Daily Economic Update: July 19, 2024

 A tough day for stocks as megacap tech stocks lead loses again, but yesterday saw selling across sectors including small-caps.  How much is "profit taking", how much is [insert some narrative here].   The economic data was mixed, with jobless claims rising more than expected, but some noise due to the Hurricane Beryl.  The Philly Fed was better than expected and showed the prices paid component cooling.  As expected the ECB was on hold and really not noteworthy (at least to me).  Other than that everyone is subscribed to Netflix.   

Price action saw stocks down, dollar up and yields rising.  The 2Y is 4.47% and the 10Y is 4.20%.   Refer to Howard Marks peice yesterday as to why the correct answer to why things move the way they move in financial markets is "I don't know."  And that answer is even more true when you mix in politics and potential economic policies domestically and globally.

It's a summer Friday with no data of importance, but analysis of Trump's speech and speculation around Biden dropping out will likely dominate the news flow.

XTOD: Here's my current portfolio:

35% Stegosaurus

30% Velociraptor

15% T Rex

5% That sunflower-looking dinosaur that kills Newman in Jurassic Park

15% Bitcoin

Am I diversified?  https://pbs.twimg.com/media/GSxklP3XUAAE7U6?format=png&name=small

XTOD: Mortgage delinquency in the Black Knight series surges 13% M-O-M marking the largest M-O-M increase since April of 2020  

What does this say about the consumer?

XTOD: After a high dose of psilocybin, the brain desynchronizes at a massive scale, causing loss of our sense of self, time, and space. This may drive the burst of plasticity caused by psychedelics. The next day, brain activity has largely returned to normal, but an echo remains – a reset of circuits critical to the sense of self.  Our study is out today in  @Nature

 https://nature.com/articles/s41586-024-07624-5

XTOD: "Envy is inversely correlated with self-examination. The less you know yourself, the more you look to others to get an idea of your worth."

XTOD:  Some projects benefit from early action. If you're writing a book, it's easy to spend a lot of time brainstorming titles and dreaming up an outline, but it's better to simply write. The book discovers itself as you go. Yes, you'll need to go back and organize things, but this is easier to do once you have material. The key is to act first and then organize your thinking.

Other projects benefit from early planning. The best way to build a skyscraper is to plan carefully. If you start placing steel beams on day one, you're guaranteed to run into problems. It is harder to make changes once you've begun. You'll need to tear it down and start over again. The key is to organize your thinking and then act.

Do you need early action or early planning?

Daily Economic Update: July 18, 2024

Potential economic policies seemed to be a catalyst to push investors out of big tech and into small caps.  The narrative around the trade is that the large AI sensitive names might find it challenging to procure the hardware needed to fuel the growth that is priced into those stocks, while smaller companies tend to have more floating rate debt and could be direct beneficiaries of Fed rate cuts.  According to CNBC, it was the first time in over 20 years the Nasdaq lost over 2.5% while the Dow registered a gain.  Yields were little changed.

In more important news, Howard Marks latest Memo was released The Folly of Certainty.  A quick summary in the bullets below (You can probably find my recaps of some of the other recent memos here.)

• The premise: "how can anyone be without doubt."
• Macro-forecasting is impossible: (a) we don't know what's going to happen and (b) we don't know how the markets will react to what actually does happen
• The economist consensus has been wrong about the path of rate cuts and about the odds of a recession.
• He remarks about how some people have ended up capturing massive gains in the stock market based on a belief the Fed would be cutting rates.  Clearly the Fed didn't cut but stocks rose nonetheless.  In other words, they ended up right for the wrong reasons.
• "Markets swing more than economies and companies. Why? Because of the unpredictability of market participants' psyches or emotions."
• "Intelligence, education, access to data and analysis can't be sufficeint to produce correct forecasts.".  Quoting John Kenneth Galbraith, "There are two kinds of forecasters: those who don't know, and those who don't know they don't know."
• People underestimate the role of luck in making money. There is a specious association of money and intelligence.
• Have intellectual humility - realize you might not be sure, or you don't know
• Certainty in fields like politics, economics and investing is absurd.

After reading Marks', here are some reminders from this blogger (from post on this blog over the year +):

Uncertainty is an interesting word and one that is often conflated with "risk" in the financial setting and perhaps is a little confusing. I've found the following to be a helpful guide: "risk refers to all outcomes that can be insured against, uncertainty to those which cannot." And "..uncertainty as both Keynes and Knight define it, but which the mainstream denies: a situation where we have no scientific basis for calculating a ratio (probability)."  To further illustrate: "For example, if one smoker out of ten died of lung cancer, the probability of smokers dying of lung cancer is 10 percent. This set of numerical probabilities [cardinal probabilities] is the standard domain of risk as recognized by actuaries...At the opposite extreme is uncertainty...where we have no scientific basis for calculating a ratio."  Keynes (as reported by Skidelsky) sums this up as "The magnitudes of some pairs of probabilities we shall be able to compare numerically [cardinal probabilities], others in respect of more or less only (i.e. 'more or less likely', "ordinal probabilities), and others not at all [uncertainty]."  If you're ever interested in reading more about risk and uncertainty (and Keynes views on uncertainty), author Peter Bernstein's classic "Against The Gods" is worth a read.   

While uncertainty might be scary, Bernstein laments: "A tremendous idea lies buried in the notion that we simply do not know.  Rather than frightening us, Keyne's words bring great news: we are not prisoners of an inevitable future. Uncertainty makes us free."

Or as Frank Herbert said in the Dune series:   “to know the future absolutely! All of it! What fortunes could be made — and lost on such absolute knowledge, eh?” but “what a hellish gift that’d be. What utter boredom! Every living instant he’d be replaying what he knew absolutely … Ignorance has its advantages.” 

Given the uncertainty and the bombardment of noise in the current economic environment, I was reminded of two quotes in the famous wall street book "Where Are the Customers' Yachts?" by Fred Schwed: "In this case, the notion that the financial future is not predictable is just too unpleasant to be given any room at all in the Wall Streeter's consciousness" and "For one thing, customers have an unfortunate habit of asking about the financial future.  Now if you do someone the signal honor of asking him a difficult question, you may be assured that you will get a detailed answer.  Rarely will it be the most difficult of all answers-"I don't know".

A prudent way to navigate the inherent uncertainty in the world and economy is by maintaining some flexibility, a buffer, a margin of safety and a level of creativity in planning.  This flexibility isn't free, it's the extra turn of leverage not taken, it's the liquidity not deployed, or other analogous things, but it also provides a valuable option to change course when things aren't working out.  It creates a condition to increase the odds of survival and survival is what allows individuals and businesses to adhere to Charlie Munger's first rule of compounding: "The first rule of compounding is to never interrupt it unnecessarily".

On the data side, housing starts beat expectations lead by a beat in multifamily.  Building permits also beat expectations and industrial production beat after auto assemblies surged.  In Fed news, NY Fed Prez John Williams seemed to indicate that the data between July and September would be important for the Fed to gain more confidence on the fight against inflation, which would seem to potentially make a July cut a long shot.  Gov. Waller continued to express belief that we'll pull off a soft landing and also the need to see "a bit more evidence" over the next couple of months before penciling in a rate cut.

In the real world people still seemed to largely be employed, taking vactions, flying, dining out, etc. 

On the day ahead, it's ECB (expected to be on hold), jobless claims, Philly Fed and Fedspeak.  Markets will also look to parse and further react to overnight comments from VP nominee Vance.

XTOD: Part 1 Here is a contrary opinion on the emergence of Silicon Valley support for former President Trump. Which like all my opinions on here, probably won’t be popular.    It’s a bitcoin play.  

Not because the former President is a far stronger proponent of crypto. That’s nice. But doesn’t really impact the price of crypto. It makes it easier to operate a crypto business because of the inevitable, and required, changes at the SEC  

What will drive the price of BTC is lower tax rates and tariffs, which if history is any guide (and it’s not always ), will be inflationary. 

Combine that with global uncertainty as to the geopolitical role of the USA, and the impact on the US Dollar as a reserve currency, and you can’t align the stars any better for a BTC price acceleration

Part 2  How high can the price go. Way higher than you think.  Remember, the market for BTC is global.  And the supply has a final limit of 21m BTC, with unlimited fractionalization.  

Keep that in mind as you consider what happens if because of geopolitical uncertainty and the decline of the dollar as the reserve currency, BTC becomes a “safe haven” globally.  Which means that BTC could be what countries and all of us look to buy as a means to protect our savings.  

Crazy ? It already happens in countries facing hyperinflation.  

And if things really go further than we can imagine today (and I’m not saying they will.   Just that this has a possibility somewhere above zero) , then BTC becomes exactly what the Maxis envision.   A global currency

XTOD: The biggest outperformance of small-cap stocks over large-cap stocks, over a 5-day period, in history.

XTOD: The problem with this Trump ticket is that most these economic policies are predicated on proven to be totally inefficient measures like tariffs, devaluation, etc… 

I sure hope these are election rhetoric and that Trump will prove his usual opportunistic self by using the ideas to get voted in but not actually toying with implementation.

XTOD: “On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous.”  - Buffett

XTOD: Keep the goal. Change your mind about how to reach it.  One sign you’re getting in your own way is not changing your tactics when you’re not getting the desired result.

Daily Economic Update: July 17, 2024

Yesterday's data featured a sizeable beat in core retail sales causing many economist to increase their forecast for 2Q GDP.   STL Fed GDP forecast is now back to 2.5%.  Import prices were flat, possibly a good sign for inflation in the U.S. and our neighbor to the north saw falling inflation.  Fed Gov. Kugler signalled some cautious optimism on rate cuts this year. The market is pricing in a Fed rate cut by September.  The 2Y is 4.43% and the 10Y is 4.16%.  In equities the outperformance of small caps of late is catching attention, but nonetheless equities continue to win. 

On the day ahead we get housing starts, industrial production and Fedspeak including Waller. 

XTOD: Russell 2000 ytd gains as of one week ago: +0.9%  Russell 2000 ytd gains as of today: +12.5%

XTOD: kendrick lamar’s ‘not like us’ is now the best selling rap song of 2024 in the US🤯

XTOD: Home Run Derby Anthem singer Ingrid Andress announced that she’s checking herself into rehab

XTOD: Everyone needs one person in the group that can do a good Trump impression. This is on my 2025 to-do list if he wins.  https://x.com/gb1121/status/1813177959777231172

XTOD: “Hear Me…”   Mike Tomlin GOLD “It’s not what you are capable of; it’s what you are willing to do.  Plenty of people are capable.  Fewer people are willing.”   This message is the ultimate TRUTH in sports.   No Deposit - No Return

XTOD: It's not typical to see a Catholic priest behind a DJ booth. But it's where Guilherme Peixoto shines. He rose to fame playing electronic dance music near his village church. Now the 49-year-old is playing at some of the world’s best nightclubs https://reut.rs/3Y302M4

Daily Economic Update: July 16, 2024

 

Stocks rose, the yield curve steepened.    Powell indicated he's good to cut rates before inflation returns to 2%.  2's10's curve is now just 22bps inverted on Fed cuts and steepening on the long end due to predictions that if elected Trump's policies would increase deficits and inflation.  Trump named J.D. Vance is running mate and for some reason when I hear Vance I only think of The Office. 

Nothing on the earnings front is causing any major concerns at the moment. 

Retail Sales on the day ahead. 

XTOD: The Rapper 50 Cent is reporting in talks with Organizers about appearing at the Republican National Convention in Milwaukee alongside Former President Donald J. Trump.

XTOD: The inventory spike in Texas/Florida right now is breathtaking.  Active listings in these two states up to 249,000.   The highest level in the last 7 years. And they continue to go up like a hockey stick.   Don't be surprised if values in Texas/Florida are down by at least 10% by year end.  

Meanwhile - Northeast US is still in massive inventory shortage.

XTOD: Scoop: Biden WILL announce plan to cap rents at 5% nationwide, sources say  Would strip tax benefit from corporate landlords who dont comply  Plan, which likely requires D control of Congress, comes as Biden emphasizes populist econ ideas after debate  W/ @rachsieg   https://washingtonpost.com/business/2024/07/15/rent-cap-biden-housing/

XTOD: jokes aside JD is a great choice, former VC, and very good on crypto. Trump 2.0 is signaling a pro tech, pro silicon valley, pro american dynamism outlook.

XTOD: "Unless you buy a stock at the exact bottom (which is next to impossible), you will be down at some point after you make every investment. Your success entirely depends on how dispassionate you are towards short-term stock price fluctuations. Behavior matters."  — Joel Greenblatt

XTOD: The US isn’t a failed European country, it’s a working Latin American country.  If it fails, it‘ll look more like Mexico than Scandinavia.

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.