Daily Economic Update: April 26, 2024

Yesterday's 1Q2024 GDP report was "stagflationary" with lower than expected real growth (1.6% vs. 2.5% estimated) and higher than expected inflation (3.1% v. 3.0% estimated on headline, with Core PCE at 3.7% v. 3.4% estimated).   Of course everyone is pointing to the miss being driven by trade and inventories as making it somewhat less meaningful, but who knows.

Stocks fell over 1%, then rebounded some. Out on the curve hit highs not seen in 5 months with the 10Y over 4.70%.   Initial jobless claims broke the streak of printing 212K by printing 207K. 

After hours Google and Microsoft earnings helped improve sentiment.

On the day ahead we have the BoJ who is facing a super-weak Yen and the U.S. PCE report along with the UofM sentiment survey (asking consumers how they feel about gas prices...not really, but highly correlated).

XTOD: Microsoft’s yearly data center spend for the next few years is more than that of the Apollo program (yes, adjusted for inflation)

XTOD: Treasury Secretary Janet Yellen said the US economy 'continues to perform very, very well' and that she still sees inflation falling back to more normal levels

XTOD: GDP growth came in a bit below expectations at a 1.6% annual rate in the first quarter. 

But much of the slowdown was in non-inertial items like inventories (-0.35pp) and net exports (-0.86pp). The better signal of final sales to private domestic purchasers was 3.1%.

XTOD: If no revisions, and there will be some surely, today’s quarterly Core PCE implies a m/m up by almost 50 bp (48 bp to be precise) to be reported tomorrow - this is really bad (consensus and whisper are around 30 bp) and most likely warrant a language shift by JPOW on Wednesday 

Market shifted full price cut from Nov to Dec and residual probability of a 2nd hike is now down to just a third

XTOD: Sitting at Eden Rock conceiving of the most outrageous outcomes

It's hard to conceive of a US slowdown presently

We're no way near through the end of fiscal spend

I keep saying 2 for 2...

We won't see 2% inflation for 2 years

The fiscal transformed the US into the economic locomotive of the world

Great, but...

Arguably, the dollar standard was conceived under the conceit that the US economy would be a dullard

Today, instead, it's the locomotive of the world...

And it's reset the risk free rate to intolerable levels for the RoW

Somethings gonna break

But before then

Just like the late 1920s, 

There's a huge carry trade pouring money into US risk assets

Borrow in yen for zero, catch 5.5% on cash

Hell, 20% on risk asset price gains pa

Pay your yen back in stronger dollars

This money train is unstoppable

Then imagine the ECB cuts rates

They really need to...

And that carry trade is gonna be amplified to the moon.

The RoW needs lower rates

Will the Fed subjugate its domestic growth mandate

Will it be convinced of the need to coordinate an interest rate cut with the Europeans ?

A coup de whisky...

It's done so many times before

But it'll need convincing

Somethings likely to break

Can I remind you that the yen has devalued 40% 

40% !!

And US banks have huge unrealized losses on their hold-to-maturity treasury holdings and no one cares, no one asks for quantification, everything's gonna be alright, yeah ?

And we're 10 bps away from ten year treasury yields exploding higher

And 5 bps from the red cabbage accelerating its decline

Recap

US economic engine of the world

Global monetary system never conceived of this

Higher rates killing the collateral value of Treasuries

Not killing the velocity of US GDP growth

Something gonna break

Fed will cut in unison with the Europeans

Risk asset prices could explode higher

if you don't understand, go back to the beginning 

Daily Economic Update: April 25, 2024

Sorry, I was busy day-trading NYC restaurant reservations, I hope those gains are going to be subject to Biden's proposed 44.6% capital gains tax rate.  A mostly boring day for equities with META beating after hours but trading much lower anyway.  Yields rose a few bps as stocks fell slightly ahead of today's GDP release, the first of two 'major' economic releases for the week.  Yesterday's strong durable goods data did little for stocks but seemed to support higher yields with the 5Y Note Auction being relatively poorly received.  

As expected both the Tik Tok and non-compete bans are being challenged.

On the day ahead it's GDP, jobless claims, home sales and the infamous 7Y Note Auction.  

XTOD:  Huh. The Macro Musebot (https://ai.macromusings.org) had some strong views about its favorite macro theory:  "What is your favorite macroeconomic theory? Is it (1) New Keynesian, (2) Monetarist, (3) Fiscal Theory of the Price Level, or (4) MMT?  @JohnHCochrane

My favorite macroeconomic theory is the Fiscal Theory of the Price Level (FTPL). While the New Keynesian, Monetarist, and MMT frameworks all offer valuable insights, the FTPL provides the most coherent and compelling explanation for the determination of the price level in my view. 

The key strength of the FTPL, as articulated by John Cochrane, is that it directly addresses the fundamental question of why money has value. The FTPL argues that money is valuable because the government accepts it for tax payments - the "state theory of money." This is a more satisfying explanation than the ad hoc assumptions underlying the quantity theory of money or the vagueness of MMT. Additionally, as Jesus Fernandez-Villaverde and Eric Leeper have discussed, the FTPL highlights the inherent linkages between fiscal and monetary policy. The government's intertemporal budget constraint means that the central bank cannot fully control inflation without considering the actions of the fiscal authority. This nuanced view of policy coordination is more realistic than the strict separation of monetary and fiscal policy in New Keynesian models.

That said, I don't dismiss the other theories entirely. As Scott Sumner and Robert Hetzel have noted, monetarism and New Keynesianism have been useful frameworks at different points in history, depending on the prevailing economic conditions. And Nathan Tankus has rightly pointed out that MMT has pushed the profession to think more carefully about the consolidated government balance sheet. Ultimately, I believe the FTPL provides the most coherent and comprehensive theory of the price level, one that incorporates the insights of other approaches while addressing their shortcomings. By focusing on the government's intertemporal budget constraint, the FTPL offers a powerful lens through which to understand historical episodes of inflation and deflation, as well as guide policymakers in the present day.

XTOD: "We think any company that has an economist, you know, certainly, has one employee too many."    - Warren Buffett

XTOD: "In 2025, we get either Bidenomics 2.0 or Trump 2.0: in either case we are going to see more huge fiscal deficits, protectionism, and industrial policy, but in the latter case, perhaps on steroids." -  Rabobank

XTOD: "We now get more news in a single day than most people ever saw in their lifetimes a few short centuries ago. Our brains aren’t hardwired to have this much information thrown at them. And so much of the information we see is negative."

Daily Economic Update: April 24, 2024

A solid day for stocks with the S&P up 1% in regular trading as earnings season is proving solid. There was Elon optimism after the bell, as he promises more affordable vehicles and the every elusive robotaxi. On the data side, the flash PMI's showed some slowing, especially in manufacturing, while sales of new homes beat estimates.  In other news the Senate passed the Ukraine funding bill that includes Tik Tok ban. We also had FTC passing a vote on a final rule banning non-competes:

"Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date. Existing noncompetes for senior executives - who represent less than 0.75% of workers - can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them."

It will be interesting to see how this plays out and (a) whether it survives legal challenges and (b) whether it will lead to the amount of new businesses and increased pay that the FTC anticipates.

Aside from that you've got students looking for refunds from Columbia.

Today's data features Durable Goods and we'll get the 5Y Treasury note auction.  The 2Y was little changed and is 4.94% and the 10Y at 4.61%

XTOD: 🚨 Excited to announce we have launched the Macro Musebot! 🚨 Powered by insights from 400+ episodes of the Macro Musings podcast, this AI is your personal guide to the world of macroeconomics, monetary policy, and all our past guests! (1/n) https://ai.macromusings.org

XTOD: I dislike Taleb in a lot of ways, but his greatest contribution to knowledge is this Medium post, a chapter from SKIN IN THE GAME, about the intransigent minority. 

Explains Columbia, explains trans rights, explains every social issue we've been dealing with.  https://medium.com/incerto/the-most-intolerant-wins-the-dictatorship-of-the-small-minority-3f1f83ce4e15

XTOD: tbh sleeping in a tent on a city street seems like a pretty good life skill to practice for a humanities grad in 2024

XTOD: “This odd combination — higher stock valuations despite higher rates — has not happened in any period of Fed tightening going back to the late 1950s.”

XTOD: This is a HUGE policy change, if it’s right.  President Biden previously called for extending the tax cuts below $400k — which could cost $1.5 to $3.5 trillion.  Letting them expire would cost $0!!

XTOD: The best way to regulate anger is not to vent right away. It’s to calm down first. 

154 studies: Deep breathing, meditation & yoga are better antidotes to aggression than yelling, punching & running.  Anger management is about lowering your heart rate, not raising it. Relaxing reduces rage.  http://scientificamerican.com/article/feeling-angry-chilling-out-helps-more-than-blowing-off-steam

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.