Daily Economic Update: August 30, 2023

The 2Y is yielding around 4.91% to start the day, while the 10Y is yielding around 4.15%.  Yesterday the 2Y yield fell by (checks charts) the most since (gasp) May (obviously historic), following JOLTS, which El Erian summarized in a X/Tweet as: "The job market isn't so strong that employees feel emboldened to quit loudly and find another job, but it isn't so weak that companies can carelessly cut their staff count, counting on easy hiring when profits improve."  The JOLTS data, declining consumer confidence and a strong 7Y auction has emboldened bets of the Fed pause in September.  Across the pond this morning, German and Spanish inflation data looked to come in above expectations.
We'll see how ADP and GDP looks today and still have PCE and Jobs on the come. 
Hurricane Idalia is yet another reminder that climate risk are real.

XTOD: You a year ago: OMG the Phillips Curve is going to destroy us!! 😲 You now: Hahaha idiot macroeconomists, you actually believed in the Philips Curve, LOL macro is so fake 😂😂😅

XTOD: Sure why not crowd on 

XTOD: You’ve probably read studies finding <5% of stocks make up the entire historical excess return of stocks over T-bills. The market is cap weight, so those successful companies have a large impact. Active managers tend to equal-weight, and that makes it tough to beat the market.

XTOD: “There are 60,000 economists in the US, many of them employed full-time trying to forecast recessions and interest rates and if they could do it successfully twice in a row, they’d all be millionaires by now. As far as I know most of them are still gainfully employed which ought to tell us something”   --- Peter Lynch

XTOD: While a weaker RMB does make Chinese manufacturing more competitive in export markets, the PBoC doesn't want a weaker RMB for at least two reasons. First, stronger exports come at the expense of weaker domestic consumption, as a depreciating RMB effectively shifts income from households (who are net importers) to manufacturers (who are net exporters), and by now almost everyone agrees that China must urgently boost domestic consumption.  Second, expectations of RMB weakness can become self-fulfilling and lead to destabilizing capital flight if these expectations cause wealthy Chinese to start selling RMB for dollars. We saw how badly this can go seven years ago.

XTOD: GOP presidential candidate Vivek Ramswamy said in an interview he’d accept the terms of a cease-and-desist letter he received for a campaign trail performance of Eminem’s hit song “Lose Yourself.”

XTOD (not investing advice, by who new Jeff Bezos had some real estate investing platform?): Thanks to Jeff Bezos, you can now make money from real estate for just $100

XTOD: Thursday 31st August 2023 is a Super Blue Moon.  Last Super Blue Moon was on 31st Jan 2018.  Subsequently, $NDX dropped by 10% in a week.  Incidentally, $NDX was up roughly +40% over a year, almost similar to now 🥹  #Gothilocks does work in mysterious ways🥹

Daily Economic Update: August 29, 2023

U.S. yields start the day with yields relatively unchanged following the double auctions yesterday which seemed relatively clean.  The 2Y is trading 5.01% and the 10Y ~4.20% (off the highs of about a week ago of around 4.35%) . I guess we're all going to be buying electric cars from Vietnam...and I thought VinFast might be tied to vehicles made for Vin Diesel in Fast and Furious.  China remains in focus, wake me up when they do something big in terms of stimulus.  The Jackson Hole papers referenced yesterday continue to garner some discussion, especially the Eichengreen paper on the era of high government debt.  I haven't listened to the podcast yet but Odd Lots has covered the paper.

 Today's JOLTS data will be the first labor market indicator that will be scrutinized this week and I'm sure there will be some post somewhere about the Beveridge Curve.

XTOD: Here is the J-Hole paper that concluded the world is f**cked (which was of course obvious to anyone who is not a career economist since 2009)

XTOD: I wonder why there is no session at Jackson Hole on "Lessons from the fastest economic recovery ever" or on "How to restore full employment faster after a recession"

XTOD: U.S. consumers in recent weeks have seen gasoline prices tick up to their highest levels so far this year, leaving many with an unwelcome sense of déjà vu

XTOD: https://threadreaderapp.com/thread/1696262024626651461.html Share this if you think it's interesting. 

XTOD: The "urban doom loop" has caught on as a possible threat to cities nationwide -- especially in midsize cities that may be more vulnerable to an economic spiral  My look at what's behind the risk, and what it could look like from Minneapolis to Memphis:  Much of the focus has gone to hubs like New York and San Francisco. But many economists and analysts are more concerned about smaller cities with less ability to offset the economic blow if companies nix large leases or sale prices of downtown buildings crater.  Still, the loop isn't a given. Many cities are leaning on state and local stimulus aid. A large share of the outstanding business and mortgage loans aren't due for a few more years. And wonky tax rules are key to assessing whether individual cities could be in trouble. But a look at midsize cities could show early signs of distress. These places have some of the highest rates of office delinquency (where loan payments on buildings are behind schedule) and the lowest rates of office occupancy.

XTOD: "They issued an urgent call for a revised playbook to better understand and respond to a rapidly changing landscape that threatened to stoke more frequent supply shocks, higher prices and heightened volatility across financial markets." An important article on #JacksonHole by the  @FT 's  @colbyLsmith   Good to see the growing recognition among policymaking influencers that we have gone from a world of insufficient aggregate demand to one in which the supply side needs to be better understood and responded to.

XTOD: Michael Kantrowitz - bearish stocks
Michael Hartnett - bearish stocks
Michael Wilson - bearish stocks
Michael Kramer - bearish stocks 
Michael Gayed - bearish stocks 
Michael Burry - bearish stocks
What do they all have in common?  Anyone?

XTOD: "Everything in life is volatility times time. As volatility increases, time compresses. But what we care about is the validity of the fixed point. If we lose it, everything in the past becomes meaningless." — Myron Scholes

Daily Economic Update: August 28, 2023

The final days of August are upon us with a week that ends with a Jobs/ Payrolls Friday report. Before we get there 2Y is up over 4bps to 5.10% and the 10Y is flat, trading at 4.24%.  It will be a busy data week and labor disputes remain something to watch with UAW, actors and writers, etc. 
With J-Hole behind us, while Powell gets all the hype, there were other speakers.  To start here's a quick recap of Lagarde at J-Hole: (1) there may be some fundamental changes in economic relationships, so understanding policy transmission can be more difficult in today's changing world (2) three major changes are changes to labor markets, with remote work and AI, the green energy transition and geopolitics (3) these shifts may lead to more supply side disruptions in the economy as well as increasing investment needs which may lead to relative price changes amongst sectors  (4) confronting this changing world monetary policy will need to continue to ensure price stability while being flexible.

I can't say I read all of the J-Hole papers (not good beach reading), but at a high level here's what I saw upon a cursory review (not all inclusive and take this summary with a grain of salt): (1) a paper by Ma and Zimmerman positing that monetary policy may impact innovation (tight monetary policy may impact innovation negatively with higher cost to future growth) and therefore may not be long run neutral (2) a paper by Duffie on deficits and how structurally dealer balance sheets may not be able to accommodate the increase in the size of the Treasury market (3) a handout by Jones that seems to ponder if we're running out of ideas and therefore poised for lower growth - will AI come up with ideas for us? (4) a handout by Richardson on the job market for nurses and teachers where demand outstrips supply (5) a paper by Eichengreen on how high debt and deficits are here to stay and could lead to financial repression and some difficult "medicine"

It's a busy week that starts with a double auction day today with both the 2Y and 5Y being auctioned at 1pm. 
Tue: JOLTS, home prices, 7Y note
Wed: ADP, GDP (2nd read), pending home sales
Thur: PCE, Income and Spending, Jobless claims
Fri: Jobs Day! ISM Manufacturing

XTOD: Everybody knows the inflation target is ACTUALLY 3.14159265359

XTOD: Yesterday, I trolled Larry Summers, as I thought his graph was more misleading than helpful. But I fully agree with the major points of his WAPO column today: Inflation is still too high, unemployment very low, and deficits too large.

XTOD:  Mark Cuban said that after investing nearly $20 million in 85 startups on “Shark Tank,” he’s taken a net loss across all of those deals combined. 

XTOD:  I cannot believe Bob Barker lived as close to 100 as possible without going over.

XTOD: For the sake of argument, can we consider an alternative to the current narrative on rates, literally the semantics: the explicitly pessimistic "raise them until something breaks" or the ominous sounding "higher for longer"?   How about "properly pricing risk," "correcting mistaken capital allocation", or even the pedantic but true "getting all those formulas in the finance books to actually work?"  Yes, the inversion of the curve/high near-term rates is real/has negative implications for businesses & consumers, has created issues for bank balance sheets (1.5% paper now at 4%), & managing inflation is a challenge for all.  But the 10 year at 4% is a whole lot healthier & "normal" for financial decision making than 1.5%. By a lot. It will lead to less speculation & to less misallocation of capital. So, here's 😃 😀 😃 for rates closer to where they ought to be after too many years of distortionary rate levels expressed in comforting but misleading phrases.

XTOD: I’m bullish on organizations that help people live their ordinary lives well over the next few decades: who to call when someone dies, teaching adults how to cook, curating the best of music and literature, how to manage content and take paid time off. All these things and more.

Powell at J-Hole: must there still be pain as "we are navigating by the stars under cloudy skies"?

J-Star, unlike the other "stars" (r-star, u-star, etc.) is a fully observable variable that describes how Jay Powell is the star of J-Hole and what he says carries more weight than any other variables.  When J-Star is inserted into your equation all other coefficients go to zero and therefore have no impact.  WWPD, "What Will Powell Do?" is important for markets.  I'm being facetious of course. 

Expectations play a prominent role in  today's economic models and Fed policy (this wasn't always the case, see here). If you followed Powell's speech one thing he didn't mention was cutting interest rates.  Highlights of the speech focused on uncertainty around the post-pandemic labor market dynamics and how labor market tightness feedbacks into wages and inflation.

In today's speech Powell didn't use the word "pain" but he did say:

"Getting inflation sustainably back down to 2 percent is expected to require a period of below-trend economic growth as well as some softening in labor market conditions." and "We expect this labor market rebalancing to continue. Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response."

So I guess the Phillip's curve is alive and well, while it remains a topic of debate. 

Markets didn't seem to react much too strongly to Powell's speech and market expectations are for 2024 rate cuts.

One other thing Powell mentioned again was that 2% remains the Fed's inflation goal, despite some debates and calls for changes to the target. 

The current Atlanta Fed GDP estimates are 5.9% and Powell acknowledged that growth has continued to come in above estimates this year.  It's hard to fathom 2% inflation with real growth at 5.9%, but perhaps it's possible.

We'll get more data on employment and inflation between today and the meeting that could change market expectations.  The next FOMC meeting is September 20th along with updated dot plot, for now Powell's journey to get inflation back to targe will have to ramble on:

"..the autumn moon lights my way

For now I smell the rain, and with it pain, and it's headed my way

..but I know one thing I've got to do
Ramble on, the time is now" - Ramble On, Led Zeppelin

Daily Economic Update: August 25, 2023

 J-Hole day is upon us. 2Y Treasury is trading 5.03% and the 10Y is trading 4.24% both up slightly.  Atlanta Fed GDP now rises again, now at 5.9% for Q3, while across the pond German Ifo business confidence fell again and was below estimates.  Why we care so much about central bank speeches is a wonder of the modern world, but I guess if you're of the view that the Fed acts largely through expectations then speeches matter a lot.  Of course there is also a saying that actions speak louder than words and eventually people won't care about what you say unless you eventually follow through.  Last year Powell basically said there would be pain and I guess there was if you were were certain institutions, but for the market writ large that pain has been hard to see and inflation has come down nonetheless.  

On the day ahead we get UofM Consumer Sentiment data, Powell's speech and Lagarde's speech. 

XTOD: My experience with Jackson Hole is that the actual contents of the speech rarely matter. It’s an opportunity to identify the point of maximum pain, and squeeze

XTOD: All the *s should be "dismissed with prejudice" https://thefaintofheart.wordpress.com/2016/08/10/the-fed-wastes-time-star-trekking/

XTOD: Lots of people beating up on Larry Summers over his chart making recent disinflation look just like the mid-70s disinflation, which reaccelerated. Indeed, problematic on many fronts. But the biggest issue is that the story was very different. Mid-70s disinflation was achieved via a huge rise in unemployment; reasons to wonder what would happen as U came down again.  This time no rise in U at all, so completely different process. Oh, and a lot of the inflation resurgence was about the Iranian revolution and oil prices 

XTOD: Nike down record 11 days in a row

XTOD: Tiger 🐅 Global is doomed

XTOD: Here’s a great primer by Popular Info on what “shrink” and “organized retail crime,” is, and why corporations and media like to make it sound like it’s all shoplifting.

XTOD: The Sopranos 2023: Adriana starts an OnlyFans... This is not a meme. Drea De Matteo announced last night on IG that her OF is now live

Treasury OFR compares the plight of Office to that of Malls

Researchers from the Treasury Office of Financial Research has a brief out today titled Work from Home and the Future Consolidation of the U.S. Commercial Real Estate Office Sector: The Decline of Regional Malls May Provide Insight.  In the report the authors provide the following key points:

• Workers have a preference for work from home which may become permanent and if it does employers who recognize and adapt to that reality will have an advantage obtaining and retaining talent.
• Office demand may be even weaker than reported due to the high level of space that is currently being subleased by existing tenants and that structural vacancy rates may be as high as 50%.
• The authors discuss how e-commerce up-ended regional malls and the negative feedback looped that ensued; retailers left malls, leading to fewer shopping options, making malls less attractive for shoppers, leading more tenants to leave.
• The preference for work-from-home is much like that of e-commerce and may lead office down it's own negative feedback loop that will need to ultimately culminate in finding a new "highest and best use" (I like the nod to accounting terminology out of ASC 820) for these properties, most likely with significant reduction in current value. 
  
• It is not clear that appraisers have fully baked in the possibility of structural vacancies, instead continuing to focus on in-place leases and some assumption that the future will be like the past and not yet reflecting the risk premium that would be required to actually sell an office to a new owner.
• Because the OFR is focused on financial stability as one its mandates, they highlight 3 risk to financial stability due to declining office values: 

1. Significant losses for financial institutions holding debt and equity positions tied to office
• $3.2 trillion of total value is current in the office sector and losses of over $180 billion are plausible
• This loss of value would happen over time but would hit direct lenders and exposed CMBS.
2. The loss of tax revenue for municipalities
• Commercial property taxes make up a significant portion of municipal revenues and may be difficult to replace which could deteriorate municipal balance sheets.
3. The high cost of repurposing the buildings
• Unlike malls, offices don't sit on large land parcels around their buildings, offices tend to be in dense areas and cannot be easily transformed into warehouse or distribution or storage centers.
• There are likely a number of challenges to convert office to multifamily.
• The most likely outcome is to demolish the buildings.

While the brief is certainly not prognosticating that office is doomed, it does outline the risk which are generally known by market participants.  The question is exactly what scenario the market is pricing in for office and whether or not it's reflective of the risk posed in this brief.

Daily Economic Update: August 24, 2023

Apparently 8/24 is the date that more people call out sick than any other date.  After bonds rallied solidly and stocks rose on Wednesday, Thursday starts with 2Y up ~3bps at 4.98% and 10Y up ~1bp at 4.21%.  WSJ article with quotes from former St. Louis Fed President Jim Bullard where he calls recession fears overblown and mentions the possibility of the Fed going to 6%.
Stocks look to rise following Nvidia post-close earnings beat on news that we're all just generative AI running on their chips after all. We get jobless claims and durable goods orders on the data front today.

XTOD: Don't forget. Yellen has unholy powers to make you buy bonds. Even if you don't want to

XTOD: Love it.  Every fleeing H4L on silly survey data ahead of Jackson Hole

XTOD: Everyone buying a house is like “well, rates will come down, so can just refi” and that’s why rates are so high to begin with.

XTOD: The Kremlin continues to target and attack Ukraine’s ports and food exports. This time, Russian forces destroyed 13,000 tons of grain that was destined for Egypt and Romania.

XTOD: Books that endure don't look like good books; they are almost always very poorly written, but address fundamental topics. Masterfully crafted ones generate excitement; they look like "great works", get prizes, impress academics, critics, & empty suits, then fade away.....3)Samuelson on Keynes's General Theory:  "a badly written book, poorly organized; any layman who bought it was cheated of his 5 shillings ... not suited for classroom use... arrogant, bad-tempered. polemical...abounds in confusions.  (...) In short, it is a work of genius."

XTOD: A very thoughtful look at designed insecurity and how it manifests itself in the financial world and beyond. https://nytimes.com/2023/08/18/opinion/inequality-insecurity-economic-wealth.html?smid=tw-share via  @nytopinion   +  @astradisastra

XTOD: Still one of the most important market dynamics to watch: inflation-adjusted Treasury yields (magenta, inverted) are at cycle highs, yet valuations (blue) remain lofty. No knowing how/when the lines converge again, but the gap is not likely sustainable

XTOD: Brazil’s former president may be arrested because of expensive watches sold at Philadelphia suburban Willow Grove Mall   inquirer.com/politics/phila… via @phillyinquirer

Daily Economic Update: August 23, 2023

U.S. yields start the day lower, with the 2Y down 4bps back at 5% and the 10Y down 6bps at 4.26%, both back to where they were pre-SVB (remember SVB?).  Eurozone PMI contracting further with German manufacturing continuing to weaken.   Some retail earnings weren't great on Tuesday, but really where are there still Macy's anyway??..and stop stealing from Dick's [insert if Staples sells Staples then...videos here].  There are some academic and non-academic theories connecting a rise in retail theft (or "shrinkage") to inflation.  Generally those theories are that either: (a) rising prices make some goods more expensive so people steal them and (b) rising prices creates an incentive to sell stolen goods below retail prices on the black market.  As we wait for Powell at J-Hole on Friday, attention has turned to bashing Biden's trip to Maui, counting Trump arraignments, Republican primary debates, or, dare I say mask-mandates?  On the day ahead we have S&P PMI's, new home sales and 20y auction today.

If we're going to keep talking about R-Star, can we at least give my man Knut Wicksell some credit?  Wicksell believed that while you could not see the natural rate, you could see the impact of policies that kept rates above or below this rate by looking at trend growth rates. Today, our central bankers discuss their interest rate policy relative to this neutral rate or “R-Star” to determine if their policy is restrictive or not. 

“Nature’s productivity has a strong tendency to keep up the rate of interest” – Irving Fisher ....read the Febezzle article 

XTOD: Confession: in the past 3 years, I've never listened to a single podcast that someone has sent to me. I'm maxed out.  Always feels like main point can be summed up in a tweet or a paragraph rather than expecting me to block out 1-3 hours.

XTOD: Time to scrap ALL stars. ystar, ustar rstar

XTOD: Zoltan: “The west dreamt of the Brics as a lapdog, that they would accumulate dollars and recycle them into Treasuries, but instead of that they are renegotiating how things are done.”  Who opened this door?   “The signal moment for them in the past 18 months, argues the former Kofi Annan aide Mousavizadeh, was not Russia’s full-scale invasion of Ukraine in February 2022 nor Nato’s rediscovery of its purpose, but the freezing of Russian central bank reserves, which dramatically underlined once again the power of the US dollar.  “For middle powers, it was the equivalent of someone going in and seizing embassy property.”

XTOD: Interesting article, but with a pretty bizarre quote from Zoltan Pozsar: “The west dreamt of the Brics as a lapdog, that they would accumulate dollars and recycle them into Treasuries, but instead of that they are renegotiating how things are done.”.....I don't think he understands at all how the international balance of payments works. If he were the only one, it wouldn't matter, but he repeats a very common confusion....There is a popular conspiracy theory (sometimes called the petrodollar conspiracy) that claims that the main purpose of US foreign policy is to trick or cajole foreigners into buying US Treasuries so as to lower the borrowing cost for the US government...This is total nonsense. Net foreign purchases of US assets is just another name for US trade deficits, and the US has been eager to reduce its trade deficits, which is just another way of saying that the US wants foreigners to stop buying US assets..BRIC countries want to do exactly what Pozsar says they don't want to do, and the west wants them to stop doing exactly what Poszar says the west wants them to do.

XTOD: Microsoft $MSFT just announced the public preview of Python in Excel - Tech Crunch

XTOD: Unexpected inflation can lead to redistribution, hurting creditors and possibly workers.  But steady, expected inflation gets built in to interest rates and wages—it does not hurt workers or creditors.  To a first approx think of real wages as unrelated to average inflation.

XTOD: Crash coming.  Haven’t used that word in forever.  Retail is getting taken out back today.  The consumer is not strong.  Airlines all failed miserably and household savings is 90% below it’s peak of 2020/2021.  Asset prices and real estate prices are going to fall with rates pushing above levels not seen since 2007.  Credit conditions are tightening and we have record debt levels.  This is the most obvious precursor to a recession I have seen since the financial crisis.  Takes time and more layoffs, but it is coming.  I haven’t been this bullish on the vol market since the beg of 2022