Daily Economic Update: October 6, 2023

Jobs Day in 'merica.   Yields are up slightly this morning with the 2Y at 5.04% and the 10Y at 4.74%.  Forecast calls for headline of +170K, a decline in the unemployment rate to 3.7% and average hourly earnings growth of 0.3% mom and 4.3% yoy.  Jobless claims again remained extremely low and, per Reuters reporting, additional data from Challenger, Gray & Christmas showed that September layoffs were down 37% from August, but up from a year prior.  Oil remains off recent highs having one of its worst weeks since March, down ~9%.  And in energy a huge deal is in the works a energy space as Exxon is reported to be near buying shale giant Pioneer Natural Resources.  Fedspeak yesterday from Daly and Goolsbee was largely in the pause with no need to hike further camp.  Daly was adamant that we're not seeing any signs of a wage-price spiral  On the Fed front we'll get a speech from Governor Waller at noon today.  

XTOD: What's the most Gothilocky reaction for NFPs tomorrow?

#1 = Strong NFP, followed by an Equity bounce and a Bond puke ("strong economy bro!")

#2 = Weak NFP, followed by an Equity puke and a Bond puke  ("it's never been more over")

XTOD: "We find that funds with facial unattractive managers outperform funds with attractive managers by over 2% per annum. We next show that good-looking managers attract significant higher fund flow..."

XTOD: Wall Street keeps thinking nothing of lasting significance happened in the spring of 2020, so they keep pounding away with all the same pre-pandemic rules and then "struggle to explain" when none of these rules work anymore?

In other words, don't be @Austan_Goolsbee. He is "puzzled" about higher rates because he still thinks it's 2019, and why his speeches about how things work have been way off the mark.

* The answer may be that we are in a higher inflation world!!!

* The labor market has changed forever (see the strikes and remote work)

* Deglobalization is a thing that is not going away

* Energy output is now a political weapon.

Want to know who does not understand this? Analysts Wall Street droning on and on about used car prices and airline tickets. This assumes, again, that nothing of lasting significance changed the inflation outlook in the spring of 2020. Instead, what is needed is a new understanding of how post-pandemic inflation works. It is not the same as the pre-pandemic inflation world. It is higher, and yields are following inflation higher.

Do this, and the "struggle" to explain rising yields will disappear.

XTOD: Anecdotally, from speaking with investors, this rings true. People were completely caught off guard by deficit coming in at $1.9 trillion - then they study the unsustainable outlook & see total dysfunction in DC = higher rates

XTOD: “sustainable” results is another mystery the CBO does not explain."  Of course, if interest payments really rose to 20%, even 10% of GDP, they would likely have big economic effects. The most obvious thing is increase spending, GDP and likely demand side inflation. But if they did that, the ratio of interest payments to GDP would fall. The reason this doesn't happen in the standard forecasts is, as I've said, they simply don't model the effects. It's easy to get a number to go to infinity in a model, but presumably we care about reality This is where the Fed comes in. If the Fed is raising rates, than its because they think the rising private interest payments drain demand more than the interest income adds to it. But if that's true, than again we're back to asking why we care if economic factors are good.  If these interest payments don't have macroeconomic effects, why should we care (outside of impacts on inequality)? This brings us to the final issue. As economist Scott Fullwiler pointed out 7 years ago, these models also don't model private debt ratios...Here the "Schrödinger's interest payments". issue gets especially stark. household and business interest payments relative to GDP would likely rise faster and crash the economy well before government interest payments got that high...Thus what won't be "sustainable" is Fed interest rate policy, not debt or deficits. On the other hand, if for some reason private sector debt to gdp (and thus private sector interest) stayed much lower than the public sector's, we're back to "lowering rates would reduce spending"

XTOD: “More fiction has been written in Excel than in Word.”    - Pythagoras, 544 BC

XTOD: This is not a meme stock, not the U.S. dollar, not yields and not even the global debt. 

This is the chart of orange juice futures 

Daily Economic Update: October 5, 2023

 

Yields are down another couple of basis points with the 2Y at 5.03% and the 10Y at 4.716% after a reversal of some of their recent bear steepening trend following yesterday's ADP employment data coming in below expectations. The move lower in yields was despite better than expected factory orders and ISM services data showing continued strength in the service sector.  The Kaiser Permanente health care 'temporary' strike became official, adding to a growing list of striking workers in 2023.  European data this morning has shown weakness again in Germany with both exports and imports falling more than expected.  Ahead of tomorrow's Jobs Report, we'll get another look at the job market with initial jobless claims this morning and there will be more Fedspeak.

XTOD: Is the Fed finally getting tighter financial conditions (via a term premium bump)? 

“These types of things often take on a life of their own until they self-correct” through weaker data or “a more sinister mechanism, such as a financial stability scare.”

XTOD: Two implications of the incredible run-up in real interest rates over the last month: 

1. The Fed should have a higher bar to raise rates again--to the degree they have more work to do this is doing some of it. 

2. More deficit reduction would be really helpful right now.

XTOD: The $MOVE is back above 140, time to send the bond market to its room for a time out.  The MOVE @ 140 implies a yield change of ~9bp a day for the next month, that is not sustainable; similar to the VIX near 50, or ~3.1% a day for a month.

XTOD: 5yr TIPs with current real yields at 2.6% will be the most compelling risk-return asset vs cash over the next couple years.  These bonds are offering boom level yields at a time when the economic cycle is softening and recent market moves suggest further softening.

XTOD: Will Michael Lewis's exposure as a fraud finally wake people up to the more general problem of rampant Lex Fridmanism?

XTOD: If long rates continue to rise we are not out of the woods for additional banking problems.  In addition, office and other challenged CRE will be harder to refinance, raising non-performing loans at the same time of large held to maturity securities losses.

XTOD: I am expecting 'unseasonality' over the balance of the year

*  In the coming months we will be forced to face and to navigate the hangover caused by years of quantitative easing and ZIRP

* Mounting consumer, corporate and government debt, the lack of discipline in fiscal

XTOD: In our latest infographic, economists from our #CenterForInflationResearch answer the question: How does raising interest rates help to lower #inflation?

Explore now: http://clefed.org/3Burp5e

XTOD: Hang onto the first people you hire. They're crucial to the company.

XTOD: I think the thing that offends me the most about this book is how Lewis gives a microphone to SBF to speak grandly about all kinds of broad philosophical, social, political, and economic conditions, as though an oracle, when, in fact, he sounds like a spoiled child.

Daily Economic Update: October 4, 2023

 

This October is already making history as McCarthy was forced to vacate the speakership, a first in U.S. history.  Of course this raises the prospect of a government shutdown. Everything sold off yesterday with the 10Y yield crossing 4.80% as bonds continued to bear steepen, and stocks falling by over 1%.  The USD-JPY touched 150 before it is assumed the BoJ intervened to support the Yen.  This all following stronger than expected job opening data. The 2Y is currently yielding 5.14% and the 10Y at 4.81%.

On the day ahead we'll get ADP employment, services data and plenty of Fedsleak.

XTOD: Every past market decline looks like an opportunity, every future decline looks like a risk.

XTOD: Could 10-year Treasury rates hit 13%?  @RickSantelli  charts the path to much, much higher yields, and warns that the Fed is running out of tricks

XTOD: The JOLTs summary - hiring rate stays below 2019 levels, quits remain right at it, openings have a slight reversal (though v/u remained the same for August).

XTOD: The Beveridge Curve has Normalized in a big way…. Solid progress, but economic strength continues - that’s a good thing when people have jobs. 

XTOD: Markets in a very dangerous spot here. Statistical risks flashing red. Banks and Utilities too. Credit starting to move. Lev loans liquidity sucked out. CRE unwind accelerating and housing market about to freeze. 

XTOD: But here’s the thing: the trade in 1987 was to play an equity crash. The trade today is to play the bond crash in 2023. Buying bonds then or shorting equities now was/is a deriv that may or may not work (worked in 87).

XTOD: He will go down in history as the man who reversed 30 yrs of ZIRP insanity. like him or not, he pulled the punch bowl away. Those that fail to see this, either support returning to an overleveraged ZIRP environment, or just dont understand how truly insane Greenspans spawn were.

XTOD: A Nobel Laureate Offers a Biting Critique of Economics - Angus Deaton says Larry Summers and other great minds in the profession have lost sight of its most important mission: Improving people’s lives.

XTOD: New monthly GDP estimates from S&P Global are out! NGDP grew at a 10.6% m/m ar (annualized rate) in August, accelerating from 9.2% in July....Consider the notion that inflation is what happens when there is too much money (NGDP) chasing too few goods (RGDP)....It's highly doubtful that RGDP can sustainably grow above 2%. Therefore, if NGDP growth is too high as S&P Global's estimates indicate, we should be ready for inflation to show some resurgence. Will be closely looking at NGDP when BEA releases its Q3 data on 10/26.

Daily Economic Update: October 3, 2023

Maybe the quote above was in reference to the Fed's inflation fight?  Speaking of the Fed, in an effort to stem the losses on their bond holdings they have decided to expand operations into the social media influencer sphere on Instagram https://www.instagram.com/federalreserveboard/  I'm sure Powell will be a successful influencer.

Yields are once again higher with the 2Y at 5.11% and the 10Y at 4.70%.  The USD continues to climb. USD-JPY flirting with 150. The Fedspeak yesterday from the likes of Bowman, Barr and Mester sounded nearly unanimously centered on the higher for longer rate path. 

U.S. manufacturing data yesterday was also stronger than expected with employment strong and the prices paid component showing some relief.  However, with respect to the prices paid, the ISM report notes that higher energy prices could affect that data point going forward.  Timothy Fiore, the Chair of the Institute for Supply Management's Manufacturing Business Survey Committee added in the report: "More importantly, the share of sector GDP registering a composite PMI® calculation at or below 45 percent — a good barometer of overall manufacturing weakness — was 6 percent in September, compared to 15 percent in August and 25 percent in July, a clear positive,” 

On the day ahead it's Bostic speaking and the JOLTS data as highlights.  Overnight the Royal Bank of Australia held their cash rate at 4.1%.

XTOD: MLB Wild Card Get-in Prices (Game 1) 

3 pm ET: Rangers @ Rays: $33 

4:30 pm ET: Blue Jays @ Twins: $7 

7:00 pm ET: Diamondbacks @ Brewers: $22 

8:00 pm ET: Marlins @ Phillies: $199

XTOD: Fed's Mester Says One More Rate Hike Likely, Then Hold For Some Time

XTOD: Dear author. We need to talk. Please review the last several decades and you will see stronger economic growth occurring when interest rates were higher than they are today.  The ZIRP era brought us useless innovations like Bored Ape NFTs. But it also led to world-changing innovation, says 

@karlbykarlsmith  via  opinion...Truly promising innovations will attract capital. They always do. And with higher rates, they won’t have to compete with all those idiotic “innovations”  that have been able to attract investment dollars because of ZIRP...Low productivity, wealth inequality, increased corporate concentration, excessive leverage, financial instability, rampant speculation - these are all enabled by ultra low rates.  Happy to send you the studies if you’d like...Is it worth tolerating all these negative side effects, just to make it easier for some unspecified, theoretical “moon shot” to get capital?...Boosting the attractiveness of tech investments and enriching the prospects of venture capitalists are not part of the Fed’s mandate.

XTOD: When Fed was remitting hundreds of billions to Federal budget from its portfolio earnings, it was counted as revenues to the budget. Now that the Fed is running a loss and shelling out huge interest payments to banks on cash deposits, it does not count as expenditures to the budget. Magic accounting that doesn’t conform to GAAP rules. 

XTOD: United Airlines would save $80 million a year if the average passenger weight falls by 10 pounds

XTOD: The USD is strong due to 1) relative yield spreads and 2) relative energy balances. 

Even if monetary policy makes a U-turn, policy-makers can't change the ongoing imbalances in the energy space, and a weaker USD seems very unlikely from here.

XTOD: I don't really know what my equity view is right now. Seasonals are raging bullish but this chart gives me pause.  I am generally not a huge fan of the inverted yield curve as a predictor of recession because it doesn’t include a timing factor and therefore ends up costing people much money as they position way too early for the inevitable recession. 

A potentially somewhat better timing indicator is when there is a bear steepening during a period of yield curve inversion. This next chart shows those occasions in blue and US recessions in red. 

You can see the blue bars have generally been pretty terrible times to own stocks. The signal in April 1999 was early, but the signal timing in 1990 and 2007 was excellent. Small sample size, obviously. No call to action here, it’s just something to think about and it’s an offset to a bullish seasonal risky asset view. The ongoing collapse in gold is a bit of a yellow flag with regard to current liquidity conditions, too.

Daily Economic Update: October 2, 2023

October, the month best know for: (a) The Panic of 1907 (also a good book), (b) Black Thursday, October 24, 1929, and (c) Black Monday (also a Showtime comedy), October 19, 1987....Ok, maybe it's best known for Oktoberfest or Halloween or pumpkin flavored lattes, or MLB Playoffs or something else, but here's to October's, lets hope not to make negative history.  September ended with the Atlanta Fed's GDP Now 3Q GDP estimate of 4.9% and the NY Fed GDP  Nowcast at 2.1% further evidencing the divergence in interpretation of the economy's performance.  This October starts with the government shutdown averted, for now at least, UAW still on strike and the prospect of a Kaiser Permanente healthcare strike, and the resumption of student loan payments.  Yields are up ~5-6bps to start the day, the 2Y is 5.10%, the 10Y is 4.62%.

On the day ahead it's ISM manufacturing data, construction spending and a Powell speech. The highlights of the week will likely be on the labor front with the JOLTS report Tuesday and Jobs report Friday.  There is also plenty of Fedspeak.

On the week:

Tues: JOLTS

Wed: ADP Employment, ISM services

Thur: Jobless claims

Fri: Jobs Day

In full disclosure, this author is not an Orioles fan, but any team that goes from 100 losses to 100 wins in a two year span deserves some credit.  In honor of the Orioles making the playoffs for the first time since 2016 and because their now injured closer had one of the best walkouts in all of baseball this year, for the month of October I'll be starting each post with an epigraph (see quote at top of post) from the HBO series The Wire.  There are plenty of business and leadership lessons one can learn from the series.

Speaking of business and leadership, the CNBC appearance by Barry Sternlicht of Starwood Capital Group on Friday is worth a listen.  Barry hits on the tug-of-war between Congressional spending and the Fed's inflation fight, discussing the "deficit out of control".  Maybe Barry believes in the Hamilton Norm? And the risk of fiscal dominance: "he's going to have to [go back to QE]".  If its true that our fiscal largesse is a problem (shh...don't tell Stephanie Kelton), many think it's inevitable that Powell will be forced to lower rates.  But maybe Powell will heed my favorite advice to central banker's courtesy of Peter Stella: “I define central bank independence in one sentence, it's the ability to raise interest rates when the Treasury doesn't want you to. And the Treasury almost never wants you to, because of the cost of the debt.” which might force political leaders to find other solutions.

Friday's PCE seemed to fall into the goldilocks reading camp, but NY Fed's Williams indicated rates should remain high for a long time: "My current assessment is that we are at, or near, the peak level of the target range for the federal funds rate. I expect we will need to maintain a restrictive stance of monetary policy for some time to fully restore balance to demand and supply and bring inflation back to our 2 percent longer-run goal."  He used the analogy of layers of an onion and that the inner layer of inflation, including shelter and services, will continue to be the most challenging.

Economist Brad DeLong had a good substack post discussing both the PCE read as well as the recent expert commentary on the risk of continued rising yields.  He concludes his post as follows: "if either BlackRock or JPMC actually thought that 10-Year Treasuries were going to 7% with any confidence, they would have and would have told customers and clients to take positions and the 10-Year Treasury would already be at 7%. It isn’t.  There may well be more inflationary shocks in our future. But it really looks like the shocks in our past—the reopening-bottleneck shock, the fiscal insurance against a return to secular stagnation shock, and the Putin attack on Ukraine shock—are now in our past. And, right now, the ocean looks remarkably calm again."

XTOD: If someone asks you to define "chutzpah," you no longer need to say "like when a guy who killed his parents asks for clemency because he's an orphan." 

You can say, "like private equity providing loan-shark liquidity to investors in illiquid PE funds."

XTOD: We talk and write a lot about all the bad ways the pandemic hit the economy. We should talk more abt the surge in entrepreneurship it unleashed — reversing a decades-long decline.   It’s not a mirage. 

XTOD: important point here: these systems are much better at doing tasks than jobs.  and giving people better tools to do their work faster often leads to qualitative changes in what they can do.  (of course, over the long run, we expect these systems will be able to do all of some of today's jobs and aren't trying to hide the ball on that. confident we will find new and much better jobs when that happens!)

XTOD: Duane “Keffe D” Davis, the man who admitted to being in the car used to gun down Tupac Shakur in 1996, was arrested and indicted Friday in Las Vegas for the murder of the legendary rapper, according to multiple sources.

Daily Economic Update: September 29, 2023

U.S. yields start this Friday with the 10Y some 15+ bps off yesterday's high of 4.68%, now trading around 4.53% and the 2Y is also down to start the day trading at 5.04%.  Despite a strong jobless claims data point yesterday and a weak 7Y auction, late day Fedspeak from Barkin and Goolsbee which leaned dovish were able to help sentiment with stocks improving. We've got people like Dalio, Fink and Ackman all in the yields go higher camp.

 EU inflation data out this morning showed inflation falling below estimates at a headline of 4.2% v. estimates for 4.5%.  The BoJ bought some bonds overnight and 

All attention will be the Fed's preferred inflation measure PCE this morning, as well as personal income and spending and the UoM survey of how consumers feel about gas prices.

In this endless barrage of economic data, speeches and forecast, it leaves one to wonder just how much is noise and where exactly is the signal.  For example, we have some serious divergences in the Atlanta Fed's GDPNow, the NY Fed's GDP Nowcast and private forecasters models of Q3 GDP.  We have other divergences in estimates of the neutral rate of interest, R*, and so on.

On the topic of R*, I was reading "The Stars Our Destination: An Update for our R* Model" by Lubik and Matthes in which the authors attempt to address the differences in the Richmond Fed's estimate of R* which is above 2%, and the NY Fed's estimate which is below 1%.  Perhaps the biggest takeaway is just how difficult it is to estimate R* and therefore the stance of monetary policy. 

This had me thinking about a conversation on Simon Sinek's podcast "A Bit Of Optimism" with guest Robert Greene .  Beginning around the 27:30 mark Greene begins discussing the fluidity and complexity of life and how in all this complete flux "our brains freeze them into these little snapshots..into good, bad, moral, evil, etc...and it is stupidity..it leads to stupid ideas on politics [and by extension policies]."  Greene goes on to state the source of human stupidity is a belief in certainty. It's worth a listen, perhaps more so, for those in charge of fiscal and monetary policy and all the voices on social media platforms who tell you exactly how the economy or markets are going to play out over the short or long run futures.  And yes, I know the Fed, use models that are "dynamic" and "stochastic" therefore recognizing elements of randomness or uncertainty.  A criticism by some is that these models fail to fully capture the complex and adaptive behaviors of the economy.  

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".

In all the complexity there was a great FT article on a recent JPM Research piece by Jan Loeys, who seems to be keeping it real https://www.ft.com/content/651cc7a4-27e3-4026-9381-76421a0203bb

Anyway, I wouldn't spend your Friday and weekend worrying about the economy, in a few years you're going to be walking around in Ray-Ban smart glasses from Meta or Apple's Vision Pro in complete bliss.

XTOD: Cocktail waitresses turned realtors learning about the Fed for the first time this week

XTOD: As we travel southwest across higherer for longerer island waving to @BillAckman

 and @real_bill_gross   along the way. Nice call guys. We will come to a crossroads.  To the south lies "Old Normal" continent where Jamie lives.  The new DSR available to clients of DS Read has a map

XTOD: The probability of another rate hike is deflating, especially for a November hike (green). 

Is this why yields are shooting higher? If the Fed is no longer going to be vigilant about fighting inflation, then US Treasuries are a sell.

XTOD: “Inflation still needs to come down. But we also can’t lose sight of the fact that the Fed has the chance to achieve something quite rare in the history of central banks—to defeat inflation without tanking the economy."

XTOD: Revised picture for GDP is the same as the old picture for GDP: real GDP is basically just about where you would have expected if there had been no COVID/policy response to COVID.

XTOD: The U.S. economy is showing signs of another Global Financial Crisis warns JP Morgan strategist Marko Kolanovic who urges investors to be in cash

XTOD: Thank You Big Fiscal

XTOD: "Bank of England plans permanent lending facility for non-banks"

XTOD: In an era of TikTok investing dominated by short-term monkeys, narratives change to match the price movement. 

Eg This week’s narrative: “The sell-off was attributed to the the US government losing control of the bond market. Parallels with 1987 are inevitable.” Aka IT’S SO OVER

Next week’s likely narrative: “The equity sell-off was attributed to JP Morgan’s collar and was a mere technicality.  The bond sell-off was attributed to a couple of hedge funds using leverage irresponsibly and they have now unwound their positions.” Aka WE ARE SO BACK

And I’ll be here to fade each and every one of these narratives. After all: Bears get killed, Bulls get killed, shrubs photosynthesize 

Daily Economic Update: September 28, 2023

Yields continued to rise and the curve continues to 'disinvert' as well as bear steepen.  Yesterday's stronger than expected durable goods order data seemed to further embolden the higher for longer view.  Oil continues to be high with crude over $93/bb on weak inventories. The 10Y is now over 4.60 at 4.63% and the 2Y down slightly, back to 4.13%.  The rapid rise in yields, continued rise in oil and the stronger dollar continues to pressure equities. Steven Ricchiuto of Mizuho Securities was great on Bloomberg Surveillance yesterday (see 2hr 5m mark) when he said in regards to the Fed's inflation fight: "this particular Chairman doesn't have this clout..you have a situation where the political economist vs. the academic economist are winning" and as it relates to rates: "the Fed is willing to play games..at least some of them are...with the 2% target....no one is going to believe 2%..so the reality is long term rates move higher..as long term rates move higher inflation expectations become unanchored..the Fed then has to address the situation..I think they'll take action to address the situation."

Today we'll get the final read of GDP as well as revisions to prior GDP measures as well as jobless claims and a 7Y auction.  At 4pm today Powell addresses teachers in a town hall style format and Goolsbee and Cook on the mic as well.  Across the pond there is inflation data with Spanish data already coming in over expectations.  We'll see if German inflation data comes in as weak as expected given the soft German state inflation readings.  In the meantime German 10Y yields are at new highs at 2.91%.  China Evergrande is suspended again, this time after its chairman was placed under police surveillance.

XTOD:  Amid concerns over cellphone addiction, China proposes limiting screen time to a maximum of two hours a day for children, enforcing a ban on use between 10 pm and 6 am

XTOD: Do you think our friends at the  @federalreserve  realize how close we are to another event a la December 2018? The flight of bank deposits from the outer branches of the depository tree is stunning. Double digit rates of change.

XTOD: Bank deposit rates are still lagging benchmark interest rates, via Barclays. 

If you haven't shopped around for higher savings rates, then you are not doing your part to improve the effective transmission of monetary policy and Pablo is judging you.

XTOD: A government shutdown could blindfold a "data dependent" Federal Reserve. 

Shutdowns in 1996 (21 days) and 2013 (16 days) delayed inflation and employment reports by two or more weeks.

XTOD: COSTCO CEO said "I've gotten a couple of calls that people have seen online that we've been selling gold - 1 ounce gold bars, yes, and when we load them on the site, they're typically gone within a few hours and we limit two per member."

XTOD: "Entropy is the law by which physical systems inevitably become more disordered over time. A similar sort of financial entropy has built up in our system, as fiat credit can only move in one direction (higher) without the whole highly leveraged system collapsing. Meanwhile, the system ... tends to incentivize politicians and voters to keep making promises that, once the numbers really begin to hit hard, aren’t maintainable as originally intended; the difference is just printed. The present has been persistently improved at the cost of the future."

XTOD: I went deep into the FTC’s massive antitrust complaint against Amazon, explaining how the retail giant imposes a vast economy-wide hidden tax using Amazon Prime and anti-discounting provisions. https://www.thebignewsletter.com/p/the-ftc-sues-to-break-up-amazon-over

XTOD: I hate to break it to everyone but this is the worst ERP in 22 years… you are guaranteed to lose money in equities over a medium term horizon. Risks are much higher than in any other point in the last 22 years with QT, high real rates, margin squeeze, inventory unwind, risk of fiscal retrenchment, etc…

But you are not compensated for these risks

XTOD: Yesterday, OFAC designated an Ethereum address linked to the Sinaloa cartel that dealt in both Tether and USDC stablecoins. Circle quickly blacklisted it. Crickets from Tether, though.

XTOD: Last year an investor purchased a Target in Portland for $16,000,000 and a 4.25% CAP. 

Yesterday it was announced that due to crime and theft they are closing this location down and 2 others in Portland.   What's the lesson here?  In my opinion the largest under-appreciated risk currently in the RE market has to do with the municipality and states that you invest in.

Daily Economic Update: September 27, 2023

Yields have fallen off YTD highs the 10Y is down ~5bps but remains above 4.50% while the 2Y is down to 5.06%.  Markets continue to monitor the possibility of a government shutdown which some are pegging odds of a shutdown at 90%. Yesterday's consumer confidence and new home data didn't seem to help sentiment with stocks falling again, now off 7% from July highs.  If you're in the camp that the Fed should cut rates sooner rather than later, data out of Brazil (a central bank that has begun cuts) yesterday showed inflation rising for the second straight month hitting 5% YoY. On the day ahead in the U.S. it's durable goods data and 5Y note auction.

Given the recent sell-off in Treasuries, I've been thinking more about the "Hamilton Norm", a topic I had first learned about through economist Eric Leeper.  I was reminded of the topic yesterday, when author and investor Mark Higgins stated the following in a substack post: "In 1790, Alexander Hamilton warned Congress that the true secret of rendering a nation’s credit immortal was to ensure that “the creation of public debt should always be accompanied with the means of extinguishment.”⁵ During the nation’s first 175 years, the U.S. adhered to this principle, and public debt was issued in large quantities only during times of emergency, such as the War of 1812, Civil War, and the two World Wars."  Have we violated the norm and does it matter?

I found the recent Macro Musing podcast hosted by David Beckworth and featuring former KC Fed President Thomas Hoenig to be pretty interesting, especially Hoenig's retelling of the events leading to the GFC.  Hoenig: Then we go and we have the great financial crisis. We lowered rates from 2001, 2002, all the way down to… it was above 5%, all the way down to 1%, and people were using their homes as ATMs. Greenspan even referred to that. They were refinancing at these lower interest rates, taking the money out, spending it, life was good. They increased their leverage, their debt. Bankers and the public took the bait, low interest rates. Then we got inflation started, went up to 3%, 4%, close to 5% and so the Fed, what did they do? The increased rates from 1% to 5.25% over the two-year period. 2006, they stopped. When did the crisis really blow up? Over two years later, [it was] called Lehman Brothers. And so, they blamed it on the bankers. They took the bait, low interest rates, do it. Get the loans out there. Housing is great. You can finance it forever. Interest rates are going to stay low forever. We had a crisis and we blamed it on the bankers. We get the Dodd-Frank.

Hoenig: Now we’re at today, what do we do? We have a pandemic. I understand we put money in there for the immediate crisis, but then we have the CARES Act. That was an immediate crisis. We had the Reconciliation Act in late 2020. That was another two trillion, so two trillion plus two trillion. Then we had the Recovery Act, another two trillion. Then the Fed, every month from March 2020 through 2020 and into 2021, printed money at the rate of $120 billion in new reserves every month. Interest rates were kept at zero and guess what? The banks took the bait. They were handed this, we have loans out at 3%. We have commercial real estate. We have Treasuries on people's balance sheets because they're risk-free, right? They're risk free, so they load up on that stuff. Suddenly, we have 9% inflation, and the Fed gets [inaudible]. They raise rates from 0% basically to 5.5% today in less than two years. So, in March, we have a banking crisis......I remind people that we're a year and a half into the tightening phase. The great financial crisis was two years in the tightening phase, and then two years before the crisis really erupted. We're early in this process, folks. Get ready. We're just getting into it now. Now, I could be wrong. I have been in the past. I could tell you that, but if I am, I will be humbly willing to accept it, but I don't think so.....We put $8 trillion into the economy over what we were projecting to do in three years. God help us if it wasn’t strong. It doesn't make sense. Are we going to continue to print money and do this, so we have inflation and inflation takes care of the problem? I don't think so. I'm not at all saying that we're going to have a soft landing. I could be wrong, understood. I'm willing to accept that risk.

XTOD: May 1986: Top Gun 1 released   Oct 1987: Black Monday Crash   May 2022: Top Gun 2 released  Oct 2023: Black Monday Crash 2? 

XTOD: i was told that rising bond yields were bad for stocks and falling yields were good for stocks  i'd like to speak with the manager

XTOD: The manager is away buying stocks. Will return shortly.

XTOD: People keep piling into $TLT, another $750m this wk, amazing, can't recall an ETF taking in so much money ($16b, #2 overall) while being down so much and so consistently (esp when you can get just as much yield w no duration risk).  Also happened w $KWEB but smaller scale.

XTOD: Please see my new essay on monetary policy https://www.minneapolisfed.org/article/2023/policy-has-tightened-a-lot-is-it-enough-a-second-update

XTOD: Who tricked everyone into thinking that travel is the most fun thing you can do in life? When I'm taking a trip, maybe 25% of it is actually fun   The rest of it is logistics, packing, checkins/outs, spending stupid money, running out of clothes, crowds, lines, airports, etc

XTOD: Here’s a great little anecdote Kurt Vonnegut relayed at Joe Heller's funeral:  Joseph Heller, an important and funny writer now dead, and I were at a party given by a billionaire on Shelter Island. 
I said, “Joe, how does it make you feel to know that our host only yesterday may have made more money than your novel ‘Catch-22’ has earned in its entire history?” 
And Joe said, “I’ve got something he can never have.” 
And I said, “What on earth could that be, Joe?” 
And Joe said, “... Enough.”