Daily Economic Update: March 15, 2024

 "Every choice has an impact on the Compound Effect of your life."

"Your biggest challenge is that you've been sleepwalking through your choices.  Half the time, you're not even aware you're making them!"

"It's the little things that inevitably and predictably derail your success. Whether they're bone-headed maneuvers, no-biggie behaviors, or are disguised as positive choices (those are especially insidious), these seemingly insignificant decisions can completely throw you off course because you're not mindful of them."

"..our need for immediate gratification can turn us into the most reactive, nonthinking animals around."

"Indulging in our bad habits doesn't seem to have any negative effects at all in the moment....But that doesn't mean you haven't activated the Compound Effect".

-Darren Hardy, various excepts from The Compound Effect originally published in 2010. 

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