Daily Economic Update: April 12, 2024

If I've learned one thing from the tv series Shogun and from the Ohtani saga, it's that you shouldn't underestimate the importance of your interpreter.  

Yesterday's PPI came in a little under expectations, providing a little reprieve for investors concerned about inflation, but not enough to reverse the recent move higher in yields.  As for inflation, Economist Brad DeLong posits: "My current guesses? A 40% chance that things are simply delayed by the long and variable lags, a 30% chance that I am in for a big surprise as it turns out that that the era of “secular stagnation” & permanently low equilibrium rates that place chronic deflationary pressure on the economy, and a 30% chance the “unknown unknowns” rule everything around us…"

In Fedpseak, both Williams and Collins again indicated that nothing in the data indicates a need to start adjusting monetary policy to one of lower rates.

The 30Y Auction wasn't quite as bad as yesterday's 10Y, but still tailed and had weak foreign demand, making for a rough week for Treasury issuance. 

Across the pond the ECB was on hold as expected: "The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.50%, 4.75% and 4.00% respectively."   ECB remains ready to cut but is "data-dependent".

And in shocking news a financial institution is being investigated for doing a poor job with AML.

Today we survey consumers about gas prices and expect that and their political opinions to tell us something about the future of inflation.  

XTOD: With the death of OJ, let's talk about how savage Norm McDonald was and risked his career at SNL when he would not let up on his OJ jokes.

XTOD: The current federal interest outlay is ~$1T per year, straight into financial portfolios. If you think that outlay is inflationary, imagine how inflationary it was last year when the U.S. stock market rose 30% from trough to peak. 30% is worth $12T to those SAME financial portfolios, ALL AT ONCE!  

The people who are arguing that rate hikes exacerbate inflation via the "interest income" channel are obviously wrong, but even if they were right, the ZIRP alternative they compare things to is not an alternative where you get to just subtract interest payments from private wealth & spending power, and voilà, you're done. You have to also ADD the effects of the extreme asset market melt-up that the policy would induce (and all the follow-on reflexive effects--scary to even think about).  

Just imagine how the system would respond right now if the Fed cut to zero amid the current inflation numbers! (or had held at zero all along, as the team transitory MMTers who traffic in this nonsense were demanding). 

The whole angle is just incredibly stupid. It only serves to corroborate the criticism that MMT is a political ideology that will say anything to justify aggressively loose policy, as opposed to a serious economic framework. Stop with it already.

XTOD: So, let's start with what I believe everyone still needs to understand ... The COVID lockdown/restart of the economy was the biggest ECONOMIC event of our lifetime. Bigger than the financial crisis. It changed the economy in ways we see but do not want to accept.

XTOD: Two's at 5 ...10's at 4.60   Stocks at 250 Twelve month forward EPS and a 20.8 PE

This is just fantastic pricing for a recession island destination bet.  I am still sailing the economic slowdown sea tied to the mast to avoid sailing to Soft Landing Island

XTOD: If you already live a comfortable life, then choosing to make more money but live a worse daily life is a bad trade. 

And yet, we talk ourselves into it all the time. We take promotions that pay more, but swallow our free time. We already have a successful business, but we break ourselves trying to make it even more successful. 

Too much focus on wealth, not enough focus on lifestyle.

Daily Economic Update: April 11, 2024

Shave a point off the equities indexes as inflation comes in hot.  So much for the myth that stocks are a good inflation hedge I guess.

As for CPI, core was 0.36% above the 0.3% expectation, headline was also higher than estimates.  Auto related items appeared to drive some of the above consensus reading...good thing no one needs to insure or repair their cars.  And the so called “super-core” inflation is looking not only sticky but rising.

As you might have expected it was a tough day to auction 10Y Treasuries, given 10Y yields saw double digit moves higher in yields.  The 2Y is nearing 5% at 4.96% and the 10Y is back over 4.50 at 4.54%.

Essentially every headline on the FOMC Minutes started with the words 'uncertainty' and the need for further 'confidence' that the data shows inflation will come back to 2%.  The line that some participants warned that  inflation "had been relatively broad based and therefore should not be discounted as merely statistical aberrations," 

We'll see what PPI does today.

XTOD: For currency-issuing governments, bonds are a policy choice, not an economic imperative. You can prune the debt tree by leaving reserve balances in the system (as central bank liabilities) instead of forcing them to convert to government bonds (liabilities of Treasury). 

https://on.ft.com/3UaSCEa

XTOD: Find myself in a virtually unoccupied middle ground on this issue. Yes, composition of the debt b/w (base) money & bonds is a policy choice. But "monetizing" the debt does not "prune" the debt tree--it simply relabels it (e.g., as interest-bearing reserves in the U.S.)  Swapping bonds for interest-bearing money mainly shortens the maturity structure of the outstanding supply of government securities. The total supply of debt (rather than its composition) and its path (relative to demand for this debt) matters more, in my opinion.

XTOD: Can we finally get a mea culpa from Krugman, MMT clique & other transitory truthers?

Would be congratulating themselves like crazy rn if data were good, despite 2 yrs too late.

PISS POOR analysis & forecasting, confidently issued w/ political motives & no actual insight. OWN IT

XTOD: “The 3-month annualized change in supercore inflation is now over 8% and accelerating… The 6-month annualized change is 6%, and the year-over-year change is 5%… We are sticking to our view that the Fed will not cut rates in 2024”  Apollo’s Torsten Slok

https://x.com/StephanieKelton/status/1778025062647357738

https://x.com/dandolfa/status/1778041930276041019

https://x.com/Jesse_Livermore/status/1778050504779608131

https://x.com/FerroTV/status/1778094795119907068

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.