Daily Economic Update: April 10, 2024

CPI Day is upon us.  Expectations are for both headline and core CPI to rise 0.3% MoM.  Speaking of inflation, yesterday's NFIB Small Business Optimism provided the following:

“Small business optimism has reached the lowest level since 2012 as owners continue to manage numerous economic headwinds,” said NFIB Chief Economist Bill Dunkelberg. “Inflation has once again been reported as the top business problem on Main Street and the labor market has only eased slightly.”

I was as shocked as you, I didn't know inflation could be so problematic, in fact I thought it was business greed that was causing inflation.  How could business be harmed here?  

Maybe 'Money Illusion'?   

"Business is always injured by uncertainty. Uncertainty paralyzes effort, and uncertainty in the purchasing power of the dollar is the worst of all business uncertainties."  - Irving Fisher

Don't worry I'm sure crypto solves this or if not AI will.

Yesterday's 3Y auction wasn't super pretty with a 2bp tail, we'll get CPI and 10Y Note auction today.  Markets also keeping an eye on the geopolitical risk with tensions escalating in Gaza.

XTOD: TODAY IS THE MOST IMPORTANT CPI REPORT OF YOUR LIFE SO READ THIS THREAD🧵

XTOD: Is the U.S. deficit growth a problem which will necessitate YCC one day?  Maybe.  But talk to me when the yield curve is positively sloped by 250bp AND our currency is weak relative to other fiats AND our economy is in a recession.  Otherwise STFU about #YCC

XTOD: Here's a crazy stat that no one will believe.  The universal investment benchmark is the 60/40 portfolio of stocks and bonds.  What if you replaced the bonds entirely with gold....crazy right? 

Turns out it makes no real difference.

XTOD: Manley: "Lower mortgage rates would prompt more people to sell their homes, leading to more supply and potentially softer prices."

"Manley’s idea is a provocative one." That's provocative: "P-R-E-T-T-Y-S-T-U-P-I-D."

XTOD: Who are you riding with to take home the green jacket?

Daily Economic Update: April 9, 2024

One of those weeks where everyone is kind of waiting for inflation data.  Stocks fell slightly while yields rose again.  The 2Y is sitting right around 4.80% and the 10Y at 4.43%.  Market continues to reprice the number of rate cuts on the remainder of the year lower.

In the interim there is more student loan related forgiveness talk, this time using something through the Higher Education Act.  The plan reportedly would cancel up to $20K in interest for borrowers up to certain income caps and has several other categories of debt eligible for cancelation, including those whose loans have been outstanding for greater than 20 years.   

Yellen talks tough on Chinese banks for supporting Russia.  

On the inflation front, the NY Fed SCE showed consumers continue to have 1 year ahead inflation expectations of 3% and once again increased their 3 year ahead expectations.

On the day ahead it's NFIB Small Business Optimism and 3Y Treasury Note auction.

XTOD: Slide deck from Jim Bullard's talk on April 2, 2024 at the University of Miami.   Basic message: TR says Fed was too slow in raising policy rate and is now too slow in cutting.   https://docs.google.com/presentation/d/1Qi6jBL4htNvkXa7-7e1PRtJyAXtFQTPe/edit?usp=sharing&ouid=115002303683574113856&rtpof=true&sd=true

XTOD: Leon suddenly became the element Curb couldn't do without. New  mansions in new neighborhoods, a move to New York for a season, even a  five-year hiatus—Leon and his durags have persisted through it all. And  in the process, JB Smoove became one of Hollywood’s most prolific  comedic character actors.  https://gq.com/story/jb-smoove-hype?utm_brand=gq&mbid=social_twitter&utm_social-type=owned&utm_medium=social&utm_source=twitter

XTOD: The focus is on big name MLB elbows, but what should get as much attention/concern are 16-year-old studs having UCL reconstructions now. They'll be throwing 100+mph in the big leagues with old ligaments 10 years from now. That's how this perpetuates. We HAVE to think upstream.

XTOD: Warren Buffett: "[My dad] taught me that what's on your inner scorecard is more important than your outer scorecard. A lot of people are concerned with what the world will think about this or that — instead of what they themselves think about it." 

XTOD: No surprise:  "Brent Clark is often asked by other parents how he and his wife Anne nurtured Caitlin to become the basketball star that she is. 

His answer? Get your children engaged with as many different activities as possible, sports or otherwise."

Daily Economic Update: April 8, 2024

Eclipse Monday.

"I'm not the only one staring at the sun" ???  

  or "Black hole won't you come and wash away the rain" ???  

or "And everything under the sun is in tune But the sun is eclipsed by the moon"

Strong job data causes equities to bounce, setting off east coast earthquake on Friday…or something like that.  Correlation is not causation.  Now we have Eclipse Monday...

Jobs +303K, well above consensus with unemployment rate at 3.8% and average hourly earnings holding in there at a solid 0.35%.   Rate cuts?  We're talking about rate cuts? 

We start the week with coming off a losing week for equities and with the 2Y yield sitting 4.76% and 10Y yield sitting at 4.40%.  

Your goal for the week: think about such elusive concepts as R*, measuring productivity, and equity risk premium.  Good luck.

Another CPI report and PPI on the come.....just consider for a moment some thoughts from Nassim Taleb on what he calls the "Noise Bottleneck"....

"In business and economic decision-making, data causes severe side effects —data is now plentiful thanks to connectivity; and the share of spuriousness in the data increases as one gets more immersed into it. A not well discussed property of data: it is toxic in large quantities —even in moderate quantities....The more frequently you look at data, the more noise you are disproportionally likely to get (rather than the valuable part called the signal); hence the higher the noise to signal ratio....To conclude, the best way to mitigate interventionism is to ration the supply of information, as naturalistically as possible. This is hard to accept in the age of the internet. It has been very hard for me to explain that the more data you get, the less you know what’s going on, and the more iatrogenics you will cause."

Monday:  Try not to get blinded by the eclipse

Tuesday: NFIB optimism

Wednesday:  CPI

Thursday: PPI, Jobless Claims

Friday: Import Prices, Consumer Sentiment

XTOD: “Knowledge compounds almost in the same way that your money compounds. In fact, only when your knowledge compounds at a faster pace, your money is safe. To me, that is a very fascinating journey and rewarding life.”  — Li Lu

XTOD: “The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.”  — Morgan Housel

XTOD: Financial institutions operate by a kind of reverse Occam's razor.  

They have a large incentive to favor the complex and costly over the simple and cheap, quite the opposite of what most investors need and ought to want. - Jack Bogle

XTOD: 46% of people take less Paid Time Off than offered. I would’ve guessed the number is 80% tbh.   It’s a big problem for Americans either way. “Feel badly about co-workers taking on additional work.”

XTOD: Israel bombing Iranian embassy in Syria and now Ecuador invading (!) Mexican Embassy in Quito—feels like a lot of international law and taboos are being broken with very uncertain long term consequences.

XTOD: BREAKING - #Armenia's defence ministry reports numerous areas came under fire from #Azerbaijan last night, including areas around the villages of Movses, Chinari, Sotk, Verin Shorzha, Kut and Aravus. Troop movement reported near Ishkhanasar.

XTOD: Iowa-UConn WBB is ESPN’s most-viewed basketball game … ever. And it’s ESPN’s second-biggest audience for a non-football game … ever.

XTOD: The all-new 75th anniversary edition of this timeless Ben Graham classic will release on October 22, 2024.  640 pages of Graham's original book — "leaving his original text untouched" — alongside updated commentaries from Jason Zweig to explain how the Dean of Wall Street's wisdom still applies today.

XTOD: Nice review of "Getting Monetary Policy Back on Track" by Tom Hogan https://www.independent.org/publications/tir/article.asp?id=1926

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.