Daily Economic Update: March 28, 2024

Another record high close for the S&P 500 and this time the gains weren't lead by AI stocks.  The S&P is now up ~10% on the quarter.  In fixed income land, bond yields fell with the 2Y down ~3bps to 4.57% and the 10Y down ~5bps to 4.18% as the strong 7Y note auction priced about 1bps through where WI issued was trading, making this a strong week for Treasury demand.

Fed Governor Waller's speech was titled There's Still No Rush, you probably didn't need to make it much past the title to get the gist.  "Adding this new data to what we saw earlier in the year reinforces my view that there is no rush to cut the policy rate. Indeed, it tells me that it is prudent to hold this rate at its current restrictive stance perhaps for longer than previously thought to help keep inflation on a sustainable trajectory toward 2 percent."  "I continue to believe that further progress will make it appropriate for the FOMC to begin reducing the target range for the federal funds rate this year. But until that progress materializes, I am not ready to take that step."..."In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data. "..."As a result, in the absence of an unexpected and material deterioration in the economy, I am going to need to see at least a couple months of better inflation data before I have enough confidence that beginning to cut rates will keep the economy on a path to 2 percent inflation. "

You may not have directly heard of Danny Kahneman or read his books (Thinking Fast and Slow is an interesting read, though I found it to be a tough read), but you're likely familiar with some of his work around heuristics, bias and ultimately his impact on the field of behavioral finance.  Kahneman passed away yesterday at age 90.  I don't know if Kahneman is best known for "prospect theory", but for those unfamiliar with the theory, it essentially says that individuals place different weights on gains and losses.  In the work of Kahneman and his long time partner, Amos Tversky back in 1979 they conducted a study in which participants were offered a choice of a sure gain of $500 or a 50/50 chance to either gain $1,000 or nothing at all, respondents overwhelmingly chose the "sure gain".  Correspondingly, when another group was asked to choose between a sure loss of $500 or a 50/50 chance to lose either $1,000 or nothing at all, a majority gravitated to the uncertain outcome.  It appeared to be that human nature is to prefer an uncertain loss to a certain loss but to prefer a certain gain to an uncertain gain. [aforementioned paragraph comes from a CFA Reading from 2007 on managing investor portfolios written by James Bronso, Matthew Scanlan and Jan Squires)

Further, author and former poker player, Annie Duke, references Kahneman's work on prospect theory and loss aversion in her book, Quit.  In it she discussed further work by Kahneman that involving coin flip propositions where a person starts in a $100 position and is offered a coin flip with a positive expected value of $110 that showed that people "are willing to give up extra profit to lock in the sure win.  They will pay to avoid their win evaporating with the flip of a coin, and the regret that comes with it."  The same experiment also started people off with a $100 loss position and offered them a coin flip with a negative expected value of $110 which showed that "people will indeed pay for the chance to recruit luck into the equation, which is the only way they can turn a sure loss around."

XTOD: My conversation with the legend, Daniel Kahneman.  Daniel was gracious enough to spend an entire afternoon with me the first time we met.  May he forever rest in peace.  https://fs.blog/knowledge-project-podcast/daniel-kahneman/

XTOD: One of the strangest things with tip culture is who does not get tipped.   Waiters yes, flight attendants no.   Uber Eats driver yes, UPS driver no.   Valet yes, front desk no.

XTOD: What turns an Austrian boom into a bust isn't slower credit expansion or disinflation; its real interest rates rising back to their "natural" levels. And my impression is that that's already happened.

XTOD: 16 sentences of wisdom from bond trader turned restaurateur, Sean Feeney, that will make you a better person, friend, and leader.

1. The most important ingredient is the one that’s left out.

2. The greatest gift is courage. Give someone the courage to be themselves.

3. Success is doing something every day for the rest of your life, happy to do it.

4. Everyone has genius inside them.

5. Truly showing belief in others will buy them a ticket to someplace they never knew.

6. Hospitality is creativity plus compassion.

7. “That’s just the way it is,” tells you there’s money to be made.

8. It is tempting to have something for everyone but there is preciousness in not filling demand.

9. Create a brand that people chase, don’t chase people with your brand.

10. Make others feel a part of something.

11. You are one of us, whether you work with us or you're dining with us.

12. Treating others well is good for business.

13. Finish the day, asking, “How did I impact someone in a positive way?”

14. Know what works and be honest with what doesn't and don't do that.

15. Block out all the noise and keep it simple.

16. Believe every day is a good day. But don’t think it’ll be easy.

https://x.com/ShaneAParrish/status/1773042318578200855?s=20

https://x.com/morganhousel/status/1773064353928913386?s=20

https://x.com/GeorgeSelgin/status/1773030503211295157?s=20

https://x.com/InvestLikeBest/status/1773040994801291298?s=20

Daily Economic Update: March 27, 2024

In a data heavy day, durable goods new orders both headline and core exceeded expectations, while shipments were below expectations and home prices rose more than expected.  The S&P Case Shiller home price index showed increasing home prices MoM generally in line with expectations and clocking in at a rate of 6.6% YoY.  The Conference Board's consumer confidence survey was slightly below expectations and showed “Consumers’ assessment of the present situation improved in March, but they also became more pessimistic about the future,” said Dana M. Peterson, Chief Economist at The Conference Board.  Despite some pessimism in the report, the data showed consumers continuing to reduce their recession odds and still consider jobs to be plentiful.

Stocks ended down for a 3rd straight day while cocoa prices hit new all-time highs.  Yield were down slightly with the 2Y at 4.60% and the 10Y at 4.23%.  We'll get some of Fed Governor Waller on the day ahead.

In tragic news, the collapse of the Francis Scott Key Bridge in Baltimore following a massive container ship losing power causing it to ultimately hit one of the bridge's support columns, is an abject reminder of uncertainty.  Investigations will continue to try to assess what could have been done to prevent this accident and what can be done to prevent these types of accidents from occurring in the future.  Certainly some lessons will be learned.  I wouldn't be surprised if we find that some of the problems in this disaster were tied to the topics of complexity and tight coupling, but time will tell.

I've written about the topic of uncertainty (and it's close cousin risk) a ton on this blog, you can find those instances here and further find the word "uncertainty" with a good old fashion Ctrl+F search on the page.

XTOD: It’s easier to be lazy than it is to fail.   As soon as you actually try you realize how little you have to do to beat the people who do nothing.  There are far fewer people who’ve failed than people who were too lazy to try.

XTOD: Is there a known law for a long-life of compounded positive reputation DESTROYED at end (Ala @nntaleb turkey’s life before thanksgiving)?.....Paraphrasing Buffett + PE’s Buffett (and Lux godfather) Carlyle’s Bill Conway “10 years to build a rep 10 seconds to lose it”....Coach Wooden nailed it:  Care about your CHARACTER over your REP, because it’s what you really are  REP is just what others think you are

XTOD: We put round pizza in a square box and eat it in triangles.

XTOD: Many different methods will deliver training results. The only two non-negotiable factors for success, though, are effort and consistency. Adaptation won't happen unless you force it.

XTOD: Is what I'm about to do today connected to what I'm going to value over the long-term?

Daily Economic Update: March 26, 2024

I wonder if there is a Reddit about trading Reddit shares? There probably is.  Reddit and shares of some AI stocks did well while the major indexes closed slightly lower.  Yields rose 3-6bps across the curve as Fedspeak from Bostic and Cook leaned slightly more hawkish against the usually dovish Goolsbee.  Bostic is on record calling for only one rate cut this year.  The 2Y at 4.63% and the 10Y at 4.25% as traders position for markets being closed on Friday as PCE data hits.

Meanwhile as we wait for PCE, it looks like two staples, chocolate and gasoline, will continue to be expensive.  Cocoa prices continue to reach new all-time highs due to supply shortages largely related to weather and oil prices are rising related to geopolitical supply concerns.  

Away from economics and markets, it was heavy in pop culture news:  P. Diddy investigated for human/sex trafficking, Ohtani says he never bet on sports and was stolen from, Trump couldn't post bond but gets more time, Huberman can't manage dating five woman at the same time, and the Terminator had a pacemaker put in. 

Today's we'll get durable goods orders (does all the Boeing issues - now with a C-suite shakeup ever show up in this data?) , home price data and some consumer confidence data.  We also have the 5Y Note Auction.

XTOD (Andy Constan - who to the best of my knowledge coined "H4L Island"...now leaving): FWIW I have left H4L island and expect NGDP to be lower than longer than expectations. I am sailing in the Economic Slowdown Sea.  The only destinations on my journey are Recession Island or Soft Landing island.  My guess is the former.

XTOD:  A few smart things I've read lately: https://collabfund.com/blog/smart-words-from-smart-people/

XTOD: Imagine working hard to get into a good university, studying to get into a competitive IB job, and toiling away for 90+ hours a week to earn $150-175k in comp after your first year, only to have teenagers yolo shitcoins with no inherent value and gain millions of dollars

XTOD: I don't think it's the price of being an A podcaster—there are many honest ones. It's the price you pay for selling yourself as someone you're not, and making millions off it by engaging in a form of deception that is supported by an oligarchy of deceivers, all of whom emerged in the wake of the pandemic. These were people who knew how to take advantage of other's vulnerability.  I don't feel bad for him.

Daily Economic Update: March 25, 2025

Sorry if this post is incoherent.  I wrote it with an experimental neuralink device while exercising "squatters rights" in a $2 million property in NY and taking Ozempic.

Who would you like to sue?  We've got shoppers suing Hermes because Birkin bags are rare, expensive and they won't sell them to just anyone, you need to buy a bunch of other stuff to prove you're worthy first.  On top of that we've got a suit against Starbucks because oat milk is a surcharge and some people are dairy intolerant (apparently lactose intolerance is recognized as a disability).  I have decided to follow on with lawsuits against every company in the food and beverage category because: (a) healthy food is generally more expensive than junk food and (b) I have a kid with celiac, which requires him to be gluten free.  Last I checked gluten free food is ridiculously expensive and not offered at every single restaurant. They shouldn't be able to limit my access to healthy food or charge more for gluten free food, right?  Capitalism and Supply and Demand be damned.

Last week was a nice week for equities despite Friday's down day.  The tensions around the terrorist attack in Russia and the failing ceasefire negotiations in Israel are reminders that there are plenty of geopolitical risks still out there.

We start the week with 2Y Treasuries at 4.60% and 10Y at 4.20%.  Anyone willing to trade a 2's10's Steepener here?

More inflation data on the week ahead with the Fed's preferred PCE measure on Friday.

On the week ahead:

Monday: Fedspeak, new home sales

Tue: Durable goods orders, home price indexes

Wed: Gov Waller

Thur: Jobless Claims and a 3rd read of 4Q2023 GDP, UofM asking people about gas prices

Fri: PCE, Powell

XTOD: Doing what everyone else thinks you should is a sure path to the same results as everyone else.

XTOD: Take pride in your effort, not your talents. Your talents are a gift, you didn't do anything to earn them. You should take pride in what you do w/ them. True excellence comes from combining gifts with dedication and effort. (Working & studying hard/practicing consistently)

XTOD: Resendo Tellez, a 27 y/o from Wasco, California was Arrested earlier today after an Incident occurred this morning in which he was a Witness to a Fatal Accident at an Amtrak Rail Station, which involved a Person being Struck by a Train and Killed, before Tellez decided to then take the Severed Leg of the Victim and was later Filmed by a Passerby as he attempted to Eat the Human Leg.

XTOD: Breaking News - Pete Rose is now claiming it wasn’t him.   It was his Translator ( pictured below) https://pbs.twimg.com/media/GJT_pbHXMAA34I6?format=jpg&name=900x900

XTOD: This week I reintroduced my Ultra-Millionaire Tax.   It’s time for millionaires and billionaires to start paying their fair share.

XTOD: the lowest earning 40% of americans pay no income tax  the top 1% of american earners pay 40% of all income tax

XTOD: Bitcoin: Crypto’s Original Use Case:  The coin that Warren Buffet called “rat poison squared” is now a $1.3 trillion global asset sought after by some of the largest financial institutions in the world—with the potential to disrupt a wide range of markets.

Daily Economic Update: March 22, 2024

I still can't believe no one asked Powell for his NCAA pick.  

Yesterday's jobless claims data proved you still can't get fired, while S&P PMI's showed continued expansion.  The news on the central bank front was slightly more interesting with the Swiss National Bank cutting rates by 25bps to 1.50% in a move that was not priced into expectations.  The BoE heled their policy rate at 5.25% but is more clearly moving away from a hiking bias and towards easing.

Even a DOJ anti-trust case against Apple couldn't keep the major indexes from continuing their bull run.

The 2Y yield rose to 4.64%, reclaiming some of the ground lost earlier this week, and the 10Y is 4.27%

We’ll get some Powell at a Fed Listens event today, which will likely be a non-event and everyone will be watching basketball or buying AI stocks anyway.

XTOD: I am concerned because I am hearing reports of a mass epidemic of a terrible 48-hour virus that has people not showing up for work or school today. Hope everyone is feeling okay!!! Take care of yourself, get your rest, nothing more important than your health.

XTOD: DOJ suit against Apple has five claims on monopoly maintenance. Antitrust Division alleges Apple:

1) Blocking super apps 

2) Mobile cloud streaming services

3) Excluding cross-platform messaging apps

4) Degrading non-Apple smart watches

5) Limiting third party digital wallets

XTOD: Some thoughts about the bond market treading water since the Fed meeting while risk markets rally ...  ----- The Fed cannot randomly pick some day and cut rates. If they do and the market thinks it is not serious about inflation, sell bonds. 

In 2022, the Fed hiked 75bps at four consecutive meetings. While they were doing this, inflation hit 9%. But the Fed was "on the case," and the 10-year yield peak was just 4.22%.

Contrast this with 2023. The Fed stopped hiking in late July 2023, when the 10-year yield was 3.95%. Even though inflation had declined from 9% to 4%, the market was "unsure" about the Fed's commitment to fighting inflation. Ninety days later, the 10-year yield jumped to over 5%, peaking in October 2023.

If the Fed is not serious about fighting inflation, when the market thinks it is a problem, it is not serious about owning the 10-year notes.

Fed dovishness only works if the market is convinced inflation is not a problem. Right now, it is unsure.

I long thought inflation was a problem (3% to 4% problem), and the economy is "no landing." So I think the market will resolve that inflation is at least an issue and that the Fed is not acting seriously about it, and it will start selling bonds.

XTOD: Microsoft CEO Satya Nadella to board members: 

"If OpenAl disappeared tomorrow, we have all the IP rights and all the capability. We have the people, we have the compute, we have the data, we have everything. We are below them, above them, around them."  Wow.

XTOD: “Welcome back to SportsCenter Presented by ESPN Bet, for more on the Ohtani situation we go to our FanDuel MLB Insider Jeff Passan at our DraftKings Studio in Los Angeles brought to you by Caesar’s Sportsbook. Jeff, how could something like this happen?

Daily Economic Update: March 21, 2024

 Yesterday the FOMC:

• Held their policy rate at 5.25-5.50%
• Raised their growth and inflation projections while keeping their median 2024 projection of rate cuts at 3 cuts.
• The median projection for Fed Funds did increase for 2025, 2026 and in the longer run.
• No changes were made to the balance sheet runoff, but they will likely need to slow the pace of runoff fairly soon.
• Powell was asked if the Fed will tolerate inflation above target for longer, but believes they are making good progress on inflation.  He refused to provide any answer around how long they will tolerate above target inflation, other than they'll get inflation down to target "over time".
• Powell said that the road to 2% will be "bumpy" but they don't really think that the story that inflation is coming back to 2% is changed by recent data.

The conundrum from yesterday's FOMC was that the Fed seems to see better growth and higher inflation over the balance of the year, yet might be willing to cut 3x this year anyway.  The Fed is also apparently willing to cut rates in the face of pretty loose financial conditions.  Ultimately this disconnect likely comes down things like estimates of the neutral rate and how you think about inflation data.  All things we've talked about in post over the past week (and forever).

Of course the Fed will remain data dependent and will judge the balance of risk to both sides of their dual mandate.

Equities were happy, with new all time highs and bond yields were lower across 2s, 5s and 10s.  The 2Y is now sitting around 4.60% while the 10Y is 4.27%.

On the day ahead we get BOE, March Madness begins (noon), Philly Fed, S&P PMI's.

XTOD: Powell has a zillion really good PhD economists slicing and dicing the inflation data, and if they're telling him Jan/Feb uptick is mostly noise, we should all take that on board.

XTOD: While I don’t disagree on the recent data, I recall that his zillion PhDs said to ignore inflation a few years ago.

XTOD: I agree the Fed staff "forecast" does not deserve notably more deference than anyone else's. But their ability to decompose exactly what is driving the data in real time is excellent.

XTOD: Nothing changed. Policy mistake then. Policy mistake today. Fed is gambling on layoffs kicking in full gear and UR going up. That’s not data dependency, that’s hope. And hope is not a strategy. At the first jump in claims, market will revert back to > 6 cuts in a blink.

XTOD: “Financial conditions have tightened significantly over the last year” - Powell 

Someone tell him that Unvaxxed Sperm coin is up 5000% this week.

XTOD: Some people find it very difficult to believe that you can hold these three thoughts in your head:

1. The Fed is making a mistake

2. I can profit from that mistake

3. Even though I can profit from the mistake its still a mistake and bad for society.

XTOD: Dodgers Star Shohei Ohtani’s Interpreter Fired, Accused Of ‘Massive Theft’

https://go.forbes.com/c/t2Sq

XTOD: You can't just walk into Hermès and buy a Birkin bag.  Instead, you need to have a history of buying other Hermès items.   In a class action lawsuit filed today, California consumers say that policy—tying the sale of Birkins to other products—is illegal.

FOMC Recap: What lessons can the Fed learn from March Madness?

 

Let's be realistic, in 24 hours no one is going to be talking about this FOMC meeting, after all tip-off to the round of 64 of the NCAA Men's Basketball Tournament, "March Madness", is less than 24 hours away.  What lessons can the Fed learn from March Madness?

There's just something about March.  Dating back to 44 BC and the assassination of Julius Caesar, March has been associated with turmoil and uncertainty.  Shakespeare's famous line "Beware the Ides of March" certainly continues to portend bad omens in today's popular culture.  Away from ancient Rome, March has indeed had it's share of ominous moments in financial market history, just to name a few: March 2023 saw the failure of Silicon Valley bank, March 2020 saw some of the largest single day moves in rates and stock prices during Covid, March 2011 was the Japanese earthquake and Fukushima disaster, March 2010 was the height of the Greek debt crisis, March 2008 was the collapse of Bearn Stearns...you get the point.  Nevertheless, it's easy to forget the specific dates or even that the aforementioned financial market events all happened in March.

"March Madness", the basketball version, has better marketing and is less forgettable than financial market history. Like the fortuitous events that have occurred in the month of March over history, the NCAA version of March Madness is often filled with unexpected events, upsets and Cinderella stories.  We can remember 16 seeds (UMBC and FDU) upsetting 1 seeds, we can remember Christian Laettner's "The Shot", we can remember the Cinderella runs of N.C. State, Villanova and others, as well as the many future stars who became household names as a result of their play on the biggest stage in college basketball. 

The Fed can learn many lessons from March Madness, including:

• It is impossible to be perfect:  The odds of completing a perfect bracket are a number that is incomprehensible.  The odds that the Fed can steer the economy to perfection by moving an interest rate both gives the Fed too much credit and creates an illusion that something as complex as the economy is that controllable.
• Plans are worthless, but planning is everything (Dwight D. Eisenhower): In Eisenhower's words, "There is a very great distinction because when you are planning for an emergency you must start with this one thing: the very definition of "emergency" is that it is unexpected, therefore it is not going to happen the way you are planning. So, the first thing you do is to take all the plans off the top shelf and throw them out the window and start once more. But if you haven't been planning you can't start to work, intelligently at least.  That is the reason it is so important to plan, to keep yourselves steeped in the character of the problem that you may one day be called upon to solve--or to help to solve."
  Every college coach knows that you have to take in the data, do your homework and come up with a plan to attack your opponent.  In the same vein, every coach knows that their team has to survive the proverbial punch to the face.  The biggest stumbles in March Madness occur when some top seeded team, faces a team that comes out with a different style than expected.  When that higher seed fails to make any adjustments, upsets often follow.  The Fed can learn that sometimes things don't go according to plan, it doesn't mean you shouldn't have watched the film, taken in the data, etc. it means that as you watch the film and take in the data you need to make your plan robust and be willing to revisit and adjust. Just as good coaches call time out and get to make adjustments at halftime, the Fed needs to remember that sometimes what they thought was going to work, doesn't work as planned.   Maybe the Fed should consider this as the take in current inflation data.  Sometimes you have to change your defense to stop the streaky shooter.  Maybe inflation is today's streaker shooter and the Fed needs to step up it's defense. To the Fed's credit they are often very good at making adjustments when it matters most.  

While there are many more lessons the Fed and financial market participants can learn from the NCAA tournament, the primary lesson is one of learning that the future is uncertain, expect the unexpected and that anything can happen.

I'll end there, but if you want a little more on uncertainty, risk management and the parallels to the NCAA tourney, read on...

Daily Economic Update: March 20, 2024

Another Fed Day is upon us. Attention will be focused on the "Dots" to see if the year end 2024 median projected Fed Funds rates will continue to show 3 rate cuts, consistent with the December projections or if the projections will be reduced to only show 2 rate cuts.  The other indicator to be watched is whether the Dots reflect any upwards drift in the Fed's projections of the long-run neutral rate (see yesterday's post). 

The force of the AI revolution is strong, sending stocks higher as yields await the Fed.   The 2Y remains around 4.70% and the 10Y around 4.30% ahead of the Fed. Yesterday, the BoJ's long awaited end to NIRP (negative interest rate policy) came to fruition, along with their end to yield curve control and their end to ETF and REIT buying.  All of this was seemingly already priced into the market, with the Japanese Yen actually weakening to over 150 against the USD. 

I think I'll have a FOMC recap later in the day, so feel free to check back.

XTOD:  NEW: Couple arrested in Florida after passing out drunk on the beach and losing their children.  Some people shouldn't reproduce.  Alyssia Langley and fiancé Timothy Stephens were arrested for child neglect, having alcohol on the beach and trying to escape the police after they were found passed out with no children in sight.  When the couple finally waked up, it became clear that they had no clue where their kids, 5 and 7, were.  After getting handcuffed, Stephens tried running from the police but was quickly stopped.  Luckily, the kids were later found at a hotel pool.

[I mentioned George Selgin's quest to debunk claims that banks create money and need no funding, see here ].  

XTOD: Well, it took a little longer than I had originally planned, but here is my (longish) essay defending the  oh-so passé claim that banks are savings-investment intermediaries against the très chic view that they fund their loans with keystrokes: https://cato.org/sites/cato.org/files/2024-03/working-paper-80.pdf

XTOD: Both MMTs and Rothbardians agree that ordinary banks can and routinely do extend credit without having to acquire and fund their lending with anyone’s real savings.  Now that I’ve given you ample reason to distrust the claim, find out just how wrong it is.

XTOD: This is worth a read for the monetary nerds out there. After the GFC it became popular for some to say banks and governments don't "fund" their spending from income or existing assets. Yes, banks and govts are creators of money, but they also rely on funding their spending.

XTOD: The great conservative insight is that order is really hard to achieve. It's really precious, and it's really easy to lose. — Jonathan Haidt