Daily Economic Update: July 29, 2024

It's like the olympics of central bank meetings this week with 3 central bank meetings (FOMC, BOJ and BoE).  Of the 3 CB's, the most interesting might be Japan, where a rate hike could still be in the cards.  The BoE and Fed are likely on hold, but BoE has decent odds towards a cut.   Friday's PCE data was largely in line with expectations and markets seemed to like the fact that Personal Income was lower than expected, so let's cheer people making less because it increases the chance the Fed cuts? Is that the narrative?

With Jobs Day on Friday, I thought I would reflect on how last week everyone was worried about recession because of rising unemployment.  Then Claudia Sahm of the Sahm rule wrote a lot of words that I think said, the rule is sending the right signals in terms of risk of recession, but it's complicated.  Got it!   And Goldman research said we shouldn't be too concerned with the rise in unemployment because in part (they had 3 reasons: (1)there haven't been layoffs (2) the Fed has plenty of room to cut and (3) there are temporary labor frictions) because people aren't losing their jobs:

"First, the recent rise in the unemployment rate breaks with the historical pattern in one crucial respect—there has not been an increase in the layoff rate, which remains historically low. This is important because it means the economy is not experiencing the usual vicious circle in which job and income loss lead laid-off workers to reduce their spending, leading to further job loss. The increase in the unemployment rate has instead come partly from a surge in labor supply driven by immigration, with which job growth has not quite kept up. But job growth is far from weak, and with final demand still growing at a robust pace, it appears set to remain fairly solid.

Overall economists as usual don't know and this time immigration is clouding the employment picture.

In the words of Vanguard founder John C. Bogle from his book "Enough.":

"Today, in our society, in economics, and in finance, we place far too much trust in numbers. Numbers are not reality. At best they are a pale reflection of reality. At worst they're a gross distortion of the truths we seek to measure.  But the damage doesn't stop there....By worshipping at the altar of numbers and by discounting the immeasurable, we have in effect created a numeric economy that can easily undermine the real one."

Internationally we have Israeli striking Hezbollah following a Hezbollah missile strike that hit a soccer field in Israel.  The rising tensions between Israel and Hezbollah in Lebanon risk expansion of conflict in the Middle East.  We also have a crazy story of two Mexican narco lords, one of the sons of El Chapo and the other known as 'El Mayo', were arrested in Texas.

On the week ahead the big U.S. data is FOMC and Jobs, but there are plenty of "important" data releases throughout. We also get more mega-cap tech earnings from 4 of the Mag 7 (Apple, Amazon, Microsoft and Meta).  

Monday: recover from the weekend and prep yourself for having to listen to pundits talk all week about central banks and jobs

Tuesday: Home Prices and JOLTS

Wednesday: BOJ (overnight) FOMC at 2pm before that ADP Employment

Thursday: BoE, Jobless Claims, ISM Mfg

Friday: Jobs Day, factory orders

XTOD: The Biden Administration is concerned that the Hezbollah Rocket Attack earlier on a Youth Soccer Match in the Town of Majdal Shams, could be the Spark which leads to an All-Out War against Hezbollah; with a Senior U.S. Official telling Axios, “What happened today could be the Trigger we have been worried about and tried to avoid for 10 Months.”

XTOD: A  disingenuous take is when someone predicting economic collapse says "I hope I'm wrong, I would love to be proven wrong here."  Of course there are some very smart pessimists but I think some fantasize about economic collapse because in a world where everyone is suffering they would feel better about themselves by comparison.

XTOD: Macro view

Financial conditions are NOT restrictive 

Growth will bounce

Inflation will stick at to high levels

Earnings estimates for 2025 will not be realized 

Fed won't cut in 2024

Treasury is stuck and will be forced to up coupon issuance

Long term bonds have no upside 

Equities are stupid rich

Positioning remains massively overweight long by long only and hedge fund shorts are moderate

XTOD: Today’s PCE report on inflation and spending was already baked into yesterday’s GDP report. They showed an economy, where discounting is luring consumers to open their wallets a little further, especially for big ticket items that often require financing.  

Still, there were new data in the report. Spending outpaced personal disposable incomes, and the saving rate fell to its lowest rate since December 2022. Consumers are leveraging home equity and other lines of credit to pick up their spending on everything at appliances, furniture and building material and garden stores. Much of those gains were in higher income households as those at the lowest rungs of the income strata have tapped the saving they amassed during the pandemic and then some.

XTOD: Teen Allegedly Derailed BNSF Freight Train For "Insane" YouTube Footage

Daily Economic Update: July 26, 2024

Summer Friday PCE data day.  What if PCE data for some reason is hot and market expectations for rate hikes are again repriced into further out in the future?

Stock narratives include: a tech re-rating around returns to AI, an unwind of Yen carry trades ahead of an expected BoJ hike, a potential slowing economy (the Dudley editorial) and political risk.  Ford shares were particularily hit hard citing warranty cost. Overall it was an up and down day in equities with S&P ending in a loss and Nasdaq down again.

In data GDP beat big,  coming in at 2.8% vs. 2.0% est. with higher than expected demand and higher PCE, but no one cared.  Durable goods orders were weak but seemed to be driven by airline orders and jobless claims continue to be super low.  The 7Y auction was solid, but yields rose from lows of day.  The 2Y ended at 4.43% and the 10Y at 4.24%.

PCE will be the headline today.

XTOD: Never mind GDP – the real shocker in the data today was the core PCE deflator (+2.9% SAAR in Q2 vs consensus views of +2.7%). Unless prior revisions were the culprit, the quarterly data suggest that the June core deflator will move in the opposite direction tomorrow as the CPI did – the risk now is +0.3% MoM (consensus at +0.2%).  This could well complicate the near-universal view that the Fed will start cutting rates by the Fall.

XTOD: This is your reminder that the Fed won't cut rates next week and won't cut rates by 50bp in September. My view remains they won't cut rates in September either fwiw.

XTOD: In case anyone doubted the role of carry trades on $NDX, here’s $JPY vs $NQ for the past 13 days:  https://pbs.twimg.com/media/GTWXSyRXIAANyD1?format=jpg&name=900x900

XTOD: “Beauty awakens the soul to act.”      ― Dante Alighieri

XTOD: “In a life properly lived, you’re a river. You touch things lightly or deeply; you move along because life herself moves, and you can’t stop it; you can’t figure out a banal game plan applicable to all situations; you just have to go with the ‘beingness’ of life.”   - Jim Harrison

XTOD: Charlie Munger: "The toxic people who are trying to fool you or lie to you — who aren't reliable in meeting their commitments — the great lesson of life is [to] get them the hell out of your life. And do it fast."

Daily Economic Update: July 25, 2024

Catching up on Dalio latest, he doesn’t believe it is the most likely scenario, but if Trump loses in a close race, he believes that it is probable we see some form of Civil War.  Unrelated to that view, at least we think, the equity markets had a rough day yesterday, led by a double digit decline in Tesla shares.  Despite the tech led sell-off in stocks, the yield curve steepened and the 2's10's inversion is down to just 13bps.  Both Goldman and ex-Goldman (Dudley) are now in the cut rates now camp.

Canada cut 25bps to 4.50% as expected, noted excess supply and cooling shelter cost.  The Canadian Dollar is nearing it's weakest in the last year partly driven by the interest rate differtential with the U.S.  In other international news, Netanyahu's visit to the U.S. to address Congress was met with plenty of protest in the D.C. area.    

In data, home sales fell, higher inventories, smaller trade deficit and better than expected services PMI data.  The current question based on the recent data is whether or not the economy is speeding up.  Don't believe me look at the various GDP forecast/nowcast, they've all bounced off a low from early July.

On the day ahead it's GDP 2Q, jobless claims and the 7Y auction...and politics.

XTOD (I need someone to buy me this): i choose to believe that the audience for this exists https://pbs.twimg.com/card_img/1815789118988709888/o1OaYGu5?format=jpg&name=900x900

XTOD: SCOOP: OpenAI may lose $5B this year & may run out of cash in 12 months, unless they raise more $, per analysis@theinformation

Investors should ask: What is their moat?  Unique tech? What is their route in profitability when Meta is giving away similar tech for free? Do they have a killer app? Will the tech ever be reliable? What is real and what is just demo?

XTOD: Karine Jean-Pierre just said that the President continues to believe that he can serve four more years and did not withdraw due to his diminished state. "It has nothing to do with his health." ...

XTOD: The Nasdaq and S&P 500 just had their worst drops since 2022 

XTOD: A stunning 10% of Cuba’s population — more than a million people — left the island between 2022 and 2023, the head of the country’s national statistics office said during a National Assembly session

XTOD: Blackstone Mortgage REIT Cuts Dividend as Distress Increases @business

 #CMBS $BXMT  ▪BXMT to repurchase $150 million shares to blunt dividend news

▪Muddy Waters’ Carson Block shorted the trust in December

XTOD: “Think of yourself as dead. You have lived your life. Now, take what's left and live it properly. What doesn't transmit light creates its own darkness.”           ― Marcus Aurelius, Meditations

Daily Economic Update: July 24, 2024

Sales of existing homes fell the most in 2 years as median home prices remain high and consumers feel the pinch of higher mortgage rates.  Stocks were slightly lower on the day as were yields lower. After hours Tesla and Alphabet earnings disappointed investors.

 The 2Y Auction saw very good foreign demand, printing over 2bps through where WI was trading.  The 2Y ended the day 4.50% and the 10Y at 4.25%.

In politics the Secret Service director resigned and away from politics part of Yellowstone park exploded itself and a whale jumped on a boat in New Hampshire. 

Flash PMI's and the 5Y Note Auction will be the highlights of the day ahead in data as Tech Earnings and Biden's 8pm address will also be in focus.  Outside the U.S. the Bank of Canada is also expected to cut rates for their second straight meeting.

XTOD: (long thread and a paper perhaps worth a read):  Summary: changes to Treasury's issuance policies have provided similar economic stimulus as a 1% cut in the Fed Funds rate, usurping core functions of monetary policy and blocking the Fed's efforts to restrain inflation and growth.....Let’s get into the mechanics: Treasury has an established rule of issuing 15% to 20% of debt in short-term bills rather than interest-rate-risk bearing intermediate/long-term debt (“coupons”).  They're violating this rule materially of late, issuing more bills and fewer coupons.  https://www.hudsonbaycapital.com/documents/FG/hudsonbay/research/635102_Activist_Treasury_Issuance_-_Hudson_Bay_Capital_Research.pdf

XTOD: Oil powers the machine everywhere. The economic machine. The activity machine. The war machine. The Machine. It is the substrate of power and might.  The uncertainty splintering the minds of many in the market could end in up with “oil as the next gold,” in the following way.

XTOD: An unusually large eruption of one of Yellowstone’s geysers occurred at Biscuit Basin moments ago.

XTOD: Want to know just how bad Delta's meltdown is?  The airline has now canceled 5,370 flights and counting since Friday.  That's more flights than Delta canceled in all of 2018 ... and all of 2019, too (5,343).  Two years worth of cancellations in less than five days.

XTOD: 6. Embrace Adaptation  

"Life is pretty simple: You do some stuff. Most fail. Some works. You do more of what works." ― Leonardo:

• Learn from both successes and failures.

• Stay flexible and open to change, continually adjusting your path as needed.

XTOD: BREAKING: The Biden administration's ban on noncompete clauses has been upheld in court, per MorePerfectUnion.

As of now, virtually all noncompete agreements with bosses will be banned and voided beginning September 4.

Daily Economic Update: July 23, 2024

 Stocks rose as apparently the Dems are the party of big tech and the Republicans are the party of small business, or something along that narrative came out of Jim Cramer’s mouth (I think).  The 10y finished at 4.22 and the 2y is 4.53 as markets continue to digest politics.

In other news I once took a Delta flight on a bus, true story, so I’m not surprised with headlines that they continue to cancel flights due to Friday’s tech outage.

On the day ahead it’s politics and home sales, 2y note auction and tech earnings.

XTOD: America is wondering whether their president is alive or dead and it’s like the third weirdest thing that’s happened in the past 9 days.

XTOD: Atlanta airport is jam-packed. Mothers w/ small children on the floor in the terminal. Line for customer service is 1/2 mile long. No rental cars. Few hotel options. People’ve been stuck here 3 days.

If there weren’t bigger national news- @Delta CEO would be dragged to testify

XTOD: Crowdstrike now -30% in just a month since Jim praised it. Legend

XTOD: The price of success is paid in private.

Visible triumphs are built on invisible toil.

Daily Economic Update: July 22, 2024

This blog was not impacted by the CrowdStrike outage, at least I don't think so.  It would probably take people actually reading it to know for sure. 

On Sunday Biden was unburdened by what has been and decided to drop out of the 2024 race and for now Kamala is the heir apparent.  Alternatively the headline could have been Biden Crowdstriked Out by Dems....or something like that.  Nonetheless we now know that rather than giving a speech in the Oval Office, it's X that is the world's most important medium.

With no real data today, I'm just going to refocus on the important topic of debate around climate change which is clearly, if you're on an electric boat and it's sinking and there is a shark 10 yards away do you stay on the boat and get electrocuted or test the shark?

Over in Asia, the PBOC cut their prime rates for 1y and 5y loans by 10bps.  In the Middle East things seem messy, remember the Red Sea?

On the week ahead:

Monday - listen to people speculate about politics

Tuesday - Home sales and PMI's

Wednesday - New home sales

Thursday - GDP 2Q, jobless claims

Friday - PCE.

XTOD: Conheads rejoice. It’s his time.

XTOD: This show. It’s always this show. https://x.com/i/status/1815093641133830514

XTOD: Aaron Sorkin says the Democrats should choose Mitt Romney as their Biden replacement: https://pbs.twimg.com/media/GTAthbwXYAAYCXa?format=jpg&name=900x900

XTOD: Billy Beane: I’m just saying you can't start Biden at President. 

Art Howe: Well, I am starting him at President. 

Billy Beane: I don't think so. He plays for Delaware now.

XTOD: People are acting like it’s a done deal that Kamala Harris will be the candidate, but that question seems pretty far from decided.

XTOD: The world is a large theater with a small exit door. The definition of the sucker is someone who focuses on the size of the theater, not the size of the door.

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.