Daily Economic Update: January 16, 2024

To end last week PPI came in below expectations and the 10Y ended the week below 4%.  The real story is the situation in the Red Sea and Middle East more broadly, but lets not also forget that China is still upset with Taiwan (especially with DPP winning a 3rd presidential term, continuing to rebuke China). 

More broadly we're still at the part of 2024 where you get investment outlooks and predictions.  This reminds me of one of the central points from Ben Graham's The Intelligent Investor where he states:

"..every competent analyst looks forward to the future rather than backward to the past, and he realizes that his work will prove good or bad depending on what will happen and not what has happened.  Nevertheless, the future itself can be approached in two different ways, which may be called the way of prediction (or projection) and the way of protection." 

"Those who emphasize prediction will endeavor to anticipate fairly accurately just what the company will accomplish in future years...without paying too much regard to the level at which it is selling"

"By contrast, those who emphasize protection are always especially concerned with the price of the issue at the time of study. Their main effort is to assure themselves a substantial margin of indicated present value above the market price - which margin could absorb unfavorable developments in the future."

In the commentary provided by Jason Zweig that accompanies Graham's advice, Zweig provides the following:

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

Probably worth think about that as there is heightened attention to categories like inflation, interest rates, war, etc. at present. 

In other news, last week, NY Fed's Liberty Street Economics ran an article on the evolution of the FX market over the last two decades.  For those who have been involved in FX over the past decade or longer many of their observations are likely to resonate.  

• FX trading volume has exploded, led by the increased breadth of market participants and increased FX swap trading - much of which is short-term and rolled
• More volume is being internalized by dealers who match off internal customer flow
• Increase of electronic trading
• Rising complexity may have worsened price discovery
• Regulators have focused on mitigating settlement (Herstatt risk) and rooting out bad behavior, encouraging the adoption of the FX Code
• On the look ahead, the NY Fed believes we'll continue to see faster settlement, with T+1 for many trades starting this year, continued debate over the role of principal trading firms (aka high-frequency traders), and the possible impact of CBDCs

XTOD: Never forget: Corporal Wojtek, a Syrian brown bear, fought on the side of the Allies in WWII

XTOD: Columbia Business School professor Stijn Van Nieuwerburgh calls office real estate a train wreck in slow motion. He forecasts a 40% reduction in the value of New York offices. https://cbsn.ws/48O0WhI

XTOD: One narrative I frequently hear is that AI will remove some of the drudgery from people's jobs, which seems true enough. But one person's drudgery is another person's "stretch project" if they're in a job that's even more boring. I don't think we're talking about that enough.

XTOD: After repeated US strikes in the region, Iran’s ballistic missile attacks in Iraq/Syria tonight — partially very close to U.S. interests — are being seen as a message that Tehran is willing to wade into the regional conflict itself, not just via its proxies/allies

XTOD: I have presented the #TRADFI perspective on #Bitcoin Like this one:

".... making thousand of percent for something with no value in kind, no use as money by central banks and very little use as money for transaction ?

..... is just sheer speculation. At least they should admit it, it might benefit their trading.

We are all in for speculation to some degree, knowing it makes the situation better."

@GraphFinancials

XTOD: Bitcoin doesn’t “fix this”, any more than wooden nickels did during Weimar or briefly again in 1929.  They are a speculative bet on USD debasement and US insolvency that likely/may never come - but MOST don’t understand how to measure so they blindly follow the gospel that is bitcoin. 

Don’t get me wrong, there are great advocates, who also serve as preachers, and are not charlatans, whom I follow closely for their insights: @LynAldenContact  @CaitlinLong_

 And I will gladly agree that for an elite few they are a store of value and for a nascent few, they are an actual utility. And as such I hope #BTC continues. Just maintain some perspective…  As Lyn reminds: bitcoin trades in the billions each day. Bravo.   As I will remind: US dollars trade $7 trillion per day. 

It’s hard to unseat the incumbent without dollar collapse, and US insolvency. 

So that begs the question: As you HODL away your bitcoin, are you secretly wishing or expecting this? 

More to my point on bitcoin/crypto, as proxies for wooden nickels *should* the time arise to need them…And this is the MONEY QUOTE: “as soon as monetary order was reestablished they went to ZERO.”  @GraphFinancials    Bears reminding is all I’m saying.  KNOW WHAT YOU OWN AND WHY.

XTOD: "The returns don't come from the stock market they come from the corporation" is a great way to try and understand why Vanguard isn't into bitcoin ETFs but yet has no problem investing in cos that are involved w btc. Bogle just saw stocks and commodities as two VERY dif things. This is how he put it in one of my intvs w him which I touched on in my book....And to be fair Bogle bashed stock trading more than commodities btw, but tried to separate Investment Returns from Speculative Returns as a way to get ppl to understand why you should inv/not trade in stocks as well as keep your cool when things get really good or really bad.

XTOD: Great bosses know the secret: It's not just about what you do, it's about who's doing it. 

Shift from 'What's important?' to 'Who's important?'. 

Listen, support, grow together. Happy team, better results. A simple change in words, a transformative change in leadership. 

Daily Economic Update: January 15, 2023 (MLK Day)

Sharing a story told by author, journalist, podcaster, Cal Fussman regarding Dr. King's famous "I Have a Dream Speech":

Cal: [00:53:30] I have a story that really goes to show how there are these connections that are all around us. You don't even know that they're there if you're just seeing things from a distance. But I'll tell the story about the I Have a Dream speech. This is something that very few people know. I know it because I know the guy who actually has the paper that the speech was written on. And the words I have a dream are not on that paper. 

And so what happened was Dr. King was speaking at churches all over. And as he would speak, he would talk about this dream. It was part of his talks. And there was a gospel singer named Mahalia Jackson, who often went to the same churches and saying, while he was speaking, she knew, because of this continual connection, his whole repertoire. 

When this event was built in Washington, it was not really created for a church crowd. It was created for a huge American audience. And so Dr. King actually had somebody who he worked with write the first six paragraphs or so of the talk so that it was aimed at everybody. And then Dr. King wrote through the rest of the speech. And he got up to give the talk, and he's giving it, and it's going over okay. 

But if you're Mahalia Jackson, the gospel singer, who knows what's possible, you're looking out at the crowd and thinking, uh-oh, this is not going the way she had hoped. The crowd is responding nice and warmly and it's going well, but at about three quarters away through, and there's a ring of people behind Dr. King as he's giving the speech, he pauses for a second and Mahalia Jackson shouts out, tell them about the dream, Martin. Tell them about the dream. As soon as she says it, he pushes the speech aside and you hear I Have a Dream. 

Now you talk about connection, you talk about leadership. The whole movement was vitalized with those few words that would not have come out that day if it hadn't been somebody who was seated there, carefully listening to what he was saying, carefully watching the crowd. And remember, she's a gospel singer. She is a performer in a way. She knows what works. And she just stepped up and connected with him so that he could connect with everybody.

And it's just an example these connections are happening for us all the time if you pay attention to them. And obviously, Dr. King was because as soon as she said it, he understood exactly what she wanted to get across. And as soon as he went into I Have a Dream, everything changed. And not long after that, President Kennedy identified it as the I Have a Dream speech.

And the guy who got the speech, it is interesting. He was a student at Villanova visiting a friend's house. You just talk about connections here. His friend's father said, what are you guys doing over the next few days? And they said, oh, I don't know. And he said, why don't you go up to Washington and listen to Dr. King's speech?

So they went up. And this guy's name was George Raveling, and he was a basketball player at Villanova. So he's a big guy. One of the organizers walked over to him and said, you're pretty big. We need some extra security. Do you mind coming on stage when Dr. King is speaking and serving his security? And he said, sure. And so now he's on stage. King gives his speech. Afterward, he's been congratulated. He walks over to shake his hand and he said, do you mind if I have that speech? And Dr. King says sure and handed it to him. 

Now all this is just connection after connection after connection. But you have to recognize it the way Mahalia Jackson did or you have to ask for it the way George Raveling did. And now he is telling people like me the story.

Daily Economic Update: January 12, 2024

Yesterday bond yields rose then fell and stocks were lower but closed nearly flat following a CPI report which showed inflation hotter than forecast.  The 10Y ended  the day back under 4%.  Core CPI was 0.31% MOM vs. 0.3 est. and 3.93% YOY vs. 3.8% est.  Headline CPI was 0.3% MOM vs. 0.2% est. and 3.3% YOY vs. 3.2% est.  While shelter cost looked better than expected, healthcare cost and insurance cost were hot and car prices were strong.  Of course most of the commentary is how the hot components are backwards looking (and remember rent is always falling) and largely behind us, we'll see.  In labor news you still can't get fired as jobless claims were super low again.

On the day ahead PPI and bank earnings will be the highlights.

I wasn't expecting to be writing about MMT on a Friday, I kind of thought it was dead, but MMT made it into the FT yesterday with Stephanie Kelton's FT Interview .  Here are some of the takeaways:

• Kelton considers rising bond yields to be a subsidy for “people who already have money”.
• Kelton thinks the US should stop selling Treasuries to fund the federal deficit and governments everywhere ought to invest in public jobs programs so that workers who lose their jobs never become fully unemployed
• She thought inflationary pressures would abate on their own and believes MMT is being proven correct
• She thinks monetary policy gets too much credit and is actually an inflation accelerator
• A core component of MMT is that deficits don't really matter (technically MMT does believe they matter - but believe the size of deficits needs to be much larger than anyone generally thinks)
• Government bonds are unnecessary and only a tool to allow for an interest rate target (I think Alexander Hamilton may disagree here)
• Government deficits need to be at least as big as the US current account deficit, in order for the private sector as a whole to save.
• Kelton would: (1) stop managing interest rates and move to a permanent zero interest rate policy with no government debt (I wonder if she's read The Price of Time ?)  (2) Fiscal policy would be the sole demand management tool for the economy (3) Stop worrying about deficit neutral, but do think about inflation neutral (4) Offer a government job guarantee (BTW, the Soviets provide anyone a job, and that's pretty scary) (5) Take more action on Climate

I don't know what you think about MMT, but I've read Kelton's book, The Deficit Myth, I find the theory somewhat interesting, I think partly because I believe not enough attention is paid to fiscal policy.  That said, I find John Cochrane's Fiscal Theory of the Price Level much more compelling (it reaches a very different conclusion about the importance of govt.debt) and grounded in traditional economic analysis, supported by equations that can be used to test the theory, narrative histories, etc.

For the uninitiated in Kelton's book, my summary is as follows (largely captured in the article - which begs the question why did the book need to be so long?):

• In almost all instances deficits are good for the economy
• Taxes don't matter (other than to create demand for currency and to punish certain behaviors), the government can print it's own currency to finance all expenditures
• Inflation is governed by real resources and often economies are not maximizing those (i.e. not everyone is employed) so having the government run deficits when the economy's real resources are not maximized won't lead to inflation
• What we've been taught, that the government has to Tax and Borrow first to finance spending is wrong and backwards - the government doesn't need our money, we need it's money
• Spending has to come first or else no one would have any money to pay in taxes
• Taxes are used to get people to do work and to create demand for currency
• Borrowing is a choice of offering people a different form of money, it's not necessary
• Kelton tells of an illustrative example provided Warren B. Mosler (I do enjoy listening to Mosler when he's interviewed, he's an interesting guy) to illustrate the MMT worldview:
• Mosler wanted his kids to help keep the house and yard clean, etc.
• To compensate them for their time, he offered to pay his kids.
• They got 3 of his business cards if they made their bed, 5 for doing dishes, 25 for yard work
• At first the kids didn't do any chores and Mosler wondered why
• Then he had an epiphany, the kids didn't need his business cards.
• So he told the kids they didn't have to do any work, but at the end of each month they each needed to pay him 30 of his business cards, failure to do so would result in loss of privileges.
• Mosler had imposed a "tax" which now made his business cards worth something
• MMT contest the concept of a natural rate of unemployment or the need for some unemployment to keep inflation in check
• Bond sales just allow holders of green dollars to exchange them for yellow dollars
• The government doesn't have to accept the "market" rate, it can choose whatever rate it wants
• All government deficits are just nongovernmental surpluses - Uncle Sam's red ink is our black ink
• MMT's stance on trade is a little confusing, but I think their belief is to produce more at home
• Provide a job guarantee where those jobs could work on addressing climate

When I read the book, I couldn't help but think it all as a read on the need for a very big, centrally planned government agenda, supported by a regime of deliberate financial repression, substituting government for all private sector solutions.  It seemed to fail to address the possibility that at some limiting point people (both domestic and foreign) would no longer want to hold the government's currency (including loss of the dollar's "exorbitant privilege") because it's effectively worthless and at that point, yes, the government could require it for taxes, but effectively those taxes would just be a form of punishment that leads to no incentives for productivity and at some point the politicians who created this situation would all be voted out.  History shows people have always found substitutes for trading without making use of the fiat currency when needed (see Soviets or South America).  In other words it doesn't seem to be sustainable, at some point credibility would be lacking and the relationship between the government and those it governed would fundamentally change.  It's true if you can print your own currency you can't technically default, but fails to mention that there are consequences, like hyper-inflation, that are the same as default. It further fails to recognize that savings are a form of deferred consumption and that capitalist economies are proven at efficiently crowdsourcing dynamic solutions to problems of production that are fueled by market incentives. If you want the government to provide all jobs, what jobs and at what wage and what about skills mismatches, etc.

If you're interested in a full review of the book by someone more credible then I am when it comes to economics, John Cochrane's is worth a read https://johnhcochrane.blogspot.com/2020/07/magical-monetary-theory-full-review.html

XTOD: Bitcoin -- a project designed to allow the masses to bypass the use of conventional intermediaries -- now brought to you by none other than the intermediaries it was designed to replace.

XTOD: CPI bottomed last June. I don't know why this is so difficult for people to understand.  What's interesting to me is that today's inflation report is below the fold in the WSJ. Gotta look to find it. It's the only thing that matters to any professional investor today, and downplaying it like this is significant from a narrative-shaping perspective. On the left is today's WSJ inflation-splainer graphic, where they want to emphasize core CPI. On the right is last July's WSJ inflation-splainer graphic, where they wanted to deemphasize core CPI.  See the difference?
Also, look at the phrasing here. This isn't inflation picking up again. It's the downturn "stabilizing". It's an all-of-2023 thing instead of a first-6-months-of-2023 thing.

The truth is that disinflation stopped cold turkey six months ago.

XTOD: There is much talk about "sticky" CPI Owner's Equivalent Rest (OER) for December, printing 0.5% and pushing headline CPI to a beat of 0.3% for December. (3.4% YoY).  Many argue that this is "wrong" and that OER should be coming down.  They need to look at it correctly. 

Here is a chart of the cumulative changes of Zillow's Rental Index (black), OER in orange, and Rents of Primary Residence in red.  Zillow is the "real world." From 2013 (its creation) to 2021, it tracks closely with OER and RPR's cumulative changes.  Then, starting in early 2021, Zillow raced ahead of OER and RPR. In other words, OER and RPR are "undercounting" CUMULATIVE housing inflation.  OER and RPR should stay "sticky" to close the gap with the real world (Zillow).  We are in a "sticky" inflation world of 3% - 4% YoY inflation (December was YoY 3.4%).

XTOD: This is good. Just got off with my workout contact at a bank w/ 15b+ book. They claim ZERO problems.   I push back. How can you really have no problems? Didn't get a clear answer.  

Then I started talking about CREFC and how no one really talked about problems. 

He goes to me. "Man, if anyone says they don't have problems, they're full of sh!t". 

I laughed and said. YOU JUST TOLD ME YOU HAVE NO PROBLEMS

XTOD: Save more money than you think you need. Life is unexpected and your future tastes will likely be more expensive. Not worrying about money tomorrow is worth more than whatever you could buy today.

XTOD: Nick Saban: *retired at age 72*  Pete Carroll: *retired at age 72* 

Congressmen at age 97:https://twitter.com/i/status/1745310835583443258

XTOD: Nick Saban is 72 and still on top of his game. He's retiring.  Pete Carroll is 72 and just got pushed out of his job after consecutive winning seasons.  Bill Belichick is 71. He's only a few years removed from the playoffs. He's also being pushed out of his job. 

Three of the greatest football coaches of all time. But still, football coaches. 

And yet Republican and Democrat primary voters seem hell bent on making us choose between 78 year old Donald Trump and 81 year old Joe Biden to lead the entire country, neither of whom is as sharp mentally as any of the coaches I just mentioned. You people should be ashamed of yourselves.

Daily Economic Update: January 11, 2024

CPI day is here.  The consensus is for 0.3% MOM and 3.8% YOY increase in core and slightly lower prints in the headline numbers at 0.2% and 3.2% respectively.  I have no idea what the impact of Zuckerberg feeding his Hawaiian raised cows macadamia nuts and artisanal beers will have on current or future inflation.  

Yesterday, the spot BTC ETF's actually got approved (for real this time), the 10Y retook 4%, stocks rose and Matt Levine weighed in on some of his current favorite topics, Securities Fraud & Insider Trading, both while discussing Bitcoin ETF approvals and the Reddit thread: "Is it insider trading if I bought Boeing puts while I am inside the wrecked airplane? …"...classic stuff.

Yesterday, Japanese stocks hit a 34 year highs.  In his commentary to the 2003 edition of Ben Graham's The Intelligent Investor, journalist Jason Zweig used Japan as an example of why owning foreign stocks is advisable.  Zweig states: "It's the end of 1989, and you're Japanese. Here are the facts: 

• Over the past 10 years, your stock market has gained an annual average of 21.2%, well above the 17.5% annual gains in the United States
• Japanese companies are buying up everything in the United states from Pebble Beach golf course to Rockefeller Center; meanwhile American firms like Drexel Burnham Lambert, Financial Corp. of America, and Texaco are going bankrupt.
• The U.S. high-tech industry is dying. Japan's is booming.

    In 1989, in the land of the rising sun, you can only conclude that investing outside of Japan is the dumbest idea since sushi vending machines.  Naturally you put all your money in Japanese stocks. 

    The result? Over the next decade, you lose roughly two-thirds of your money.

    The lesson?  It's not that you should never invest in foreign markets like Japan; it's that the Japanese should never have kept all their money at home.  And neither should you. If you live in the United states, work in the United States, and get paid in U.S. Dollars, you are already making a multilayered bet on the U.S. economy.  To be prudent you should put some of your investment portfolio elsewhere - simply because no one, anywhere, can ever know what the future will bring at home or abroad."

One difference that I see between the 2003 story and today is that there are many more multinational companies listed in both the U.S. and foreign markets that generate at least a decently high proportion of their earnings from non-U.S. markets, which should provide some international diversification inherently.  Nonetheless it's a good reminder that we're always facing the unknowable future.

With the spot BTC ETF approved and the continued inundation of investment outlooks, perhaps it's a good time to revisit the distinction between investing and speculating.  Doing so makes you realize how difficult it is to separate investing from speculation.  Everyone thinks that the distinction between those two terms is so easy (go ahead take out a piece of paper and try to clearly define each term), partly, I believe, because most people don't want to believe that they're speculating.  The classic definition of investing comes from Benjamin Graham where he describes investing as "an operation, which upon thorough analysis, promises safety of principal and adequate return."  Graham makes clear that investing involves a true analysis of the company whose securities are being purchased and that in making such analysis you ensure you are confident that serious losses and would be willing to hold the stock even if you had no way of knowing its daily share price.

Another definition of investing that I believe deserves serious consideration comes from Martin Fridson whereby he states: "Having rejected the customary bases for distinguishing between investment and speculation, I realized that the distinction that actually mattered was between holding the market portfolio and holding any other mix of securities and weightings. I dubbed the latter behavior “subdiversification.” "One might subdiversify for a specialized purpose, such as matching assets to a particular set of liabilities. That strategy aims at eliminating uncertainty and cannot reasonably be regarded as speculation. If, however, an individual overweights certain securities and underweights others with an eye toward outperforming the market portfolio, that individual is speculating."

Back in 2013, CFA's Future of Finance Forum had a panel on the topic of investing vs. speculating. Robert Hagstrom, CFA offered up his assessment as “An investor thinks foremost of the asset first then the price of the asset afterwards...“A speculator thinks foremost of price first and then the asset later or not at all.” And perhaps he summed up the topic best, lamenting: "“How is it an accountant can tell me the difference between debits and credits; a lawyer can define the differences between a felony and a misdemeanor; and a doctor can tell me what is the difference between a bacterial infection and a viral infection but we in the financial industry cannot answer . . . what is the difference between investing and speculation[?]”

XTOD: *FED'S WILLIAMS: RATES RESTRICTIVE ENOUGH TO REACH 2% PRICE GOAL

*WILLIAMS:MUST BE CONFIDENT INFLATION HEADED TO 2% BEFORE EASING

*WILLIAMS: DON'T SEEM CLOSE TO POINT OF SLOWING ASSET RUNOFF

XTOD: Todd Combs on reading what others don't: I think most people would probably be surprised how few people actually read annual reports and 10ks and so forth...let alone trade magazines and so forth. Like, I still read trade magazines and they're a phenomenal source of information...get information just as a journalist would.

XTOD: What we have learned from all the recent regional (NY, Philly, Dallas, etc…) Fed Surveys (as the name indicates, these come from the beast’s mouth) is that wage indicators have been showing an inflection higher for a few months now. 

That means AHE are likely to reflect this in q1 and inflect higher.  

Which makes you really wonder, how in the face of this adverse odds did the Fed and JPOW chose to perform their dovish pivot, knowing damn well that they ran a high risk of yet another policy mistake. 

You could argue, one more, one less, what’s the big deal. And no one can blame you for it.

XTOD:  Did you know America is now producing more oil and gas than any other nation on Earth?

XTOD (epic Airbnb thread - something like 30 million + views):  For a fun game, let's do a tour of the unit @Airbnb  refuses to give me a refund for! I'm sure they'd hate if you liked it shared this, which seems to be the only way to get their attention.  Let's start with the entryway. Not off to a great start re: cleanliness. https://x.com/SureAsMel/status/1744876406020915672?s=20

Daily Economic Update: January 10, 2024

Howard Mark's writing a memo that uses Edward Chancellor's excellent book, The Price of Time, as the source of Mark's inspiration, sign me up!  I've written about Chancellor's book in this LinkedIn article and I've mentioned Marks a few times on this blog (you can search) and have always enjoyed his thinking on risk and leverage, including this quote: 

"Leverage doesn’t add value or make an investment better. Like everything else in

the investment world other than pure skill, leverage is a two-edged sword – in fact,

probably the ultimate two-edged sword. It helps when you’re right and hurts when

you’re wrong. "

As for Mark's latest memo "Easy Money" , I would summarize and comment on Mark's thoughts as follows:

• Mark's notes (again) that the extended period of low interest rates had a major impact on business and the associated appreciation of assets.
• Mark's list the stimulative effects of lower interest rates, including pushing investors out into riskier investments in a classic 'search for yield'.
• He goes onto discuss some of the problems that occur with abnormally low interest rates, something Chancellor provides examples of in his book and something I equally mentioned in my LinkedIn article (above).  In my article I wrote - "As Chancellor states: “Without interest, future income streams are impossible to value. Capital can’t be properly allocated and too little is saved. If this situation continues for long, then the state investment would have to replace private investment and central banks would have to replace commercial banks as the major providers of credit.” "
• Mark's cites a number of "malinvestment" examples from the recent cycle of low yields including Argentinian 100 year bonds, financing of LBO's, Theranos & FTX scams, and the proliferation of 'zombie companies'.
• As always Mark's never misses an opportunity to discuss leverage, writing: "In much the same way, leverage can make otherwise unattractive investments investible....it must be noted that cheap leverage doesn’t make investments better; it merely amplifies the results. In times of low interest rates, absolute prospective returns are low and leverage is cheap.  Why not use a lot of leverage to increase expected returns?  In the late 2010s, money flowed to both private equity, given its emphasis on leveraged returns from company ownership, and private credit, which primarily provides debt capital to private equity deals.  These trends complemented each other and led to a significant upswing in levered investing."  Further providing, "Heavy leverage can render companies fragile and make it hard for them to get through the proverbial low spots in the stream"
• Mark's also talks about the perils of borrowing short to invest long, reminiscent of the March 2023 bank failures, and mentions some of the challenges of a psychological belief in lower for longer rates.
• After discussing the impact of the low interest rate cycle, Mark's moves onto to discussing the power of understanding financial history and specifically that of credit cycles.  Interestingly Mark's uses the same John Mills quote in his article that I used in mine....should I go all Bill Ackman on him?
• Mark's notes how similar the post-GFC years characterized by 'easy money' have been to other periods of financial history that did not end well for investors, yet, the lessons of the past fall on deaf ears.
• While avoiding making any predictions, Mark's does not believe we're going back to unusually low interest rates and characterizes current interest rates as "normal", believing that only a true economic emergency should lead to rates lower than 2-4% range over the coming years.
• Mark's believe the market is currently pricing in "goldilocks thinking" as it relates to either what will be the likely strength of weaknesses in the economy which will reveal themselves in the future and that such thinking will lead to disappointment.

Yesterday, stocks were little changed and yields remain largely rangebound with the 10Y Treasury seemingly caught in a trading range from around 4-4.05%. Spot BTC ETF's were "approved" until it turned out the SEC's Twitter account was "compromised".  Got to love how much crypto can and does get manipulated.

Treasury Supply (10Y auction today), earnings season and CPI on the horizon. 

XTOD: What's the lesson I want you to understand?  Greed and status can make you successful to the point of self-destruction. Leverage + taking instant IRS credits (filing taxes w/ accelerated depreciation) to live large, acquire properties, be that person on X, IG or TikTok talking about financial freedom through owning real estate is fun, until it's not.

XTOD: So, what is the purpose behind those who tell tales of cheap Canadian drugs? They seek to imply that our system is broken, and delivers only expensive drugs, when the socialist Canadian system delivers the goods for its people. Thus, they implicitly argue that we need to have socialism here. It's not complicated.  So, repeat after me. We could go with the Canadian system and have super cheap drugs, if only we can find a much bigger, more medically advanced, freer country right next to us to make miracle drugs for themselves, and then we insist that we pay them only a bit above their variable cost for our share, and then they in turn agree to let us be their parasite. Mexico, would you mind helping us out?”

XTOD: Hoarding talent backfires. Managers who fail to promote people wind up with weaker teams. 

Study of 96k job applications: Bosses who advanced their employees attracted more & better internal candidates for open positions.  People gravitate to leaders who invest in their growth

XTOD: Makes me happy to see one of my old blog posts still being read, liked, and shared.

https://worthwhile.typepad.com/worthwhile_canadian_initi/2010/12/milton-friedmans-thermostat.html

XTOD: An analysis finds that nominal wage growth peaked in 2022. In 2023, wages were still increasing but at a slower rate, and growth has yet to fall to pre-pandemic levels https://ow.ly/EF4E50Qpc0s

Daily Economic Update: January 9, 2024

An everything rally to start the week as stocks generally rose (AI > airplane stocks on the day) while yields fell 3-4bps.  Elon's drug use, an oil price cut from the Saudi's, and the NY Fed Survey of Consumer Expectations were the headlines.  Of those it's likely the oil and inflation expectations that mattered.  The NY Fed survey showed inflation expectations continue to decline with the 1-year ahead expectations hitting the lowest level since January 2021, further fueling rate cut speculation.

Fed Governor Bowman sounded hawkish citing upside inflation risk stemming from geopolitical risk to food and energy, the easing of financial conditions and a continued strength in labor markets.

XTOD: The FTPL view of the recent disinflation: "The model's account of the end of inflation is perhaps even more important than its account of the rise. A one-time fiscal shock leads to a one-time rise in the price level, to wipe out just enough real value of nominal debt. Inflation goes away on its own once that is achieved." (1/2)  @JohnHCochrane   https://grumpy-economist.com/p/fiscal-narratives-for-us-inflation

John also reminds us that the "US government borrowed about $5 trillion dollars [and] monetized about $3 trillion of that issue." This helicopter drop restored the dollar size of the economy to its pre-pandemic trend path, but also caused it to rise about $2 𝒕𝒓𝒊𝒍𝒍𝒊𝒐𝒏 𝒂𝒃𝒐𝒗𝒆 𝒕𝒉𝒂𝒕 𝒕𝒓𝒆𝒏𝒅 (similar story for PCE). That above-trend surge in aggregate demand was a policy choice. One could easily imagine a world with rapid catchup growth to trend with far less overshoot of it. (2/2)

XTOD: If BofA is correct and QT is over by July what are you doing buying bonds?  Just go all in on Meme stonks, crypto and Gold.  Why bother with anything else.  NOT ADVICE

XTOD: Kind reminder that Bank Reserves + RRP are still running at circa 15% of US GDP.   Last time Fed broke markets in 19, they were closer 8%.   Keep this in mind when you hear all the « Fed should do this and that or else something will break »  System is still operating with a large reserves buffer in US

XTOD: One of the hot new trends in private credit is evergreen funds, that let investors put in and withdraw their capital more easily

XTOD: Nike says goodbye to Tiger Woods after a 27-year partnership.

Daily Economic Update: January 8, 2024

 2024 has been off to an interesting start with some interesting headlines both economic and non-economic.  On the economic front, we had a Friday Job report that seemed better than expected, though everyone is spent the remainder of the day looking for reasons to dismiss any strength in the report.  Then we had ISM Services report showing the services employment index hitting a low not seen since the early part of Covid.  Per the ISM press release: "Comments from respondents include: “Remote work is preferred for most, making it difficult to recruit skilled employees, and our skilled employees are leaving for hybrid options” and “Layoffs have increased in the professional services and staffing industries over the past several months as companies try to reduce cost amid the climate of economic uncertainty and decreasing customer demand."  Real estate was listed as one of the industries where employment was challenged, go figure.  The rest of the economic debate to start the year continues to be focused on whether or not you can have a soft landing and whether or not the Fed has any role in creating a soft landing or whether it was all supply shocks.  I guess I'll add the debate over the end of QT to the list, especially given Lorie Logan's Saturday speech where she discussed monitoring the level of the Fed's ON RRP to determine when to slow or stop the pace of QT.

On the non-economic front, Boeing can't seem to get their problems behind them following the weekend's fuselage incident (aka holy crap a door of the plane got ripped off mid-flight and lucky no one got sucked out the of plane).  This was the second incredible airplane story of 2024, following the collision in Tokyo where somehow most everyone escaped alive.  

If crazy airplane stories aren't your thing you can read something like 10,000 to a million words from Bill Ackman as he fights 'Higher Education' and tries to figure out what actually constitutes plagiarism, what proper citation looks like, and whether and when AI will end all tenured professors careers by uncovering plagiarism. 

While there are plenty of political stories, let's not forget two wars going on, one of which appears to be causing major shipping issues.  On the positive (I guess?) it does look like a government shutdown might be avoided as there appears to be some agreement on spending that could lead to passage of appropriations bills before the January 19th deadline.

On the week ahead we'll get inflation data as the highlight. CPI on Thursday and PPI on Friday.

XTOD: It is 1989, I am not born, Matt Darling is explaining how the median is not the average

It is 2005, I'm 3 years old, Matt Darling is explaining how the median is not the average

It is 2024, I'm 21 years old, Matt Darling is explaining how the median is not the average

XTOD: I want Matt to run for president one day so he can explain to the American public what a median is on the national stage

XTOD: people remember in the back of their brain that mean, median, and mode are 3 different things, one is "vulnerable to outliers" and another isn't, then see a statistic they dislike and go "oh yeah median, that's vulnerable to outliers", and misremember which one isn't vulnerable

XTOD: gonna make a bold prediction and say next year, economic statistics will confuse more people than ever before

XTOD: TUNA SELLS FOR RECORD-BREAKING $789K IN TOKYO, BUYER SAYS, 'I'D BEEN FEELING THAT THE ECONOMY WAS GETTING BETTER (MSN)  In Tokyo’s Toyosu fish market, a bluefin tuna has been auctioned for an astonishing 114.24 million yen ($789,000), making it the fourth-highest price in recorded history.  Full article:

https://msn.com/en-us/money/companies/tuna-sells-for-record-breaking-789k-in-tokyo-buyer-says-i-d-been-feeling-that-the-economy-was-getting-better/ar-AA1muvxX?ocid=msedgntp&pc=HCTS&cvid=e89bbb5821df46ac98cc929d5613dab4&ei=65

XTOD: "The California State Teachers’ Retirement System, the country’s second-largest pension fund, may borrow more than $30 billion to help it maintain liquidity without having to sell assets at fire-sale prices..."

XTOD: I love that the nyt deep dive on how the Harvard board turned on Gay is all about conversations taking place entirely at vacation spots for the superrich.  ‘And the heiress to the tootsie roll fortune took an urgent call from her lodge in Aspen…’....The thing to understand about all of these lazy entitled pieces of shit is that this is how virtually every big public corporation in America is governed.

XTOD: Here's where I disagree with Krugman. If the inflation of 2021-22 had been *only* due to a supply shock (as in this picture), the economy wouldn't have boomed in 2021-22; we'd have had stagflation.   What seems more likely to me is a supply shock AND a demand shock.

XTOD: There is no sin, there is no love, there is no God—there is no teleology whatsoever in Sam Altman’s worldview. The most fight is between “technological-driven growth” and decline. That’s it. That’s the whole future. 

Helping people prepare for all the wrong battles.

Daily Economic Update: January 5, 2024

The first Job's Day in 'merica for 2024.  Consensus is calling for headline payroll increase of +175K and unemployment rate ticking up to 3.8%.

Yesterday: ADP better than expected, jobless claims lower than expected, EU inflation hotter than expected.  The 10Y yield trades back to 4% yield. We'll see what today's Job's report shows.

XTOD: When I grow up I want to be an uncorrelated asset.

XTOD: Pre-Payrolls Options Wager Targets 4.15% 10-Year By Friday Close: BBG

XTOD: I don't understand how anyone can justify rate cuts with initial claims close to 50 year lows

XTOD: This seems like a phenomenon crying out for explanation.  It's been 20 years since a majority of Americans have said they’re satisfied with the way things are going—a drought with no precedent in modern polling.  And it's worse now then ever.  via  @bpmehlman's new annual deck