Daily Economic Update: April 23, 2024

A ho-hum news day. Stocks finally rose with tech names like Nvidia rebounding and yields rising.  No Fedspeak and perhaps some optimism that Middle East tensions won’t spark a larger regional conflict provided a somewhat supportive backdrop for markets.  

Yields await the major data of the week in the form of GDP and PCE.  Ahead of today's 2Y auction we have the 2Y at 4.97% and the 10Y at 4.61%.

On the day ahead it's S&P PMI's, New Home Sales and the 2Y Treasury Auction.

XTOD: The 10-year yield was 3.78% in late December. As this story notes, it hit 4.70% last week, almost a 100 basis point rise in four months.  The story asks if the 10-year yield can hit 5% as if this were a bold call. It's not.  Saying the 10-year will NOT hit 5%, or the yield rise has no more than 29 basis points left, is a bold call!  ---  This says a lot about sentiment.  It suggests that predicting the bond sell-off has no more than 29 bps left is still the safe call.  However, it is "tricky" to predict yields may rise another 30 basis points.  Bullishness still prevails.   Only when yields rise enough that everyone dusts off Jamie Dimon's 8% prediction from two weeks ago and proclaims him Nostradamus is it over.  

I think it happens when yields get above 5%. Then it is safe to be bearish.   So, almost there but have some work left.  https://wsj.com/economy/central-banking/path-for-10-year-u-s-treasury-yield-to-5-is-possible-but-tricky-e29be0c9?mod=latest_headlines

XTOD: america’s problems solved in one tiktok https://twitter.com/i/status/1782536475244150808

XTOD: is that Stephanie Kelton

XTOD (evidence that the tik-tok and Kelton are in action?) Today, my Administration is investing $7 billion in a new program called Solar for All that will enable over 900,000 low-income households to have solar on their rooftops for the first time.  Solar for All will give folks more breathing room – and cleaner breathing room at that.

XTOD: “A DCF is like the Hubble telescope - turn it a fraction of an inch and you're in a different galaxy.”  - Curtis Jensen

XTOD: Most insufferable man I matched with on Hinge was a middle-aged CRE guy.  Asked him to let me know the make and model of his car so I could have a guest parking pass preemptively printed for him. (We were meeting at my place and walking to a spot in midtown for drinks.) 

He says, "you'll know it when you see it." 

Already annoying as that doesn't help at all. My concierge cannot print a pass with this information.

Guy proceeds to show up in a base model Porsche with vanity tags.  

I cancelled the date.

XTOD: What commission-based profession has the best reputation?

Daily Economic Update: April 22, 2024

Stocks on a 6-day losing streaks, markets repricing the timing of Fed rate cuts (now looking like November), Bitcoin "halving" completed (this reduces the compensation miners receive for solving a challenging mathematical puzzle that allows them to propose a new block - which should slow the supply of Bitcoin and in theory increase the price), geopolitical tensions and tensions on college campuses, U.S. election chatter heating up, would seem to sum up the last week or so.

With Powell's seemingly "hawkish pivot" all of a sudden all the people who were in love with the Fed's forward guidance, dot plot, parading out every Fed President on TV, etc.,  all seem to be saying it's use case has run it's course.  Hmm...sounds familiar, see my commentary on the January 31, 2024 FOMC meeting here.   In it I shared my advice to the Fed:

my advice to Powell is to revisit Robert Greene’s book The 48 Laws of Power with specific consideration to the following of Greene’s laws:

              Law 4: Always Say Less Than Necessary: When you speak, always say as little as possible. The more you speak, the more likely you are to say something foolish.

              Law 5: So Much Depends on Reputation – Guard It With your Life: Reputation is the cornerstone of power. You can influence more people and gain more opportunities with a solid reputation. Therefore, it is essential to protect it fiercely.

              Law 9: Win through your Actions, Never through Argument:  Winning an argument gives you momentary advantage but winning through actions gives you lasting power. Actions demonstrate competence and create value, whereas words, often in arguments, lead to negative emotions and resentment.

               Law 20: Do Not Commit to Anyone: It is the fool who always rushes to take sides. Do not commit to any side or cause but yourself.  By maintaining your independence, you become the master of others.

Good news is there is NO Fedspeak this week as the Fed is on blackout.

On the week ahead GDP and PCE along with Income and Spending.  It's all tech earnings.

Mon: no major releases

Tue: S&P PMI's, new home sales

Wed: durable goods

Thur: GDP,  jobless claims

Fri: PCE

XTOD: Blackthorne: You think this is over?! You think the unprecedented escalation between Israel & Iran will end here—both sides content with flashy but ultimately inconsequential strikes? You're a fool! The rules have changed  Mariko: The Anjin is upset about the falling price of oil

XTOD: Every manager has the same 5 problems:  

- They can't get clear direction

- They need better people

- They lack the budget

- They don't have time

- They won't say "No" 

Fix those first. Everything else is a distraction.

XTOD: If you want to get rich quickly, the biggest factor is luck.   If you want to get rich eventually, the biggest factor is consistency.

XTOD: Complexity is overrated. Simplicity is underrated.  Analytical ability is overrated. Personal behavior is underrated.  Having a high income level is overrated. Inculcating a disciplined saving habit is underrated.

XTOD: A hired man, who is not a shepherd and whose sheep are not his own, sees a wolf coming and leaves the sheep and runs away, and the wolf catches and scatters them. This is because he works for pay and has no concern for the sheep.

Daily Economic Update: April 19, 2024

The equity losing streak continues.  Jobless claims continue to print the same number and Philly Fed data was solid, allowing yields to rise further, with the 10Y at 4.63% and the 2Y settling in at 5%.

Other than that people are still watching Netflix and I guess we'll be releasing gas from the strategic petroleum reserve this summer.

In other news Ray Dalio reminds us what he thinks good money is while also "not" recommending people by gold:

"Good money is both a good medium of exchange and a good storehold of wealth that is widely accepted around the world. The most globally recognized and accepted monies are the dollar......These monies are held in debt assets—i.e., they are debt-backed money—i.e., currency = debt. "

" Since debts are promises to pay money, when a government has too much debt to be paid, its central bank is likely to print money."

" Gold, on the other hand, is a non-debt-backed form of money.....Cryptocurrencies are also non-debt monies. I don’t know of any other types of non-debt monies...."    

"When the financial system is working well—which is when there aren’t debt and inflation crises and the borrower-debtor governments printing debt-backed monies are meeting their obligations and paying their interest without printing and devaluing money—debt assets and other financial assets are good assets to hold; on the other hand, when the reverse is the case, gold is a good asset to own. That’s the main reason that gold is a good diversifier and why I have some in my portfolio. "

On the day ahead it's just the dovish Goolsbee from the Chicago Fed.

XTOD: So market went from pricing 7 cuts for FY24 in mid January to pricing just ONE in Nov with dwindling odds of a second cut. Not sure if everyone realizes : that’s a very short timeframe for such a radical reversal. We had anticipated this (that’s what #bigflip2 was about). 

Yet it shows that the initial 7 were built on flimsy expectations, actually mostly driven by a policy error by JPOW in Dec 23.  

It should keep everyone on their toes when it comes to this new found certainty of higher for longer, probably driven by yet another policy error….  This game is not easy…

XTOD: Once RRP vol hits zero, liquidity will continue to drain from the financial system with continued Balance Sheet Runoff and Treasury issuance. The trend-line is pretty powerful. As it stands, there could be as much as $1.3T drained from the financial system by the end of the year

XTOD: It's a really interesting view that highlights how the military revolution of 14th-16th century redefined the state, its financing needs, and how trial & error led to central banking. As Josh notes, it is no accident that the state today maintains a monopoly on violence and a monopoly on money. Here is his article (2/5) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4759755

XTOD: MMT was taken for a test drive. They called it the “CARES Act.” The failed theory crashed into a wall & burned to the ground as MMT-ers doubled down with more “free” money igniting the mother of demand-pull inflationary spirals.  Other than that, the play ended swimmingly.

XTOD: “We are all born original, but many die as photocopies."  —Blessed Carlo Acutis, c/o 

@stephengadubato

Daily Economic Update: April 18, 2024

Another down day for equities as bets on rate cuts continue to get pushed out further into the future, with some strategist now pushing cuts out to 2025 and some bank strategist at UBS warning that the Fed may need to raise fed Funds to 6.5% by mid-next year.  Despite that sentiment, yields managed to fall and the 20Y Treasury auction was solid.  The 2Y is 4.93% and the 10Y is 4.59%.

In a Substack Note, Economist Brad DeLong, characterized what he sees as the current sub-era of post-GFC monetary policy as "waiting for a shoe- any shoe to drop".  He goes on to say that the Fed's current willingness to see long-term real interest rates rise as a sign that the Federal Reserve has:

"reached two conclusions: 

1. It no longer believes that considerations as to what it thinks r* is can guide monetary policy and its adjustment. 

2. The major risk is not a deep recession and a return to the zero interest-rate lower bound, but rather some sort of rebound in inflation and a consequent de-anchoring of inflation expectations."

Maybe it all comes down to R-Star.   Back on August 23, 2023, I mentioned Knut Wicksell's theory that while you could not see the natural rate, you could see the impact of policies that kept rates above or below this rate by looking at trend growth rates.

Away from Fed land, Howard Mark's had his latest letter published yesterday titled, 'The Indispensability of Risk' .  If you read this blog you can check out my summary on Mark's previous memo here.

As for the current memo it is based on the role of sacrifice in chess, as highlighted recently in a recent WSJ article, and how that can be applied to the world of investing.

• In chess sacrificing a piece can serve one of two purposes: (1) a "sham" sacrifice -  when one gives up a piece in order to obtain a concrete benefit that can be calculated and (2) "real" sacrifice - when giving up a piece provides no immediate or tangible benefit but may offer some strategic benefit.
  
  
• "The analogy to investing begins to become clear. Buying a 10-year U.S. Treasury note is a modest or “sham” sacrifice. You give up the use of your money for ten years, but that’s only an opportunity cost, and accepting it brings the certainty of interest income. Most other investments involve real sacrifices, though, where the risk of loss is borne in pursuit of “gains that are neither immediate nor tangible.”
  
  
• In chess players often intuit the level of risk and have to decide if making a risky move is worth it.
  
  
• In investing "Because the future is inherently uncertain, we usually have to choose between (a) avoiding risk and having little or no return, (b) taking a modest risk and settling for a commensurately modest return, or (c) taking on a high degree of uncertainty in pursuit of substantial gain but accepting the possibility of substantial permanent loss."
  
  
• While most investors understand that earning high returns, both in absolute and relative terms, requires bearing meaningful risk, they may take for granted that "The risk inherent in not taking enough risk is very real. Individual investors who eschew risk may end up with a return that is insufficient to support their cost of living."
  
  
• "There’s such a thing as the risk of taking too little risk. Most people understand this intellectually, but human nature makes it hard for many to accept the idea that the willingness to live with some losses is an essential ingredient in investment success."
  
  
• "You have to take a shot. Not every effort will be rewarded with high returns, but hopefully enough will do so to produce success over the long term. That success will ultimately be a function of the ratio of winners to losers, and of the magnitude of the losses relative to the gains. But refusal to take risk in this process is unlikely to get you where you want to go."

I know Mark's is a big Buffett fan and reference's what he sees as the basis for the success of Berkshire in this latest letter, but perhaps the memo is just another way of stating what Buffett recently summed up in the last Berkshire Hathaway annual letter:

"One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital. Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been – and will be – rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes."

Remember optimism and taking risk is not incongruent with "Margin of Safety".

XTOD: Sebastian Steudtner, a German pro surfer, rode a wave over 115 feet tall at Nazare, Portugal, a record breaking surf!

XTOD: How bad is  @CathieDWood  ? Over the last 5 years she has now returned -7% in $ARKK she trails the $SPX by 88% and $COMP by 107% respectively. Maybe think twice about shoving her face on TV again.

XTOD: Economics is an ecosystem and I love most or perhaps even all of it. Theorists. Empiricists. Government statisticians. Ivory tower academics. In the trenches think tankers. Investment bank economists. Government economists. Tweeters. And many more I didn't mention.

XTOD: Bank of England policy maker Megan Greene said developed economies including the UK face a “bumpy ride” as central banks squeeze out the final effects of the global inflation shock

XTOD: Clarity comes from cutting out the clutter.  Pinpoint your focus, relentlessly eliminate noise, and watch productivity soar.

XTOD: Tony Robbins believes that, in a lowered emotional state, we only see the problems, not solutions.   Let’s say you wake up feeling tired and overwhelmed. You sit down to brainstorm strategies to solve your issues, but it comes to naught, and you feel even worse afterward. This is because you started in a negative state, then attempted strategy but didn’t succeed (due to tunnel vision on the problems), and then likely told yourself self-defeating stories (e.g., “I always do this. Why am I so wound up I can’t even think straight?”).   To fix this, he encourages you to “prime” your state first. The biochemistry will help you proactively tell yourself an enabling story. Only then do you think on strategy, as you’ll see the options instead of dead ends.  “Priming” my state is often as simple as doing 5 to 10 push-ups or getting 20 minutes of sun exposure.  I often ask myself, “Is this really a problem I need to think my way out of? Or is it possible I just need to fix my biochemistry?” I’ve wasted a lot of time journaling on “problems” when I just needed to eat breakfast sooner, do 10 push-ups, or get an extra hour of sleep.  Sometimes, you think you have to figure out your life’s purpose, but you really just need some macadamia nuts and a cold fucking shower.

XTOD: In a world loud with information, mute the unnecessary.  Pinpointing the essential is a superpower.

 

Daily Economic Update: April 17, 2024

To paraphrase the line from the movie The Usual Suspect, the greatest trick Team Transitory ever pulled was convincing the world inflation was, well, Transitory....or something like that, anyway, clearly Powell doesn't believe the data shows inflation is sustainably moving back to 2% and is now messaging H4L.  NY Fed President Williams said he believes U.S. growth potential is around 2% or higher, which makes some sense given the ATL GDPNow estimate is 2.9% as of yesterday.  If U.S. real growth is indeed that high then policy is likely less restrictive than the Fed has believed.

Stocks found a way to power through and avoid deeper losses despite ending lower as yields rose. The 2Y yield briefly topped 5% and the 10Y sits around 4.66%.  Gold again at record highs and what's a Japanese Yen?  154 and change...yikes.

I've provided a ton of links to articles and blogs this week and over the course of this blog and as you can likely see there is really no clear consensus on what the Fed should be doing with their interest rate target at present. If you want a noted economist to say the Fed needs to cut rates soon you can find one, if you want one who says the Fed still isn't restrictive enough you can find one, if you want one who says the White House needs to reduce deficits to combat inflation, you can find one.

I probably find one of each form of economist everyday without even trying (sometimes from multiple post from the same few).  For example, Scott Sumner said yesterday:

The future course of the economy always involves a bit of guesswork. But it seems to me that the following two claims are pretty likely to be true:

1. Over the past three years, monetary policy has been far too expansionary.

2. It is likely that monetary policy is still a bit too expansionary, although I have less confidence in that claim.

He goes onto to discuss how nominal economic growth is reaccelerating and TIPS spreads widening while counseling the Fed to remain more restrictive while also expressing his belief that the whole way of doing monetary policy is wrong.

This is the point where economists discuss “what the Fed should do”, by which they mean where should they set the fed funds target. In my view, interest rates are not the right way to think about monetary policy, so I won’t recommend a particular rate setting. Instead, I’ll recommend making the policy regime more effective......1...The Fed should adjust their fed funds target daily, to the closest basis point (say using the median vote of FOMC members.) The Fed funds target should look like other market prices, like a random walk. New information should not make people expect a different level of NGDP in 2025, rather new information should show up as the adjustment in the fed funds rate required to keep expected 2025 NGDP on target.....2....The Fed thinks in terms of growth rates, not levels. That radically increases uncertainty about the future path of NGDP, and largely explains the wild swings in the financial markets in response to seemingly trivial adjustments in Fed policy.

The Fed is not reacting to unexpected swings in aggregate demand, the Fed is creating unexpected swings in aggregate demand, through its clumsy interest rate targeting system and lack of level targeting.

But if you want a different view, just hop on over over to Claudia Sahm who argues that inflation has largely been a supply side phenomenon all along (to her credit she does mention pent up demand and Covid-stimulus as factors).

 Identifying shelter and motor vehicle insurance as two primary sources of inflation now is not meant to ‘explain away’ inflation. Inflation is too high; understanding why helps identify the best policy response. Herein lies a bigger problem.

We are down to a few enemies in the fight against inflation. Unfortunately, the Fed’s ‘weapons’ are unsuited to address supply-driven inflation. Sustainability requires getting the excess inflation out of all the spending components. The Fed holding rates or raising them further would eventually put the economy in a recession. That might reduce the demand for other types of spending and bring down their inflation further, achieving the topline inflation of 2%. However, that does not necessarily solve the current problem, and it creates new ones.

Inflation is narrowing down to a few challenging areas. That narrowing reflects several victories in the fight against inflation, but what’s left has a big lesson. It’s time for policymakers outside the Fed to accept responsibility for inflation and, most importantly, do something. The Fed is in the mix, but it can’t fix this alone.

It's unclear to me what policies she proposes to fix inflation in car insurance, as that inflation seems to be driven by the fact that (1) cars cost more due to both size and inflation, (2) cars are now computers which also are expensive - inflation in many components and (3) natural disasters have lead to rising claims.  I would assume lowering the cost of actual cars and their component parts would lead to lower car insurance, but maybe I'm wrong.  I'm not sure the policy that prevents bad weather events....I have so much left to learn.

With all this focus on the Fed and inflation, is it wrong to think that this will all be funny to look back on when some "shock" hits the real economy down the line?

On the day ahead:  Fed Beige Book, Fedspeak

XTOD: After a massive outperformance in a short time and due to Jay showing up on H4L island we have  reweighted back to DS Beta. Net sold gold, tips, commods and equities and bought nominal bonds for our long only beta portfolio

XTOD:"After several days of rising tensions in the Middle East, Treasury yields are higher, not lower. This is a potent sign the wind has changed, and we are firmly stuck in an inflationary regime."  

@LondonSW

XTOD: Yes I still think 3 cuts this year.

XTOD: I had kinda hoped that the crypto market would learn finance, and prices would move back to present discounted value of dividends. But some of what has happened is that the stock market has learned crypto-pricing and some stocks are temporarily over-priced by hype and attention.

Daily Economic Update: April 16, 2024

Down day for the major equity indexes as geopolitics and rising bond yields weigh on sentiment.  Retail Sales data showed a consumer that won't quit with headline sales and core sales both exceeding expectations.  The 10Y yield crossed 4.60% and the 2Y continues its march towards 5%, almost getting their intraday but ending at 4.93%.

Speaking of geopolitics,  a few days ago, economist Noah Smith had a blog post titled "Americans are still not worried enough about the risk of world war" in which he was discussing the parallels between the start of WW2 and what is occurring throughout the world at present, in it:

So if you were living at any point in 1931 through 1940, you would already be witnessing conflicts that would eventually turn into the bloodiest, most cataclysmic war that humanity has yet known — but you might not realize it. You would be standing in the foothills of the Second World War, but unless you were able to make far-sighted predictions, you wouldn’t know what horrors lurked in the near future.

In case the parallel isn’t blindingly obvious, we might be standing in the foothills of World War 3 right now. If WW3 happens, future bloggers might list the wars in Ukraine and Gaza in a timeline like the one I just gave.

Or we might not be in the foothills of WW3. I think there’s still a good chance that we can avert a wider, more cataclysmic war, and instead have a protracted standoff — Cold War 2 — instead. But I’m not going to lie — the outlook seems to be deteriorating. One big reason is that China appears to be ramping up its support for Russia.

As for investors, writer, Joakim Klement has pointed out here that most geopolitical events can barely be recognized on a chart of long-term equity market indexes.

In any case, Cassandras that deal in geopolitical risks have long been a bugbear of mine. So much so that I sat down and wrote an entire book about geopolitics for investors which you can download for free at the CFA Institute Research Foundation.

One of the key messages was that most of the time, geopolitical events do not matter for investors.

.... That is, of course, until they do.... This brings me to the second key message of my book. Learning how to identify which geopolitical events matter and which ones don’t is key to being successful as an investor.  And this is where Cassandras who predict geopolitical crises always fail.

 Even if a geopolitical event escalates, an investor must be able to correctly separate the major events from the ones that don’t escalate to major events as these events unfold in real-time.

And if it turns out to be a major geopolitical event, key drivers of asset return like inflation, risk-free rates, or future cash flows must be permanently and materially altered to make an impact on the portfolio.

We rarely fall off a cliff. And investing based on the assumption that we will fall off a cliff is going to lose you money.

I guess Klement's advice is to be an optimist, described in my post here .  It doesn't mean you should ignore some principals of having a margin of safety.

On the day ahead it's Housing Starts, Building Permits, Industrial Capacity, Durable Goods and Fedspeak

XTOD: it’s so humbling how happy a 72 degree makes me. I thought I was more complex than this

XTOD: Israel’s response to the Iranian attack may be "imminent," an Israeli official said Monday.

Speaking after Israel’s war Cabinet met for several hours, the official said Israeli decision-makers believe it's important for any response to closely follow the attack. via NBC News

XTOD: Away from the Middle East crisis, cocoa prices keep climbing with the most active contract in New York surging today to a fresh all-time high of ~$10,700 a metric ton. Over the last year, cocoa prices are up ~270% | 

Daily Economic Update: April 15, 2024

 

 

Tax Day in 'merica. "If you take a walk, I'll tax your feet".  You can check out Stevie Ray Vaughn's cover as well. 

The weekend retaliatory attack by Iran and subsequent missile exchanges by Hezbollah and Israel will keep the risk of a broadening conflict front and center.

On Friday, the UofM consumer sentiment index came in below expectations, but showed increases in the year ahead and five year ahead inflation expectations.

Speaking of inflation and what the Fed has accomplished to date, a few interesting blog post over the last few days.  Both of the following post hit on the puzzle of interest rates and r-star.

The first, courtesy of Stephen Williamson, titled "Do Central Bankers Know What They're Doing" which posits:

• Williamson is a known 'Fisherian' or an adherent of 'Neo-Fisherism'.  What's that?
• It's based on the Fisher Effect, coined for Irving Fisher, and the basic equation that a Nominal Rate = Real Rate + Inflation
• If you turn this equation on its head, you can posit that a high nominal interest rate will cause inflation to actually rise over time (in other words the causation runs counter to what you tend to think), why?
• Because economist believe that nominal interest rates are 'long-run' neutral and do not change the real rate
• Back to Williamson's blog, he argues:
• PCE inflation is essentially at target and inflation expectations measured by break-evens are well anchored at target
• "So, the state of the U.S. economy, by these measures, appears to be as close to perfect as the FOMC might want, given its dual mandate, including its 2% PCE inflation target. Then, given that the median FOMC member still thinks the long-run nominal interest rate should be about 2.5%, if I had been asleep for 20 years, just woke up, looked only at these charts, and knew the 2.5% long-run estimate, I would wonder why the overnight rate was not 2.5% instead of 5.3%."
• "My best guess, though, is that the FOMC isn’t so worried about the actual inflation numbers as the state of the real economy. That is, the idea that the inflation rate is controlled by controlling the unemployment rate persists at the Fed, as it does at most central banks in the world, despite plentiful evidence to the contrary....Inflation came down with essentially no upward movement in the unemployment rate. The Phillips curve narrative persists, as it somehow allows monetary policy committees to achieve consensus, and it’s easy to explain to the public - however wrong it may be. Unfortunately, if central bank officials speak Phillips curve language for long enough, they start to believe it, which produces bad monetary policy."
• He posits that if the Fed truly believes the long-run real interest rate is 0.5% then maintaining this level of nominal rates will set the Fed up for above target inflation.
• " That is, if the policy rate stayed at 5.3% forever, and the long-run real interest rate is 2%, then we would expect inflation to come in at 3.3%, which is better than 4.8% under the FOMC consensus."
• "The bad news is that the FOMC, along with other central bankers in the world, may be setting itself up for persistent overshooting, just as central banks tended to undershoot their inflation targets from 2010 to 2020. That’s all part of the same phenomenon, which is not recognizing long-run Fisher effects - and this may set in sooner than people seem to think. Basically, consistent with all mainstream macroeconomic theory, a persistent increase in the central bank’s nominal interest rate target produces a long-run increase in inflation, not a decrease. What allows a central bank to hit its inflation target is a widely-held belief that the central bank will always revert to a nominal interest rate target consistent with its inflation target and Irving Fisher. If that widely-held belief falters, the game’s up."

The second post comes from Scott Sumner, who is an avid supporter of Nominal GDP Targeting.  His post titled "Time to Add Epicycles" discusses what he describes as the absurdity of 'reasoning from a price change' when talking about interest rates causing changes in other macro variables. 

• "Interest rates can change for multiple reasons, and the effects of the rate change will depend on the underlying factors that caused them to change."
• He goes onto discuss the 'frustrations' with current economic models and excuses such as "long and variable lags".
• "If interest rates rise because of tight money, then aggregate demand may decline. If interest rates rise because of fiscal deficits or booming immigration or strong “animal spirits”, then aggregate demand may rise. It depends."
• "Doesn’t the Fed determine interest rates? Well, it has a target, which it moves up and down in response to what it perceives as changes in the equilibrium interest rate. But is it leading the market, or following?"
• "All I can say is that the proof is in the pudding—apparently we are still not able to model that “natural” rate with any degree of accuracy. As a result, we end up reasoning from a price change.
• "Monetary policy is not interest rates, it is the market forecast of future NGDP."

And just to complete the trifecta, we get a post from John Cochrane titled, "Inflation Confusion"

which discusses a recent WSJ article and how the current administration is struggling with basic economics.

• Cochrane starts off with some basics around how relative price changes are not inflation and that by jawboning about inflation has been tried and failed.
• He goes on to complain about the administration's lamentation that there isn't much they can do about it:
• "Nothing one can do? We have, now admittedly, a deficit fueled inflation. One could start by not pouring more gas on the fire. Such as cancelling billions of student loan debt, never mind the Supreme Court and the quaint idea that Congress votes spending. The CBO reports “The deficit totals $1.6 trillion in fiscal year 2024, grows to $1.8 trillion in 2025, …” with a 3.8% unemployment rate. Even in the simpleminded Keynesian economics that dominates left-of center Washington, there is no excuse for such stimulus."
• "There’s nothing we can do except the one thing that we all know would work. So we’ll rearrange the teacups on the side tables of the deck chairs of the Titanic instead. Which means nothing we want to do."
• "The quote here reflects the standard Keynesian view, deficit = aggregate demand = inflation with a lag. But we’re pretty clearly now in the situation that expected systemic deficits are the problem. Germany stopped a hyperinflation in a month. A credible announcement of spending, tax, and growth reforms that put the budget on a sustainable track would do the job. Scaling back the IRA, Chips, student debt river in recognition of inflation would help a lot more than complaining about how many potato chips are in a bag. Even just saying we recognize that’s needed would help."
• He concludes his piece with a complaint that politicians care too much about what 'resonates with voters' rather than taking the action they could take to lower inflation.

On the week ahead we'll get a lot of corporate earnings, retail sales and plenty of Fedspeak:

Monday: Empire St. Mfg, Retail Sales, Fedspeak

Tuesday: Housing Starts, Building Permits, Industrial Capacity, Durable Goods and Fedspeak including Powell at 1:15pm

Wednesday: Fed Beige Book, Fedspeak

Thursday:  Jobless Claims, Home Sales, Leading Indicators

Friday: Just one Fed speaker (Goolsbee)

XTOD: "You don't need to worry about progressing slowly. You need to worry about climbing the wrong mountain."    @JamesClear

XTOD: “Notice that, while lots of people are happy to tell you about Golden Ages, nobody ever seems to think one is happening right now. Maybe that’s because the only place a Golden Age can ever happen is in our memory.”   – Adam Mastroianni

XTOD: AUCTION ALERT:  -345k sq ft office building in Baltimore  -Starting bid of $1.5M or ~$4 per sq ft  -68% vacant  You can officially buy office towers for less than a small condo in many cities around the US

XTOD: Then, things go pear-shaped. The economy goes into recession. You lose your job and your source of income. Also, the value of your portfolio goes down 50%. Things were really good before, but they are really bad now....What if there was a way to avoid this?....I call this THE LIFE HEDGE.  

Here is the goal:  In good times, your portfolio is mostly flat.  In bad times, it explodes higher.  Thus, smoothing out the volatility in your life. How do you do this?  Well, gold plays a large role, and so does bonds.  Maybe you have some shorts to go with your longs. Maybe you have some insurance in the form of put options.  The Awesome Portfolio does this, with 40% of your portfolio being allocated to gold and bonds...This is the way I've invested my money since 2008, and I haven't given up anything in the way of returns.  In 2008, I was long my career, long a bunch of LEH stock, and long the stock market. Lost my job, my income, and almost 50% of my portfolio overnight.  NEVER AGAIN.

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.