Daily Economic Update: March 14, 2024

 

Experience, in the peculiar sense we teach them to give it, is, by the bye, a most useful word. A great human philosopher nearly let our secret out when he said that where Virtue is concerned “Experience is the mother of illusion”

              

   -C.S. Lewis, The Screwtape Letters (#28) - "Experience is the mother of illusion" is a paraphrase of a quote from Immanuel Kant: "For as regards nature, experience presents us with rules and is the source of truth, but in relation to ethical laws experience is the parent of illusion, and it is in the highest degree reprehensible to limit or to deduce the laws which dictate what I ought to do, from what is done"

Daily Economic Update: March 13, 2024

There's something wrong with the world today
I don't know what it is
Something's wrong with our eyes
We're seeing things in a different way
And God knows it ain't His
It sure ain't no surprise, yeah

We're livin' on the edge
Livin' on the edge

-Aerosmith 1993 Livin on the Edge  (current societal mood is nothing new)

Daily Economic Update: March 12, 2024

 "Well, ladies and gentlemen, we're not here to indulge in fantasy but in political and economic reality.  America, America has become a second-rate power. Its trade deficit and its fiscal deficit are at nightmare proportions.  Now, in the days of the free market when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because their money was at stake.  Today, management has no stake in the company! All together, these men sitting up here own less than three percent of the company...You own the company.  That's right, you, the stockholder.  And you are all being royally screwed over by these, these bureaucrats, with their luncheons, their hunting and fishing trips, their corporate jets, and golden parachutes."

        

-Gordon Gekko, Wall Street (the movie) 1987 (complaining about deficits and management is a timeless American tradition) 

Daily Economic Update: March 11, 2024

The Federal Reserve is in it's blackout period leading up to their March 20th rate decision.  The week ahead features an important (aren't they all important?) CPI data print on Tuesday,  followed by PPI and Retail Sales on Thursday and UofM consumer sentiment on Friday.

Like the Fed, every so often it's good to cut the noise out of your day, especially in financial markets news.  As Warren Buffet said in the latest Berkshire annual letter [referring to his sister): "She is sensible – very sensible – instinctively knowing that pundits should always be ignored. After all, if she could reliably predict tomorrow’s winners, would she freely share her valuable insights and thereby increase competitive buying? That would be like finding gold and then handing a map to the neighbors showing its location."

So like I did back in December 2023  for the remainder of the week, you'll get one quote/excerpt a day from whatever books, article, transcript, etc. I have laying around.

Speaking of NOISE, here are two quotes to consider to start your week:

"Noise, the grand dynamism, the audible expression of all that is exultant, ruthless and virile.... We will make the whole universe a noise in the end. We have already made great strides in this direction as regards the Earth.  The melodies and silences of Heaven will be shouted down in the end."

                            -C.S. Lewis, Screwtape Letter #22

"that’s the problem is our modern world, with all of its noise, produces a state of constant alert, and that is not optimal. And this would all matter less, but that amid that noise, there is also signal. In the realm of information theory, the term signal refers to the desired meaningful information. While noise is the unwanted interference, transposing this concept into our daily lives, the signal is the crucial work. It’s a heartfelt conversation. It’s the key insight. The noise is everything that distracts or detracts from that, and this constant exposure to noise makes it hard for our brains to filter out the essential from the non-essential. When bombarded by too many stimuli, too much noise, the brain struggles to identify and process the signal. You know the feeling. You’re trying to write a report, and your email notifications keep pinging, annoying emails interfere with the signal writing the report, affecting the quality of your decision-making and clarity, and all of this leads to mental fatigue or cognitive fatigue when the brain is overused. Similar to how our muscles tire after prolonged exertion, constant noise, and distractions demand the brain to switch tasks frequently.

You know what it’s called – context switching. Each switch uses up cognitive resources leading to rapid depletion of our mental energy. So this is why after not even a day but a few hours with constant interruptions, even if they’re minor, you can feel as exhausted as if you’ve done intense physical labor. The fatigue isn’t just about the mental effort of the main task but about the additional energy expended in managing and shifting between distractions, and the fatigue has a compounding effect. As you become more tired, your capacity to differentiate between noise and signal diminishes further, making you even more susceptible to distractions, which in turn increases fatigue. So there’s a vicious cycle that can severely impact mental wellbeing. "

 -Gregg Mckeown, podcast ep. 233 

Daily Economic Update: March 8, 2024

It's another JOBS Day in 'merica.   We'll start with new record highs for S&P and Nasdaq as investors cheer central bankers who sound determined to cut rates this year.  The 2Y is ~4.50% and the 10Y is ~4.09%  ahead of jobs.

As for the jobs report, the consensus is for a headline number of ~200K with the unemployment rate remaining at 3.7%.  The Average Hourly Earnings number might get additional scrutiny after yesterday's BLS data on productivity and unit labor cost data showed YoY compensation per hour at 5.1% (see page 6).   Whatever happens, blame the weather as GS research reports that nationwide snowfall declined substantially in February which might have caused an uptick in construction and leisure jobs.

Yesterday, as expected the ECB kept their key interest rates unchanged at 4.5, 4.75 and 4% for the main refinancing, marginal lending facility, deposit facilities respectively.  The ECB did revise down their inflation projections and expect to get to target inflation in 2025 (on a headline basis) while characterizing the growth in wages as 'strong'.  I guess we'll see if inflation falls as quickly as now forecast by the ECB, if it does it sounds like they'll be cutting by June.

In Fed land, probably the most memorable thing about Powell's testimony will be the questioning from John Kennedy of Louisiana around the allegations of sexual misconduct by bank examiners (see around 4:30 mark).  I get that the ultimate line of questioning had to do with the Basel III endgame in some way, but I'm just not sure what the FDIC has to do with Powell. Unfortunately or fortunately, social media has had their fun with this exchange and it will now be the only thing most people remember from this testimony.

The SOTU was about as expected based on pre speech media reports, with Biden taking an opportunity early in the speech to paint Trump as a threat to democracy at home and abroad. Record job growth featured prominently and there was a soft landing reference in the speech.

XTOD: Did u guys see that bro's expression in the back?  https://pbs.twimg.com/media/GIFPvMtbsAUHMoS?format=jpg&name=medium

XTOD: Powell: "Interest rates right now are well into restrictive territory. They’re well above neutral."

"We're far from neutral now."

XTOD: Oaktree’s Howard Marks says many companies are still "swimming naked" with debt maturities yet to hit. “The tide hasn’t gone out.”

XTOD: Goldman Trader: Back In 2000 Everyone Thought The Internet Would Run On Cisco Routers At 50% Margins... Until They Didn't

Daily Economic Update: March 7, 2024

Powell stayed on his talking point that the Fed needs to see more evidence that inflation will get to and stay at 2% target before cutting rates.  The market seemed to cheer on the fact that Powell at least doesn’t think the Fed will need to hike again. Even NYCB couldn’t derail a bit of a relief rally (looks like maybe some crony capitalism with the Mnuchin deal, who knows). The 10Y yield fell to 4.10% while the 2Y fell to 4.56%.

ADP comes in less than expected at 140K vs. 150K est.  As an observer the correlation between ADP and the Non-farm payrolls is weak at best, so I'm not sure how much stock markets place in the ADP number as a predictor.

The JOLTS data showed job openings falling slightly but beating consensus forecast.  Quits and hiring both fell slightly but remain robust.  Speaking of job openings there are plenty of post on LinkedIn where people are complaining that job post on LinkedIn are not really for jobs that exist, theorizing that many posting are made by companies simply to create the impression that the company posting is growing rapidly. This has lead some LinkedIn candidates to ponder whether anyone has actually been hired from a job posting on LinkedIn.

There have been a few interesting Fed related post on inflation and the level of interest rate policy.  One of the post was by the St. Louis Fed and seeks to analyze the output gap, how closely the economy is functioning to it's long-run production capability, and concludes that a a Taylor Rule would imply that interest rates should be at around 5% to react to the current output gap.   A second post was from the NY Fed discussing inflation expectations and completing the 'last mile' of returning inflation to target.  That post looks at New Keynesian models and concludes that bringing inflation down is dependent upon expectations for labor market conditions driven by macroeconomic policy.  What I find interesting in this post is the author's conclusions, which show scenarios where inflation doesn't return to the 2% target until 2025 at the earliest:

"The model predicts that further disinflation—the final mile—is likely to be gradual. It bears emphasizing that these are our model-based forecasts and not official projections.

What affects the speed of disinflation? In the chart below, the left panel presents three forecast scenarios for inflation based on possible future paths of the unemployment rate, shown in the right panel. When the unemployment rate rises faster than the baseline forecast, then underlying inflation reaches its long-run trend (red line) by the end of 2025 (gold line). However, when the unemployment rate moves sideways, then the pace of disinflation is slower (blue line)."

On the day ahead it's jobless claims and moar Powell. 

 XTOD: This guy put $260 into a meme coin named “Jeo Boden” 3 days ago…It’s now worth $433,000. I love this country.

XTOD: This. Emphasis on the years of upcoming capital spend needed to make up for 4 decades of outsourcing/asset light businesses/ "financialization" of returns. The US corporate pendulum will swing back from extreme Wall Steet efficiency closer to Main Street efficacy.

XTOD: The yen extended gains against the dollar to as much as 0.5% on news that the Bank of Japan has tacit approval from some government officials to end its negative interest rate policy in the near term: BBG

XTOD: Can’t get this chart out of my head. It points to a culture that is not just stuck but dead. 

If you abdicate your attention to addiction, you cease being 'you.' You’ve stepped into the pod, made yourself comfortable, said thank you.  https://pbs.twimg.com/media/GH_zVKeXoAERIrz?format=png&name=medium

XTOD: The modern HF industry went vertical on AUM when $SPY did nothing from the tech bubble top in 2000 until post the GFC in 2010.  The modern HF industry was destroyed when the $SPY went vertical from the GFC lows of 666 to 5000+ as it wasn’t needed anymore.    It was never about limiting vol and always about total return.

XTOD (John Cochrane gets into with MMTers): Easy. 27% rise in nominal GDP (Q1 2021-now) = 27% rise in real GDP, not 9% rise in real GDP and 18% rise in prices. MMT said "there is always slack," so printing money won't cause inflation. The experiment was just run.

XTOD: “How inexplicable it seems.   "If one sets aside time for a business appointment, a trip to the hairdresser, a social engagement or a shopping expedition, that time is accepted as inviolable.  

"But if one says: I cannot come because that is my hour to be alone, one is considered rude, egotistical or strange.”  ― Anne Morrow Lindbergh, Gift from the Sea

Daily Economic Update: March 6, 2024

A tough day for equities as major indexes fell more than 1%. Yields also fell 5-8 bps as investors reassessed their risk appetites, or at least that sounds plausible.  

Yesterday's ISM showed the service sector expanded for the 14th straight month with strength in activity and new orders and some softening in employment and prices.  The softening seemed to dominate the market’s sentiment, despite the fact that comments that ISM highlighted from respondents read fairly optimistic. 

Also weighing on risk appetite, apparently Apple and Tesla have sales problems in China.  How much of that is economic weakness in China vs. consumer preferences being influenced by nationalism vs. increased domestic Chinese competition (I saw that 60 minutes on China's EV industry and their robotics a few weeks ago).  

Crypto doesn't care about China (or maybe it does as it generally doesn't like authoritarian regimes and Chinese can use crypto to get wealth out of China).  I've written about crypto lately, but a bit more quietly Gold has hit new record highs.  Perhaps Bitcoin and Gold are driven by similar factors, both of which are driven by political economy questions.  True Bitcoiners are libertarian and techy who want a way to make uncensored payments with some assurance that no one will hyperinflate away the digital coin (though while Bitcoin is fixed quantity, nothing stops the proliferation of a thousand other cryptocoins).  Gold bugs generally believe that fiat currencies should be redeemable into a physical commodity, gold, which serves as a "medium of account" under a general premise that gold monetary units provide a more stable currency than fiat and are less prone to the political will to inflate (though a gold standard still requires political cooperation, especially if governments control the mints).

Speaking of gold and Bitcoin, Larry White of George Mason, was speaking about his book Better Money: Gold, Fiat, or Bitcoin? on MacroMusings back in August 2023 in his talk he mentioned the following as to why he believes Gold has characteristics that make it a better money than Bitcoin, specifically how gold supply expands as money demand grows, while Bitcoin supply does not:

That's the biggest point the book makes that in the long run, under a gold standard, the quantity of money grows as demand grows. And so you get this mean reverting characteristic that we talked about earlier where the purchasing power is pretty stable and predictable, not perfectly, but pretty stable and predictable, more stable and predictable than Bitcoin would be, more stable and predictable than fiat monies have turned out to be in practice.

...... But because the quantity of Bitcoin at any point in time is a vertical supply curve, over time, the supply curve shifts to the right slowly with the programmed increase in the supply, but the quantity doesn't respond at all to increases in the demand. All of the increase in demand goes into the price and none into the quantity. And so that makes it more volatile than a gold standard, both in the immediate run where the gold standard supply curve is not perfectly vertical, because you can convert non-monetary gold into monetary gold, but it's especially dramatically different in the long run where the supply curve for monetary gold is basically flat and the supply curve for Bitcoin is basically vertical, meaning you get a lot of volatility in the price and no volatility in the quantity. Whereas with a gold standard, it's the reverse. You get response in the quantity and stability in the purchasing power.

....So if fiat monies break down and people are looking for a better money, and to go back to the beginning of the book, as they had to do in Venezuela during the hyperinflation, it seems to me that gold is a better candidate. People would find it a better candidate.

On the day ahead it's ADP Employment, JOLTS, Beige Book and Day 1 of Powell.

XTOD: New Commentary The most important topic for Professional Investors is "The Cost of Carry" - what it costs to hold a position over time.  Today I detail this concept in layman's terms for civilians. 

https://convexitymaven.com/wp-content/uploads/2024/03/Convexity-Maven-The-Cost-of-Carry.pdf

XTOD: Is private equity actually worth it? https://t.co/kdAR1K89A8

XTOD: Berkshire Hathaway director Chris Davis on The Knowledge Project podcast:             

"Berkshire is run with the idea, from the very beginning, that the people that were invested in Berkshire had 100% of their net worth in Berkshire. 

That really does shape the culture there.  

It's not that [Berkshire] is afraid of risk, but the sort of risks it takes are risks that are manageable on the income statement. 

The idea of Berkshire really, really being built to last — that is profoundly true."

XTOD: When gold rises in your currency DESPITE positive real rates, the gold market is saying “Your government will have a debt spiral if real rates remain positive.” 

Gold began warning of this in late 2022; numerous other markets have since begun playing by this "new set of rules."

XTOD: Janet Yellen gives an important update regarding crypto  https://twitter.com/i/status/1764830154780717335

XTOD: Worth the read  The Loser’s Game   By Charles D Ellis  https://twitter.com/F_Compounders/status/1765091631370248200/photo/3

Daily Economic Update: March 5, 2024

Yields rose and stocks fell hit then fell from record highs to start the U.S. trading week.  Like most weeks, the narrative is that investors are awaiting word from Powell and economic data, this week being the Jobs report on Friday.  There are some other narratives about Chinese stimulus and how draining the RRP is de facto QE, etc. but for now the focus remains on U.S. growth and inflation expectations with many pundits continuing to push their equity calls higher and some moving to the no rate cuts for 24 camp.

Crypto and shitcoins don't need any excuses to rally, I mean we're buying a coins called "Dog Wif Hat and Frog Wif Hat", a coin called "Retardio" is up like 50%....sure, the technology, the spot etfs, the halving, the correlation of all-time highs with the release of Dune movies, etc....looks up definition of money...looks up definition of asset, closes books, burns CFA Charter. 

Maybe the definition of money that is in play for crypto comes from Aesop's Fables story of the miser [substitute 'crypto' for 'gold' in the story] which concludes that "The worth of money is not in its possession but in its use."   I still haven't seen any cryptocurrency that has a legitimate use case.  And don't say, 'but I can sell my alt-coin and use the money', that seems to imply what you sold wasn't money.  

Speaking of money, every couple of months a debate pops up on X/Twitter where someone claims that banks are not intermediaries as they create their own money.  The modern view is that banks don't need deposits to make loans, in fact it is making a loan that creates their own deposits.  I don't dispute that view, but where the debate seems to really heat up is essentially around the topic of how those loans are funded, which is the key to whether or not there is any intermediation going on when banks lend.  One person who gets really fired up on this topic is economist/professor George Selgin.   "A bank that is constrained by the “cost of funds” is an intermediary _ipso facto_. Banks that dob’t need to borrow from others to finance their own lending face no such cost. In this respect the 2014 BofE article is self-contradictory."...."Claiming that a bank "funds" its lending by taking advantage of its ability to create exchange media, is not much better than claiming that anyone with a blank check can fund her shopping by taking advantage of her ability to fill out the check for some positive amount. In the second case, the blank check isn't enough: the real "funds" available consist of the shoppers deposit balance. In the first, they consist of the resources the bank has to make good on the loan when the fact that it is drawn upon results in claims against it."  Feel free to follow @GeorgeSelgin on X as he'll probably be pissed off about this topic for at least another few days.

I've already spent too much time on Money today, guess we'll have to save the distinction between "inside" and "outside" money until another date.

Look on the bright side, I could have written about R-Star again, but fortunately the BIS did it for me https://www.bis.org/publ/qtrpdf/r_qt2403b.htm   They even threwin a Knut Wicksell reference.

XTOD: me explaining to my parents that I make a living by rearranging logos on powerpoint and doing basic math on excel  https://pbs.twimg.com/media/GHyjjq-WMAA9tg5?format=jpg&name=medium

XTOD [Andy Constan replies to some dude who lost money following his trades]: Lots of lessons here for everyone including me 

1) Most importantly.  Hold assets for long term passively with low fees

2) market timing is hard and most people can't do it.

3) Following others trades particularly when you cherry pick is silly

4) follow people you can learn from. 

5) big concern for 

@kevin_jawn that after all those lessons he has decided to follow only bullish accounts. If that's for market timing reasons review 1-3 and the remind your self about 4.  For me I am here to learn and teach and hold myself accountable by detailing my trades and performance.  The last 3 months have been bad. The career good.  I want follows from people on the same journey.  Don't be stupid.  I give my opinion on stuff. In the end it's not investment advice and you need to decide for yourself and do your own research.  Again review 1-5   Thanks for your tweet Kevin and the comments within.   I see flaws in your logic and worry about your ongoing process but proud of you that you are reflecting and thinking deeply about what works for you

XTOD: We have that policy now. The American Opportunity Tax Credit (AOTC) is usually described as a $2,500 tax credit per child in college. But it is mathematically identical to giving every household $5,000 but then assessing a penalty on non-college ones. The thought experiment does not answer the question of whether the AOTC is a good policy. But it is a useful way to reframe the question to ask yourself because every benefit sounds good but all of them are effectively a penalty on others. (This was inspired by the Wendy's "debate" where you had people saying that it is fine to give discounts in slow periods but unfair to have surcharges in busy periods--when those two are identical pricing policies just framed differently.)

XTOD: I grabbed coffee with a former colleague over the weekend. He works for a multifamily GP. They have (had?) a $100M fund with a family office. However, the fund can veto any deal. If they do, the GP can syndicate the deal. The fund was smart and declined to participate in most of the 2022 deals. So, what did the GP do? Everything you’ve been reading about in TRD, Bisnow, etc. Purchased properties in the Sun Belt with max leverage and floating rate debt. They raised the remaining capital from retail LPs. 

The acquisitions team was having a hard time getting deals to pencil. Luckily, the CIO was able to solve the problem! He increased the rent growth assumption and lowered the exit cap. Magically, they had a bunch of home runs on their hands. They bought 10 properties in 2022. Fast forward to today- most of the properties are bleeding cash. Even worse, their interest rate caps begin to expire in a few months. The situation is clearly spiraling out of control. I asked my former colleague, “Why haven’t you approached the lender yet to start discussions?” His response was that the CEO and CIO are afraid they’ll have to pay a “wider spread” in the future if they have a loan modification on their records.

These guys are living in an alternative reality.

XTOD: Worth reading, but I think this emphasizes “clock speed” a bit too much. The more fundamental issue for Google, as @bgurley  and  @altcap  pointed out in their excellent new pod, is that LLM-generated answers cost a LOT more to serve than a handful of blue links. And it’s not clear at all that the revenue will sufficiently offset those costs. The days of the search cash cow might be over.

XTOD [full Tweet from Marc Andreessen is very long]: The conclusion is obvious: OpenAI must be immediately nationalized.

XTOD: Check out this *beautiful* chart of consensus US growth forecasts for 2024. Not even a soft landing, just a brief refuelling.  https://ft.com/content/0d58cb77-c771-4b05-8e7b-fca2a53e4912