Daily Economic Update: November 9, 2023

With Cleveland Fed's Loretta Mester reaching retirement age and the Cleveland Fed launching a formal search for a replacement, I think my time has come.  S&P winning streak up to 8 days (highly correlated with the 76ers current 6 game winning streak) and the actors strike is over.

After the curve flattened yesterday with long end yields falling, this morning yields are up 4bps on the front end with 2Y at 4.94%, the 10Y is 4.53%.  On the day ahead it's jobless claims, Powell and 30Y auction.  

GS Research (Mericle): To summarize, we think the impact of rate hikes is mostly behind us and see rate cuts next year as optional. We expect the FOMC to conclude that while neutral might not be as low as the 2.5% median longer run dot, it probably is not 5.25-5.5%, so some amount of normalization makes sense as inflation falls. We think this rationale is enough to cut to 3.5-3.75% but probably not further, though the policy rate could end up lower if a growth risk emerges and the FOMC pushes back with insurance cuts. We expect the equilibrium rate to be higher than last cycle because the post-financial crisis headwinds are behind us, large fiscal deficits are likely to persist, the funds rate is approaching equilibrium from above, and the r* narrative is changing

XTOD: PSA: guys, I know how to calculate the Sahm rule.

XTOD: Turning Empty Offices Into Apartments Is Getting Even Harder https://www.wsj.com/real-estate/commercial/turning-empty-offices-into-apartments-is-getting-even-harder-b6659020?reflink=integratedwebview_share

XTOD: “When you take out a mortgage in America, immediately after closing, they sell your loan—all your personal information—to a random lender unknown to you”  TRUTH.    “Cyber attack” on 900 billion dollars of loans   Mr. Coopers vibes are off.  Way off.  I’m not hanging with him

XTOD: “You’ve got 375 Principles. Those aren’t principles. Toyota has 14 principles. Amazon has 14 principles. The Bible has ten. Three hundred and seventy-five can’t possibly be principles. They are an instruction manual.” https://t.co/wa0jxi9e74

XTOD: Incredible display of Ray Dalio's PRINCIPLES:

1.) Ray Dalio builds app for ranking employee believability at Bridgewater

2.) Other employees rank as more believable than him

3.) Forces devs to auto-rank him as most believable

XTOD: We are getting a recession. Oil is the tell

XTOD: How about: build something good for humanity—because people don’t necessarily know what they want, and sometimes their death instinct is strong

XTOD: The last 8 times this happened, 100% of the time the weekend started on a Friday night with a glass of Barolo and a shaving of tartufo!

XTOD (good post on market timing, which I talked about here): Why market timing doesn't work: S&P 500 is up 14% this year, but just 8 days explain most of the gains.   Bottom line: no one knows when the best or worst days will come, so timing markets not a sound investing strategy. https://cnb.cx/47kzGqs  @DataTrekMB  @CNBC

Daily Economic Update: November 8, 2023

Stocks keep wining streak alive, reaching 7 days. I'm sure hoping stocks keep winning, I'd certainly hate to see bonds or commodities make it to the super bowl this year.  All the talk of the stock winning streak just feels like such a sports headline, but I guess that makes sense given gambling on the stock market is up there as one of America's pastimes. 

Yields higher by 3-4bps to start the day, the 2Y is 4.95% and the 10Y is 4.59%.   Across the pond, Eurozone inflation expectations rose to 4%, up from 3.5% in August, perhaps inflation is a tricky puzzle. Oil continues to confuse investors, as crude trades around $76 down ~15% over the last couple weeks as markets seemingly discount risk to oil from the war in the middle east.

On the day we get Powell at 915 (he's just opening speaker at a Fed conference), tons of Fedspeak including Vice Chair Jefferson and the 10Y Note auction.  

XTOD: There have been two times in the past 40 years when the S&P 500 rose for 7 straight days following a 100-day low.  The first was on March 20, 2003. It marked the end of that bear market.  The other was today.

XTOD: Nintendo shares jump in Tokyo, rising the most since December 2020 after the firm announced it's making a live-action Zelda movie

XTOD: Syphilis cases in US newborns rise 10-fold over a decade http://reut.rs/3SwJWYv

XTOD: More people are failing to make on-time auto loan and credit card payments. “Despite sub-4% unemployment, delinquencies on auto loans and credit cards continue to rise sharply:” 

@Lavorgnanomics  writes, citing Q3 data just released by the NY Fed

XTOD: 'Net interest costs have surpassed 14% of revenues, historically the inflection point for a shift from fiscal accommodation to fiscal austerity. Essentially, tension is building up over how the federal gov. will pay for all the things that it's doing.'

XTOD: The significant November move down in both yields and oil prices, which is continuing today, is helpful for both the economy and most financial asset classes …with an important cause/effect qualification: that their impact is not overwhelmed by them ending up as an accurate forecast for significant economic softness.

XTOD: NY Mets owner Steve Cohen unveils $8 billion, 50-acre investment around CitiField.  

Will include a Hard Rock Hotel & Casino + sportsbook, restaurants, bars and a live music venue. Also 20 acres of public park space.

XTOD: Come on, Charles Schwab! 😡 You jammed 20 different ETFs in a $50k taxable robo account?! That is just irresponsible.   This is perfect example of complexity for job security. In Schwab’s case, high fees on the 10% in cash at Schwab Bank, and 11 of 20 investments are Schwab ETFs.

XTOD:  Oil prices dying by death of a thousand cuts.  Goldman's latest Oil tracker also supports the view that the "cuts haven't been cuts of late" as oil supply increases collides with lower oil demand (refinery turnaround season).

XTOD: This is going to be an interesting story once all of the details come out. The gossip is that a couple offices got raided, but who knows. I also imagine if you're getting blacklisted by Freddie, then you're probably also not doing deals with Fannie anymore. 

Link in the comments.   Here's a link to the article:  

https://therealdeal.com/new-york/2023/11/07/meridian-capital-under-investigation-by-freddie-mac/

XTOD: They’re blaming Mr. Beast for giving 500,000 people clean drinking water because it correctly showed how easy it could be done and how useless, wasteful and corrupt government can be.

XTOD: Morgan Housel: "I’m not interested in anything that’s not sustainable. Friendships, investing, careers, podcasts, reading habits, exercise habits. If I can’t keep it going, I’m not interested in it.  

I think the only way to do that is if you are going out of your way to live life at 80-90% potential. If you’re always trying to squeeze out 100%, almost certainly it’s going to lead to burnout, whether it’s a friendship or a relationship or an investing strategy. If you’re a type A person, it’s almost impossible to do. But going out of your way to live life at 80% has always been a strategy that I want to do just because I want to keep it going for a long time." ....

"It’s super dangerous to attach your identity to something that’s unsustainable, whether it’s being a model or having a certain career, having an investing strategy. If you attach your identity to something that you cannot sustain when it ends, you’re going to be morally crushed. It’s just going to destroy you.

Back to investing, the variable that I want to maximize for is how long can I do this for? It’s not, can I earn the highest returns? It’s, can I maintain this investing strategy for another 50 years? And I know that I could earn a higher return this year and over the next five years if I did something different, but I’m way less confident that I could keep it going and sustain it. And I think it’s the same for relationships."

@morganhousel   via  @tferriss

Daily Economic Update: November 7, 2023

What WeWork filed for bankruptcy?  I'm shocked...I mean I'm not shocked that they filed for BKO, but shocked that it took this long to get to an actual bankruptcy filing. Yields rose yesterday but have reversed course early this morning and are down ~5bps to start the day.  The 2Y is 4.90% and the 10Y is 4.61%.  Overnight the RBA raised their policy rate by 25bp to 4.35%, their first hike since June as inflation remains stubbornly above target.  

Markets continue to try to ascertain what the most recent loosening of financial conditions might mean for Fed policy.  On the day ahead we'll get a ton of Fedspeak and the first of this week's Treasury auctions with $48bln of 3Y notes.

XTOD (side note, I wrote about Schrager's book here):  “I recall in 2008ish, there was lots of handwringing that finance sucked up all the talent who could be doing bigger and better things. But in retrospect, the problem was really an industry that attracted and overpaid mediocre talent.” https://allisonschrager.substack.com/p/longer-means-longer?r=9w60&utm_medium=ios&utm_campaign=post

 

XTOD: COOK: AMERICANS MAY BE PESSIMISTIC BECAUSE THEY ARE NOT JUST LOOKING FOR SLOWER INFLATION, BUT FOR PRICES TO RETURN TO WHERE THEY WERE BEFORE THE PANDEMIC

XTOD: "the economy sucks because, where workers gained leverage, their employers tended to push the cost of that leverage onto customers, which intensified a vicious cycle of service workers and customers getting mad at each other"  

is my most compact explanation of any "bad vibes"

XTOD (FYI - someone needs to tell Blanchard what it means to post a short summary): 1. My views on the implications of higher long rates for fiscal policy and debt trajectories. https://shorturl.at/gntAF  Here is a short summary.   2. Interest rates at the long end have increased by more than can be explained by the fight against inflation. (I shall freely admit that I did not expect it).  It is hard to think that, for example, the 5year/5year rate should be very much affected by the current Fed tightening.   3. Bond investors may well be wrong. Long real rates may decrease; we saw a hint of this last week. But for ministers of finance needing to finance their current borrowing, the rates are what they are, and they have clear implications for fiscal policy and the evolution of debt.  4. With (r-g) close to zero, what happens to debt GDP ratio depends on the sign of the primary balance. So long as the government runs a primary deficit, the debt ratio increases. Only by returning to primary balance does the debt ratio stabilize, although at a higher level.  5. Today, most advanced countries are running primary deficits. Eliminating them cold turkey would likely be catastrophic, as it would lead to serious recessions, and likely lead to the rise of populist parties. Thus, the plan must be to do it slowly, but steadily and credibly.  6. The implication is that, even with the most responsible policies in play, debt ratios will increase for some time. This is not catastrophic. The evidence suggests that countries and markets can live with higher, but stable, debt.  7. What would be catastrophic however would be to let debt ratios explode, i.e. to let primary deficits continue forever (If (r-g) becomes substantially negative again, then the constraint will be less tight, and the plan can be adjusted).  8.  I worry that the new European fiscal rules, focused on debt reductions, may be too tight. Leading some countries to breach them and destroying the rules' credibility, or to satisfy them at the cost of reduced activity and insufficient defense and green investment  9. I worry that the US, which has a more substantial challenge, with large primary deficits, a higher (r-g) than most others, and a dysfunctional budget process, may not be prepared to do what is needed.

XTOD: Miss having baseball to watch?  Do yourself a favor and catch the fabulous Yogi Berra doc, “It Ain’t Over,” now that it’s on Netflix   It’s funny, heartwarming and real. But it’s also an important reminder of what a great player Yogi was.

XTOD: Apes, we are aware of the eye-related issues that affected some of the attendees of ApeFest and have been proactively reaching out to individuals since yesterday to try and find the potential root causes. Based on our estimates, we believe that much less than 1% of those attending and working the event had these symptoms.   While nearly everyone has indicated their symptoms have improved, we encourage anybody who feels them to seek medical attention just in case.

XTOD: Defined-maturity bond funds are surging in popularity as investors seek to lock in higher yields

XTOD: Heard through the grapevine  One of the largest commercial mortgage brokers in the country was raided over the weekend  Fraud was found in loans they'd sent to Fannie Mae 

This could now trigger a chain reaction of buybacks and  less liquidity among Fannie lenders

XTOD: Aswath Damodaran: "I have often said, we read too much and think too little. I don't have that problem. I have lots of time. ... an idle mind is often where you get your best connections of ideas. Your best thinking is done when you have nothing in your mind per se that you have to get done. The advantage of not having a to-do list on most days is I get more done when I have not to-do list than when I do."

Daily Economic Update: November 6, 2023

The 2Y yield is up ~4bps to start the day at 4.87%, the 10Y is up ~4bps to ~4.60%.  Will the post-QRA, post-FOMC, and post-Jobs report, bond and stock market rallies continue?  

The week ahead features plenty of Fedspeak, actual Treasury auctions and limited data.  If part of the narrative around the Fed not needing to hike again was predicated on higher long-term bond yields, how does the recent 30+ basis point move lower in those yields potentially impact that narrative? If Powell or other Fed officials are going to talk up potential hikes they'll have plenty of opportunities to do so this week.

Today: Fed gov. Cook, SLOOS

Tue: Trade balance, tons of Fedspeak with Williams and Waller in the mix, 3Y Note Auction

Wed: Powell speaks, Wholesale Inventories, Vice Chair Jefferson, 10Y Note Auction

Thur:  Jobless claims, Bostic, Barkin and moar Powell, 30Y Bond Auction

Fri: UofM survey about gas prices and more Fedspeak

XTOD: interest rates at zero = good for the wealthy   interest rates at 5% = Universal Basic Income via 5% yields on risk-free US govt bonds for the wealthy   interest rates fall from 5% and bonds jump in price = good for the wealthy   if i were you in the economy, i would simply be rich.

XTOD: It’s amazing how many texts, DMs, @, etc. I get when it looks like Sahm rule triggered. (It didn’t.)  Y’all really want that recession …

XTOD: The S&P 500 could soar another 18% by year-end, as the economy is strong and the Fed is likely to end its rate hike cycle, according to Oppenheimer.

XTOD: I have now had SEVERAL close friends confide in me that they are surviving on debt that are dual income households earning 250-400k per year. Keeping up with the Jones’s is a major priority to that subset of earners, and they’re all in trouble because of it. They will spend until they can’t, but I assure you they are rapidly nearing the point where they can’t. Everything I see with my own eyes in my own life and community are now screaming recession. Wasn’t the case a year ago, I see it now.

XTOD: It's a parable, where every time a scorpion stings someone the victim gets a lecture on how to treat scorpion stings and how not to provoke scorpions. No one lectures the scorpions, and they don't listen anyway.

XTOD: Zuckerberg is way richer than me, but I'm pretty sure that if I blew out my knee, I would have the same surgery as him. This simple truth, about how technological advances diffuse through a population, escapes critics of techno-capitalism.

XTOD: He's right. 👇The Fed added a huge fixed-for-floating $8 trillion interest rate swap to the consolidated government's balance sheet; the Fed is paying floating and receiving fixed.

XTOD: Just released Grok

XTOD: Jason Cummins at Brevan Howard:   The “new normal” looks like a unique period of historically depressed interest rates.  The “new abnormal” will be characterised by higher and more volatile inflation and a return to structurally higher interest rates.

XTOD: “The buildings don’t go away,” - Warren Buffett  

“But the owners do… I think that the hollowing out of the downtowns, in the United States and elsewhere in the world, is going to be significant and quite unpleasant,” -Charlie Munger

https://x.com/talmonsmith/status/1720502589169537453?s=20

https://x.com/Claudia_Sahm/status/1720450694170230832?s=20

https://x.com/unusual_whales/status/1720460071048806878?s=20

https://x.com/SandLot84/status/1720552710506721564?s=20

https://x.com/Kasparov63/status/1720519002869407848?s=20

https://x.com/JimPethokoukis/status/1720825461322690925?s=20

https://x.com/HannoLustig/status/1720945974544355406?s=20

https://x.com/elonmusk/status/1721027243571380324?s=20

https://x.com/NickTimiraos/status/1721240327564960053?s=20

https://x.com/ShlomoChopp/status/1720998660236865961?s=20

Daily Economic Update: November 3, 2023

We'll see what another Jobs Day in 'merica has in store for markets (market expects +180K headline). Stocks higher, yields lower, dollar weaker, since the Treasury announcement and FOMC. Yesterday's strong productivity number and a Bank of England on hold helped add fuel to the "everything" rally, but Apple's sales forecast came in below estimates putting a little pressure on equity futures this morning.  This morning, the 2Y is up slightly but still under 5 with a 4.99% and the 10Y is 4.66%.  On the day it's Jobs and ISM Services. 

If you're a CFA Charterholder, good news, as Matt Levine wrote yesterday,   "A team of JPMorgan Chase & Co. researchers and university academics tested whether OpenAI’s ChatGPT and GPT-4 chatbots would have a chance at passing the first two levels of the exam. It typically takes humans four years to complete all three levels of the test, which can lead to higher salaries and better job opportunities.   “Based on estimated pass rates and average self-reported scores, we concluded that ChatGPT would likely not be able to pass the CFA Level I and Level II under all tested settings,” the researchers wrote in an 11-page report. “GPT-4 would have a decent chance of passing the CFA Level I and Level II if prompted.”  Levine also added: "ChatGPT could never pass the strong moral compass requirement! Or at least it could never pass the hands-on practical skills modules. No hands."

XTOD: BANKMAN FRIED GUILTY ON ALL 7 COUNTS

XTOD: Will Biden ever return the $5m donation from FTX?

XTOD: This sort of yield volatility is not normal for a security — the US 10 year government bond — that serves as an important benchmark for the financial system, domestically and beyond. 

It is also not desirable as it undermines constructive financial intermediation, harms the global financial standing of the US, and risks breaking something.

XTOD: Labor productivity is the silver bullet that would allow GDP and real wages to rise while inflation continues to fall. It is the secret not just to a soft landing, but to an economic boom. In Q3, it rose 4.7%, and unit labor costs *fell* 0.8% as a result.

XTOD: Test your knowledge with our November Investing Quiz: https://investor.gov/additional-resources/spotlight/investing-quizzes

XTOD: Peloton revenue -3.4%    Novo Nordisk revenue +38%   fat pills made superglued ipad exercise bikes obsolete

XTOD: Word is that the editors of the world’s leading publications are clocking the real risk of WWIII - finally. Here’s a piece I wrote in October 2021 arguing we were already in it then: https://lnkd.in/eMyWhxtz.   Here’s the irony. Those who are independent can see the signs and say something early because they are independent of any institution. But that independence is hard for media to comprehend. They feel safer quoting those associated with a known and respected institution. “She works for a bank so she must be ok” is the logic. But that means they get the same old group think. That’s why it takes them so long to register that WWIII is in motion. 

We are in a Hot War in Cold Places: Space and the High North

We are in a Cold War in Hot Places: Africa and The Pacific

And now we are in a Hot War in a Hot Place: The Middle East.

Now the task is to win the peace: 

XTOD: +287,000 #NFPGuesses

XTOD: Let’s talk about US consumers for a bit, shall we? How fucked are they? Pretty fucked. Certainly more fucked than what Q3 data led everyone to believe.  

1) > $ 2 T of fiscal transfers and relief programs would have vanished by YE 

2) 80% of consumers have as much or less savings than pre-COVID. Give it a few more months and literally all US consumers will be in that case, on an inflation adjusted basis.  

3) 9% of consumer debt is students loans, that’s $ 1.6 t, and repayment would be in full effect in q4, a $ 65 b drag 

4) UR is about to take-off and will lead savings rate to follow 

5) Loss of income will be compounded by years of above average inflation

6) Consumers did soldier through up until q3, but at what cost? CC balances have topped the $ 1 t for the first time ever (previous peak was some 85% of that in q3 2007). More alarming, revolving credit exploded by over $ 300 b to $ 1.3 t since q2 21. Why does this matter? CC APRs are at 50 years high 

7) Signs of stress are showing everywhere, from autos to revolving and especially Retail ABS delinquencies.

Daily Economic Update: November 2, 2023

This morning yields are down again, with the 2Y at 4.96% (down ~10bps from yesterday morning) and the 10Y at 4.72% (down almost 20bps from yesterday morning). Equities have also rejoiced. The Treasury Refunding Announcement and FOMC/Powell lead to a big move lower in yields yesterday. Fixed income investors responded to smaller than anticipated sales of 10Y, 20Y and 30Y auction sizes as well as the Treasury indicating that increased auction sizes are likely not going to be persist past another quarter.  As it relates to the FOMC, the release and press conference were generally viewed as "dovish" in the sense that there was no clear commitment to further hikes as the tightening of financial conditions may be doing the job of rate hikes.  Otherwise on the day, data was generally ok, with JOLTS data showing continued tightness in the labor market.    The Atlanta Fed GDPNow is estimating 1.2% growth for 4Q, a pretty sharp drop from 3Q, and traders are estimating a very low probability that the Fed hikes again this December.

On the day ahead we get the Bank of England, jobless claims and Apple earnings.

XTOD: QRA synthesis BUY ALL ASSETs.  Janet saved Christmas.   Letsssssss gooooooo $TLT $SPY

I am not being sarcastic.  I am bullish bonds and stocks and covered all my shorts and am buying dips

XTOD:  US Treasury officials may not be gaming the market, but they are listening to it. That's one of the biggest takeaways from today's refunding announcement, in which the Treasury refrained from boosting long-term bond sales as much as markets expected.

XTOD: Launching on Nov 6th, a listed investment "strategy" that owns only newly issued MBS  https://convexitymaven.com/wp-content/uploads/2023/10/Convexity-Maven-The-Center-Cut.pdf  

As chatted with: @EconguyRosie @ErikTownsend   @GrantsPub  @profplum99 @biancoresearch

Yields ~100bps over similar duration Corporate (IG) bonds with NO CREDIT RISK

XTOD: I think the key to this Powell presser is that he has done little to reset market expectations towards a greater chance of a rate hike. He's not taking it off the table, and he's confirming there is a bias to hike, but Powell seems very comfortable with the market pricing in that it's unlikely.

XTOD: He means "higher forever." he just needs "traders" to swallow it in bite sized pieces.

XTOD: With Bob Knight passing away it’s almost a must to watch his speech where he talks about trying get on Michael Jordan’s ass in the locker room. An absolute classic! RIP https://x.com/SportsGuyLance/status/1719854705008939351?s=20

FOMC Recap: It's a Vibe

IT'S A VIBE

• As expected, the FOMC is on hold for the second straight meeting, leaving the Fed Funds target range at 5.25% to 5.50% and leaving QT unchanged
• The Fed remains committed to returning inflation to its 2 percent target
• Powell is not confident yet that rates are sufficiently restrictive to bring inflation back to 2%, not thinking about rate cuts
• The rise in long-term yields has been viewed as being driven by exogenous factors that should slow the economy and effectively do the job of additional rate hikes as long as there is a persistence of these higher yields

About a week ago, a few days after BEA data shows the U.S. economy grew at 4.9% in the 3Q2023, I was awakened to the text message above, a text which is emblematic of how it seems many people feel about the state of the U.S. economy. While statistically the U.S. economy is by all accounts in pretty good shape, with current low unemployment, strong GDP, household net worth at record levels, and slowing inflation, the overall sentiment seems to be pretty bad.  The recession calls of the past 18 months continue to plague the psyche, the recent geopolitical actions have reminded us that the world is indeed a scary place, there are economic concerns tied to the government financing, commercial real estate, regional banks, China's economy and the list goes on.  

The term "vibecession" was reportedly coined by Bloomberg Opinion contributor Kyla Scanlon to describe such a situation where sentiment risks creating narratives that actually lead to consumer and business behavior that does in fact lead to a decline in real economic activity.  In my opinion this is "vibecession" thinking is a form of Keynes "animal spirits" .  Post-Keynesian economist would probably say we should be fairly concerned about the bad vibes.

How much expectations matter for inflation and central bank policy is a source of debate, but with nominal GDP growth sporting an 8 handle, it might be hard to see an immediate impact from sentiment.  Nonetheless, I believe the Fed is cognizant of the "vibes" as they continue to assess the cumulative impact of rate hikes to date, the potential lagged impacts and the uncertain impact of policy on financial conditions.

In my opinion, the text message above and the term "vibecession" are really problems in risk management and dealing with uncertainty.  The Fed is also dealing with this risk management problem and inherent uncertainty when asking "should we hike more?"  While Powell believes the risks are more two-sided at present, he noted that there are risks that policy may not be sufficiently restrictive even with uncertainty over the impact of lags.

I'm not an expert on Keynes, but Robert Skidelsky is one such expert.  In his book "What's Wrong With Economics?"  he spends some time discussing Keynes perspective on risk and the differences between risk and uncertainty.

"risk refers to all outcomes that can be insured against, uncertainty to those which cannot."

" ..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)."

Effectively, Keynes (as reported by Skidelsky), defined risk and uncertainty as being on a continuum: "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]." 

Fortunately one of the great triumphs of Finance is that it gives us ways to manage risk through innovations such as insurance and hedging. Unfortunately, it cannot eliminate all uncertainty, and of course taking some level of risk is necessary to meet return objectives.  

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". Perhaps this is why the Commercial Real Estate industry has clung to the motto "survive to '25".

Just the other day economist Brad DeLong shared a substack post which discussed the long-run outperformance of U.S. equities over U.S. government bonds.  After reviewing the data, which shows the 65004-to-41 wealth gap in favor of stock investors since 1870, he posits: "But if stocks are such a good deal for the long run, why are our investors in the stock market not richer?" to which he retorts: "there is a reason why they are not even richer. It takes time for the law of averages to work itself out. And "average" is only "typical" if you have that time. If you lose your stake and cannot continue to play, you do not have that time. Mathematically, your strategy may have had a high expected return. But the typical investor who undertakes that strategy never sees that expectation."

It is unfortunate that the ideas of market efficiency and staying the course seem to be fighting an uphill battle of late. After all, if we all thought there was certainty that a financial crisis was right around the corner, we would all act on that information today and in essence we would cause that crisis today.  In theory all of this negative sentiment, and the beliefs about fiscal and monetary reaction functions are already "priced in" to today's markets   We also generally know that investors who try to time the market fail, or even if they can get out at the right time (top), they fail at redeploying their capital when the market truly does look cheap (even based on whatever metrics led them to sell in the first place). Perhaps the reason these ideas sometimes fall by the wayside is that people find it much more interesting to read a post about recession or doomsday than to read a post about risk management.

Back to the Fed, can the Fed engineer a "soft landing", can they get inflation back to 2% without pain? I don't know.  In my last FOMC recap, I described what I see as the three main "endings" to the current rate hike cycle that I see most commonly discussed in financial media, these are broadly (1) soft landing, (2) financial repression or (3) hard landing.

I don't know how the economy will unfold from here, or what other "shock" will hit in the interim, but I think that I know that surviving through whatever downside scenarios you can imagine will allow you to most fully maximize returns in the long run.

Daily Economic Update: November 1, 2023

Weird not posting a quote to start this...but we survived October despite stocks making it 3 straight months of losses. FOMC decision day is upon us.  WWPD?  Ahead of the 2pm FOMC decision, markets await the Treasury's announcement of the specific amounts and tenors of Treasuries to be issued in upcoming auctions and the anticipated Treasury buyback program.  Long end yields are higher to start the day with the 10Y back over 4.90% (with 10Y real yield back above 2.50%), while the 2Y is unchanged at 5.07%.  Equities are weaker, but at least stocks are the Yen yet.  USD-JPY crosses 151 and approaches a 30 year weakness for the Yen.  Elsewhere in Asia, Chinese manufacturing activity PMI's were below expectations and Biden will be meeting with Xi in San Francisco later this month.  This Reuters article says that "important details need to be hammered out.." but I can't help but think that means the White House needs to figure out how to remove all the feces from the sidewalks. (you can google it)

On the day ahead we get ADP Employment, Treasury Announcement at 830am, ISM Manufacturing and JOLTS.

Check back this afternoon after Powell for my FOMC recap.

XTOD: My plea for adequate funding for the IRS: I think we all love our country, and if we all love our country, we need our government to be able to function. That means being able to collect taxes—as Justice Holmes famously said, they are the price we pay for civilized society.

XTOD: Just spent 5 days in NYC speaking to funds, lenders and other allocators who we place for.  Quick takeaways:  1. I believe it’s earlier in the down cycle than I initially thought   2. There’s a lot of knife catching currently going on; little understanding that the first buyer is often not the last buyer in a downturn   3. There’s almost no real underwriting being done on the end users of the real estate   4. There’s a lot of distrust for the government and at the same time complete unequivocal belief in a bailout if needed. This is insane - you can’t have it both ways   5. “Traffic syndrome” is in full effect (people sit in traffic but can’t admit they’re part of said traffic) when it comes to employment. Everyone is outsourcing, automating and reducing and no one believes it’ll affect them  6. There’s a lot of fraud in the market and in a quarter I might say it’s more serious than last time because it affects higher-value assets much more than housing. Not ready to say this yet, but maybe soon   7. Slowly seeing predatory capital line up at the fringes of the markets. Not ready to enter yet, but sniffing for pray from the sidelines. This is not capital that regularly invests in real estate  And while you might think this is grim, I believe that as long as the consumer remains strong there’ll be major reshuffling in commercial real estate (including housing) but not in residential (end-user) housing. However, if the job market breaks due to corporate debt loads, structural unemployment and seeking efficiencies, there simply won’t be consumer demand for a lot of the real estate that is currently occupied because man will not be able to afford it at any price.

XTOD: This is key -- it's really the first time in the age of mass communications that adversaries of the United States have had messaging supremacy within the United States proselytizing directly to American youth. It's a major coup and it happened without anyone noticing.

XTOD: A Missouri jury has found the National Association of Realtors (NAR) guilty of conspiracy to inflate commissions - NAR and defendants have been ordered to pay $1.78 billion in damages

XTOD: Cant overstate impact of ruling just out saying National Assoc of Realtors conspired to inflate commissions.   NAR has beaten back every challenge to the realtor business model for decades.  That may now change.   Just one lawsuit but market whacking real estate related stocks.   2-3% total realtor commission on the way?  Hundreds of thousands of families rely on that income

XTOD: Interesting. Nominal ECI wages are steady or slightly higher in Q3. This is ~1% higher than the job number's average hourly earnings, which is more between 3.5 and 4% now. Interesting. Nominal ECI wages are steady or slightly higher in Q3. This is ~1% higher than the job number's average hourly earnings, which is more between 3.5 and 4% now.

XTOD: The pace of wage growth is consistent with what you would expect with 3.2 to 3.7 percent inflation depending on which data series you're looking at.

XTOD: Did @Wealthfront's vanity risk parity project cost its clients $500 million (and counting)?Yet another cautionary tale from liquid alts land.  Summary:  Wealthfront is a pioneer in the robo advisory business.  Good!  Cheap and efficient access to model portfolios.  Then they tried to build a hedge fund product to look cooler than other robos.  Bad.  Really bad.  Here's the story....

XTOD: Looking back at this video of Chamath from 2 years ago is so amazing.  " I want to be an instrument, like Berkshire, for the retail investors to help them close the inequality gap for themselves."  Yes, you've helped them so much sir.  $CLOV -91%  $DM -91%  $SPCE -85% $OPEN -81%  $MILE Delisted  SO PROUD OF YOU HAHAHAHAHAHAHAHAHA

XTOD: Another weird admission Sam made to me came up. At trial, Sam's basic position has been that he didn't know what was going on. But to me, he described a meeting at which he, Caroline, Nishad and Gary had decided to extend more credit to FTX.  Prosecutor: "Do you recall telling Zeke Faux in December of 2022 that when Alameda repaid its third-party lenders, you understood that there was a risk to FTX?"  Prosecutor: "I'm going to direct you to page 226-227. And I want to direct your attention to the middle of the page, where it starts, 'You were.' And just ask you to read those two sentences to yourself."  Prosecutor: "Does that refresh your recollection about whether you told——whether Zeke Faux said to you, "You were all aware there was a chance this would not work?" And you said, "That's right, but I thought that the risk was substantially smaller"? SBF: "I don't recall that, no."

XTOD: If we assume the point of investing is ultimately to improve your quality of life and the quality of life of those you most care about, investments that consistently add stress over long periods of time probably don’t make sense. Money is traded for things or experiences that catalyze certain feelings. If your investments are generating the opposite spectrum of feelings, it might be time to reassess.  It’s easy to miss the forest for the trees. Money is a means, not an end.  And in the end, most things matter very, very little. Do what helps you sleep at night and wake up with a low heart rate. To me, those are the hallmarks of a world-class investor who gets the big picture.

XTOD: Navigating "corporate speak" isn't easy. Here's a helpful guide I put together:

"Let me check with my team" = No

"Possibly" = No

"On my roadmap" = Not happening

"This will be done in Q4" = This will be done in Q2 next year

"Disagree and commit" = I hate you

"Per my last email" = Try reading, for once in your life

"Challenging landscape" = We're going out of business, quickly

"Digital transformation" = We're going out of business, slowly

"Let's circle back" = We'll never speak of this again

"Take it offline" = We'll never speak of this again

"30,000 foot view" = I don't know what I'm saying

"Low hanging fruit" = Easy promotion

"Open up the kimono" = HR violation

"We use AI" = We don't use AI

"We use machine learning" = We don't use machine learning

"All hands on deck" = Let's actually try for once, please