Daily Economic Update: February 12, 2024

It was between this or the many memes of Kelce yelling at Reid

Why the day after the Super Bowl is not a national holiday remains a mystery. 

On Friday the S&P closed above 5K for the first time ever.  Yields continued to move higher over the last week. The 2Y is close to reclaiming 4.50% as the timing of rate cuts continues to get pushed back, while the 10Y is 4.18%.

The week ahead features CPI on Tuesday and Retail Sales on Thursday as highlights.

Today: fedspeak

Tue: CPI

Wed: Valentine's Day 

Thur: Retail Sales, jobless claims, 

Fri: Housing starts and building permits, PPI and UofM survey

XTOD: Heard from our NYC office that they went out to get bagels as a team today, some new analyst ordered a scooped bagel and the rest of the deal team beat the shit out of him and now we have an incoming lawsuit

XTOD: We’re all living through a great enshittening, in which the services that matter to us, that we rely on, are turning into giant piles of s**t. It’s frustrating. It’s demoralising. It’s even terrifying https://on.ft.com/48bnYyv

XTOD: "Margin of safety—you can also call it room for error or redundancy—is the only effective way to safely navigate a world that is governed by odds, not certainties. And almost everything related to money exists in that kind of world."  — Morgan Housel

XTOD: Positioning over predicting.

XTOD: "Then I get that feeling...which is, 'I don't care who reads this, I don't care what happens to this, this is mine, no one's taking it away from me, I am doing this at the expense of all other things.'"  (

@SomanChainani   on the  @tferriss podcast)  Beautiful. This is the definition of authenticity.

XTOD: Macro is Hard   "It’s fine to have views on the economy. It’s fine to listen to other people’s views on the economy. It’s rarely helpful to act on those views when it comes to your portfolio."  https://buff.ly/3Uz4XTm 

XTOD: Great summary by  @I_Am_NickBloom  “So the big-name CEOs and Politicians claiming WFH is damaging growth have got it 100% wrong. WFH is likely powering the current economic boom by increasing labor supply and productivity, while also improving personal and family time.”  Women plus flexibility is profitable. Who knows what I might have accomplished if I have had flexibility during my career. It would have been a lot easier and humane. TY Nick. 👏paying it forward in every way I can.

XTOD: Chernobyl's mutant wolves appear to have developed resistance to cancer, study finds. The wolves are exposed to cancer-causing radiation as they roam the wastelands of the abandoned city - with researchers finding part of their genetic information seems resilient to increased risk of the disease. https://news.sky.com/story/chernobyls-mutant-wolves-appear-to-have-developed-resistance-to-cancer-study-finds-13067292

Daily Economic Update: February 9, 2024

Another relatively strong/low jobless claim report, despite the incessant headlines of layoffs.  Yields rose a few bps as the S&P crossed but couldn’t hold 5K.   The 30Y Auction was also strong, marking a strong week for demand for U.S. govt. debt.  Otherwise Chinese deflation is out there and for now it doesn't seem like the decline in Chinese equities and the real estate crisis is at a level yet that will lead to any meaningful global risk aversion.  Perhaps the bigger question is what will the impact of ailing U.S. CRE (particularly office) be on some foreign banks and investment firms?

I was wondering why I couldn't get Snoop Dogg's cereal at Walmart, per CNBC: "According to the lawsuit, when it was placed on shelves, Snoop Cereal was popular and sold well. However, the products were quickly taken off the shelves, leaving shoppers wondering where to find them, the suit says."

XTOD: Have a buddy who is feeding workplace conflicts into ChatGPT and asking it to analyze the situation and propose his course of action based on the 48 Laws of Power 

He is definitely going to either be promoted or fired in the next 6 months. Excited to find out which it is

XTOD: Fed officials love to pretend they don’t wade into fiscal matters, but the Fed paying interest on reserves (IOR) *is deficit spending*. Hell, all Fed spending goes right out of the budget via reduced remittances. Not to mention the rate hikes themselves, obviously.

XTOD: Monetary & fiscal policy is linked via a consolidated government budget constraint. But IOR is not in itself  “deficit spending.” (It’s possible to pay IOR and run a surplus). Comments on post below are bizarre.

XTOD: MMTers: "We never said deficits don't matter...they can cause inflation if they push the economist past capacity" 

Congress: Here's $4 trillion over 2 years to push the economy past capacity. 

Economy: Here's 7% inflation. 

MMTers: "Look at this supply shock"

XTOD: Choose a career you love and you’ll never work a day in your life because that field probably isn’t hiring.

XTOD: Watching the Presidents press conference in real time, responding to the special prosecutor’s report alleging cognitive decline.  This was the worst possible moment to confuse Egypt with Mexico while answering a question on Gaza. 

Daily Economic Update: February 8, 2024

New all-time highs on the S&P.  The earnings picture to date has been pretty solid.  Yields ended the day slightly higher despite regional bank fears. The 10Y Treasury auction was strong with the largest stop thru when issued since last February.  Fedspeak generally held the line on the desire to see more evidence that inflation will get back to target before initiating cuts.  Continue to see various takes on Powell's 60 Minutes appearance, specifically around his calling the national debt unsustainable.  Those takes include views from the MMT crowds view that there is nothing unsustainable about the debt (but that the Fed should cut rates), and views of certain famed investors clamoring for how the Fed needs to cut rates to keep the deficit from continuing to grow (not to mention how they could really use low rates to sustain certain investments). 

I obviously don't know Powell (I once rode an elevator with Bernanke), but I wonder if he would agree with this quote:

“I define central bank independence in one sentence, it's the ability to raise interest rates when the Treasury doesn't want you to. And the Treasury almost never wants you to, because of the cost of the debt.” – Peter Stella 

On the day ahead it's jobless claims and the 30Y auction. Other than that I guess we'll see if the Tucker-Putin interview drops. 

XTOD: One of the biggest mistakes by finance idiots* is to conflate tail risk awareness with bearishness. 

Believing in Black Swans ≠ Permabears.  * Short for fucking idiots.

XTOD: BREAKING: The winner of the Nevada Republican Primary election is literally "None of These Candidates."  Over 61% of the votes are for "None of These Candidates."  This is double the 32% that Nikki Haley, the second place candidate, received.  Donald Trump was not on the ballot.

XTOD: Yet another example of monetary policy in action - rich people (credit scores >760) were taking out massive amounts of mortgage debt to bid up the price of housing until the Fed started tightening policy in early-2022 https://newyorkfed.org/medialibrary/i

XTOD: My undergraduate thesis was on this very question.  I argued that religions can be modeled as providers of social insurance, and that the US secularized after Europe due to our under-developed welfare state.  To test this, I showed that the post-'90s "secular boom" was associated with Medicaid expansions in prior years at both the state and census division level, particularly the '80s expansion to uninsured kids and the explosion in federal payments to charity hospitals after the '86 budget act. 

In essence, it seems like Medicaid crowded-out the social insurance function of religion for many parents, leading to a cohort of kids who grew up with weaker affiliation. As a secondary effect, the growth in federal payments also induced many sectarian hospitals to be bought-out by secular networks. There's a sizable literature showing a similar relationship holds cross-nationally as well as in micro, such as Dan Hungerman's work showing the negative impact of welfare expansions on church donations.  This was my first empirical paper and, while I remain concerned about spurious correlation, I think there's more than enough "there there" to at least make this mechanism plausible. I would love for someone with better stats abilities to try to replicate it using the latest data, as I agree with David that it is an important and still under-theorized question.

XTOD: The 32-year-old banker, whose satirical alter ego has gained a cult-like following on Instagram, reveals his identity in an FT interview: https://on.ft.com/3OuCiuH

Daily Economic Update: February 7, 2024

The S&P advanced as yields fell as the market digested rising consumer debt levels and Fedspeak.  The 3Y auction seemed decent with pricing thru where when issued was trading.   Mester seemed to indicate the Fed will cut this year, but that there's no reason to rush and likely no need to cut aggressively.  We get more Treasury supply today and Thursday along with more Fedspeak.

On this blog I think I've intentionally or at least subconsciously written about noise, narratives, and forecasting.  In writing about these topics, I have tried to highlight what I see as the challenges that come from simplifying the complex in such a manner that creates a false sense of certainty.  That's not to say that simplification cannot be an appropriate way to make an important message accessible, but rather to build awareness that the ability to create vague, simple messages often wrapped in a well crafted veneer that is alluring, is a trick employed by charlatans throughout history  to cement their wealth and power at others expense (see post on finfluencers and Mill's Civilization essay) .  Obviously with social media and AI, the ability for those who want to create cultlike followings and draw people into otherwise ridiculous ideas has grown and will continue to grow exponentially.  The risk of falling into the simple, vague, but alluring promises is particularly high in financial services and probably a risk we'd be wise to realize exist.

"For years the financial services have been making stock-market forecasts...they are sometimes right and sometimes wrong. Wherever possible they hedge their opinions...in our view...this segment of their work has no real significance except for the light it throws on human nature in the securities markets. Nearly everyone interested in common stocks wants to be told be someone else what he thinks the market is going to do. The demand being there, it must be supplied."  - Ben Graham

The tricks of today's charlatans are very similar to those played in the past, just now done easily with scale.  Awareness of the games played in crafting messages and building a following is a first step towards building a better understanding of potential tricks and determining the appropriate course of action from there.  In fostering awareness of the methods used by charlatans, author Robert Greene, whom I referenced in my FOMC Recap, has what he calls "The Science of Charlatanism Or How to Create a Cult In Five Easy Steps".   Those five steps are (with reduced commentary):

1. Keep it vague; keep it simple: promise something great and transformative, but use total vagueness.  People want to hear a simple solution will cure their problem.  If you explain in detail the benefits to someone, you will be expected to satisfy them, so avoid details.
   
   
2. Emphasize the Visual and Sensual over the Intellectual:  dazzle your followers with visual splendor, colorful charts, new technological gadgets - anything that creates a pseudo-scientific veneer. 
   
   
3. Borrow the Forms of Organized Religion to structure the group - talk and act like a prophet to hide the fact you are a dictator.  Ask people to sacrifice something to your cause (ex. sign up for your newsletter which gives you money).  Even better if you tier your community.
   
   
4. Disguise Your Source of Income - you must never been seen as hungry for money and the power it brings.  Never reveal your wealth comes from your followers' pockets.
   
   
5. Set Up an Us-Versus-Them Dynamic - make it so that any outsider who questions you or tries to reveal the charlatan nature of your belief system can now be described as an enemy.

I can't speak for everyone, but I see so many of those dynamics at play particularly in social media.  You too can probably think of various accounts in the finance "crowds" on X/Twitter or YouTube particularly where the topic is something to do with things like crypto, MMT, certain company's stock (ex. Tesla), "experts" explaining the recent moves in a market, predicting a soon to come recession or crash, people talking their own book, etc.  Once you're aware, you probably then think about where else some of these dynamics are involved in other areas of your life.

"Men are so simple of mind, and so much dominated by their immediate needs, that a deceitful man will always find plenty who are ready to be deceived."  -Niccolo Machiavelli

XTOD:  Great thread outlining the reality and uncomfortable truth behind the headlines and incessant CNBC pumps & promos  https://x.com/ttp_cap/status/1754917296638767318?s=20

XTOD: Adam Neumann just totally crushed the ZIRP era. Nobody close.

XTOD: When Barry Sternlicht was 32 y/o he started Starwood with Bob Faith and an assistant. 18 months later, after acquiring 8,000 MF units, he sold to Sam Zell’s Equity Residential REIT in return for 20% ownership.  By the time he was 37 they owned Starwood Hotels and Lodgings Trust, the largest Hotel REIT in the world with $20B AUM and 120,000+ employees across the globe.  Today Starwood Capital Group and affiliated entities manage over $120B in assets across the globe and have become the giant in the room.  Today’s episode is full of incredible stories of how they climbed to the top of the real estate world: 0:00 - AI & Hotels  6:34 - The Midas touch  8:16 - Scaling to 120k people in 7 years 14:00 - Shared Pair REITs  27:15 - Thoughts on Blackstone  35:25 - How to buy a REIT 39:45 - Taking a company from $1B in AUM to $10B   48:50 - How did you keep Starwood Capital moving while you stepped away?  58:22 - Selling Caesar’s Palace 1:07:53 - Thoughts on the market in 2024 https://twitter.com/i/status/1754852728344363340

 

 

Daily Economic Update: February 6, 2024

Better than expected ISM, with the prices paid component markedly higher, coupled with continued digestion of recent strong data and Powell's 60 Minutes appearance lead to a pop higher in yields.  Maybe markets are starting to come back around to the idea that the Fed won't be cutting 6-7 times this year.  The recent moves higher following last Friday's jobs numbers have the 10Y yield back to 4.15%, which marks a solid move off recent lows of ~3.80%.  The 2Y is almost back to 4.50% off recent low of 4.20%.

The last week has me wondering whether we've re-entered the end of summer/early fall of 2023.  It was during that time period that all of the talk from the Fed (including Powell's J-Hole speech) seemed to focus on uncertainty around estimates of the neutral rate of interest.  We'll have to wait for both the NY and Richmond Fed to update their estimates of the neutral rate.  Yesterday we had Kashkari out wondering if neutral rate has increased post pandemic https://www.minneapolisfed.org/article/2024/policy-has-tightened-a-lot-how-tight-is-it

On the day ahead it's Fedspeak starting at noon.

XTOD:  ISM Services 53.4, Exp. 52.0, Last 52.3  ISM Prices Paid explode to 64.0, Exp. 56.4, Last 56.7  When is the Fed hiking again?

XTOD: "Stock options is always an expense. Its in kind but Analysts reverse it. It's like a pizza store owner giving away free pizza because u can't supplement the wage because u can't pay them high enough wage. It's eating into profit & got to be factored in" 👌--- @AswathDamodaran

XTOD: There's a difference between "I don't have the time" and "This isn't a priority." It's okay to communicate the latter even though you always say the former. Be brave, friends. We're all protecting our time and attention.

XTOD: "By working faithfully eight hours a day, you may eventually get to be a boss and work twelve hours a day." — Robert Frost, American poet and winner of four Pulitzer Prizes

Daily Economic Update: February 5, 2024

I wrote this while wearing an Apple Vision Pro, while driving a Tesla Cybertruck...you're welcome.

Friday's job report was a blowout, leading to the question of what is the need to cut rates?  Average hourly earnings was also much stronger than anticipated.  Maybe Powell was onto something when he expressed a desire to see more data before confirming the Fed's policy was restrictive.   

Some recent data might lead one to wonder where the elusive "neutral rate" is these days. Powell was asked this in his news conference last week and uncertainty over the neutral rate is now a long forgotten topic, but was the topic of Powell's J-Hole address.  Continued strong GDP data and Atlanta Fed GDP estimates for 1Q2024 with a 4 handle, obviously lead to the question how does the economy keep expanding.  Economist Scott Sumner tackled this topic in his post, Why might I be wrong about trend GDP?   In basic terms, the economy can grow by doing more with the same amount of resources (i.e. Productivity) or by increasing real economic inputs (ex. labor).  Sumner hits on the potential grow impact from the politically thorny topic of  immigration as an under-looked factor that could be increasing real GDP (see Powell comments from 60 Minutes below...maybe Sumner was onto something)....Elon Musk was busy sharing his own opinions on immigration this weekend.

Powell stayed busy in the news cycle with a 60 Minutes interview and candidate Trump indicating he won't reappoint Powell if elected.  I mentioned the need for the Fed to maintain independence in a charged political environment in my last FOMC Recap.

If you didn't watch Powell on 60 Minutes, he stuck to the FOMC script, implying that March will be too soon to cut rates and that the number of cuts priced in could be on the high side.  That said, here's a summary of what I considered to be notable quotes (my emphasis added):

•  Right. And we have to, we have to balance those two risks. There is no, you know, easy, simple, obvious path. We have to balance the risk of moving too soon, which, as you mentioned, or too late. And there are different risks. We think the economy's in a good place. We think inflation is coming down. We just want to gain a little more confidence that it's coming down in a sustainable way toward our 2% goal……
• And I can't overstate how important it is to restore price stability, by which I mean inflation is low and predictable and people don't have to think about it in their daily lives…
• I would say it this way. It's really going to depend on the data. The data will drive these decisions..[As to imply there is ever a time that they don't depend on the data]
• We do not consider politics in our decisions. We never do. And we never will....You know, I would just say this. Integrity is priceless. And at the end, that's all you have. And we in, we plan on keeping ours. [Looks like Powell read my FOMC recap]
• Well, interesting, you know, we were being honest, and I was being honest in saying that we thought there would be pain. And we thought that the pain would likely come, as it has in so many past cycles, in the form of higher unemployment. That hasn't happened. It really hasn't happened...
• So, it, I would say this. In the long run, the U.S. is on an unsustainable fiscal path. The U.S. federal government's on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy. So, it is unsustainable. I don't think that's at all controversial. ...
• I don't think there's much risk of a repeat of 2008. I also think, you know, we need to be careful about making proclamations about the -- particularly about the future. Things have surprised us a lot. [First I'll tell you that there is no risk of 2008, but then I'll hedge by telling you I can't predict the future...and that we're often wrong] But no, on this, on this, I do think it's a manageable problem. I think we're doing a lot to manage it.
• I think we need to just remember that we have this dynamic, innovative, flexible, adaptable economy. More so than other countries.....the United States has been the indispensable nation supporting and defending democracy, security arrangements, economic arrangements. We've been the leading voice on that. And it is clear that the world wants that. And I would want the United States to know, people in the United States to know, that this has benefited our country enormously. It benefits our economy so much to have this role.
• We had a combination of rising labor force participation in prime-age workers, and we also had with that, we had a resumption of immigration. So, there was really no immigration net in or very little during the pandemic...But in 2023, we saw immigration move back up to the levels that would have been normal before the pandemic.....Because, you know, immigrants come in, and they tend to work at a rate that is at or above that for non-immigrants. Immigrants who come to the country tend to be in the workforce at a slightly higher level than native Americans do. But that's largely because of the age difference. They tend to skew younger...I will say, over time, though, the U.S. economy has benefited from immigration. And, frankly, just in the last, year a big part of the story of the labor market coming back into better balance is immigration returning to levels that were more typical of the pre-pandemic era.
•  I would say it this way. The economy's strong. The labor market's strong. Inflation's coming down. There's no reason why that can't continue. We're gonna try to use our tools to give the economy -- to continue to improve as inflation comes down. We'll give it every chance to do that. That's our plan. We don't have a perfect crystal ball about the future, and things could happen. But I do think the economy is in a good place, and there's every reason to think it can get better.

On the week ahead it will be ISM Services and Fedspeak.  And don't forget about geopolitics which Powell called the biggest risk in the near term.

XTOD: The hole in the border fence was way more interesting than Powell.

XTOD (reply): I disagree. He WANTS the subject of deficits to come up. And he WANTS the "politics" to be examined as well. His answer was strong. He knows the crossroads are coming, probably later this year. The Fed will have to decide whether to consider more QE to help Treasury sell debt.

XTOD: We generally don't need more data.  Just more insightfulness

XTOD: In the Fall of 2022 Powell was basically begging companies to fire ppl

We've added 4.1 million jobs since then and inflation is down 

Coming around to the idea no one really knows what truly drives the economy

And maybe monetary policy doesn't matter as much as we all think

XTOD: BARTIROMO: If things are so bad, how come the stock market is on a roll? 

TRUMP: Because they think I'm gonna be elected 

BARTIROMO: You think the stock market is rallying because people think you're going to be elected?

XTOD: James Clear: "I think about decisions in three ways: hats, haircuts, and tattoos. 

Most decisions are like hats. Try one and if you don't like it, put it back and try another. The cost of a mistake is low, so move quickly and try a bunch of hats. 

Some decisions are like haircuts. You can fix a bad one, but it won't be quick and you might feel foolish for a while.   That said, don't be scared of a bad haircut. Trying something new is usually a risk worth taking. If it doesn't work out, by this time next year you will have moved on and so will everyone else. 

A few decisions are like tattoos. Once you make them, you have to live with them. Some mistakes are irreversible. Maybe you'll move on for a moment, but then you'll glance in the mirror and be reminded of that choice all over again. Even years later, the decision leaves a mark. When you're dealing with an irreversible choice, move slowly and think carefully."  (From  @JamesClear 's 3-2-1 newsletter)

Daily Economic Update: February 2, 2024

Jobs Day in 'merica!  Consensus is for +185K headline, but the whisper number seems higher. Weather is cited as factor that could detract from the headline number.  Average Hourly Earnings are expected to be ~4.1% annualized and will likely be heavily scrutinized.

Jobless claims rose slightly more than expected at 224K, Q4 Productivity beat expectations with unit labor cost coming below estimates at 0.5% vs. 1.3% est.

BoE was on pause and it sounds like they are going to be potentially even more cautious than the Fed as they revised higher growth estimates. 

The market liked META and AMZN earnings and the META dividend.  The 2Y is ~4.20 and the 10Y ~3.88% as the 2s10s un-inversion watch has hit a pause.....

AND for all the rate cut talks Atlanta Fed GDPnow is now at 4.2% for 1Q2024.

XTOD (Taleb): Explaining the debt/death spiral. Some of my comments were spreading on social media (they was a a discussion in Congress).  Debt servicing = 40% of the past deficit. Next year we will pay interest on that. Debt servicing will reach 70% ,80%, displacing other expenditures.  On top of the fragility, there is an intergenerational transfer of liability, highly immoral (h/t Spitznagel). 

Note/Errata: total deficit north of 30 Trillion is the accumulated deficit. (I mistakenly used the same word to describe current and accumulated).

XTOD (Prof. Steve Keen): Do the accounting Taleb. The deficit creates the funds used to buy government bonds. There's no borrowing involved so long as you're financing bonds in your own currency.  You visibly don't get that government bonds aren't competing for "loanable funds", but creating money on the bank liability side, and funds on the asset side that enable banks & primary dealers to buy the bonds. You're falling for an obsolete model of banking.

XTOD (Taleb):  What you showed does not deny the presence of a debt spiral and there is no such thing as "obsolete" banking.  So you are saying that a debt spiral is good?  If what tou are saying is invariant to scaling then let's abolish taxation and just spend like crazy while printing bonds.

XTOD (some random reply): MMT told me everything will be fine, though. Sure, history disagrees with them, but it's a very convenient theory to justify living for today, tomorrow be damned.

XTOD (unrelated to the Taleb thread):  Essentially, if the US has moved to a secular growth regime higher than pre-pandemic then the path to 0.5% real-FF will end up being expansionary....So while we are debating whether or not 3 or 4 or 7 cuts this year makes sense, we are in effect implicitly debating what neutral is, due to a general assumption there isn't an upside risk to inflation.  This is why i jokingly say the Fed either needs to hike or a recession has to happen soon....This is why I think we continue to see the market trade in a violent range this year, particularly in the first half as we consume incoming data and determine the clearing price not just for bonds, or stocks or whatever you trade, but for the economy itself.

XTOD: A Few Thoughts on Spending Money https://collabfund.com/blog/a-few-thoughts-on-spending-money/

Daily Economic Update: February 1, 2024

Yesterday's FOMC left the policy rate unchanged at 5.25-5.50%.  The statement included many changes including that the committee does not expect it will be appropriate to reduce the target rate until it has gained greater confidence that inflation is moving sustainably towards 2 percent.  Powell continued to assert the need to get inflation back to 2% and noted that the policy rate is likely at its peak.  The Fed will be data dependent.  They want to see continued good inflation prints, the 6 months of "good" inflation prints doesn't seem to be enough to give the FOMC full confidence to declare victory yet. Powell described themselves as being in a "risk management mode".  Powell seemed to indicate that a March rate cut is out of the question, but we'll see.  And deep fakes of Powell pressers are a thing (and pretty funny depending on your taste)

Powell still had an easier day than Zuckerberg.

ECI and ADP data both were lower than expected with ECI below 4% (annualized), theoretically easing some risk of wage price spirals.  In other news, New York Community Bancorp shares fell greater than 30% after cutting their dividend following posting a loss and building up reserves (especially for office loans) as concerns about regional banks regained some attention.  

Yields fell with the 10Y below 4% and stocks fell as well.

On the day ahead it's BOE Rate Decision, jobless claims, nonfarm productivity and ISM mfg.

XTOD: Today wasn't about QRA it was Fed pushing back on easing, bad reaction to decent earnings and guidance, and NYCB.  But the headwind from QRA stepped up as 519BN Net new money from coupon sales will be absorbed and -317BN of Bills will result in RRP stabilizing and delay QT Taper

XTOD: Not one question for Powell on NYCB or the BTFP

XTOD: which acronym will replace BTFP and how many trillions will it inject?

XTOD: I get that no one should  mechanically follow Taylor rules. But it's interesting that all three versions tracked here by the Atlanta Fed say you're too tight.