Daily Economic Update: April 5, 2024

 

Another Friday, Jobs Day is here.  The consensus estimate is 200 to 215K depending on where you look, but the whisper number seems a little higher following this week's ISM manufacturing and Powell's comments on immigration. It seems no one believes that the number will come close to the 275K printed in the March headline.  As usual average hourly earnings and unemployment rate will both be closely watched.  No matter what the number you'll easily be able to find someone to tell you that it was due to the weather or that all of this data is of low quality these days due to survey responses falling.

Yesterday saw jobless claims rise slightly but still tracking historically low levels.  In Fedspeak, Kashkari said the quiet part out loud, that the Fed might not cut this year (if inflation stalls...which it kind of has).  Oil spiking probably doesn't help the inflation fight either.  Stocks fell and yields actually fell slightly as well.  Heading into Jobs day it's a 2Y at 4.65% and a 10Y at 4.31%.

XTOD: A lot of people seem to have a necessary level of stress, and when their life is going well they make up imaginary problems to fill the void.

XTOD: Am I heading back to H4L island  

Definitely not. That is consensus now.  I am sailing the economic slowdown sea and the sirens of soft landing island are beckoning and I am lashed to the mast and heading toward recession island which is deserted.  

Dead 

CDX protection buyers

Vol buyers

Equity shorts

KRE shorts

STIR buyers 

Litter the shores of recession island not a sole alive

XTOD: “Wasting your time doubting whether you’re going to be successful is pointless.”  ~ Kobe Bryant

XTOD: Essay: In trying to manage my ever growing list of passwords, I often find myself daydreaming about simpler times, when one could simply call a doctor’s office and speak to a short-tempered human to schedule an appointment  https://on.wsj.com/3TK5cZK

XTOD: Re: 4 Day Work Week: This is inevitable & so incredibly bullish for US economy. Everyone is insane workaholic but also everyone is doing at least a day's worth of busywork AI can do. And no one has any chill so what will they do with that extra day? Shop and buy things to fill the void

Daily Economic Update: April 4, 2024

ADP employment rises more than forecast, which coupled with strong employment components in the ISM manufacturing earlier this week have caused the forecast for Friday's Jobs numbers to appear to be revised higher.  ISM services data showed continued slowing in prices and employment, but still high levels of production.  

Powell basically said the same thing he's been saying, stressing data dependence and that the it's too soon to cut. Perhaps his comments on immigration might have been the only thing of note (see XTOD's below).

The earthquake in Taiwan is a reminder of the fragility of supply chains, given the reliance on TSMC for chips.  As the late Danny Kahneman said:

“Room for error is the only way to navigate a world that is impossible to predict.”

Reminds me of a guy named Ben Graham and his concept of "margin of safety" 

XTOD:  had coffee with the head of a large family office today, and he said something really profound that I’d never quite put together.   Paraphrasing: “Capital structure ripples through management and ultimately ripples through employee experience” 

If you work in a business run for cash flow, a PE-backed platform, a business run for growth or a business run for long term hold, your experience as an employee could not be more different.  

The cash flow capital demands low overhead, fast ROI, had little patience for capacity building.  

The growth capital spends aggressively to build the company of tomorrow, today. Nobody worries much about profitability.  

The PE capital is all about the exit, and everyone is managed aggressively quarterly to maximizing strategic value and EBITDA at time of sale.  

The long term hold capital worries about downside more than upside and tends to err on the side of conservatism. It’s a marathon, not a sprint.  

No one right way, but it’s worth remembering that it’s the capital that ultimately designs the game that everyone else plays.

XTOD: “The price spiral in assets nurtured a shift in personal values as embodied in an increasingly commonplace tendency among individuals and companies alike to worship money above all else“

XTOD: Powell leaning in on labor supply increase via migration. This seems to make NFP prints very asymmetric - strong prints are going to be dismissed as increased supply, but a hint of weakness leads to early/more cuts. IMO everything going to surge the moment NFP weakens

XTOD: Any amount of intelligence can be overridden by ego, insecurity, immorality, bad incentives, or impatience, usually in that order.

Daily Economic Update: April 3, 2024

Q2 continues to unwind some of the record gains in equity markets as stocks fell for a second straight day.  Tesla deliveries falling short of expectations weighed on those shares.  Bond yields rose yet again on better than expected factory order data (+1.4% vs. 1% est) and better than expected Job Openings (8.756mm v. 8.73mm est) .  The USD currency continued to be a wrecking ball against the rest of the world.  The 2Y is 4.70% and the 10Y is 4.36%

Interestingly very little ink has been spilled expressing any concern about the strength of the dollar and the burden that may place on EM economies that issue a lot of dollar denominated debt.  Back in December there was some talk of EM debt and at the time the Dollar had been weakening for several months and the expectation was for the Fed to begin cutting and the Dollar to weaken, but of late the Fed seems to be content to hold while many other central banks begin to cut, leading to a strengthening USD since mid-March.  Will the EM Dollar-denominated debt wall make headlines again? time will tell.

On the day ahead it's ADP, ISM Services, and Fedspeak with Williams and Powell.

XTOD: I’m stealing “hunting greatness”

XTOD: Moving toward goals is very different than running away from problems.

XTOD: "Sophisticated minds adopt simplified lifestyles; simplistic minds are drawn to overly sophisticated lifestyles." - Taleb

XTOD: Avoid these 9 mistakes

1. Losing sight of dreams and falling into work for work’s sake (W4W). 

2. Micromanaging and e-mailing to fill time. Set the responsibilities, problem scenarios and rules, and limits of autonomous decision-making—then stop, for the sanity of everyone involved.

3. Working where you live, sleep, or should relax. Separate your environments—designate a single space for work and solely work—or you will never be able to escape it. 

4. Not performing a thorough 80/20 analysis every two to four weeks for your business and personal life.  

5. Striving for endless perfection rather than great or simply good enough, whether in your personal or professional life. Recognize that this is often just another W4W excuse. Most endeavors are like learning to speak a foreign language: to be correct 95% of the time requires six months of concentrated effort, whereas to be correct 98% of the time requires 20–30 years. Focus on great for a few things and good enough for the rest. Perfection is a good ideal and direction to have, but recognize it for what it is: an impossible destination. 

6. Blowing minutiae and small problems out of proportion as an excuse to work. 

7. Making non-time-sensitive issues urgent in order to justify work. Focus on life outside of your bank accounts, as scary as that void can be in the initial stages. If you cannot find meaning in your life, it is your responsibility as a human being to create it, whether that is fulfilling dreams or finding work that gives you purpose and self-worth—ideally a combination of both. 

8. Viewing one product, job, or project as the end-all and be-all of your existence. Life is too short to waste, but it is also too long to be a pessimist or nihilist. Whatever you’re doing now is just a stepping-stone to the next project or adventure. Any rut you get into is one you can get yourself out of. Doubts are no more than a signal for action of some type. When in doubt or overwhelmed, take a break and 80/20 both business and personal activities and relationships. 

9. Ignoring the social rewards of life. Surround yourself with smiling, positive people who have absolutely nothing to do with work. Happiness shared in the form of friendships and love is happiness multiplied.

XTOD: Americans spent over $113 billion on lottery tickets last year, more than they spent on movies, books, concerts and sports tickets - combined.

Daily Economic Update: April 2, 2024

Yields rose and stocks fell to start the quarter, in a move that likely reflected the fact that Friday was a market close and thus the delayed reaction to PCE and Powell.  The 10Y yield was up double digit basis points to 4.32% and the 2Y yield was up ~8bps to yield to 4.71%

Speaking of the Fed, economist Allison Schrager weighed in on her blog with the following:

"Is it worth damaging an otherwise strong economy to get inflation from 3% to 2%? There is nothing wrong with 3%, other than the fact the Fed’s target is 2%. I know, credibility is important. But let’s be honest, when have they ever hit their target? Their credibility is about faith more than history. They were below target pre-pandemic and now just above. Maybe a wide range is a better idea, or we just admit the Fed does not have precise control over these things. Though I also worry that giving up now could destabilize expectations.

Sometimes we all need to believe something, even if it is not true. It makes for a stable(ish) equilibrium."

In yesterday's data, the ISM Manufacturing index was above estimates with strong internal components including jobs.  Construction spending was below estimates.    The Atlanta Fed GDPNow is up at 2.8% for Q1 while NY Fed's model is ~1.8%.

XTOD: First Case Of Bird-Cow-Human Transmission Of Bird Flu Reported In Texas

XTOD: Can someone explain to me how Trump Media is trading at ~$6B market cap with $4M in revenue and $58M loss?  How is this not in free fall lmao

XTOD: Bitcoin might be off its all time highs, but over the last 3 years it has outperformed the S&P 500 by over 20%.  April Fools! Actually, the S&P 500 has outperformed Bitcoin by over 20% in the last 3 years.  Thanks for playing!

XTOD: McKinsey is now offering staff 9 months severance if they agree to leave the company, in a bid to reduce headcount amid a huge downturn in professional services.

XTOD: People aren’t really looking to be economically stable before they start families; they’re looking to be existentially stable.

They will opt-out of important life decisions altogether because they are waiting for the day when they will feel like more of a confident person with a firmer sense of self before making a commitment—not knowing that it’s those very decisions and commitments which they are opting out of that would allow them to develop into the person they desire to be.

Daily Economic Update: April 1, 2024

The start of 2Q2024, let's see if the gains of Q1 can continue.  "Do not attempt to fly a blimp in the shape of Charles Barkley".  I wonder if I'm the only person who saw this warning, which is in the fine print in a Capital One commercial.  I found it somewhat bizarre, but funny, that this warning (had to be?) shown on the screen.   Anyway, I guess flying a blimp shaped like Barkley might be challenging, kind of like trying to manage inflation and unemployment by moving an interest rate (generally in 25bp increments) every six weeks.

Economist Scott Sumner has a prediction: "PS. Here’s a prediction for 2024: Inflation will remain above the Fed’s target, disappointing those who expected a soft landing. The economics profession will fall all over itself making up phony “supply-side” excuses for the lack of progress against inflation (which has obviously been a mostly demand side problem, and will remain so in 2024.)"

Speaking of inflation, on Friday, the Fed's preferred inflation measure, PCE, was largely in line with expectations.  The headline was 0.33% MoM v. 0.4% est and 2.45% YoY v. 2.5% est.  The core was 0.26% v. 0.30% est and YoY 2.718% v. 2.8% est.  Personal spending rose slightly more than anticipated (0.8% v. 0.5%) and income rose slightly less (0.3% vs. 0.4%).  It doesn't seem like there was anything overtly evident in this data that screams a major slowdown or even that inflation has been firmly defeated.

Powell continued to stress the need to see more data before cuts but still seems confident that inflation is on it's way back to target.

Speaking of data, to me, the NCAA Tournament is a reminder that there are times we take data and analytics too far.  As I watched some tournament games, you see the impact of the '3-point revolution' based on data that shows a higher expected value for 3-point shots relative to 2-point shots outside of shots in the paint.  In short it's the idea that because 3-point shots are only made at a slightly lower rate than 2-point shots that teams are better off shooting 3-pointers.  

In watching some of these games you just see teams relentlessly shooting 3's, which for some teams was clearly not working.  Without getting into statistics at all, it just seems that there are times that the fact that sports are played by real people, who can have a million factors impacting their performance, seems to be lost on those wed to the data.  At least that's what it looks like to an outside observer when they see a team that is clearly not shooting well from 3, appear to make no adjustments to account for that fact. Maybe a guy just might to step in a few feet to get his shot despite the fact the analytics might say it's better for him to shoot the 3.  Setting all that aside there have been some all-time great scorers who had strong mid-range scoring games, see Michael Jordan.

I don't doubt that on average, over time, and across many teams, shooting 3's might be the best expected value strategy. Perhaps Taleb's quote is applicable here:

Never cross a river that is on average 4 feet deep 

Which I believe is a reminder that averages alone (like the average shooting percentage on 3 pointers across a wide universe of players) tell you very little about the variation around that average, you wouldn't try to walk across a river that has a passage that is extremely deep despite the fact the average depth is only 4 feet.  With 3 point shooting there seems to be some large variances and sometimes as a casual fan observing it just appears teams might be too wed to the data.

On the week ahead it looks like JOBS Day Friday, ISM reports, JOLTS and Fedspeak will make for an eventful week.

Monday: ISM Manufacturing

Tuesday: JOLTS, Factory Orders, Fedspeak

Wednesday:  ISM Services, ADP, Powell and Williams

Thursday: Jobless Claims, Fedspeak

Friday: Jobs Day in 'merica

XTOD: Powell spoke today. Some headlines  *POWELL: CAN HOLD RATES STEADY IF INFLATION DOESN'T COME DOWN  *POWELL: DON'T THINK RATES WILL RETURN TO PRE-PANDEMIC LEVELS  *POWELL: ECONOMY NOT SUFFERING FROM THIS LEVEL OF RATES  *POWELL: NO REASON TO THINK ECONOMY IN OR ON EDGE OF RECESSION

-- Only one market is open today ... crypto/Bitcoin. It is sold off as Powell spoke, Views his talk as hawkish.

XTOD: As the market climbs, the implied ERP for the S&P 500 drops to 4.23%, its lowest value since 2008. As a forward-looking price of risk, the ERP drives everything in markets. I have a review that I do on ERP, and my fifteenth annual update is now available: https://bit.ly/49fSBU0

XTOD: BREAKING: Barry Sternlicht's Starwood Capital surrenders 3 buildings in Oakland just 5 yrs after acquiring them  Starwood defaulted on $365M in loans (from Deutsche Bank) tied to the properties w/ a combined footprint of ~1M sq ft  They acquired the buildings for $494M in 2019 and are expected to be sold at significantly lower prices  Oakland faces a critical situation w/ office vacancy at a record 30%+ surging from 9% in 2019

XTOD: A surprising result from Jonathan Haidt's research is that religion seems linked to better mental health in young people.  It's a rare chink of light in an otherwise bleak picture on the effects of smartphones on teenagers.

XTOD: When you know what's coming, prepare. When you don't know what's coming, position. 

If you have a presentation on the calendar next week, you can rehearse. If you have an appointment, you can easily factor in travel time so you're not late. If you know the bill is due next year, you can save the money this year. 

When the future is uncertain, you can position. No one knows what's going to happen with the economy, but you can position yourself against potential loss by spending less than you earn. You don't know what's going to happen to your health, but you can strengthen your position against disease by exercising. You don't know when you might need your friends, but you can be in a good position to ask for their help by being the kind of friend they can count on. 

Being well-positioned enables anyone to come out ahead no matter what obstacles the unknown may present.

Daily Economic Update: March 29, 2024

Markets closed for Good Friday.

Yesterday, 4Q2023 GDP was revised higher yet again, up to 3.9% and jobless claims remain crazy low.  As with some other commodities, like cocoa, gold is at record high.   Away from the market, FTX founder, SBF, was sentenced to 25 years, less than what many had speculated.

Despite the unambiguously positive economic news of late and stock market gains, earlier in the week, Blackrock's Larry Fink was extremely concerned about the state of U.S. retirement funds.  According to Reuters: "Fink said data from the U.S. Census Bureau's survey of consumer finances in 2022 showed nearly half of Americans aged 55 to 65 reported not having a single dollar saved in personal retirement accounts. "Put simply, the shift from defined benefit to defined contribution has been, for most people, a shift from financial certainty to financial uncertainty," he added."   Just a reminder that not everyone has benefited from recent economic gains.

Speaking of unequal gains, Ray Dalio was out with a piece this week titled In China: The 100-Year Storm on The Horizon.  In it Dalio references his big debt cycles and states: "It is quite typical for such booms to produce debt bubbles and big wealth gaps that lead the booms to turn into bubbles that turn into busts."  In China in particular Dalio discusses the history and how a convergence of forces, perhaps accelerated by Covid, coupled with a the domestic debt bubble bursting and increased international conflict has led China toward a more communist nationalist mentality.  Dalio states that: "History shows that in all countries through all times during these very difficult 100-year-storm-like periods, leaders go to much more autocratic policies because the alternative becomes great internal conflict and disorder, and typically there are forced changes of leadership that those in power fight against."  Dalio believes China needs a 'beautiful deleveraging' lead by debt restructuring coupled with easy money policies to avoid a lost decade.  He also sounds concerned about the prospects for wealth confiscation and the possibility that China tries to drag the U.S. into a 3rd war.

XTOD: Not sure what to make of this:  -25 Years for SBF sentencing  -Just about 100% recovery for FTX clients

XTOD: NYC’s Delinquent Property Taxes Soar Without Incentive to Pay  @business  #CMBS  

▪There’s an estimated $880 million in unpaid taxes this year

▪Cobble Hill, Brooklyn rental owes $52 million, city data shows

XTOD: A favorite quotation from Danny Kahneman: "Nothing in life is as important as you think it is when you are thinking about it." (Except Danny.)

XTOD: Dream big, start small, act now. Every small step counts towards your extraordinary future. 

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?