Daily Economic Update: November 27, 2023

I think I was going to take 2 weeks off from posting, or just lost track of the calendar...nonetheless, Cyber Monday starts with yields and equities down slightly and the VIX near all time lows.  The 2Y yield is 4.95% and the 10Y is down ~2bps to 4.47%.  

On the week ahead the big items are Treasury Auctions, Fed Beige Book, Fedspeak (including Powell on Friday) and PCE data.

Today:  New Home Sales, 2Y Note and 5Y Note

Tue: Home price data, Richmond Fed mfg index, Waller, Goolsbee, 7Y Note

Wed: Inventories, 3Q GDP (2nd), Fed Beige Book, Mester

Thur: Income & Spending, PCE, Jobless Claims

Fri: ISM Manufacturing, Powell speaks

I came across this question on LinkedIn:  "Can CRE have value without leverage?" "I ask because there seems to be a lot of people that seem to bifurcate “opportunities” for assets then in a separate breath say subject to debt penciling out.  Or can one claim to add any value to the asset beyond being a “core” type investment (hope to buy right then passively manage) if the debt penciling is a requirement? 

Or so we live in a world where a decade plus of zero rates just completely obfuscated the real economics of the CRE industry?"

There are obviously a few questions there, but I found the first question regarding the value of CRE of some interest.  I won't share my answer with you here (or on LinkedIn), but judging from the answers I saw from professionals on LinkedIn, I'd encourage my readers to reacquaint themselves with Modligliani-Miller's famous Proposition I on Capital Structure Irrelevance: "The market value of a company is not affected by the capital structure of the company."  "Consider why this might be true. The operating earnings of a business are available to the providers of its capital. In an all-equity company (that is, a company with no debt), all of the operating earnings are available to the equityholders and the value of the company is the present value of these operating earnings. If, on the other hand, a company is partially financed by debt, these operating earnings are split between the providers of capital: the equityholders and the debtholders. Under market equilibrium, the sum of the values of debt and equity in such a case should equal the value of the all-equity company. In other words, the value of a company is determined solely by its cash flows, not by the relative reliance on debt and equity capital.".....and yes, I know the assumptions that underlie that theory are likely not to hold in the real world and yes, I know the propositions around taxes, etc.  My point is simply that it's it worth revisiting MM from time to time.

XTOD: Idiot Lender Chronicles: Part Deux  I'd like to begin today's story with a message of hope for all the C students out there.  You may find yourself, on a gloomy fall afternoon, thinking, "I'm too dumb and lazy to run a large debt fund. Those jobs are for the smart people."  Well, cheer up my downwardly-moble friend. You don't need to pursue a career as a venture capitalist.  

With enough hubris, luck, and family connections, you too can run a debt fund. It turns out, much like VC and wealth management, intellect is not the limiting factor....The CEO (who lacks the requisite brain folds to walk my dog) told me, "we'll give you a bridge, and when rates drop in two years, you'll be in great shape."  When I suggested the deals needed to work with today's debt, he snorted a little meth and hit me with this gem.  "If you aren't underwriting a reduction in rates in two years, you have no business buying anything right now."  Assuming he was distracted and misspoke, I asked him to clarify. He doubled down.  So, you want me to definitely overpay today because rates might go down in the future?  Yes.  His suggestion was that if I wasn't underwriting a future rate reduction, I didn't understand capital markets. Which felt rich coming from a guy who's fucking portfolio is upside down. "Hell, all the forward curves are showing as much. That's how you should be evaluating our positions. 

Ahhh, yes. The forward curve, a beacon of historical accuracy.

XTOD: Count me as one who thinks the economy will continue to surprise to the upside. Say 5% to 6% nominal (GDP) growth ... keeping upward pressure on long-term yields.  Watch my discussion with Meb Faber two weeks ago for a detailed explanation. https://t.co/YsuSf5UrCh

XTOD: I, for one, can sleep a little easier now that the man who is trying to scan every retina in the world has been reinstated at his increasingly powerful artificial intelligence venture, and the people with concerns about the threat to humanity from this technology have been ousted

XTOD: If I buy a bond, the seller "owns" the stuff I offer in payment; I own the bond, a different financial asset. If I make a "deposit" at a bank, the bank owns the stuff I pay over to it; and I now own a claim against the bank, a different financial asset.   This shouldn't be hard.

XTOD: Pretty damning essay from a Googler, departing after 18 years   “I don't know anyone at Google who could explain what Google's vision is. Morale is at an all-time low”  “The clock is ticking. The deterioration of Google's culture will become irreversible”

XTOD: “The quality of your business is directly proportional to the quality of the people you hire which is directly proportional to your character and your ability to cast a clear vision and how they fit in it (not how they help you accomplish yours).”

XTOD: One of the best hacks in the investment field is learning to be happy doing nothing.

XTOD: "Here's the essence of risk management: Risk no more than you can afford to lose, and also risk enough so that a win is meaningful. If there is no such amount, don't play."   ~ Ed Seykota

XTOD: “Every investment price, every market valuation, is just a number from today multiplied by a story about tomorrow.”  Truth.   More in the image.  @morganhousel  ‘s latest book Same as Ever, has great nuggets filled to the brim. Highly recommend to read.

XTOD: For all of the most important things, the timing always sucks..The universe doesn’t conspire against you, but it doesn’t go out of its way to line up all the pins either. Conditions are never perfect. “Someday” is a disease that will take your dreams to the grave with you. Pro and con lists are just as bad. If it’s important to you and you want to do it “eventually,” just do it and correct course along the way.

Daily Economic Update: November 20, 2023

"If you consider not working a part of the work, you’re more likely to not work. This sentiment is common among the world’s best—and most lasting—musicians, athletes, artists, intellectuals, executives, and entrepreneurs. They all tend to consider rest an essential part of their jobs. They think about rest not as something passive (i.e., nothing is happening, you’re wasting time) but rather as something active (i.e., your brain—or, if you’re an athlete, your body—is growing and getting better), and thus they’re far more liable to respect it. Seen in this light, rest isn’t separate from the work—rest is an integral part of the work. Going all in on something doesn’t mean you shouldn’t rest. If anything, exerting passionate effort is all the more reason to rest. Remember that stress + rest = growth. And be sure to build in regular periods of rest and recovery to whatever you do." - excerpt from The Passion Paradox by Brad Stulberg and Steve Magness

Heeding this advice, check back on Monday, December 4th and in the meantime have a Happy Thanksgiving.

Daily Economic Update: November 17, 2023

Yields are down again to start the day, with the 2Y down 3bps to 4.81% and the 10Y down 5bps to 4.40%. This morning's retail sales data in UK also shows signs of a slowing economy.

U.S. yields fell solidly yesterday as jobless claims data was interpreted as showing a cooling in labor markets and oil prices hitting their lowest level since mid-July.  The move lower in yields was despite Cleveland Fed's Mester seeming to stress the longer part of "higher for longer" and Fed's Cook also acknowledging upside to inflation risk despite deeming the risk more two-sided at present.  But seriously why listen to a Fed official when Walmart's CEO predicted the possibility of deflation in some food and goods categories in the months to come.

Atlanta Fed GDP now is currently at 2.2% for 4Q2023 (a 2 handle GDP ordinarily would would be a number most people would be happy with, but clearly down from last quarter).  We'll get update on both GDPNow and the NY Fed's GDP nowcast today.  On the day ahead it's light on data with just housing starts, but we'll get more fedspeak to close out the week.

XTOD: In consecutive days Walmart and Home Depot say the worst of the inflation is behind us. Walmart CEO is actually talking about deflation in the months ahead!

XTOD: I don’t think we need to look to look for a smoking gun in distorted seasonal to explain the drift up in continuing claims imho, labor demand is cooling, hiring narrowing, unemployment spells lengthening & UR drifting higher—risks to the outlook are two sided

XTOD: Soft landing is absolutely the consensus view

XTOD: Update on the R-Star Wars: divergence, big time.  https://pbs.twimg.com/media/F_ESXzKXwAAmUhw?format=jpg&name=900x900

XTOD: It’s Economic Forces Day. Today, I think about how to describe what central banks do and why a recent speech by a Fed president seems to open the door to fiscal dominance, albeit unintentionally. https://t.co/yaN5MsCyLO

XTOD: NEW STORY: How far have prices for the F1 Las Vegas Grand Prix cratered? I booked a room at the Flamingo with a central location along the track for $18 on Wednesday before the race's opening ceremony. My dispatch from the most miscalculated event ever.

XTOD: TikTok is removing videos on its platform that promote Osama bin Laden’s letter justifying the September 11 attacks against the US

XTOD: There's an idea out there that physical currency is essential to anchor the money supply (bank deposits) & that if currency disappears, a CBDC will be needed to take its place. The 

@RiksbankRes  a major proponent of this view. This idea seems wrong to me.  First, even if physical cash disappears, banks will still use reserves (essentially, wholesale CBDC) to clear and settle interbank payments. These reserves would continue to trade at par with deposits. Second, bank deposits are insured (up to $250K). There's no point in running a bank in this case. (And if cash was not available, it would be even more pointless to run.) Third, banks could continue to transform deposits into cash on demand and at par even if the demand for cash in the economy falls to zero. What is the problem here?

XTOD: five narratives

1. RWAs

2. DePIN

3. web3 social

4. AI

5. zk-everything

XTOD: “If it won’t matter in 5 YEARS don’t give it more than 5 MINUTES attention.”

Daily Economic Update: November 16, 2023

Yesterday, Retail Sales come in better than expected with upwardly revised numbers, showing the consumer is still hanging in there (fairly obvious for anyone who leaves their house or office) and PPI showed mild disinflation. Yields rose ~10bps, but equities shrugged it off and made their current winning streak 4 days. In other news Biden said Xi is a dictator and people on Tik-Tok now believe Osama Bin Laden is a Saint.

Yields are down ~4bps to to start the day with the 2Y at 4.89% and the 10Y slipping under 4.50%.  Import Prices, Jobless Claims, Industrial Production, NAHB housing index, Walmart earnings and a bunch of Fed officials at a Treasury conference.

XTOD: Looked up the 1976 prospectus for the First Index Investment Trust (now Vanguard 500) to give some  context to concentration fears.  

When FIIT launched the top 5 companies accounted for over 21% of S&P 500, and top 10 were 28.3%. Not far off today's 23.5% and 32% respectively?

XTOD: “After several quarters of stagnant productivity, we have gotten productivity growth. If you have productivity growth, you can have faster wage and GDP growth without generating inflation.”

XTOD: The  @WSJ  chart on the cumulative change in the cost of three key items for US households— gasoline, food and houses — during the current inflation episode.

This chart goes beyond capturing the pressure and pain that the average household has felt due to high inflation. It is also a reminder of the distributional effects, including the vulnerability of poor households.

XTOD: I met a derivative dealer who emailed me to hire my students. My former student in his firm is only junior who knows about market making. As Finance, Money/Banking profs, we should cover topics like Industrial organizations & dealers. They are important, they pay off, they are cool.

XTOD: The head of Germany's drug regulator BfArM is considering an export ban on Novo Nordisk's diabetes drug Ozempic, which is in high demand for its weight-loss benefits, to prevent a further worsening of a supply shortage

XTOD: Im not going to invest in the stock market until 

1. I have clarity on economic data

2. The government is exactly like I want it

3.  There's no conflicts in the World

4. The market feels "safe"

5. The news is calm

6. I can better understand why the market is moving like it is. oh I forgot to add

7.  The market is cheap.

XTOD: i assume this is a masterful troll in which case well done

XTOD: Same day again in USA. Value holding in / doing well. Junk / Cathie wood soaring. It’s almost like the prospect of even slightly lower interest rates sends fools into buying crap from messianic hucksters. Almost.

XTOD: Reece Duca: "My goal is basically to wake up in the morning, love what I'm doing, love who I'm working with, be proud of what I'm doing, [and] help other people to be successful."

XTOD: Mike Tyson flew into Poland to buy one hundred pigeons from a breeder in the small village of Piątnica.  Once billed as “the most dangerous man on the planet”, Tyson has long been known for his love of pigeons.  He found solace in caring for pigeons during a traumatic childhood.

Daily Economic Update: November 15, 2023

Softer than expected CPI readings fueled the "everything rally" yesterday.  Big move lower in yields with the 2Y down 20bps and 10Y down 18bps. Equities had their best day since the spring with S&P up nearly 2%.  Deficits and downgrades are shrugged off for another day and there is some optimism on Govt shutdown front and maybe optimism on the fentanyl front (optimism the flow will slow due to Biden-Xi deal, not optimism because investors are using fentanyl).  We also moved closer to kicking the can on the government shutdown out another couple of months into 2024 as the House passed a CR last evening.

This morning, yields are up 3-4bps with the 2Y at 4.85% and 10Y at 4.47%.  Across the pond, UK inflation came in below expectation at 4.6% annualized, well below the 6.7% it posted last month.  With respect to inflation, in an interview from Mexico, Jamie Dimon indicated he didn't believe we can declare victory against inflation quite yet.  

On the day ahead we'll see if Retail Sales data and PPI data can keep the everything rally alive.

XTOD: A great number.  Pay particular attention to the 6-month trend, which Powell had emphasized was stuck throughout 2022. At the beginning of this year, the 6-month core CPI reading was 5.3 percent; it's now 3.2 percent, even as the economy added 1.9 million jobs

XTOD: Remember all those charts that show how missing the best 10 trading days in the market will cause your performance to be cut in half?   Today is one of those days...

XTOD: 'Inflation is out of control. Have you been to the grocery store lately?!' he complained as he climbed into his $80k truck after taking a 2 week vacation to Europe

XTOD: New potential rules for FHLBs will likely kill the Fed funds market and hasten the move to SOFR. FHLBs will have less cash to invest, and be encouraged to invest in deposit accounts rather than fed funds. There will also be slight rewiring of funding mkts

XTOD: Lawmakers grill FDIC chief after sexual harassment report http://reut.rs/47rPEjb

XTOD: THREAD. The fear that AI will cause mass unemployment is rooted in a zero-sum mentality that fundamentally misunderstands how economies evolve. That fear is pervasive. It is misplaced.... Much of the concern about technological advances eliminating the need for human workers is rooted in a zero-sum mentality that fundamentally misunderstands how economies evolve.....Yes, new technologies will be able to perform some tasks relatively better & at lower cost than humans. Yes, this will lead businesses to use technology, not workers, for those tasks. But the process of creative destruction creates as well as destroys.....This is not just a theory. Despite rapid technological advances over the past five decades, it has not become more difficult for workers to find jobs. There has not been an upward trend in the unemployment rate....Looking ahead to the next several decades, my main concern is not too many workers, but too few. Falling fertility rates and rapid population aging will reduce the rate of workforce growth in the United States and across much of the developed world......A world in which AI eventually replaces all human workers would look a lot different from ours. While one of today’s fundamental economic problems is how to make the best use of scarce resources, that possible future is one of abundance... In this world, technology meets all our needs and inequality as we currently understand it no longer exists. Why accumulate wealth in a world of abundance?...On the other hand, such a world could also exacerbate inequality, particularly if a relatively small number of people own the machines that are generating all the income.

XTOD: Aiming for the best is a recipe for misery. The problem isn't high standards—it's always looking for better alternatives. There's no such thing as a best job or best apartment. There's only a good fit for you.  A key to happiness is accepting options that meet your standards.

Daily Economic Update: November 14, 2023

Another CPI day is here, see below for estimates. Very little movement in stocks and bonds yesterday, as the Moody's warning seemed to be a momentary non-event and NY Fed inflation expectations did little to move markets.  There seems to be some who believe that survey's of expected inflation out 5 years only being at 2.7% is a good thing, but that strikes me as being greater than 2%.

Ahead of CPI yields are little changed with the 2Y at 5.03% and the 10Y at 4.62%.  Oil has quietly climbed back towards $80 and the Yen, well it's the Yen, and it's weakened again to a 151 handle.  In the EU data on GDP was in line with expectations for weak growth, while the employment data came in above estimates. 

All eyes will be on today's CPI, but ahead of Xi's first U.S. visit in over 5 years you can "treat" yourself to Ray Dalio's latest thinking on US-China relations.  When Ray wasn't busy rigging his firms "believability" metrics he does find time for other thinking.

XTOD: SURVEY OF CONSUMER EXPECTATIONS, OCTOBER

Median inflation expectations declined slightly to 3.6% and 2.7% at the one- and five-year-ahead horizons, respectively, but were unchanged at 3.0% at the three-year-ahead horizon.

XTOD: Goldman CPI Preview:  "We expect a 0.32% increase in October core CPI (vs. 0.3% consensus), corresponding to a year-over-year rate of 4.13% (vs. 4.1% consensus). We expect a 0.09% increase in October headline CPI (vs. 0.1% consensus), which corresponds to a year-over-year rate of 3.29% (vs. 3.3% consensus). Our forecast is consistent with a 0.28% increase in core services excluding rent and owners’ equivalent rent in October."

XTOD: This week's big data report is the October CPI   Wall Street forecasters expect the core index rose 0.34% from September, raising the 12-month rate to 4.2% from 4.1%  They see the headline index up 0.1% from September, lowering the 12-month rate to 3.3% from 3.7%

XTOD: Our #CPI indicator updates tomorrow. Our #inflation nowcasting model (updated daily!) predicts year-over-year CPI #inflation of 3.28% in October. Check it out: http://clefed.org/3yCkTHV

XTOD: BofA Fund Manager Survey 

-76% say hiking cycle is over

-80% expect lower short rates

-Record 61% expect lower yields

-Just 6% see higher CPI in 2024

XTOD: Some 900 earthquakes hit southern Iceland on Monday, adding to the tens of thousands of tremors that rattled the region in recent weeks as the country prepares for what could become a significant volcanic eruption https://reut.rs/47aQj8q

XTOD: "..Economic anger expressed in the polls may be less about current economic conditions and more about the economy the US has built over the past 40 years: one of high and rising inequality, with greater economic fragility due to higher income volatility and a reduced safety net."

XTOD: 〽️anage your time, 〽️aster your routine, 〽️ake a positive impact!

Daily Economic Update: November 13, 2023

Yields little changed to start the day, with the 2Y at 5.05% (up from 4.87% to start last week) and the 10Y at 4.64% (up from 4.60% to start last week).  

Last week ended with Moody's putting U.S. sovereign debt ratings watch negative, calling attention to the U.S. fiscal situation, and, separately, a UofM consumer sentiment report that showed inflation expectations rising.  The week ahead features CPI data, retail sales and industrial production.   The possibility of a government shutdown also comes back into focus as does U.S. - China relations with Biden and Xi meeting in San Francisco on Wednesday.

On the week ahead:

Monday: NY Fed Oct Inflation Expectations Survey

Tuesday: CPI, Fedspeak including Williams and Jefferson

Wednesday: Retail Sales, PPI

Thursday: Jobless Claims, Industrial Production, Fedspeak

Friday: Housing Starts, Building Permits and Fedspeak

XTOD:  Governments like to force bondholders to share part of the burden when they ramp up spending. See e.g. recent work by Hall and Sargent

XTOD: *US 5-10 YR INFL. EXPECTATIONS RISE TO 3.2%, HIGHEST SINCE 2011 

Highest since the Arab Spring ... partially a reaction to a spike in food prices -----

But don't worry, Powell said this at last week's presser  -- Despite elevated inflation, longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.  -- The Umich 5- to 10-year inflation expectation is considered the most important inflation expectation measure. This is why last year and into earlier this year, this measure was considered a market-moving event, while no other measure of inflation expectation was viewed as this important.  Again, now that it is at a 12-year year high, Powell wants to "just close the #^%$ door" on this measure, per his comments last week.   Just say "well anchored" despite a 12-year high, and you can also conclude there is no inflation problem anymore.

XTOD: Spitz: "We're likely now in a brief Goldilocks zone, and no one expects it - more squeeze-up and blow-off in risk assets, which l've been writing and saying for a year...Then Papa Bear shows up, and it will be too late to react."

XTOD: While "the media are screaming about the agony, there’s a huge population...that is quietly rejoicing in the higher interest rate environment. And it’s time we talked about them a little more"  "the rising cash rate is a huge lever driving their income, spending and confidence."

XTOD: That money is viewed as a tool or symbol of sovereignty today isn’t due to either its technical attributes or to the fact that nations can’t survive and prosper unless their governments control it.  Instead, the view persists simply because government control of money has been so common for so long. In ancient and medieval times, before the days of thick government bond markets, govt’s asserted this control so they could finance their activities by resorting to debasement.  Money was then and truly a pilar of “sovereignty” in the literal sense: a tool by control of which absolute monarchs supported themselves. The same monarchs often monopolized soap manufacture, candle making, salt and mineral mining, and all sorts of other enterprises, for the same reason, declaring these monopolies to be essential sovereign prerogatives.  W/ the advent of democracy those “prerogatives” went the way of absolute monarchy itself.   But the notion of “monetary sovereignty” managed to persist. It’s high time that we rid discussions of monetary and banking policy of this embarrassing vestige of medieval thinking.

XTOD: Lorie Logan's speeches are always so damn good. One q she tries to answer: Why even bother with QT, risking reserves falling too low?  She says 1) a big balance sheet makes monetary policy comms harder, & 2) ample reserves tilt liquidity in favor of banks, at a cost for nonbanks:

XTOD: Still staying far away from 2's. 100'28 seems interesting.  Druck Bro's betting big on CPI and PPI next week which I think everyone on the planet (including me) expects to be ice cold.  H4L Baby!

XTOD: "I always tell the kids, 'You know what's great about going the extra mile? There's very little traffic.'" ―Jim Larranaga 

XTOD: The power of compounding: Combs was not good at anything in particular, he was not a specialist, but rather a generalist who combined the different life experiences he had into a powerful force for investing.  He has compounded his knowledge, range, and relationships.

Daily Economic Update: November 10, 2023

The win streak is over for stocks as bond yields rose double digit basis points yesterday as investors suddenly remember supply with a poor 30Y auction. Powell saying he won’t hesitate to raise rates again if needed (and cursing as he's annoyed at climate activist), along with Billionaire Ken Griffin talking up structurally higher inflation that could last decades didn't help markets.  Bond trading was also possibly impacted by a cyber attack against the U.S. arm of Chinese bank ICBC.

This morning yields are on the rise, with the 2Y back over 5%, trading at 5.03% and the 10Y is at 4.64%.  On the day ahead it's UofM Consumer Survey and Fedspeak.

XTOD: WATCH: Federal Reserve Chair Powell caught on film saying "Just close the F--ing door" to climate protesters who interrupted his speech  https://twitter.com/i/status/1722705164719570973

XTOD: "Mitigating risk really isn't about where we think the world is going to be," Spitznagel said. "Mitigating risk is about what that path is going to look like, and the opportunities that you have along that path, right? The dry powder that you create."  https://t.co/1KKxfMySRz

XTOD: The older you get the more you realize how precious life is. You have no desire for drama, conflict or stress. You just want good friends, a cozy home, food on the table, and people who make you happy.

XTOD: Starwood Property Trust Income Down 75%, Barry Sternlicht Says Fed Is 'Crushing' Industries Like CRE  https://pbs.twimg.com/card_img/1722687872195514368/XDJ3StXL?format=jpg&name=900x900

XTOD: These pauses will help get civilians to safer areas away from active fighting.  They are a step in the right direction.  You have my word: I will continue to advocate for civilian safety and focus on increasing aid to alleviate the suffering of the people of Gaza.

XTOD: When you find a great idea, buy enough of it to make a meaningful difference to your life. 

- The Joys of Compounding

XTOD: I remain astonished at how much people ignore solid yet unflashy insights into making money over the long run in markets. https://t.co/3v4qQNNVPT