Daily Economic Update: July 15, 2024

Addendum at the beginning: I wrote the part of this post about political risk on Friday after listening to a MacroMusings podcast about the U.S. safe harbor premium and prior to the events of Saturday.

PPI came in below expectations, but was mostly dismissed.  UofM consumer sentiment fell again and showed a small downtick in inflation expectations.  Perhaps more important for inflation were the comments from Jamie Dimon where he expressed a view that inflation and rates will remain higher than the market thinks.  The driver, deficits, spending on infrastructure, restructuring of trade and military expenses.  The other talking point on inflation is the impact of base effects as the year progresses.

With elections remaining a front and center topic, something that really isn't discussed is the question of how much risk premium (if any) is priced into U.S. markets.  In other words do investors perceive the U.S. as more risky today than they would historically and do investors consider either of the current candidates more risky than the other as it relates to the credibility of U.S. institutions and standing in the world.   The US safe harbor premium refers to the premium that investors are willing to pay for investment in the US due to factors like the soundness of US political institutions, the safety and liquidity of US Treasury securities, the US dollar's status as the world's premier reserve currency, and the emphasis on rule of law and free democratic elections.   

Whenever one trades, they trade against "what's priced in".  I think investors tend to trade the election based on things like tariffs, taxes/fiscal policy and regulation, but that is somewhat distinct from what might be termed a broader political risk described above.  Is there still 0 risk premium priced into U.S. markets for political risk, or is there some risk premium that could be harvested if it's mispricing the true political risk?  If political risk is rising and investors ultimately demand a risk premium in things like U.S. Treasuries, how much and when does it get priced in?  

On the week ahead politics will dominate with the RNC running to Thursday and Trump's VP pick a topic of interest.  In data Retail Sales will highlight and we'll get some Fedspeak domestically.  Internationally it's ECB and China's Third Plenum

Monday: Empire State Mfg, Powell, Daly

Tuesday: Retail Sales

Wed: Industrial Production, Fedspeak

Thur: ECB, Jobless Claims, Philly Fed, Fedspeak

Fri: Fedspeak

XTOD: We tend to be laser-focused on certain risks: stock market crashes, our home burning down, big medical bills, losing our job. But what if the risks we’re trying to contain aren’t the risks we get hit with?  https://t.co/7uyKHwmKot

XTOD: Re-reading is probably more important than reading. Seek to cognitively own a great book rather than just reading it.

XTOD: “Everybody struggles,” Charlie Munger told @BeckyQuick  last year. “The iron rule of life is that everybody struggles.”

XTOD: "Ease is a greater threat to progress than hardship.”   ~ Denzel Washington

XTOD: Persistence = energy + imagination + resilience + good judgement + focus on a goal 

One of my favorite  @paulg  essays 

And especially this simple line, an ode to the “life’s work” concept at the center of our investing “humans will work harder on a problem we love”

Daily Economic Update: July 12, 2024

Yesterday's CPI gave further credence to the idea of a September rate cut.  Headline CPI actually fell 0.1% MoM, bringing the YoY headline figure to 3%.  Energy prices, including gasoline, looked to be a big contributor to the fall in headline prices.  Both Core and "SuperCore" continue to show disinflationary trends.  Yields fell in response with the 10Y under 4.20% and the 2Y around 4.50%, both levels we saw near the end of Q1.   One debate on rate cuts is that stocks are at all-time highs and therefore financial conditions remain loose, therefore cutting rates might spur a second leg of inflation.

On the employment front, jobless claims came in very low, which doesn't seem to indicate much weakness on the labor front for the time being.

As it relates to equities, I think a view out there is that no matter what buy tech/AI.  Something like (a) if data is weak, the Fed will cut - so buy long duration equities (i.e. tech/AI) (b) if data is strong, the economy is strong - so buy tech/AI

As we head into the weekend, should I be concerned when both the Treasury Office of Financial Research and the St. Louis Fed both put out effectively the same research about banks exposures to commercial real estate?  Should I be more concerned when they seem to cite the fact that the small and mid-size banks have the most exposure to losses and further seem to conclude that I shouldn't be worried because at least that means it's not a major risk to the financial system as a whole?  As if the track record of the official sector accurately identifying the daisy-chain and layers of exposure is one that should provide me with optimism.

On the day ahead it's PPI as the highlight.

XTOD: I can't believe McDonald's single-handedly ended inflation w/their $5 meal deal  Only in America

XTOD: The cyclically-sensitive CPI deflated -0.4% MoM and has declined now for four months in a row.  The YoY trend in the prices most sensitive to shifts in the economy is now running at –1.1% from -0.9% in May and +2% a year ago.  How can Powell not be “confident” by now??  The Fed should get its head out of the sand and either cut rates on July 31st or strongly signal a move is coming on September 18th.

XTOD: JP should be "confident"!

1. Since NGDP growth stabilized after mid-23,

2. Inflation also stabilized and

3. Harmonized CPI, which differs from Headline CPI by excluding OER is just below the 2% target.

XTOD: Your toughest opponent isn’t your rival,  it’s your self-doubt. -Kobe

XTOD: This exchange between Warren Buffett and the late Charlie Munger is golden—lessons for building wealth and living a better life:

Buffett:  "Write your obituary and try to figure out how to live up to it. For business, You just want to make sure you don't make any mistakes that take you out of the game or come close to taking you out of the game. You should never have a night when you're worried about investing. You should spend a little bit less than you earn."

2 lessons Buffett said he learned from Tom Murphy:

"You can always tell someone to go to hell tomorrow."

"Praise by name, criticize by category."

Buffett continued:   "I've never known anybody who was kind that died without friends. But I've known plenty of people with money that died without friends."

Munger:  "It's so simple: you spend less than you earn. Invest shrewdly. Avoid toxic people and toxic activities. Try to keep learning all your life. And do a lot of deferred gratification.

If you do all of those things, you are almost certain to succeed.

And if you don't, you're going to need a lot of luck. And you don't want to need a lot of luck. You want to go into a game where you're very likely to win without having any unusual luck."

Buffett added:  "You need to know how people can manipulate other people and you need to resist the temptation to do it yourself."

Munger agreed vehemently:  "Oh yes, the toxic people who are trying to fool you, lie to you, or who aren't reliable in meeting their commitments—a great lesson in life is to get them the hell out of your life. And do it fast."

Buffett:  "And do it tactfully, too, if possible. But do get them out of your life."

Daily Economic Update: July 11, 2024

Another day, another dollar for the top dog with the gold flea collar - that's the S&P & Nasdaq which both set yet another all-time high.  Bet you can't guess what sector led the way.  Speaking of markets and high levels of stock concentration, etc. in reference to a CFA study showing that Gen Z has portfolios dominated by crypto and single stock holdings, economist Allison Schrager stated in her recent blog post, "Keep calm and diversify":

"Maybe markets have changed from when I learned that good investing involved going to a mall and buying stock in the stores that were crowded. I suppose financial education has never been great.

The last 20 years of markets were weird. If the market will be dominated by a few big, fast-growing stocks, maybe stock picking is a good idea and diversification is for suckers and fools. If the world is crazy, maybe a currency with no discernible value is a smart investment.

But I doubt it. A decade or two is a short time in finance, and no one market condition lasts forever. This is why good investing, not speculation, involves diversifying as much as you can. It is just efficient. As markets likely enter a more volatile phase from increased concentration, diversification will be more important than ever.....

I suppose a bear market will teach that hard lesson. Gen X and Millennials each came of financial age during bear markets—they are more risk-averse, maybe too much so. But I think we need to take a hard look at financial education, which often fails to include basic risk principles, rather than rely on people losing money and learning the hard way."

Powell stressed data, not political dependence on rate cuts.  I talked about the political risk to the FOMC in my January 31st FOMC recap sharing Paul Volcker's 1984 election season story.  When it comes to data, economist Brad DeLong asked: "Ok, Jay Powell: Precisely Which Inflation Numbers Do You Wish to See "More of"?   in which he posits that the only reason the FOMC is not willing to cut rates yet has to be a view that we don't know where the neutral rate (r-star) is, an argument he doesn't find compelling.

Yields were again little changed ahead of CPI data today.  The 10Y auction was a solid bp through where when-issued was trading and seemed to have solid stats overall.

In politics, now that George Clooney has called on Biden to step down from the Presidential race, all is likely settled. I think he holds that kind of sway and after a few shots of Casamigos most problems can be solved.

CPI dominates the day ahead.

XTOD: Few celebrities are closer with Obama than George Clooney - You can bet he ran this statement about Biden by Barack before it went public

XTOD: Are 70% discounts on office buildings enough? Oaktree’s Howard Marks isn’t sure. 

XTOD: Wallgreens stock did 20% CAGR for 41 YEARS  And then...  It fell almost 85% in just a few years.

XTOD: No amount of money can buy you integrity.

XTOD: Ergodicity might be the most underappreciated concept to truly comprehend success, risk and longevity.  It is not performance that is the most important factor for long-term performance but survival. True champions aren't just the fastest, but the fastest among those who endure. https://pbs.twimg.com/media/GSGDiaqawAAbhJQ?format=png&name=900x900

Daily Economic Update: July 10, 2024

 Another day, another record for the S&P as Powell says the economy is "no longer an overheated economy".  Powell was reluctant to get into the specific timing of rate cuts and remains 'data depedent', but there seemed to be more emphasis on downside risks to holding rates this high for much longer.  Markets increasingly believe a rate cut is likely this September, ahead of the November election. 

Of course stubborn inflation data could prove problematic, we'll get a look at CPI later this week.  Before that it's another day of Powell, today in front of the House.  We also get the 10Y note auction.

Away from Powell there seems to be an increasing chorus of people warning that stocks and in particular AI stocks are getting too rich (see GS).  As mentioned earlier this year, Bubbles are an interesting topic (reprinting from January 23, 2024 post):

As David DeRosa writes in his monograph Bursting The Bubble: Rationality in a Seemingly Irrational Market:

"Although it is not certain that anyone will be ever able to prove conclusively whether or not bubbles exist, research shows that many famous financial crisis that have been portrayed as bubbles were not bubbles at all."

DeRosa references Occam's razor, which calls for always seeking the explanation that makes the fewest assumptions possible, and Mark Rubinstein's The Prime Directive, which says that you should attempt to explain asset prices by rational models as reasons to search first for fundamental, rational explanations for asset prices before resorting to "bubbles" as the last resort. 

What makes things more interesting is that many calls for AI stocks being overvalued are being driven by fundamental views that capex spending is too high for the current and expected use cases, not to mention things like energy consumption and water usage.

XTOD: Arthur Schopenhauer: "Man can do what he wills, but not will as he will."   Modern medicine: "Hey, Arthur, ask your doctor of Ozempic is right for you."

XTOD: The infamous 'Warren Buffett Indicator' has officially hit 195% which is the highest in history - higher than the dot com bubble, global financial crisis, and the 2022 COVID crash

XTOD: Currently one of the most compressed periods for the $VIX in the last 10yrs. Dispersion has been at or under current levels during just a handful periods of time.

XTOD: DALIO: ".. I feel like I am faced with the choice between a strong, unethical, almost fascist Republican Party and a frail, untruthful, and enigmatic Democratic Party that is failing to make clear what they will do when their sitting president can no longer serve."

XTOD: Excitement is a better motivator than discipline. The people who appear to have an exceptional work ethic or remarkable discipline are often those with a genuine curiosity or interest in that area. The person who smiles is more likely to keep working than the person gritting their teeth.

Daily Economic Update: July 9, 2024

Markets await Powell and inflation data as well as the start of earnings season.  The latest NY Fed Survey of Consumer Expectations showed consumers generally lowering their inflation epxectations, while continuing to show persistently high levels of inflation uncertainty. Little changed in yield land with 2's at 4.62% and 10's at 4.27%

Other than continued speculation over Biden's future, French election fallout, the impact of Hurricane Beryl on oil and gas, I'm sure some Boeing plane had an issue, but beyond the usual, it was a pretty slow market news day (at least in my opinion).

On the day ahead, 10am is Powell in front of Senate Banking committee, 3Y Note at 1pm and Fed's Bowman at 1:30pm.

XTOD: BREAKING: The Federal Reserve is considering a 75 bps rate hike after seeing footage of Michael Rubin's white party in Bridgehampton

XTOD: This is one of the longest streaks ever without a 2% drop for the S&P 500.  Of course, looking back further in history this streak could last a lot longer than most think.

XTOD: The immaculate disinflation of 2H 2023 during a period of exceptionally strong nominal GDP was chalked up to a material step up in productivity (GDP/worker). It now seems clear this was in fact due to undercounting workers due to the surge in immigration.   Which led to some of our lowest core MoM CPI prints of this cycle. This is what got everyone excited about rate cuts for this year. If we overestimated productivity, by default we underestimated inflation in this period.   Immigration may have incorrectly flattered CPI progress.  The immigration surge is truly historic and is thus making analysis of the economic data more difficult than it normally would be. I think policymakers should take their time to figure out all of the impacts before making any decisions they may regret, in either direction.

XTOD: Back in January, Blackstone said it's buying Tricon (which owns 35,448 homes) The 

@commobserver  is now reporting that Tricon will absorb Blackstone-owned Home Partners of America (which owns 26,516 homes)  "The majority of HPA [Home Partners of America] staff are being asked to stay on through March 2025 and will receive retention packages that include their salaries, year-end bonuses and severance, plus payments to cover the extension of health care benefits and other outplacement support." 

XTOD: Clear writing and clear speaking are simply outputs of clear thinking.

XTOD: Opportunities in life come through people.    Who do you need to connect with to gain access to the opportunities you want?

Daily Economic Update: July 8, 2024

Friday's Job's Report showed a beat on the headline NFP, but downward revisions in the prior two months, as well as a increase in the unemployment rate to 4.1% and tepid average hourly earnings made the read of this report as "weak", sending yields lower.  Stocks only go up and to the right, but you already knew that.  September rate cut odds are building.  2Y is 4.62% and the 10Y is back under 4.30%.

Of course politics has been front and center both domestically and internationally.  Calls for Biden to step aside continued following his interview on ABC.   The second round of the French elections saw a defeat of the Far Right party led by Marine Le Pen, I'm not enough of an expert in French politics to opine, other than this was a reversal of results expected following the first round last Sunday and now looks like a left/centrist coalition will lead the National Assembly.

Other than that, I guess we'll have to learn whether or not 

On the week ahead inflation will highlight data, we'll sell a lot of bonds and Powell will do his semi-annual Humprhey Hawkins testimony:

Monday: No Major Data

Tuesday: Powell Testimony Day 1, other Fedspeak, 3Y Note

Wednesday; Powell Day 2, 10Y Note, more Fedspeak

Thursday: CPI, Jobless Claims, 30Y Note

Friday: PPI and UofM survey

XTOD: Somewhere on a sunny beach is a managing director asking their associate how things are going in the office.

XTOD: "I’m so glad Bobblehead George was a fan fave. No, I don’t get anything for it except joy that 35 years after putting on those glasses people are still enjoying our work.  The show was a gift from you to us. Thanks for keeping it alive. Serenity now."  - Jason Alexander

XTOD: Aswath Damodaran, NYU Finance Professor, on CNBC: Since the 7 large tech companies have cash flows and earnings, they can be viewed as value stocks. The equity risk premium at 4.11% is the lowest it has been since 2008, before the financial crisis indicating a possible correction

XTOD: To beat the market, you need the ability to identify the 2% of winners that drive gains, a severe allergy to big losers, near-perfect behavior, a reckless disregard for your own career, and a whole lot of good luck. The odds are stacked high against you.  @jasonzweigwsj  explains how its going this year: 

"Stock pickers are doing even worse than usual. In the first half of 2024, according to Morningstar, only 18.2% of actively managed mutual funds and exchange-traded funds that compare themselves to the S&P 500 managed to outperform it."   https://wsj.com/finance/investing/why-your-fund-manager-cant-beat-todays-stock-market-a5a14688

XTOD: Money should be used as a tool to live a better life, not simply something to make the spreadsheet happy.

XTOD: To do or not to do? To try or not to try? Most people will vote no, whether they consider themselves brave or not. Uncertainty and the prospect of failure can be very scary noises in the shadows. Most people will choose unhappiness over uncertainty.

Daily Economic Update: July 5, 2024

 I hope you spent the 4th imagining what can be, unburdened by what had been.  ISM services worst since the pandemic, ATL Fed GDP now down to 1.5%, you know recession, etc.  Jobs report today.  

Across the pond, Labour wins.

Why are you reading this? It’s a summer Friday, go touch grass.

XTOD: The most powerful productivity tool ever invented is simply the word “no”.

XTOD: Your friends all just came over and you ordered a bunch of pizza and Mountain Dew. You've fired up NCAA Football on your Xbox. No school tomorrow. The adults don't care if you stay up all night long. A perfect Summer evening. You are 43 years old. The year is 2024

XTOD: what if biden announces he wants Kamala to take over but then with his dying breath he tells his wife it should be Hunter and also there are dragon…

XTOD: Ah, the song of crack and hookers I see

XTOD: Life Hack : Friendships and Relationships are not about keeping score or getting something, they are about sharing time and space , creating moments and memories! The scrapbook of LIFE is all that matters

Daily Economic Update: July 3, 2024

On the 2Y Anniversary of the 2s10s inversion, a steepener trade is starting to work.  The bond market seems to now care again about fiscal issues and how tariffs could lead to sticky inflation.  Will this bear steepener hold, who knows.

In data, JOLTS showed more openings than expected, but downward revisions muddy the picture some as does the fact that the leading category of job growth is government (actually that's less surprising).  In Fedspeak, Powell said he continues to see disinflationary progress and is characterizing risk as two-sided, with concerns about softening in the labor market.   The 2Y remains near 4.75% and the 10Y near 4.45%.  Stocks enjoyed more new records.

Meanwhile researchers from the St. Louis Fed seem a little less sanguine about inflation:

"To conclude, the mean inflation expectation only rose from about 2% before the pandemic to 2.5% in May 2024. However, the standard deviation also increased substantially, and the skewness switched from negative to positive, signaling right-tail risks on inflation expectations. The analysis in this post suggests that both second- and third-order moments should be taken into account to make assessments about future inflation and their risks."

It's an early market close but before we get there you have to wade through the deluge of data which includes ADP Employment, Jobless Claims, ISM Services and Factory Orders.  At/after the close the Minutes of the last FOMC meeting come out.  Then after fireworks and the UK general election (which Labour is expected to win in a landslide), Friday will go right into the Jobs Report.

XTOD: Strip clubs are always the most leading indicator of all...good old RICK has absolutely collapsed, this has led 2 of the last two recessions. 

XTOD: LISTENING EARS, please.  The stock market corrects when the Fed actually CUTS rates.

Until then, as it pertains to recession:   3) Unemployment lags the 3rd most (it historically rises after recession has begun)  2) Inflation lags the 2nd most  1) The stock market lags the most

XTOD: The Japanese yen is at a 37 year low, it’s the best time to plan a trip to Japan.

XTOD: Kamala for nominee futures are skyrocketing right now, doubled since noon:

XTOD: Year to date returns. Pretty wild. 

S&P 500: +15.23%

S&P 500 Equally Weighted: +4.96%

S&P 600 Small Cap Value: -5.4%

XTOD: “Once you have enough for beans and rice and taking care of your family and a few other things, money is a story. You can tell yourself any story you want about money, and it’s better to tell yourself a story about money that you can happily live with.”  — Seth Godin

XTOD: “Courage is not simply one of the virtues, but the form of every virtue at the testing point.” — C.S. Lewis

XTOD: Always stick to what makes you weird, odd, strange, different. That’s your source of power.