Daily Economic Update: August 9, 2024

"Summertime and the livin's easy" I guess was the motto for equity markets yesterday.  Jobless claims were much better than expected allaying some concerns about the recession word.  Who knew this would be enough to send stocks rallying to their biggest gains in since last November, if indeed it was only this data that helped fuel that move. There have been some headlines that perhaps things in the Middle East may not escalate dramatically that could help too.  Anyway, whatever the driver, mixed with another weak treasury auction (the 30y tailed 3.1bps), it was enough to get the 10Y back to 4% and the 2Y up to 4.05%.  

Atlanta Fed GDP Now is still reading 2.9% estimate, we'll see what the NY Fed's GDP nowcast reading is today.  As a reminder, the NBER definition of recession does not require and is not simply two consecutive quarters of declining real GDP.  That said, it's hard to see almost 3% real GDP in 3Q as being recessionary.

As we hit a summer Friday, one with no data, will this be one of those Friday's where investors "de-risk" heading into the weekend?   In the immortal words of Jay-Z "Do I look like a mind reader sir, I don't know".

XTOD  (I personally have no idea who Paulo is, but I'm sure he's a nice enough guy): From my buddy @PauloMacro  and his excellent blog…  Don’t think guys have thought this through very far.  

-If Fed cuts aggressively here, JPY goes to 120 and every CUSIP has a flash crash, as the carry trade blows up. 

-If Fed cuts slowly, then it may just blow everything up anyway, cause the economy is rolling over and the ‘wealth effect’ was the only thing holding it up. 

-Meanwhile, we just had a 10-yr auction that effectively failed. So if the Fed cuts at all, they blow up the bond market and the banking sector. They realistically need to raise rates aggressively here to save things (imagine that!!). That’s the EM Dilemma. Which is why DMs do not want to become EMs. Or in other words, ‘they’re fuct!!’

XTOD: To show why initial & continuing claims aren't worrying yet, here's how both (as a share of covered employment) reacted in the recessionary year of 2001 relative to the non-recessionary years of 1999 & 2000. The tiny 2024 wedge in continuing claims is nowhere near 2001 levels yet  https://pbs.twimg.com/media/GUdq14lasAAJ5ED?format=jpg&name=small

XTOD: Everyone is fighting a battle you know nothing about. Everyone struggles. Take solace in that.

XTOD: To experience time travel, read.  To achieve immortality, write.

XTOD: Experiences that make you grow as a person are always painful: 

overcoming injuries, getting seriously sick, losing someone you love, losing a lot of money, being treated unfairly because you were different, getting betrayed by someone you trusted. 

The ride isn't easy, but that's the only way to grow mentally and emotionally stronger.

XTOD: Not all disappointing outcomes are failures. Some lead to improvements in your process. 

Success is about more than the results you achieve. It's also about the growth you attain. 

Progress is more than how close you come to your goal. It's how far you've come from your start.  https://pbs.twimg.com/media/GUeTkWGWQAM8l7j?format=jpg&name=900x900

XTOD: We face a disturbing, understanding paradox: as information has exploded, understanding has imploded. It leads people to swallow, simple slogans. These fuel  polarization. 

To escape, we must read, write and think deeply. The time is getting urgent.  https://pbs.twimg.com/media/GUe4GXZa8AA_e1g?format=jpg&name=small

Daily Economic Update: August 8, 2024

 U.S. stocks ended lower and yields rose again.  Yesterday's 10Y auction was considered to be quite poor, with one of the largest tails (over 3bps above where when-issued was trading) in years. Not quite what you might expect in a major flight to safety trade, so I guess debt and deficits matter to investors, even when they are trying to figure out how they are assessing the U.S. growth and inflation picture.  We'll see how the 30Y Auction looks today.  With the 2Y at 3.98% and the 10Y at 3.95%, the 2's10's inversion watch is getting real, sitting at just 3bps.  Are you willing to play for further steepening of the yield curve?  If you need a refresher look here.

I already have seen the talk of the "Fed Put" a few times this week.  On a year when the S&P is up 15%.

Speaking of the "Fed Put", I thought John Cochrane  highlighted an interesting observation in a recent blog post. To paraphrase, he basically alluded to the fact that some of the voices calling for the Fed to cut are making those calls solely being made on the basis of people wishing to see the stock market higher (certainly there are some concerned about the employment picture).  It does make you wonder, if the Fed were to cut early or bigger than what's priced in, will it be a defacto bail out of some of the levered and short vol trades that the current narrative is blaming on the recent price action?  In other words does it perpetuate moral hazard and further encourage investors to behave like Taleb's Turkey, picking up pennies in front of a steam roller.

 

Anyway, this week to date reminded me of "Febezzle"

Jobless claims, 30Y auction, Fed Barkin today and eyes on wars in Ukraine and Middle East.

XTOD: Taylor Swift’s shows in Vienna were canceled Wednesday after two men—one with alleged ties to ISIS—were arrested in connection to a terror plot targeting one of the events. What happened—and what's next for Swifties? Here's what we know: https://trib.al/h15tpaA

XTOD: ISIS just Pissed Off the one Group that you don’t want to Piss Off…Swifties.

XTOD: ""The US is not in a recession, despite the Sahm Rule indicator bearing my name saying that it is. That said, the risk of a recession is elevated, strengthening the case for the US Federal Reserve to cut interest rates."" https://bloomberg.com/opinion/articles/2024-08-07/the-sahm-rule-is-warning-of-recession-but-claudia-sahm-isn-t-sold?srnd=undefined&sref=YAR8Qcu4 my 

@opinion

XTOD: Former New York Federal Reserve President Bill Dudley has a Bloomberg opinion piece out in the last half hour. 

He is hyperventilating that the Fed needs to cut 150 to 200 bps as fast as possible.

* He dismisses the Sahm Rule pushback as being distorted by migration. He is taking it at face value, and it means the economy is in deep trouble.

* He argues that the neutral rate is 150 to 200 bps below the current funds rate of 5.25%.

Dudley's thinking is why I'm worried the result will be 4% to 5% inflation and not a rescue of an economy (that might not need it).

----

https://bloomberg.com/opinion/articles/2024-08-07/federal-reserve-markets-wild-ride-has-just-begun

Dudley ...Monetary policy is tight and becoming tighter as price and wage inflation moderate. It needs to get to neutral. Federal Open Market Committee members’ estimates of the neutral interest rate range between 2.4% and 3.8% (I’d put myself in the top half of that range). This means there’s a long way to go from the current effective fed funds rate of 5.3%. And if a recession materializes, the Fed will need to go into accommodative territory — to 3% or less.

An immediate rate cut is in order, but that’s very unlikely. It wouldn’t be consistent with Chair Powell’s deliberative manner, and the Fed rarely makes such moves outside of its regular policy-making meetings — only when a severe shock changes the economic outlook dramatically or threatens financial stability.

XTOD: I'm toying with starting a "Get on With Your Life" Investing Club. 

Key principles:

+Get educated/make money doing something you enjoy

+Save and invest regularly in something reasonable (60/40, 80/20, whatever)

+Don't peek

+Go do other stuff

Who's in?

XTOD: If you refuse to maintain a proper diet, proper training, proper self-discipline, and an absolute focus on your long-term vision and goals, you are disrespecting yourself, and you are extremely arrogant to believe that you can achieve exceptional results without paying the price.

Daily Economic Update: August 7, 2024

Stocks recovered some losses, bond yields rose some.  The 3Y auction was solid, as you probably expected given risk-off sentiment.  The 10Y reclaimed 3.90% and the 2Y almost got back to 4%.  The Atlanta Fed GDP now is at a very recessionary 2.9%.  That's your recap. 

XTOD: “The stock market is the only market where things go on sale and all the customers run out of the store.” — Cullen Roche

XTOD: That guy who missed 200% move up but feels vindicated about a 9% drop...

XTOD (didn't read it, but sounded interesting): "In a world where survival is all-but-guaranteed, your greatest risk is that you spend your life not really doing a whole lot of anything."  Today's blog, on the cost of apathy: https://youngmoney.co/p/the-cost-of-apathy

XTOD: Senior U.S. and Western Officials believe that the time for preventing an Iranian Attack against Israel has now passed, with decisions likely to have been made by Iranian Government Leaders and Military Commanders to move ahead with a Large-Scale Attack against Israel.

XTOD: I believe that life exists to be enjoyed and that the most important thing is to feel good about yourself.   Each person will have his or her own vehicles for both, and those vehicles will change over time. For some, the answer will be working with orphans, and for others, it will be composing music. I have a personal answer to both—to love, be loved, and never stop learning—but I don’t expect that to be universal. 

Some criticize a focus on self-love and enjoyment as selfish or hedonistic, but it’s neither. Enjoying life and helping others—or feeling good about yourself and increasing the greater good—are no more mutually exclusive than being agnostic and leading a moral life. One does not preclude the other. 

Let’s assume we agree on this. It still leaves the question, “What can I do with my time to enjoy life and feel good about myself?” 

I can’t offer a single answer that will fit all people, but, based on the dozens of people I’ve interviewed, there are two components that are fundamental: continual learning and service.

Daily Economic Update: August 6, 2024

 I remember one year during the GFC we made a calendar with images of traders with their hands on their heads....not good times, but good times.  In the immortal words of Gary Cherrone of Extreme, "more than words to show you feel", images.  If you haven't feel free to read my summary/review of a book about managing risk check out this post 

Imagine if the ISM Services data was bad yesterday?  It was in expansion with strong internal employment and prices paid measures.  

And all of a sudden financial conditions matter again. Remember in late 2023 when people were concerned that stocks had run up too fast, bond yields had fallen to far, arguing Fed policy wasn't tight enough and inflation due to the wealth channel would continue?  Now it's the Fed is too tight look at the last two trading sessions.  I thought part of the whole forward guidance thing was to let the market do the tightening or loosening for the Fed?   Did conditions just all of a sudden get that tight following the jobs data or is it the confluence of jobs and BoJ?  

Of course everyone knows all the answers when there is a sell-off, after all the people with all the answers have been predicting this sell off for (checks calendar)...well forever.  Maybe people need to re-read Howard Mark's last memo "The Folly of Certainty"...hint - you don't know why this is happening and what will happen next.   

If you want answers you have to consult the Oracle... of Omaha https://fs.blog/mr-market/   But he's been selling stocks and is sitting on billions of t-bills...and the "The Buffett Indicator" has been at over-sold levels. “The most that owners in the aggregate can earn between now and Judgment Day is what their business in the aggregate earns.” — Warren Buffett

Anyway, I'm sure you can find all the answers (everyone on the internet is now an expert in Yen carry trades) and the best market-timing strategies....on some other blog.

XTOD: In this time of extreme equity market pain it’s comforting to knew that Private Equity prices are largely unchanged. They win again. Many (not all, some are quite clear about their risk) don’t tell the truth, but again that’s a winning strategy and many of their clients (often also my clients) are complicit in the falsehood as it makes their life safer and easier even at a long term cost of lower ER than your true beta should earn and more risk in a possible long term bear than you thought you had (sorry, truth to power and all that, please don’t shoot the messenger).   Congrats Ostriches.

XTOD: From 1928-2023 the S&P 500 experienced drawdowns of:10% or worse in 64% of all years  15% or worse in 40% of all years   20% or worse in 26% of all years   Losses are normal   https://awealthofcommonsense.com/2024/08/this-is-normal-2/

XTOD: I am beginning to wonder if the popular Sahm Rule is not just a predictor of recessions, but an amplifier of recessionary fears that can become self-fulfilling.

XTOD: When something feels like the top, trust your instinct  https://pbs.twimg.com/media/GUPwz3iXYAAuAx2?format=jpg&name=900x900

XTOD: Yes, it's ugly out there, but this feels more like SVB exploding (taking down some regionals and shaking up the system) than 2008.   I think this will be mostly forgotten next week.

XTOD: Nearly 33 years of (near) Zero Interest Rates (ZIRP) and 23 years of Quantitative Easing come at a price you eventually must pay.  (Japan was always mentioned by the QE fools as a place where the strategy worked).

XTOD: The root of people pleasing is not concern for others. It's concern for approval. A fear of being disliked leads many people to put their image above their values.  A good reputation is not about being adored by all. It’s about earning the respect of those who matter most.

Daily Economic Update: August 5, 2024

Friday's jobs number disappointed markets, leading to major declines in yields and equity indexes. Is the recession that has been forecast for going on 2-3 years finally upon us?  The narrative is currently centered around the Fed being late to cut and how they'll now need to cut aggressively to stave off recession.  Some are even calling for an inter-meeting cut.  Are we really at that stage after this jobs report?  It's a very Fed-centric narrative to say the least. 

You'll hear plenty more talk about the Sahm rule being triggered and whether that will lead to recession, or according to Sahm, maybe not as this triggering is not caused by people losing jobs vs. an increase in the labor force.  I'll let economist figure out whether that matters.  

What else do we have out there, oh yeah, unwind of Yen carry trades, see USD:JPY back at 145, remember 160?  Tough to be short Yen with that move and you might be forced to sell whatever assets you were financing with the Yen short.  Anyway, Japanese markets looking rough at the time of this writing.  Remember back in January when the Japanese stock market hit a 34 year high finally reclaiming it's 1989 level, no you don't.  But I wrote about it here.  Hopefully it doesn't take another 34 years to reclaim the recent highs, but it's been a violent move lower over there.

Other narratives, Buffett selling Apple, that's apparently not bullish for tech stocks.

Let's also not forget about tensions in the Middle East and whatever narratives we have around domestic politics as the U.S. Presidential race tightens.

On the week ahead it's a little light with ISM Services.  It will be interesting to see how officials from the all powerful Fed talk about the Jobs report and the rate cuts the market have quickly priced in.

Monday: Goolsbee, ISM Services, Daly

Tuesday:  trade data, 3Y Auction

Wednesday: take the morning off, come in for the 10Y Auction

Thursday: jobless claims, Barkin

Friday: take another day off

XTOD: This is the biggest market decline since the last decline you don't remember or care about anymore.

XTOD: Interestingly, most of Friday's bond easing was to inflation breakevens. The nominal 10Y yield fell 19bps, but the 10Y TIPS only fell 3bps. The 5Y was a qualitatively similar story.

XTOD: “History never repeats itself. Man always does.”   - Voltaire 

We are in that part of the market cycle where all past corporate governance misdeeds are being overlooked and stocks of promoters who are promising multi-year high growth guidance inspite of negative OCF are soaring.

XTOD:  As of today, it appears as though we are headed into a recession.   You know what is going to get smeared in a recession?   Private equity.   Low exits are going to no exits. Then what? More to say on this in the coming days. Enjoy your weekend.

XTOD: The whole marketplace is pricing exceptionally high probability rates are going down by a lot - which is just consistent with recession pattern. Rate cuts don't do anything (pure superstition) so the higher unemployment goes the lower the Fed will go chasing it.

XTOD:  Your paycheck is the drug that makes you forget about your goals and passions.

Daily Economic Update: August 2, 2024

Jobs Day in 'merica.  The street is expecting headline job gains of ~185K with the unemployment rate holding at 4.1%.  Of course you'll hear all about the effect of things like seasonality, immigration, hurricane Beryl and plenty about how many jobs were in government.  While reviewing the data, remember the headline number comes from CES/Establishment Survey while the labor force participation rate and unemployment rate comes from census data, feel free to read a few articles on how immigration may impact employment data.  A summer Friday, with rate cut speculation heightened against a backdrop of perceived recession risk, political and geopolitical considerations being repriced, could make for interesting market reactions to this report.

August started with a big down day for equities. After hours Intel got smoked and AMZN was down, while Apple was up. Yields also fell double digits again yesterday, with the 10Y breaches 4% for the first time since Feb.  The catalysts include fallouts from yesterday's FOMC, perhaps the "hawkish" BoE rate cut, weaker than expected ISM Mfg, higher than expected jobless claims, positioning ahead of today's Jobs numbers and likely some of the heightened geopolitical risk.  The 2Y is at 4.16% whil the 10Y is at 3.98%.  

XTOD: Past 3 weeks:

-NATO summit

-Attempted Trump assassination

-RNC + Vance VP pick

-Biden stepping down

-Harris becoming Dem nominee

-Netanyahu visit 

-VZ elections

-Hamas/Hezbollah assassinations

-Plea deal for 9/11 attackers

-Biggest prisoner swap deal w/ Russia since Cold War

XTOD: poor guy, we've all been there https://pbs.twimg.com/media/GT54BiDWUAAHw1D?format=jpg&name=900x900

XTOD: Joe Rogan suggests Kamala Harris will win the 2024 election, says "people are giving into the bullsh*t."  Rogan pointed to the media's PR work for Harris and argued that their strategy is working. 

"She’s gonna win," Rogan said to Michael Malice who disagreed.   "Everybody forever was like, 'Kamala Harris is the worst vice president.'"  "She’s the least popular vice president of all time, and then in a moment in time, all of a sudden she’s our solution. She’s our hero."   "[Now], everybody’s with her. All these social media posts about her. Try Googling a negative story on her, you won’t find one."  

"I feel like we are in this very bizarre time where people are giving into the bullsh*t in a way that I never suspected people would before."   "They're willing to gaslight themselves." 

"I’m saying it because she could [win]. I’m not saying it because I think she’s going to and I’m not saying it because I want her to. I’m just being honest. I could see her winning."

XTOD: The S&P 500 withstood a sell-off in tech to end July 1.13% higher than at the start of the month. With the 10-year rate dropping to 4.09%, the ERP for the index stands at 4.12% and the expected return on stocks is 8.21%. http://Damodaran.com

XTOD: Signs point to the upper-limit being reached for what consumers will spend before looking for alternatives, leading to price pushback hurting company profits.  “Top White House economist Jared Bernstein told a room of researchers and reporters Tuesday that price sensitivity would help complete inflation's ‘round trip’ — that is, bring it back to pre-pandemic norms.”

XTOD: We have the meme of the year:  At the Olympics shooting, everyone is wearing ear protection, lenses, glasses, and futuristic gear  Then he arrives from Turkey, 51 years old, with a t-shirt, hands in his pockets, a serene look, and wins the silver medal 🥈 Unlocking a new level

XTOD: “Show up every single day and do the work.”  - Kobe Bryant  https://x.com/i/status/1818299747154923658

XTOD: The top 10% of alcohol drinkers in the US consume 74 drinks per week.
[forbes.com/sites/trevorbu… This article does a good job of explaining the flawed methodology of the study that generated this implausible data. It was based on self-reported data (which is unreliable) and multiplied responses uniformly by 1.9. ]

Daily Economic Update: August 1, 2024

It now feels lost in the shuffle, the BOJ raised its policy rate to 0.25% and also laid out a further tapering of their bond buying program.  Governor Ueda also set up the possibility of further rate hikes at the coming meetings. The Yen liked the rate hike, rallying strongly as the market hadn't fully priced in the hike.  USD:JPY back under 150. 

You can find my FOMC recap by navigating this blog, I believe in you. Most everyone seems to believe Powell is positioning for a September cut.  As an aside, it will be funny when the Fed cuts 3x this year and they’re like “see just like we projected at the start of the year”.   Bond yields fell following the FOMC presser with the 10Y now at 4.06% and the 2Y down to 4.27%.  Remember when we were in the 3.80s on the 10Y at the start of the year?  Stocks did what stocks do, rising as we all believe in AI (thanks META) and rate cuts again. NVDA reportedly added $329 billion in market cap...cool.

In other data the employment cost index rose by less than expected, ADP employment was lower than expected and in the EU inflation was higher than expected.

Also lost in the shuffle of Fed day is rising risk in the Middle East.

On the day ahead it's BoE, Jobless Claims and ISM Mfg.

XTOD: Jay Powell appears to say: another near-quarter of data telling us that the macroeconomy is normalizing, and we at the Federal Reserve will start to normalize interest rates and the yield curve. But another quarter of normalizing data will produce a macroeconomy that is...well, normal. And policy should normalize in step with the economy, not lag behind—that guarantees a complex root in the dynamic equation, hence pointless disruptive stop-go cycles. And what would a “normal” yield curve look like today, anyway?

XTOD: Fed: We decided to take our chances waiting to cut rates cause our jobs are not at risk, only yours are. No seriously, if they get this wrong again not one of them will get fired.

Nobody got fired for the GFC or transitory.

The only ones that had to leave against their will by "retiring" were the ones caught insider trading.

XTOD: REMINDER: Anytime the media quotes a poll, or a prediction market, or a survey -- without simultaneously disclosing the prior track record of that item over the past few election cycles -- they are committing journalistic malpractice...

XTOD: Since 2022, $META revenue up 40% yet # of employees down 19% despite massive new investments in AI.  AI is not only extending and accelerating Meta revenue growth, it is also leading to big leverage on people / opex.  

XTOD: Israel has sent Diplomatic Back-Channel Messages to both Iran and Lebanon, stating that they are willing to go to Full-Scale War if Iran, Hezbollah, and other Iranian-Backed Groups conduct a Retaliatory Response which causes Significant Damage and Casualties in Israel.

XTOD: High draft pick. Doesn’t seem that good. Still a big time player despite not being that good. Gets to the big stage and goes on a heater of a lifetime to take down the Bob Kraft supported overwhelming favorite. Turns out they’re pretty good if not great. Kamala is Eli Manning.

XTOD: "I believe in maximum flexibility, so I reserve the right to change my position on any subject when the external environment relating to any topic changes too." --- Henry Singleton

FOMC Recap: FOMC Trade Deadline Edition

• The Fed held their policy rate target range at 5.25% to 5.50% as expected
• The FOMC Statement made changes to indicate a moderation in the employment picture and a slowing in the inflation picture. Noting that they are attentive to risks to both sides of their dual mandate.
• Powell said the FOMC does not making policy decisions based on an outcome of elections that haven't happened yet.

With the MLB trade deadline passing on Tuesday, the FOMC faced their own decision deadline today. Like MLB GM's, FOMC officials know the importance of making decisions with their goals in mind.  In the case of a MLB GM the pinnacle goal is winning the World Series.  For the Fed the pinnacle goals are low and stable inflation, maximum employment and moderate long-term interest rates, or more generally stated, fostering economic health.  

Every FOMC meeting is like the MLB trade deadline.  Just as MLB GM's need to decide whether to add or subtract to small parts of their roster or to wholesale change direction, the FOMC needs to decide what to add or remove from their statement, whether to do more or less of something they are currently doing with their policy tools, or in times of crisis deciding to do something they've never done before.  Like MLB GM's and all of us, the FOMC is making their decisions with their goals in mind, trying to face reality as it is, and prudently balancing going for it now against the risk of harming the future.  MLB GM's and FOMC officials face the added task of communicating their decisions to the public in a way that manages expectations.

There is often a realization that what got the team to where they are today won't get them to where they want to be, that when things stop evolving they stop compounding.  Every coach and manager knows that small decisions can lead to big results, especially when those decisions lead to actions that are able to use time to compound (long and variable lags anyone?).  They also know that bad decisions can compound in a negative way.  

While MLB executives would like to believe they have one goal or priority, which is winning a championship, the reality for some (most) franchises is they have a dual or multiple mandates, like the FOMC, and have to balance competing priorities that can often be in tension.  In many cases we have to prioritize one goal over another.  In the words of Greg McKeown:

"The word priority came into the English language in the 1400s. It was singular. It meant the very first or prior thing. It stayed singular for the next five hundred years. Only in the 1900s did we pluralize the term and start talking about priorities."

Further it was once written (you can find it, but I won't bias it):

"No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other. " 

I'm no Fed sympathizer, but the decisions the Fed has to make are hard. The decisions we all make are made under uncertainty and hard.

The decision by the FOMC today to make statement changes reflects the reality of the recent economic data they have consumed since the last meeting.  By not making any change to the policy rate today, the committee feels that progress toward their goals remains on a path they find acceptable.

It's hard to know exactly what questions the committee asked themselves as they made their decisions, but hopefully they collectively reached their decision based on their honest assessment of the state of the economy, without interference of political or external pressures, in a state where they were less concerned with their personal futures, uninfluenced by past criticisms, and more concerned with recognizing their decisions impact a complex ecosystem and need to be made with an eye toward protecting the people from undue harm from their decisions.  That is probably good a lens to make any decision (you can find many of these principles embedded in Charlie Munger's investment decision making).

The modern world loves to cling to a belief that everything can be controlled. There is probably a hefty "illusion of control" we place in the Fed, despite the fact that macro-forecasting is impossible (see Howard Mark's last memo).  Perhaps Powell said it best today:

"Certainty is not a word we have in our business".

Rather than be anxious to find certainty from the FOMC, perhaps we should rejoice that it is uncertainty that sets us free.  The best we can hope for out of the Fed is sound decision making guided by principled questions.