs of probabilities we shall be able to compare numerically [cardinal probabilities], others in respect of more or less only (i.e. 'more or less likely', "ordinal probabilities), and others not at all [uncertainty]."  If you're ever interested in reading more about risk and uncertainty (and Keynes views on uncertainty), author Peter Bernstein's classic "Against The Gods" is worth a read.   

While uncertainty might be scary, Bernstein laments: "A tremendous idea lies buried in the notion that we simply do not know.  Rather than frightening us, Keyne's words bring great news: we are not prisoners of an inevitable future. Uncertainty makes us free."

Or as Frank Herbert said in the Dune series:   “to know the future absolutely! All of it! What fortunes could be made — and lost on such absolute knowledge, eh?” but “what a hellish gift that’d be. What utter boredom! Every living instant he’d be replaying what he knew absolutely … Ignorance has its advantages.” 

Given the uncertainty and the bombardment of noise in the current economic environment, I was reminded of two quotes in the famous wall street book "Where Are the Customers' Yachts?" by Fred Schwed: "In this case, 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 "For one thing, customers have an unfortunate habit of asking about the financial future.  Now if you do someone the signal honor of asking him a difficult question, you may be assured that you will get a detailed answer.  Rarely will it be the most difficult of all answers-"I don't know".

A prudent way to navigate the inherent uncertainty in the world and economy is by maintaining some flexibility, a buffer, a margin of safety and a level of creativity in planning.  This flexibility isn't free, it's the extra turn of leverage not taken, it's the liquidity not deployed, or other analogous things, but it also provides a valuable option to change course when things aren't working out.  It creates a condition to increase the odds of survival and survival is what allows individuals and businesses to adhere to Charlie Munger's first rule of compounding: "The first rule of compounding is to never interrupt it unnecessarily".

On the data side, housing starts beat expectations lead by a beat in multifamily.  Building permits also beat expectations and industrial production beat after auto assemblies surged.  In Fed news, NY Fed Prez John Williams seemed to indicate that the data between July and September would be important for the Fed to gain more confidence on the fight against inflation, which would seem to potentially make a July cut a long shot.  Gov. Waller continued to express belief that we'll pull off a soft landing and also the need to see "a bit more evidence" over the next couple of months before penciling in a rate cut.

In the real world people still seemed to largely be employed, taking vactions, flying, dining out, etc. 

On the day ahead, it's ECB (expected to be on hold), jobless claims, Philly Fed and Fedspeak.  Markets will also look to parse and further react to overnight comments from VP nominee Vance.

XTOD: Part 1 Here is a contrary opinion on the emergence of Silicon Valley support for former President Trump. Which like all my opinions on here, probably won’t be popular.    It’s a bitcoin play.  

Not because the former President is a far stronger proponent of crypto. That’s nice. But doesn’t really impact the price of crypto. It makes it easier to operate a crypto business because of the inevitable, and required, changes at the SEC  

What will drive the price of BTC is lower tax rates and tariffs, which if history is any guide (and it’s not always ), will be inflationary. 

Combine that with global uncertainty as to the geopolitical role of the USA, and the impact on the US Dollar as a reserve currency, and you can’t align the stars any better for a BTC price acceleration

Part 2  How high can the price go. Way higher than you think.  Remember, the market for BTC is global.  And the supply has a final limit of 21m BTC, with unlimited fractionalization.  

Keep that in mind as you consider what happens if because of geopolitical uncertainty and the decline of the dollar as the reserve currency, BTC becomes a “safe haven” globally.  Which means that BTC could be what countries and all of us look to buy as a means to protect our savings.  

Crazy ? It already happens in countries facing hyperinflation.  

And if things really go further than we can imagine today (and I’m not saying they will.   Just that this has a possibility somewhere above zero) , then BTC becomes exactly what the Maxis envision.   A global currency

XTOD: The biggest outperformance of small-cap stocks over large-cap stocks, over a 5-day period, in history.

XTOD: The problem with this Trump ticket is that most these economic policies are predicated on proven to be totally inefficient measures like tariffs, devaluation, etc… 

I sure hope these are election rhetoric and that Trump will prove his usual opportunistic self by using the ideas to get voted in but not actually toying with implementation.

XTOD: “On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous.”  - Buffett

XTOD: Keep the goal. Change your mind about how to reach it.  One sign you’re getting in your own way is not changing your tactics when you’re not getting the desired result.

Daily Economic Update: June 28, 2024

"The Noah Rule says: "Predicting rain doesn't count, building an ark does." - Warren Buffett

 "In the final chapter of The Intelligent Investor Ben Graham forcefully rejected the dagger thesis: "Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety." Forty-two years after reading that, I still think those are the right three words. The failure of investors to heed this simple message caused them staggering losses" - Warren Buffett

It's a summer Friday, I'll keep it brief and I won't write anything on the debate, sorry if that dissappoints....feel free to consult the odds sites https://www.predictit.org/markets/detail/7456/Who-will-win-the-2024-US-presidential-election.   With last night's debate, the first round of the French elections on Sunday and the UK general election on the 4th, elections are certainly front and center.  Today's PCE report and UofM survey will be the highlight.  

Yesterday's 1Q Real GDP was revised up to 1.4% annualized though consumption was weak and prices were higher than consensus forecast expected.  Headline durable goods were better than expected and jobless claims remained benign.  The Atlanta Fed GDP now was revised down to 2.7% for Q2 estimate.  

If you spend all day running your life or business going from one economic data point to another, you might want to take a step back and revisit Ben Graham's secret of sound investment which he distilled into three words: Margin of Safety.

XTOD: My 1 repeated learning in life: "There Are No Adults" Everyone's making it up as they go along. Figure it out yourself, and do it.

XTOD: Incredible work by the Wells Fargo analyst who ordered the same burrito bowl 75 times at eight different Chipotles in NYC to prove the portion size inconsistency

XTOD: The collapse of #walgreens has been unlike anything I've ever seen in big retail.  It's down 24% today and has now lost 80% of its value in under 5 years.     This is America's largest pharmacy chain .. with over 8,500 stores & more than 300,000 employees.  Simply insane.

XTOD: Compounding starts slow and then happens all at once.  Looking for quick results and checking in on your progress constantly can be disheartening.  Be patient with the results, and trust the process.

XTOD: Augie Garrido 5x NCAA national 🏆⚾️coach at Cal State Fullerton & Texas told me in a podcast 15 years ago when I asked him what he knew now he wish he knew early in his career 

he said  “Be loyal to people not institutions or brands, institutions change, you don’t work for an institution. You work for people. When the people change, the institution will too.”

Daily Economic Update: May 20, 2024

Are my daily economic updates best read from the bottom up?  

Friday featured the Chinese property market bailout. It's been a good month for equities.  The week ahead is light on economic data so Fedspeak and the Minutes of the FOMC meeting will likely be the highlights as will Nvidia earnings.

Mentioned in Friday's post, the recent Blanchard and Bernanke paper on the last mile of inflation seemed to advocate a very Phillip's Curve dominate mentality, that unemployment will have to rise before inflation can return to target.  I thought this post from NGDP Targeting proponent Marcus Nunes, citing comments from economist George Selgin, laid out some interesting thoughts in retort to Blanchard and Bernanke.  You be the judge of the merits of the arguments.

4.83% on 2s and 4.42% on 10s is where we start the week in fixed income. 

On the week ahead:

Monday & Tuesday: Fedspeak

Wednesday: Existing Home Sales, FOMC Minutes

Thursday:  Jobless Claims, flash PMI's, New home sales

Friday: Durable Goods, consumer sentiment and Waller

XTOD: 1. Tweet triggered by some of the discussion following the publication of my new paper with Ben Bernanke. To clarify an important point. Finding that pre-pandemic era inflation was mostly due to relative price movements, especially the relative price of commodities, and that the labor market played a limited role, does not settle the issue of the role of aggregate demand and monetary policy in generating the inflation.  2. It may well be that part of the increase in commodity prices reflected higher world demand for commodities, triggered in part by lose monetary and fiscal policy, in particular but not only US fiscal policy. 3. Indeed, if one believes that individual commodity prices reflect a common aggregate demand component together with largely commodity specific supply shocks, one can use a principal component analysis to extract this common aggregate demand component. We did this in Bernanke Blanchard 2023. https://shorturl.at/s9IGs , Figure 5.  The conclusion that it indeed played an important role, at least until the end of 2022.

XTOD: GOLDMAN'S PASQUARIELLO: ".. a handful of the biggest money managers I know have recently made strong arguments for ongoing durability in the US economy.  if there’s a common thread across them, it’s the momentum behind spending on AI, infrastructure, onshoring and defense.  I agree with the broad thesis and will register that GS is calling for Q2 GDP growth of 3.2%, while the 

@AtlantaFed  is predicting 3.6% .. it stands in contrast to the ongoing pessimism I see in the press and hear on the street (specifically regarding the consumer, which I don’t agree with)."

XTOD: 7/7  When the Fed starts cutting rates at an all-time high, the stock market is signaling that the Fed is not restrictive and/or inflation is not a problem. If the market thought the Fed was restrictive and/or inflation was a problem, it would not be at a new high. So, when easier money comes, stocks boom.  But when stocks are not at an all-time high, the market signals a problem. Easy money is either not a fix or contributes to that problem, like spurring inflation. In this case, stocks struggle to break even.  Finally, if the Fed cuts a year before a recession, the signs of a recession were most likely evident, like an inverted yield curve in 2019, crashing housing prices in 2007, or the tech stocks deflating in 2001.   In this case, the Fed cut attempts to reverse this trend (read: panicking to stop the recession), and it is unsuccessful.   Conclusion  The problem with thinking rate cuts would produce lower spending is rooted in the belief that rate cuts are like candy raining down from the sky. Rate cuts only produce pleasure and never pain. So, cut rates, watch inflation fall, and stocks can boom.  It is not that simple. If markets do not believe interest rates are a problem, cutting them could produce an adverse outcome. In this case, stocks might boom and supercharge inflation via a demand-driven wealth effect. Right now, the markets do not yet see inflation as completely stamped out. Cutting rates could spur fears of more inflation and drive interest rates higher.

XTOD: It takes a special kind of elite intelligentsia to suggest that rate cuts would ease inflation. 

An out-of-control externally funded fiscal deficit drove inflation skyward, inflation is now becoming embedded in expectations, and the “contrarian” position is that the central bank should be dovish to — tame inflation.  Spiking interest payments that jack the Gini coefficient and raise inequality because the 0.1% collect rates while peasants pay them is not inflation. It’s Brazilification.  You know how I have mentioned over and over on recent podcasts that the US asset mgmt industry has absolutely zero knowledge or concept of EM-ification and what this means for assets? Consider this clip Exhibit A. 

Behold your financial leaders in action, ladies and gentlemen….the CIO of fixed income at the world’s largest asset manager. FIXED INCOME! 

Rieder has zero concept what he is signing up for. If he is indeed representative of intelligent financial leadership in America, I know *exactly* what to do with all this, and I’m here for it.

XTOD: "Margin of safety—you can also call it room for error or redundancy—is the only effective way to safely navigate a world that is governed by odds, not certainties. And almost everything related to money exists in that kind of world."  — Morgan Housel

XTOD: There are 4 types of wealth: 

1. Financial wealth (money)

2. Social wealth (status)

3. Time wealth (freedom)

4. Physical wealth (health)

Be wary of jobs that lure you in with 1 and 2, but rob you of 3 and 4.

XTOD: “Sometimes when I reflect on all the beer I drink, I feel ashamed. Then I look into the glass and think about the workers in the brewery & all of their hopes and dreams. If I didn't drink this beer, they might be out of work and their dreams would be shattered"

Babe Ruth

Daily Economic Update: May 9, 2024

Yesterday the Swedish central bank cut their benchmark rate by 25bps to 3.75% in what some believe will be the first of many developed country central banks to cut rates this year.  On the day ahead we'll get the Bank of England rated decision, they are not expected to cut rates.  

Stateside, the large 10Y Treasury Auction tailed by a full basis point, the 13th of the last 15th auction to tail, perhaps showing that the market appetite for longer dated treasury paper has some fragility, but we'll see what the 30Y auction does today.  In Fedspeak, it's been more of the same kind of data dependent talk that everyone has become accustomed to of late.  Yields rose a couple of bps and stock grinded out another day of gains on the Dow and was nearly flat on S&P.

In other news Howard Marks dropped his latest memo titled The Impact of Debt.  It is his second "short" memo, following up on his last memo which I reviewed here. Readers will know I enjoy Marks' work and have covered some of his other recent memos here and here.  Perhaps my favorite Marks' quote is "Leverage doesn’t add value or make an investment better. Like everything else in the investment world other than pure skill, leverage is a two-edged sword – in fact, probably the ultimate two-edged sword. It helps when you’re right and hurts when you’re wrong."  

In this most recent memo Marks' reference the work of someone else I very much enjoy reading, Morgan Housel.  Here are some takeaways:

• "It's the presence of debt that creates the possibility of default, foreclosure, and bankruptcy."
  
  
  
• "Does that mean debt is a bad thing and should be avoided? Absolutely not. Rather, it’s a matter of whether the amount of debt is appropriate relative to (a) the size of the overall enterprise and (b) the potential for fluctuations in the enterprise’s profitability and asset value."
•  This reminds me and reminded Marks of one of my favorite Marks' memos https://www.oaktreecapital.com/docs/default-source/memos/2008-12-17-volatility-leverage-dynamite.pdf?sfvrsn=c7bc0f65_2
  
  
  
• "As Housel puts it, “ as debt increases, you narrow the range of outcomes you can endure in life.”
  
  
• The reason for taking on debt is simple, it's cheaper than equity, allows you to 'bet' more and when you're right you end up winning more.
• Of course when you're wrong you lose more...
  
  
• And this is where Marks' makes his mark in the memo: "But levered portfolios face a downside risk to which there isn’t a corresponding upside: the risk of ruin. The most important adage regarding leverage reminds us to “never forget the six-foot-tall person who drowned crossing the stream that was five feet deep on average.” To survive, you have to get through the low points, and the more leverage you carry (everything else being equal), the less likely you are to do so. "
  
  
• And in referencing Housel referencing Taleb, Marks' provides "It’s the isolated “tail events” that saddle levered investors with the greatest losses" and "One is thus capable of unwittingly playing Russian roulette – and calling it by some alternative “low risk” name. " and " as illustrated by recent events, we rarely consider outcomes that have happened only once a century . . . or never."
  
  
• So where does that leave things with regards to Marks' views on using leverage:
• "investors should usually use less than the maximum available. Successful investments, perhaps enhanced by the moderate use of leverage, should usually provide a good-enough return – something few people think about in good times."
• The risker the asset, the less leverage you should use and
• Adhere to Buffett's "Margin of Safety"

What's "Margin of Safety", there are many good definitions you can find that I've written on this blog, but I think this sums it up: think creatively and be open to things unfolding in ways different from what they expect....flexibility comes with a cost....retain the option to change course when our plans go awry and have the humility to follow through. 

On the day ahead it's BoE, jobless claims and 30Y Auction.

XTOD: There are many people here with serious gifts and talents—intelligent, witty, thoughtful—and those talents constitute a great power. Unfortunately, most choose to use that power in stupid and/or dangerous ways: the sharp-tongued pundit on here wreaking insecure havoc on everyone that disagrees with him in the slightest way; or the amount of time and energy thinking of funny memes for cheap engagement.

I often imagine what good is being lost to the world—what great good could be added to the world—if these same people used those gifts and talents, that power, to build others up and do something productive. 

What books will never be written?

What genuine words will never be said?

What time and attention is not given to a spouse that is given to a social media critic?

XTOD: If you do things you don’t enjoy for long enough without understanding why you’re doing them, you develop the bad habit of doing things you don’t enjoy without understanding why you’re doing them. And you end up with a lot of people who are miserable at work.

XTOD: Want to understand what's going on in the commercial real estate market right now, especially office properties?  Watch what's happening with 1440 Broadway.  The $400 million loan backing 1440 Broadway helped push up the serious delinquency rate for office loans to 7% in April, its highest level since early 2017,  https://bloomberg.com/news/articles/

XTOD: What I want 2 understand is where all the ratings agencies downgrades are. Crickets. Even CRE CLOS-- where the losses to the AAAs stand a real chance of repeating the 2008  meltdown that saw Our Heroes taking the "First." They LITERALLY claimed a 1st Amendment pass to avoid suits

XTOD: DavidBeckworth

𝘔𝘺 𝘱𝘳𝘰𝘮𝘱𝘵 𝘵𝘰 𝘊𝘭𝘢𝘶𝘥𝘦 𝘈𝘐: can you imagine a world where the combination of (1) big data and (2) AI enables the Federal Reserve to become more automated and less reliant on human beings? 

@pmarca

 𝘊𝘭𝘢𝘶𝘥𝘦 𝘈𝘐 𝘙𝘦𝘴𝘱𝘰𝘯𝘦:

Yes, I can envision a world where the combination of big data and advanced AI technologies enable the Federal Reserve's decision-making processes to become more automated and less reliant on human input. Here's how this scenario could potentially unfold:  

𝗕𝗶𝗴 𝗗𝗮𝘁𝗮 𝗜𝗻𝘁𝗲𝗴𝗿𝗮𝘁𝗶𝗼𝗻: The Federal Reserve could leverage big data analytics to integrate vast amounts of economic data from various sources, including financial markets, banking systems, employment statistics, consumer spending patterns, and global economic indicators. This comprehensive data integration would provide a real-time, holistic view of the economic landscape.

𝐀𝐈-𝐃𝐫𝐢𝐯𝐞𝐧 𝐌𝐨𝐝𝐞𝐥𝐢𝐧𝐠 𝐚𝐧𝐝 𝐅𝐨𝐫𝐞𝐜𝐚𝐬𝐭𝐢𝐧𝐠: Powerful AI algorithms and machine learning models could be trained on this extensive data to analyze economic trends, identify patterns, and make accurate forecasts about inflation, employment, economic growth, and other key indicators. These AI models could continuously learn and adapt, improving their predictive capabilities over time.

𝐀𝐮𝐭𝐨𝐦𝐚𝐭𝐞𝐝 𝐏𝐨𝐥𝐢𝐜𝐲 𝐃𝐞𝐜𝐢𝐬𝐢𝐨𝐧𝐬: Based on the insights derived from AI-driven modeling and forecasting, the Federal Reserve's decision-making processes related to monetary policy, interest rate adjustments, and other interventions could become increasingly automated. AI systems could recommend optimal policy decisions based on predefined objectives and constraints, minimizing the need for human deliberation and decision-making.

𝐂𝐨𝐧𝐭𝐢𝐧𝐮𝐨𝐮𝐬 𝐌𝐨𝐧𝐢𝐭𝐨𝐫𝐢𝐧𝐠 𝐚𝐧𝐝 𝐀𝐝𝐣𝐮𝐬𝐭𝐦𝐞𝐧𝐭: With real-time data feeds and AI-driven monitoring, the Federal Reserve's policies and interventions could be continuously evaluated and adjusted based on changing economic conditions. AI systems could dynamically adapt policies to maintain economic stability, without the delays associated with human decision-making processes.

𝐑𝐞𝐝𝐮𝐜𝐞𝐝 𝐇𝐮𝐦𝐚𝐧 𝐈𝐧𝐯𝐨𝐥𝐯𝐞𝐦𝐞𝐧𝐭: While human oversight and governance would likely still be necessary to some extent, the day-to-day operations and decision-making processes of the Federal Reserve could become significantly less reliant on human input. AI systems could handle the bulk of data analysis, modeling, forecasting, and policy recommendations, with human expertise focused on setting overarching objectives and ensuring the system's integrity.

However, it's important to note that such a scenario would also raise concerns about transparency, accountability, and the potential for unintended consequences or biases inherent in AI systems. Careful governance frameworks, ethical considerations, and robust monitoring mechanisms would need to be in place to ensure the responsible and trustworthy deployment of such AI-driven systems in critical economic domains like central banking.