Druck gives Bidenomics a F. The RBA was on hold at 4.35% and much like the Fed stressed the need to be more convinced that inflation is going to settle back into their target range.
Today the 10Y Auction will be the focus.
XTOD: This tweet (which may be a joke) concentrates all the logical errors presented in Fooled by Randomness. "I was playing Russian Roulette for 1 billion. I asked for advice. Was recommended to stop. Had I not listened I would have won 1 billion."
XTOD: A structural limit on private credit's ability to replace banks: fundraising. The lack of runnable deposit funding looked like an advantage in 2023. But a financial system's first and foremost job is to manufacture deposits.
XTOD: 2024 is the year of compute 2025 is going to be the year of energy as the transmission grid struggles to keep pace with the insatiable demand for POWER
XTOD: The best outcomes don't come from perfection. They come from a mindset of positioning that can not only handle but take advantage of uncertainty. …. When you want to win tomorrow, accurately predicting the future matters. When you want to win in the end, staying in the game matters more.
Positioning isn't about perfect solutions; it's about handling uncertainty and staying in the game.
It sounds like the possible cease fire between Israel and Hamas isn't immediately coming to fruition, especially as Israel launches new attacks. Nonetheless continued optimism around rate cuts helped equities gain some ground while treasuries were little changed ahead of this week's auctions.
If you haven't followed the story of the BofA investment banking junior analyst who apparently died from being overworked, it's an interesting one, see XTOD's below.
Somewhat under the radar is the Fed's upcoming strategic policy review, the one that last gave us "FAIT". I thought this line of thinking below, that John Cochrane laid out at a recent Hoover Institution Conference titled Getting Monetary Policy Back on Track, was very much in line with some of what I mentioned in my last FOMC Recap.
Ignorance. Finally, we should admit that neither we, nor central banks, really understand how the economy works and how monetary policy affects the economy. There is a complex verbal doctrine that bounces around central banks, policy institutions, and private analysts, asserting that interest rates have a relatively mechanical, reliable, and understood effect on “spending” through a “transmission mechanism” that though operating through “long and variable lags” gives the Fed essentially complete control over inflation in a few years. The one thing I know from 40 years of study, and all of you know as well, is that there is no respectable well-tested economic model that produces anything like that verbal doctrine. (More here.) Knowing what you don’t know, and that nobody else does either, is knowledge. Our empirical knowledge is also skimpy, and the historical episodes underlying that experience come with quite different fiscal and financial-structure preconditions. 1980 was a different world in many ways, and also combined fiscal and microeconomic reform with high interest rates
On the day ahead it's another light one with the 3Y Treasury Auction likely being the highlight.
XTOD: At this time, we are being told that no strike has played out and that the mood on the floor is very somber. Additionally, there’s some questions on the accuracy of the WallStreetOasis account who posted this thread....Strike or No Strike, we ultimately need reform on the street. Work hours need to improve across the board. In regards to this topic, we will only defer to follower submitted, non-anonymous information for future updates.
XTOD: The death of the BofA associate from overworking is tragic and touched a nerve. The typical reaction is usually: “guys, take care of yourselves, it’s not worth it, it’s just a job”. But it’s not that simple. I was there. I know. Imagine you work hard all your life, you land a dream job that opens new doors you never thought existed. Imagine you don’t have a Plan B. You’ll work hard to make it work.
Failure is not an option. So who’s fault is it for the tragic death? It’s not the associate’s fault. It’s his Boss’ fault. It’s the company’s fault. I left my job in Investment Banking as soon as I had a plan B.
A few months later, my former boss ended up in hospital. He almost died from over-working. I can’t say I was surprised. My message is this:
- If you are a junior, avoid toxic bosses.
- If you are senior and have juniors working for you, their well-being is on YOU.
XTOD: Didn't think it was possible, but this is actually worse than the Blackstone video https://twitter.com/i/status/1787093247728218519
Between the FOMC and the NFP (Jobs Report) missing expectations and all of a sudden we're back to talking rate cuts. The ISM Services report on Friday was also week, coming in below 50, though somewhat concerning was the prices paid component, coming in well above expectations. Over the course of last week the 10Y fell from a high of ~4.70% back to ~4.50% and the 2Y went from a high of ~5.50% down to 4.83%. Of course the move lower in yields was positive for stocks, for now at least.
On the week ahead it will be light economic data, so the BOE rate decision and Fedspeak will be in focus. You'll also get a whole week to read up on how immigration is impacting the economy, whether it is helping to cool inflation, and whether any post-election clamp downs on immigration could lead to a resurgence in wage pressures.
If you missed it, FinTwit was the video of Jared Bernstein attempting to answer a question on MMT https://twitter.com/i/status/1786272981058220187 Every couple of weeks MMT seems to make it's way back into view.
Separate but somewhat related, here are some quotes for thought.
Courtesy of Mark Higgins:
"Persuaded as the Secretary is that the proper funding of the present debt will render it a national blessing, yet he is so far from acceding to the position, in the latitude in which it is sometimes laid down, that “public debts are public benefits,” a position inviting to prodigality and liable to dangerous abuse, that he ardently wishes to see it incorporated as a fundamental maxim in the system of public credit of the United States, that the creation of debt should always be accompanied with the means of extinguishment. This he regards as the true secret for rendering public credit immortal." -
ALEXANDER HAMILTON, first U.S secretary of the Treasury (1790)
And courtesy of George Hall:
"What a Government spends the public pay for. There is no such thing as an uncovered deficit. But in some countries, it seems possible to please and content the public, for a time at least..." - John Maynard Keynes, 1923, A Tract on Monetary Reform, p. 62.
Anyway, why does a government want a monopoly over currency, see here
XTOD: To recap this week ... On Wednesday the question to Powell was if they would hike. On Friday, we are asking if they cut this summer. Any bets on what next week brings?
XTOD: This is absolutely priceless. And probably the most frightening clip you'll ever watch on the people in charge of the US economy. Jared Bernstein is literally the Chair of the Council of Economic Advisers, the main agency advising Biden on economic policy https://twitter.com/i/status/1786272981058220187
XTOD: While the U.S. government could finance all its spending without borrowing or collecting taxes, those are two ways for it to get the public to abstain from acquiring real resources. The alternative of pure money creation, on the other hand, has the government bidding against the public for the economies scarce resources, which, depending how much the government seeks to spend, can drive prices up....Once aggregate spending suffices to achieve full employment (I use the term the usual way), the "real resource constraint" binds. At that point further money-financed G is inflationary. Borrowing becomes a non-inflationary alternative....They are, no less than money creation, devices for increasing the government's command over, or share of, the economies scarce output....So, while "mainstream" economists may not express themselves well on these subjects, especially in live interviews, it doesn't follow that there is a vast gap between the mainstream understanding of gov't funding options and MMTs supposedly distinct arguments.
XTOD: The govt is always bidding against the public (& vice versa). Taxes reduces private sector ability to bid (keeping prices lower). Bonds have similar effect.
XTOD (this guy had a lot to say in response): Lots of people chuckling but nobody suggesting an answer, at least in language that normies can understand..... lots of people will tell you this story, but they will forget to mention one important thing: there are several billion humans going to work every day working for 8 hours or so. Working. Creating value (products and services). And so total value of everything in the world is increasing every day. There are new buildings and roads and chairs and cars and noodles and milk and YouTube videos and mobile phones and computers and people are able to get back to work because someone has cured them from a disease. This is why it's not really a Ponzi Scheme. Money is circulating and new money is constantly being added, but real value and assets are also constantly being added. There is real input to the scheme, human labor.....So what is the problem then? The problem is that the world economy, specifically the US economy, is borrowing more than it is going to able to pay back and that it is producing. ..How does this end? It ends in hyperinflation and collapse of the dollar. Nobody will want to buy US debt anymore because US is irresponsible. The trust will be lost.
XTOD: I wonder how many people know these “buybacks” are mostly unpaid taxes distributed to investors in US 🤔 In the case of $AAPL profits are kept offshore in 0% tax countries like Ireland, then $AAPL issues bonds in #US to finance these buybacks and when the bonds mature they use offshore cash to repay them saving the 30% tax rate owed to uncle sam (that triggers only if profits are directly “repatriated” as cash) and all other countries involved in particular in #Europe
XTOD: Just how many people are taking the weight-loss drug Wegovy? 25,000 are starting it each week in the U.S., maker Novo Nordisk said this morning. That’s 5x as many as at the beginning of this year - and more than the capacity of Madison Square Garden. The company says it would be more - but they’re working to increase supply. https://cnn.com/2024/05/02/health/wegovy-weight-loss-drug-new-prescriptions/index.html
XTOD: "Warren Buffett thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price."
XTOD: "You have to be in love with the subject," says Buffett. "You can't just be in love with the money." He adds that everyone should find out what his or her brain is best suited for — and then pound away at it. Buffett loved reading Moody's manuals. But that is not for everyone.
Another Jobs Day in 'merica is upon us. Except maybe not for her as Peloton lays off another 15% of their workforce.
Market is looking for a headline jobs print of around 250K, though immigration, a topic Powell discussed this week, is a major wildcard with the possibility for an upside surprise and recently considered a major source of divergence between headline payrolls from the CES/Establishment Survey and the data on Unemployment and Labor Force Participation which comes from the Household Survey and is based on census data. Anyway, feel free to ask a real economist.
Yesterday's nonfarm productivity showed a 0.3% mom increase and a 2.9% YoY increase, but as (or more) importantly increased by 4.7% which was above estimates. In jobless claim data, apparently approximately the exact same number of people file for claims every week.
Stocks traded higher and bond yields fell. The 2Y is 4.88% and 10Y is 4.59%. Apple’s earnings and $110bln buyback led to further equity gains after hours as we head into payrolls.
On the day ahead it's Jobs, PMI's and bring on Fedspeak, including NY Fed's Williams at 815am.
XTOD: The last 13 weeks of initial unemployment claims. It finally moved off 212k, but barely.
Again, we are a $30 trillion economy with over 160 million workers. Unemployment insurance is a state program, meaning there are 50 states with 50 rules, 50 different ways to sign up, and 50 websites. Filling out these forms takes work. That alone should give a variability of more than a thousand or two a week. Unemployment insurance is highly seasonal; little things like a holiday on the week make a difference (see around Feb 16, President's Day, and March 29, Easter). Yet, given all this, these numbers barely move. I'm not accusing anyone of anything. Rather I would like someone from the BLS (who collects the data, seasonally adjusts it, and releases it) to offer an explanation for the lack of volatility. (This is a screenshot from Bloomberg; it must have glitched as April 12 is missing. That was also 208k, same as this week.)
XTOD: The last several weeks have been remarkable in that a series of considerably firmer #inflation, #wage and #economic data points have dramatically re-rated the market-implied probability of
@federalreserve policy rate cuts by year end.
XTOD (I think he read my Dark Matter post...): Amount of attention, digital ink spilling and coverage the FOMC gets is totally out of proportion with the level of signaling it carries. These guys are systematically wrong and literally have no fucking clue what they are doing or where they are heading. They don’t have a plan and keep getting punched in the sack. When inflation was staring right in the face their informed view was not to think about thinking about hiking rates. When inflation set on it’s largest, possibly structural, surge of the last half a century, they labelled it transitory and carried on with unholy QE while driving real rates into deep negative territory. When inflation was about to get sticky and re-accelerate they touted victory in their infamous Dec 23 dovish pivot. Now they have no clue and are saying as much, just waiting for the next data punch. Next is after denying stagflation, to call it transitory. Not sure Trump setting monetary policy would do much worse to be honest. Hell a monkey would do better. And never any accountability.
XTOD: Jerry Seinfeld on why he still works hard: "Because the only thing in life that's really worth having is good skill. Good skill is the greatest possession. The things that money buys are fine. They're good, I like them, but having a skill - I learned this from reading Esquire magazine. They did one issue about Mastery. This is a very Zen Buddhist concept: pursue mastery. That will fulfill your life. You will feel good. I know a lot of rich people. They don't feel good - as you think they should and would - they don't. They're miserable. So I work because if, you don't, in standup comedy, if you don't do it a lot, you stink."
Refunding announcement showed continued high bill issuance, unchanged from current auction sizes. JOLTS data showed a large decline in job openings, ISM showed weakening activity and really the only economic beat yesterday was in ADP Employment. Of course now of this really mattered as the main event was Powell's presser, which was aptly summed up in this tweet from Bloomberg's Jonathan Ferro: "One gear: dovish. Powell says policy is restrictive and the presser ended almost as soon as it started. The 2-year rallies for the 5th straight Fed decision-day." That dovishness and the reduction in QT was enough to send yields lower and stocks higher. The 2Y is back under 5% at 4.96% and the 10Y is 4.63%.
If you'd like a little more on the Fed check out my recap here.
On the day ahead it's Jobless Claims, Productivity & Unit Labor Cost, Factory Orders and Apple earnings.
XTOD: Federal Reserve holds interest rates steady, fires back at Kendrick Lamar
XTOD: "The Treasury has continued to stick to their prior market guidance of not expecting to increase nominal coupon auction sizes for next several quarters...because if they were to deviate from that and increase, we WILL have a resumption of the term-premium scare..." @Nomura #McE
XTOD: Feed the transcript from today's FOMC press conference to ChatGPT. Here is its summary: https://pbs.twimg.com/media/GMhLEfzXMAAPbV4?format=png&name=small
XTOD: Apparently, the secret to a long and happy marriage is…proposing at the Berkshire Hathaway annual meeting? https://wsj.com/finance/berkshire-hathaway-annual-meeting-romance-25eb77fc?st=npgr0xi3cucb39s via @WSJ
XTOD: “I’ll just work until I have X dollars and then do what I want.” If you don’t define the “what I want” alternate activities, the X figure will increase indefinitely to avoid the fear-inducing uncertainty of the void.
XTOD: The best antidote to burnout is not teaching people coping skills to handle stress. It's redesigning work to reduce stress. The cure for exhaustion is removing overwhelming demands and the norm of self-sacrifice. Healthy workplaces value well-being as much as performance.
The FOMC maintained their policy fed funds rate at 5.25%-5.50%
The statement noted that "there has been a lack of further progress toward" the 2% inflation objective.
The FOMC will reduce the pace of QT.
Powell characterized U.S. growth as strong, the labor market as relatively tight, and that it will take longer than thought for inflation to return to target.
Powell continues to characterize monetary policy as 'restrictive' though noting that the data will ultimately tell them if that's true.
Powell does not believe the Fed's next move will be a hike.
Powell isn't really thinking about the calendar and whether they will have time to cut rate this year. "I don't know how long it will take".
Powell said, the economy has been hard to forecast. There are paths to cuts and paths to no cuts, but he doesn't know.
"My own view is that physics envy drove economists to think of the social world as a potentially perfect machine." - Robert Skidelsky, What's Wrong With Economics?
It is sometimes said that economics suffers from "physics envy", aspiring to find the mathematical models that will afford us the precision of physical laws, seeking precision where none is often found. Economist Robert Skidelsky points out the complexity of human behavior, the influence of social, behavioral, moral, psychological, and other factors that render making precise mathematical modeling of the economy impossible.
These other factors are the "Dark Matter" of economics. In physics, Dark Matter is something unobservable but inferred from the gravitational effect it has on physical matter. It is the hypothesized thing that scientist believes effects the behavior of the galaxies. In economics, I'll call Dark Matter all of the hidden, unobservable, or misunderstood forces that influence economic outcomes. This economic Dark Matter could be things like sentiment, changing attitudes and moralities, the role of money, financial conditions, the influence of the FOMC's own narratives and policies, the uncertainty of buildups of financial excesses, the global effects of monetary policy, feedback loops, the role of expectations, the credibility of the Federal Reserve and other institutions, and likely many other factors. Some economist in the so-called school of "Market Monetarism" would place a strong emphasis on using market-based indicators to guide monetary policy, as these market based prices can provide valuable information about the stance of monetary policy. In other words, by observing prices and nominal GDP, you can infer the existence of economic Dark Matter when policy doesn't generate the expected result.
We obsess over and analyze economic data, the FOMC meetings, the Fedspeak, but are we seeking precision where none is going to be found? Are we failing to recognizing inherent uncertainties (even when they are telling us they are uncertain)? Are we succumbing to the noise, listening to the pundits, unable to find the signal?
Speaking of 'noise', the more beautiful sound is music. Speaking as a child of the 90's, Pearl Jam recently released their twelfth studio album, Dark Matter, and corresponding closely to today's FOMC meeting, will begin touring in support of this album on May 4th. Inspired by the lyrics of the title track and with the help of ChatGPT, I wanted to share some thoughts on the Dark Matter of economics:
"Steal the lights from our eyes": Represents the loss of clarity and transparency in economic decision-making, where hidden forces obscure understanding.
"Take my blood from my heart": Symbolizes the extraction of wealth or value from the core of the economy, leaving it weakened.
"We're in all of this dark matter": Reflects the pervasive influence of hidden economic factors, such as market sentiment or systemic risks.
"Take the breaths from my chest, Take the pulse and I'm outta line": Suggests the suffocation of economic vitality and stability, leading to disruptions and imbalance.
"Denounce the demagogues, King diamond to discard": Calls for rejecting misguided leadership and outdated economic models that no longer serve the collective good.
"Deplore the dialogue, Your word against the law": Highlights the breakdown of effective communication and trust in economic institutions, leading to uncertainty and conflict.
"It's strange these days, When everybody else pays For someone else's mistake": Illustrates the unfair burden placed on the broader population for the failures or misdeeds of a few, echoing themes of moral hazard and systemic risk.
"No tolerance for intolerance, intolerance for- No patience left for impatience no more": Reflects the need for a balanced and disciplined approach to economic policy, rejecting short-termism and reckless behavior.
"No love lost for lost loves, No sorrow for the unaccountable": Conveys the necessity of holding accountable those responsible for economic harm, without sentimentality or excuse.
Overall, these allegorical references paint a picture of the complex and often opaque world of economics, where hidden forces and systemic flaws can have profound impacts on individuals and societies.
There might be more wisdom in this AI generated allegory than in obsessing over every word Powell spoke today.
In another data point that dashes rate cut hopes, the Employment Cost Index data from the BLS showed wages and benefits rising at the fastest pace in the last 3 months and rising at a 4.2% pace YoY from last March. The 2Y closes the month back above 5% while stocks finished the month on a down note to close out a losing month, the first since last October. To start the month of May, the 2Y is 5.05% and the 10Y is 4.68%. With the curve flattening yet again, is anyone willing to trade a steepener here?
May starts on a busy note with the details of Treasury issuance, JOLTS, ISM Manufacturing and of course, the FOMC decision. While you wait for Powell, you're welcome to peruse my previous FOMC recaps here.
As for the FOMC meeting, we all know the data hasn't inspired the kind of confidence a 'data dependent' Fed desires before initiating rate cuts. Recent Fedspeak following the last FOMC meeting all point to H4L, but it will be interesting to see if any there is anything new as it relates to how the Fed views the categories that are most responsible for the 'sticky' inflation. Secondly, will there be any questions about the 'neutral rate' given both stubborn inflation and strong growth? Remember when Powell spoke at J-Hole and how the Fed was navigating by the stars? And remember how nobody has any clue exactly how to measure R-Star?
XTOD: Overlapping Generations macro says old retired people sell their assets to buy labour services (and things produced with those labour services) from the working young. A (demographic) labour shortage means asset prices fall, relative to wages. I'm not seeing it. Yet Plus: the prices of "long" assets (houses, equities, etc.,) should fall in anticipation of that future (predictable) labour shortage.
I'm not seeing that either. Yet. I don't know why, either. Yet.
XTOD: It's fair to say that Yellen-JPOW have failed. They clearly wanted to curb the deficit not through spending (politically impossible in an election year), but through lower inflation => lower rates, lower cost of debt, lower deficit => lower cost of debt etc... This is not happening and they need a plan B.
They need it urgently because the cost of debt is spiraling totally out of control.
XTOD: This morning’s ECI and housing price inflation figures confirm what I have suspected and feared. Inflation is not securely trending to target levels. Note that the ECI has accelerated from previous quarterly, semi-annual and annual levels. I suspect it has been understating labor cost inflation of late because of reduced work requirements associated with WFH.
The home price inflation figures are also cause for concern that shelter inflation is not durably declining. With higher interest rates and higher unit prices, rents will at some point reaccelerate.
Note, that as many have pointed out, bottlenecks have been easing over the last year or so reducing inflation momentum. This will not be forever and given geopolitics may reverse.
Financial conditions are now loose by historical standards. All reasons why the
@FederalReserve is in a treacherous environment, should have been more careful about easing signals and now should be very cautious about possible rate cutting.
XTOD: "Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things you only hoped for." — Epicurus
Yields fell 3-5bps as investors await the FOMC and other action this week. Stocks started off the week strong with Tesla gaining approval for self driving/driving assistance in China. Oil fell on cease fire hopes and the Yen stabilized around 156 v. USD after a wild weekend where it had touched 160.
The Treasury Quarterly Refunding Announcement showed their estimates for the April - June borrowings at $41billion more than forecast back in January, while also projecting $847 billion in new borrowings in July to September quarter. We'll get more details on the mix of Treasury issuance this Wednesday ahead of the FOMC.
On the day ahead it's Employment Cost Index data, S&P housing prices and Amazon earnings.
XTOD: Stagflation, you say? NY Fed's estimate of underlying inflation is basically flat at 2.6 percent
XTOD: "Every person who is angry about inflation should go to their local planning board and demand more high-density housing in their neighborhood. That’s what we must have to be a vibrant economy. Housing is crucial." - @Claudia_Sahm
XTOD: "Apollo Accused in Lawsuit of Illegal Human Life Wagering Scheme" Creditors to APO portcos have been subject to this for decades
XTOD: 🚨Holy Moly🚨 We're on course to spend $𝟎.𝟗 𝐭𝐨 $𝟏.𝟒 𝐭𝐫𝐢𝐥𝐥𝐢𝐨𝐧 on debt cancellation. That's more than we spent ALL higher education spending before 2020, and as much as we are on course to appropriate for TOTAL education over the next decade. https://crfb.org/blogs/total-cost-student-debt-cancellation
XTOD: Look at each item on your to-do list and ask, "Is this truly necessary?”
