Besides a technical glitch that nearly bankrupted Warren Buffett, June started otherwise ok (Dow was down, S&P up). After all Berkshire Hathaway is no Gamestop, which did better than ok after a Reddit post from 'Roaring Kitty'.
The ISM manufacturing survey was in contraction, while the employment component jumped above 50 (expansion) with prices paid remaining above 50, but down from last reading. The 10Y yield fell to under 4.40% and the 2Y fell to 4.82%.
The ATL Fed GDP Now was again revised lower to now 1.8% following today's data. Remember a week or so ago, rising yields, inflation fears, poor treasury auctions? Now it's all concerns about slowing growth.
Unless you're interested in Mexico and some comments to make up for the Fed being on blackout, I'd probably skip to XTOD's.
Outside of the U.S., the Mexican Peso weakened ~4% to ~17.70 after election results showed a super majority for the Moderna party, including a landslide victory for Claudia Sheinbaum as President. Investors expressed concerns about control over the judiciary system, a lack of willingness to thwart cartel activity and about overall public finances. Per GS Research by Alberto Ramos:
The AMLO administration submitted to Congress in February a large package of broad-reaching bills, many involving constitutional revisions, to reshape key institutions such as the Electoral Institute and the Supreme Court (e.g., election of supreme court judges) and weaken/eliminate autonomous agencies, alongside populist and costly pension and minimum wage proposals. Some bills are perceived as leading to institutional erosion and weakening the current checks and balances; and several are not viewed as market friendly. With full control of the House, and for practical purposes likely the Senate as well, the probability that a significant part of this broad agenda is approved increased significantly. President Lopez Obrador will overlap with the newly elected Congress for a month (September)......a Morena administration and Morena led Congress may ultimately be reluctant to approve the necessary reforms and/or adopt the measures required to attract investment, leverage the near/friendly-shoring opportunity, and keep Mexico on a medium-term fiscally disciplined path...the new administration will be challenged not to encroach on private sector activity and free markets, and to avoid further erosion of institutional quality.
Mexico's election may prove important for the upcoming U.S. election given topics like immigration, near-shoring, legal disputes over USMCA, and the drug epidemic all looking like prominent U.S. election issues. Apparently the overlap of U.S. and Mexican presidential elections only happens every 12 years.
With the Fed on blackout until their 6/13 meeting, how will you fill your time? You could read Fed papers such as the May 31st "Lessons from Past Monetary Easing Cycles" in which evidence seems to not bode well for a Fed that arguably got a late start fighting inflation and that success or for anyone hoping that success fighting inflation won't result in a recession (it's a pretty long paper).
Marcus Nunes argues in a blog post related to the paper that there is a fundamental flaw in the Fed research with that flaw centered on a belief that the level of interest rates alone can tell you whether policy is tight (or loose). Nunes takes the market monetarist view which he discusses as:
"If not interest rates, what can we use to gauge the stance of monetary policy? The market monetarist school, which blossemed after 2009, when Scott Sumner, at the time a professor at Bentley University, began blogging, naming his blog The Money Illusion.
In short, to market monetarists, the best gauge of monetary policy is NGDP growth, not just any growth, but only the growth in excess (or short) of the a stable level growth path. In other words, when NGDP growth takes NGDP above the stable path, monetary policy is said to be expansionary. When NGDP growth takes NGDP below the stable path (which defines a state of nominal stability), monetary policy is said to be contractionary.
How, then, does the Fed determine NGDP growth? From the equation of exhange in growth form: m+v=p+y, where m is money supply growth, v is velocity growth, p is inflation and y is real output, m is the “thermostat”, the “dial” closely controled by the Fed, that strives to offset changes in the “outside temperature” (v) in order to keep the “inside temperature” (p+y=NGDP growth) stable."
Nunes ultimately concludes that NGDP is now stabilizing and policy is now tightening, which leads one to conclude that Nunes believes the Fed is risking overtightening.
Of course one of these days I'll get around to writing more about everything John Cochrane has recently blogged, but for now, I'll whet your appetite (whet vs. wet is a tricky one) with this from one of his many somewhat recent post in part of a section of models showing what the central bank can do without fiscal help:
"Higher interest rates lower inflation and output. However, they raise inflation in the long run. A form of “unpleasant arithmetic” holds here, and quite generally. The central bank can only move inflation around over time. This is a pretty normal-looking plot. Nobody would notice the slight long-run rise as something else would have happened by then. But the mechanism is utterly different from standard central bank doctrine, that higher rates depress aggregate demand and through a Phillips curve depress inflation."
and:
"This inflation surge has huge implications for economics and economic policy, which have not been digested yet. For 13 years in the US and EU and 30 in Japan the policy consensus focused on “inadequate demand,” “secular stagnation,” the idea that we just needed more stimulus to get the economy moving. Borrow or print a few trillion dollars of money, they said, spread it around and prosperity will follow. In the same period, with ultra-low interest rates, large deficits, and low inflation, “r<g”, Modern Monetary Theory and other doctrines spread proclaiming that government debt is a free lunch, never needing to be repaid. MMT preached that “there is always slack” in the US economy, so one never need worry about stimulus causing inflation. Borrow or print a few trillion dollars of money, they said, and don’t worry about paying it back.
Well, in 2021 we did exactly what this consensus asked. And we got inflation. That is an important lesson. There was genuine uncertainty about what would happen, in the 2010s, if a massive fiscal-monetary stimulus were attempted. Now we know. “Demand” bashed in to the brick wall of supply, and surprisingly soon. If you want more economic growth now, there is no alternative but incentives and microeconomic efficiency; growth. If you want to borrow and do not wish to cause inflation, you must have a plan for paying it back. Economics is back to normal. Washington has not woken up to this slap-in-the-face lesson, perhaps because it interrupts such pleasant dreams."
The best we get in data today will be JOLTs.
XTOD: Data is asking you, what stage? - q1 real GDP was revised down to 1.3% q/q ar
- Atlanta Fed GDP Now for q2 was revised lower from 4.2% to 1.8% over last month
- Real consumer spending was negative m/m in April and prior month were revised lower
- A few days ago, BEA revised down q4 wage and salary income quarterly gain by over $ 70 billions
- Pending Home sales fell 7.7% in April
- ISM Manufacturing New Orders down to 45.4 in May, lowest in a year. New Orders have been in contraction for almost 2 years running now
- ISM Manufacturing backlogs gauge is down to 42.4 in May, also in contraction for most of last 2 years
XTOD: American households have:
$32 trillion in home equity
$6 trillion in money markets
$4 trillion in checking accts
$2-3 trillion in CDs
The piggy banks are full if & when we finally have a slowdown
XTOD: The huge appreciation of the Mexican Peso (red) has been a bubble waiting to burst. Overvaluation is on the order of 20%. Obvious catalyst to burst this bubble is the US election in November, where a Trump win could bring lots of headwinds. This weekend's election is another one.
XTOD: In the next downcycle, if it ever comes, buying LP stakes from illiquid pensions and endowments that are about to default is going to be an insane business.
XTOD: “You could be somewhere where the mail was delayed three weeks and do just fine investing.”
— Warren Buffett
XTOD: A poem Rockefeller used to recite in the office:
A wise old owl lived in an oak,
The more he saw the less he spoke,
The less he spoke, the more he heard,
Why aren’t we all like that old bird?
