Daily Economic Update: February 22, 2024

Thankfully we've made it through what was likely the biggest event in the history of mankind with yesterday's earnings from NVIDIA and thankfully for mankind, their earnings beat and they guided higher.

Yields rose a few bps heading into FOMC minutes and held those yield increases. Those minutes generally highlighted the risk of cutting too quickly and that the Fed will be data dependent (as if there is ever a time decisions are made without any data).

Biden forgiving more student loan debt had me thinking about one of my favorite theories, the fiscal theory of the price level.

Eric Leeper, a fiscal theory proponent, and UVA professor, was a recent guest on the MacroMusings podcast.  If you're looking for a theory of inflation and perhaps a different perspective on whether inflation be stickier than thought, here were some of Leeper's thoughts (with my emphasis added).

• [On dismissing other factors for inflation]. We focus on the single cause, a large increase in federal COVID-related spending financed by new government borrowing, with little to no discussion of how, ultimately, to pay for the spending.”   

• [On relative price changes vs. inflation] Inflation, by definition, is a steady increase in overall prices. We often look at things that are happening at high frequency, various shocks that hit the economy, that can move relative prices around. Then, it's convenient to say, "Oh, they must have caused inflation."  And it's certainly true that if the price of goods suddenly goes up relative to services, ..... But that can't be sustained. Eventually, they will adjust their habits to accommodate what's happened to the relative prices. And so, those kinds of shocks to the economy are inherently going to have transitory effects on inflation. Then, the other side of this, which you already alluded to, is that people still have to have the income to buy the stuff when the relative prices have gone up. Where is that coming from? To me, that's really getting at what the fundamental cause of the overall inflation is. As you suggested, I think it was because we handed out a lot of transfer payments to businesses and individuals in the economy.

• [On general FTPL] one of the themes of the fiscal theory of the price level is that inflation is always and everywhere a monetary and fiscal phenomenon....Critically, the atmosphere around fiscal policy was different than it often is....And, if you lay on top of that the idea that President Trump had his name on some of the checks, it was pretty clear that these transfer payments were meant to be gifts. They weren't meant to be loans that would have to be paid back with interest in higher taxes in the future. You don't typically put your name on a check when it has attached an IOU for future taxes. That communicated to people that their permanent income had gone up. Well, they're going to want to translate that permanent income into consumption. That's what standard economic theory tells you.

• [On fiscal dominance]  What happens is that the government issued $5 trillion in new debt. There was no expectation that primary surpluses were going to rise in the future to pay off that debt. So that debt has to be revalued, has to be devalued, which happens through a combination of lower bond prices and a higher price level. That's because, basically, the current value of the goods that will support those new debt issuances hasn't changed, and so the real value of debt can't change.

• [On the Fed's current role in fighting inflation]  what has happened is that Congress did what we call an unbacked fiscal expansion, and then turned to the Fed and said, "Okay, now you mop it up." But what the theory tells us is that, in the absence of some kind of fiscal consolidation that ultimately raises primary surpluses to soak up that debt, there's nothing the Fed can do to permanently offset the inflation. They can change the timing of it. And so what the theory tells us is that the Fed's increase in interest rates serves to reduce inflation, at the time, by pushing it into the future. 

• [On the role Interest on Govt Debt can lead to inflation]  the Fed has raised the interest rate. And so, what we're now seeing— another way of thinking about what's going on right now— is that interest payments on the debt are exploding. Then, the question becomes, how are those interest payments going to get financed? So far, they've been financed by just issuing new debt. If that continues, you can expect more inflation. If, on the other hand, what happens is that Congress starts to see that they've got to pay the bills from borrowing, and therefore they can't spend money in other ways that they would like to spend it, then they do something to either raise revenue or cut spending. How those interest payments get financed is, I think, the critical question for thinking about inflation going forward

•  [On the fundamentals of FTPL] nobody disputes that Treasury bonds are a liability of the government. Nobody disputes that the bank reserves that the Fed created to buy government bonds are also a liability of the government. Both of these liabilities these days pay interest. Then, you've got to think, what are the offsetting assets? If the government's going further into debt, there have to be assets that offset that. That's where the primary surpluses come into play. And those assets don't have to be present today. There has to be some assurance that, as these bonds mature, those assets will be present. And so, that's the other way to think about it.  We think about those assets as being denominated in units of goods. The liabilities, though, are denominated in dollars. So, the price level can adjust to equate the real value of those liabilities to the real value of the assets that back them

• [On fiscal sustainability]   I think there are just some very troubling signs coming from the bond market....he $1 trillion-plus that we'll have in the deficit that has to be financed and the fact that the Fed is undertaking QT and putting more bonds into the system. Easily, we have to finance about $10 trillion, which is roughly a third of the stock, in one year.....And to be honest with you, I did paint a grim picture, but deep down inside, I actually believe that, when interest payments get high enough, even a highly dysfunctional Congress will do the right thing.....And I think that they all recognize that you can't just make marginal changes, that something fundamental has to change. And I'm sure that entitlements would be part of that, and maybe there'd be some other taxes, maybe a consumption tax. But the resistance to taxes in the United States is so fundamental to our nature.

XTOD: Head Of Boeing 737 Max Program ‘Leaving Immediately’

XTOD: it's awesome that the boeing guy hadn't been fired yet

XTOD: Rumors circulating that NYC migrants will be given 10,000 in $NVDA calls

XTOD: “The speed of innovation happening in AI is moving at a pace I've never witnessed in my entire career"  - Kyle, 22, 8 months experience at Deloitte

XTOD: Don't let your dreams of a "bonanza" lead you to "expose yourself to the possibility of a catastrophe" - Howard Marks

Daily Economic Update: February 21, 2024

Today brings FOMC Minutes, Fedspeak, and a 20Y Treasury Auction and NVDIA earnings.

Yesterday was an overall a light news day, though stocks fell being led down by tech names, and yields rose slightly. 

To fill the void of no major economic date, I'm sharing a couple of recent post that caught my attention. 

The first being the Treasury Basis Trade, a topic you can google, but the trade leads to some concerns over Treasury market stability and resilience, a topic that was highlighted in Darrell Duffie's paper at Jackson Hole. 

Probably one of the better reads on the Treasury basis trade in a post by Steven Kelly here.  In discussing the article professor Brad DeLong wrote the following: 

The remarkable continued profitability of the Treasury Basis Trade tells us that the U.S. Treasury has profoundly misjudged what kinds of Treasury securities that market really wants to hold. Hedge funds are filling in the gap via a maturity transformation that substantially shortens the effective duration of Treasury-created assets—and are making an awful lot of money by doing so. What is the Treasury gaining by issuing long-term debt that Hedgies immediately transform into short-term debt? It is moderating the impact of short-term moves in interest rates on its monthly funding reports. Is that gain worth handing the profits for effective money creation over to Hedgies (and possibly creating some systemic risk in the case that the Hedgies get overleveraged and so out over their skies?).

We're all familiar with the Federal Deficit, but I thought this was next level thinking of one potentially overlooked ramification is whether attempts to raise revenue might mean ending some programs that many people are familiar with, like 401K's.  Per Allison Schrager's latest piece

I give the 401(k) another 10 years---tops.

Don't get me wrong. I love retirement accounts, and I think we'll still have them. But the tax treatment has a shelf life. It is expensive, mostly benefits the wealthy, and there is not much evidence it gets people to save more.

If it does not change behavior, people won't miss it so much, which means it is easier to get rid of instead just increasing taxes. And the government needs revenue. So say good buy to the tax deferral.

 You can also find my post about Allison's book here.

And of course we're all focused on what the Fed will do next and Scott Sumner shared his thoughts in a recent post.  In addition to expressing his views that in an efficient monetary policy system, he provides the following:

The Fed has now set rates at a level expected to produce a soft landing. If they overestimated the natural rate of interest they might deliver a hard landing, and if they underestimated the natural rate we might get no landing at all. In the latter case, inflation might stay stubbornly above target, requiring further rate increases.

Two years ago, almost no one correctly forecast the recent path of interest rates. The same could be said about interest rate forecasts in early 2020, or early 2019. I don’t know what will happen to rates over the next two years, but I have very little confidence that things will play out in the way the markets or the Fed currently expect. There could be surprises in either direction.

I see people cherry picking some obscure inflation metric which has hovered around 2% for 6 months. But price inflation is not the right variable to look at. In order to have lower interest rates, we need a slowdown in wage inflation and NGDP growth. If wage inflation gets stuck at 4.5%, then interest rates are headed higher. I still think it’s likely that wage inflation will slow, but recent price inflation moderation doesn’t reassure me at all.

In an efficient monetary regime (NGDPLT), policy errors in either direction would be equally bad. But we don’t have level targeting. In addition, recent policy errors have been in the direction of an excessively expansionary policy. For that reason, the damage from a somewhat overly expansionary policy in 2024 would be greater than the damage from a somewhat overly contractionary policy in 2024. The longer that wage inflation stays elevated, the more difficult it will be to bring it down.

XTOD: Inflation may be turning upwards, but cuts are still coming. The Fed views the world through the lens of real rates, and believes r* is unchanged post-pandemic. They may be overestimating the restrictiveness of policy, but that just means fewer cuts.

XTOD: Should you put all your savings into stocks? @BarryNalebuff  & Ian Ayres: Yes, with leverage!

@CliffordAsness : No!

XTOD (reply from Cliff Asness): If you are unwilling to lever you can at least have an interesting argument.  But if you’re willing to lever, to choose only equities vs a more diversified portfolio is hard to imagine.  https://aqr.com/Insights/Perspectives/Why-Not-100-Equities

XTOD: Life is a series of tradeoffs, and greater results usually require greater tradeoffs.  The question is not, “Do you want to be great at this?”  The question is, “What are you willing to give up in order to be great at this?

XTOD: Simply, the decision to buy is always yours. The decision to sell isn't.

Daily Economic Update: February 20, 2024

Stocks coming off the first losing week in this holiday shortened week.  It seems like market narratives are generally all about (1) if/when the Fed cuts and by how much, (2) CRE concerns and (3) whether all things AI might be a little bubbly.  The 2Y is 4.66% and the 10y is 4.32%. 

In M&A news the WSJ reported that CapOne will acquire Discover.

On the week ahead it's pretty light with the highlights as FOMC minutes, jobless claims and existing home sales.  There will be plenty of Fedspeak in the mix as well.

Tue: nothing major

Wed: FOMC Minutes, fedspeak

Thur: Jobless claims, fedspeak

Fri: Existing home sales

XTOD: it's wild how there's people working on creating artificial general intelligence, miniature nuclear reactors, space warfare technology, and new types of monkey nfts and all four of them believe they're working on building the future

XTOD: Man, these Zuck memes today have me dying laughing. It turns out there are a lot of things money can’t buy. Here are my favorite memes:

XTOD: A pair of Trump Golds just sold in size 11 for $7,500, the current record.   

Someone in Trump’s camp definitely had the right idea with limited edition, but missed on price.

XTOD: Chocolate prices are about to rise — and bars and boxes will shrink too — after wholesale cocoa prices jumped beyond their 46-year old peak, setting a record high

XTOD: "Success does not lie in sticking to things. It lies in picking the right thing to stick to and quitting the rest."

XTOD: Create an emergency fund equal to two years of living expenses and gradually increase it to five years as you increase your exposure to equities over time.  If you need to spend money and you can't, that is a risk

XTOD: With rare exceptions, most of the miracles of humankind are long-term, constructed events.  

Progress comes bit by bit.   The silent miracle of humanity’s march is this: step by step, year by year, the world is improving.

XTOD: Don’t forget to report your income from illegal activities and stolen property as you’re doing your taxes this year

Daily Economic Update: February 19, 2024 (President's Day)

Stocks and bonds are closed.  On this day in history, 1807: Aaron Burr was arrested for treason.  Burr, the VP of the U.S. from 1801-1805 had conspired to create an independent nation in the American Southwest and Mexico.  Burr was acquitted thanks to a narrow definition of treason by Chief Justice John Marshall.

XTOD: I don’t understand people who get bearish and express it by shorting SPX or Nasdaq.

Like God made the perfect shorting vehicle, it’s called Ark Invest ETFs. Like it’s literally called Ark Invest.

XTOD: Yeah, It’s really happening! Coming this summer. Full reveal in May #CFB25

XTOD: There’s a meaningful chance — maybe it’s 15% — that the next move is going to be upwards in rates, not downwards. The  @federalreserve  is going to have to be very careful. 

XTOD: XTOD: Yeah, It’s really happening! Coming this summer. Full reveal in May #CFB25

Daily Economic Update: February 16, 2024

Stocks rose and yields fell slightly as market participants continue to try to make sense of the economic picture. We also have technical recessions in UK and Japan. 

Yesterday's economic data looked mixed as Retail Sales fell more than estimated, Philly Fed and Empire Mfg both looked better than expected with strength in new orders and jobless claims seemed to indicate that you still can't get fired (despite seemingly ever company announcing layoffs).  Industrial Production fell more than expected, but hard to make sense of how much weather impacted the report and Business Inventories rose in line with estimates.

On the day ahead it's PPI as the headliner with appearances by UofM asking people about gas prices.

Does any of this matter?  Apparently there is some AI called SORA that can generate incredible videos from text and people are buying Super Micro Computer, Inc. shares. 

In making sense of all of the various data it seems that the interpretation of the strength of the economy may largely hinge on your interpretation of productivity and good old "R-Star".  One interpretation might be that the post-pandemic economy is fundamentally more productive than pre-pandemic.  That productivity might be driven by things like the rise of WFH which allows some otherwise marginalized workers to contribute (increase labor), perhaps immigration (legal and illegal), and technology.  It might also be that people just had to work more productively out of necessity.  Rising productivity would generally be disinflationary/deflationary and maybe it is indeed playing that role at the moment, but immediately post pandemic it was met with a wall of money via government spending and bank lending while hitting supply constraints. This could explain the rising real GDP and rising nominal GDP coupled with low employment.

I don't really know if the economy is more productive, but the productivity - interest rate - inflation nexus is a tricky one.  What I do think could be possible is that the post-GFC period of low real and nominal growth might turn out to be the anomaly.  If true, the unfortunate thing might be that so many of the current crop of investors and managers has only and ever lived and worked in the low rate, slow growth, "secular" stagnation world of the post GFC.  

A recent post by Dario Perkins on the TS Lombard blog seems to do a good job walking through a framework to analyze the post COVID world, in it:

6. What does this mean for the global economy in the 2020s?

• The Great Moderation is over. Periodic supply shocks will create additional volatility in inflation, which, in turn, will produce larger short-term gyrations in real GDP.
• Inflation will be somewhat higher, but this will be due mostly to upside volatility. It is hard to say exactly how much average inflation will rise, but an extra 100bps is reasonable. The more important point is about the “prevailing tendency” of inflation: we see a world where it is always threatening to break out to the upside rather than sink to the downside.
• Real GDP growth is likely to be higher, too, thanks to tighter labour markets (faster wage growth), a more expansionary fiscal-monetary mix and more rapid investment (in areas such as AI, decarbonomics, defence and the reconfiguration of global supply chains).
• Productivity probably improves in a higher-pressure economy, where companies are forced to work existing resources harder (rather than rely on cheap borrowing and low wages). We are already seeing signs of this in the US. Over time, technological diffusion, which was remarkably poor in the perma-lukewarm economy of the 2010s, should also accelerate, ending the so-called “productivity puzzle” of the post-GFC era.

XTOD: Worth mentioning that 24 years later, Cisco is still below its 2000 high.

XTOD: Rate cuts are feeling very distant. But hey, if stocks are ripping and the unemployment rate stays low, who’s mad beyond real estate developers?

XTOD: ICYMI: I wrote about our national hanging out crisis. In the last 20 years, averaging face-to-face socializing has declined ~30% among adults and ~50% among teens.   We've never been so alone. And it's driving us crazy. https://t.co/hIdXbVPovk

XTOD: Excelling at the small choices that compound over time perpetually leaves you in favorable circumstances.

XTOD: This is absolutely unreal...Abercrombie & Fitch has risen another 15% over the last few weeks and has now ~8x in less than 18 months  It's the best performing stock in the S&P 1500 Index, even outperforming Nvidia $NVDA by a huge margin  Absolutely no one could have predicted this epic turnaround for a brand that was largely seen as outdated  What a story

Daily Economic Update: February 15, 2024

It was a slow day for economic news, so we were left to wonder about this 'serious national security threat' which allegedly has something to do with Russian military capabilities in outer space, while also seeing the reality of dangers down on earth with the shooting at the end of the KC super bowl parade.

Of the little economic news there was both PPI revisions and UK inflation data seemed to give bond bulls some renewed optimism on the inflation front.

Retail Sales and Jobless Claims on the come.

XTOD: AirPods have only been out for 7 years, and the average person now defaults to throwing their headphones in as soon as they’re alone in public.  Walk through the grocery store, everyone has their headphones in. Same with the gym, or just walking around town. 

This feels like a dystopic tech trend that will only accelerate as AI improves and new products like the Vision Pro continue to come out.

XTOD: Vice Chair Barr: "A single bank missing its revenue expectations and increasing its provisioning does not change the fact that the overall banking system is strong, and we see no signs of liquidity problems across the system."

XTOD: Who Had 'Russian Nukes In Space' On Their Election-Year Disruption Bingo-Card?

XTOD: U.S. House Representative, Michael Waltz stated when asked why Chairman Turner decided to make the National Security Threat today Public, “If we don't Deal with this Issue Appropriately, if the Administration doesn't take Firm Action, this could be a Geostrategic Game-Changer. And that is why Chairman Turner took this Unprecedented Step.”

XTOD:  I was laid off from Lyft today. I was the Director of Finance in charge of reporting our margin expansion in our earnings release. 

I accidentally wrote 500 basis points when I meant to write 50 and our stock tanked after we issued the correction. 

Working at Lyft has been the most exciting first job to have after taking only one finance class in college and graduating this past Fall. 

Time for some rest and relaxation and excited for what comes next!

Daily Economic Update: February 14, 2024

I was going to take my wife out for Valentine's Day, but after yesterday's inflation print I just can't afford it. According to an article on Travel and Tour World (whatever that publication is - it still probably gets more readers than this blog, so who am I to criticize) 46% of American's say inflation will affect their Valentine's Day plans, but despite this 33% say it's worth dipping into credit card debt for a Valentine's Day gift.  Another 24% of American's don't plan to spend any money on a gift this year. The data appears to be from this WalletHub survey  

So when's the first rate hike?

It was in July 1996, per the FOMC Meeting Transcript, that the U.S. history of 2% inflation target was born:

MS. YELLEN. Mr. Chairman, will you define "price stability" for me?

CHAIRMAN GREENSPAN. Price stability is that state in which expected changes in the general price level do not effectively alter business or household decisions.

MS. YELLEN. Could you please put a number on that? [Laughter]

CHAIRMAN GREENSPAN. I would say the number is zero, if inflation is properly measured.

This exchange was part of a long Yellen exchange, in which Yellen argued for some positive inflation under the "greasing-the-wheels argument".  

Anyway, the point is, I don't think we're at a point that would meet Greenspan's general, non-numerical criteria, which would be a place where people generally don't think about inflation when making decisions.

 
If, and it's a big if, the Fed is able to do it's job of overseeing the financial system (again, it's a big "if"), then I'll be all-in on rate cuts the day the next CPI, PPI or PCE report isn't made into a national spectacle.  That's the day I will feel confident we have achieved price stability and that rates are risking being restrictive. 

In case you forgot why inflation is harmful, Irving Fisher can remind you here.

Bad day for stocks and bonds yesterday.  Fixed income doesn't like inflation and yields finished the day up 15-20bps with the 2Y at 4.66% and the 10Y at 4.33%.

XTOD: Ok, there’s a lot of bullshit making the rounds. Ex this, ex that, not so bad, blabla… 

This is a terrible print for the Fed. There’s no sugar coating it. They will need to react to it one way or another.  Supercore (that’s core services ex housing) is up a fucking 85 bp m/m. That’s what Fed likes to watch. That’s the largest monthly jump since April 22.  Shelter accelerated. Medical care, recreation and tuition all ripped.   First foregone conclusion: cuts need to be pushed back. For now it’s June for the 1st full cut. Might still be a bit too ambitious.   Second conclusion: now just above 90 bp of cuts FY 24, also way above the Fed guided 75 bp, which is starting to look a bit too optimistic.   Someone check on Claudia Sahm

XTOD: Core CPI comes in hotter than expected, 0.4% in the month of January--which is a 4.8% annual rate.  I'm not a big fan of second derivative forecasting but those of you who are should be worried. Annual rates:  12 months: 3.9% 6 months: 3.6% 3 months: 4.0% 1 month: 4.8%

XTOD: Now is the part where we shift from "See, it was transitory all along!" back to "This is really holding us back, we need to raise the target."  Get ready to start hearing it again, because it's coming!

XTOD: Inflation - it's like trying to lose 20lbs. The first 10 come off like butter. The last ten are a root canal.

XTOD: Because the proper benchmarks for volatility laundered returns are only other volatility laundered returns.

XTOD: I've become convinced that if Biden is going to actually run for president in an electorate where 90% of independents are worried about his age, he should say fuck it and talk about his age *constantly* but only in the context of Trump being 4 yrs younger and 4x crazier

Daily Economic Update: February 13, 2024

Thanks to Bill Ackman I'm trying to determine how my name will determine my destiny...we get it, his name equals his destiny as Billionaire Activist Man.  I asked Ackman what my name means and he replied,  "It's so obvious, Edward Quince equals educating people about the pear shaped fruits of investing."  I didn't have time to ask more, he was too busy on a WhatsApp with 50 other billionaires complaining about Harvard, so I'm left to wonder what he'd come up with for Taylor Swift? 

CPI Day, which will be calculated using updated seasonal adjustments and new weights for 2024.  Will the bond markets and the Fed get numbers that make them happy?  I suppose "good" is continued signs of disinflation and more specifically slowing in services and rents.

Yesterday's NY Fed Survey of Consumer Inflation Expectations showed: "Median inflation expectations were unchanged at the one- and five-year ahead horizons, at 3.0 percent and 2.5 percent, respectively, according to the January Survey of Consumer Expectations. Expectations at the three-year-ahead horizon declined to 2.4 percent from 2.6 percent. Perceptions of credit access improved notably, with a smaller share of respondents saying it is harder to obtain credit now than it was a year ago and a larger share reporting it is now easier. The share of respondents expecting tighter credit conditions a year from now also declined."   

More interesting to me is that there remains a high degree of inflation uncertainty and data showing consumers continue to believe there is a relatively high probability of inflation being above 4% in the next year.  

Other than that you can see if ARM shares continue to pop and see how much further Bitcoin can rise now that it's retook 50K.

XTOD: The fresh MBA grad who just landed a job at McKinsey arriving at your company’s office to present a pitch deck he copied and pasted recommending that your company should simply generate more revenue and cut expenses

XTOD: This week's anticipated data release is the January CPI  Wall Street forecasters expect the core CPI index rose nearly 0.3% from December, lowering the 12-month rate a touch to 3.8%

They see the headline index up 0.15% from November, dropping the 12-month rate to 2.9% (vs 3.4%)

XTOD: “Do we want NATO to pay more? Of course we do. But the last thing we’re going to do is side with a thug. Keep in mind, Putin kills his opponents,” Ambassador  @NikkiHaley   tells 

@FerroTV ,  @lisaabramowicz1  and me.

XTOD: FanDuel says it took in more than 14 million bets on the Super Bowl. Total amount bet? $307 million.

XTOD: If you’re glued together and honorable and get up every morning and keep learning every day and you’re willing to go in for a lot of deferred gratification all your life, you’re going to succeed. — Charlie Munger

XTOD: The Nvidia run up is funny but it’s even more funny when you remember Cathie Wood sold right before