Daily Economic Update: August 15, 2024

ICYMI Japan’s stock market he regained all its losses since last week’s epic route. I'm happy that it didn't take 34 years to recover this time. 

UK inflation was below estimates, New Zealand cut rates, Middle East tensions haven't boiled over (yet) and you aren't really talking about MonkeyPox yet, right? So all was good.  And then CPI was benign: US CPI came in largely in line with estimates, with headline and core both roundng up to 0.2% MoM, which matched estimates.  The YoY headline number was 2.9% which was below the estimate of 3.0%

Of course everyone focuses on the internal components of the CPI report. Shelter and rent not declining, insurance cost, etc. But isn’t it funny how inflation is an increase in the overall price level, thus why we create indexes to measure inflation, but then we spend a bunch of time discussing individual components?  At some level discussing the individual components of the index is ultimately a discussion of relative prices and changes in relative prices isn't inflation. It feels like this insistence to discuss relative prices via the components of CPI reports losses the whole narrative on discussing inflation.   Perhaps this is why so much of the plot is lost when discussing what caused or is causing inflation and whether certain policies are working to lower inflation.  (see Twitter/X Thoughts below - for someone thinking the same thing).

Stocks were up, yields were mixed to down. The 2Y remains around 3.95% and the 10Y is at 3.83% and you're not talking about MonkeyPox.

Retail sales on the day ahead.

XTOD: The problem with this decomposition is that relative prices change all the time. Inflation measures the change in the overall price-level. Seems unlikely that any given component of the consumption basket is "driving" inflation at any given point in time.

XTOD: Here is my earlier thread.  Conclusion unchanged: "This gives [the Fed] permission to do whatever they need to for the employment side of the mandate. IF the next jobs report is weak... expect 50bp. Otherwise probably will go with 25bp..."

XTOD: How does the FTPL make sense of this low inflation? CBO is estimating another $20+ trillion of debt (i.e. sustained primary deficits) will be added over the next decade. @JohnHCochrane  

@Francesco_Bia   @dandolfa  

@HannoLustig

XTOD: With some parents using tablets as digital pacifiers to soothe their children, a new study finds preschoolers who spend 75 minutes or more in front of a screen showed increased anger and frustration as they got older, along with difficulties in regulating their emotions.

XTOD: Essentialism would be easy, if it weren't for the people. 

To bring essentialism alive, upgrade your communication and negotiation skills.

Priority conversations vs. Reactive emails

Talk about underlying vs. Ignoring stuff

Culture of listening vs. Loudest voices

Essentialism is done together or not at all.

Daily Economic Update: August 14, 2024

Yesterday's PPI came in below estimates at 0.1% vs. 0.2% for the month on month reading. The core reading was flat month over month, meaning food and energy made up for the increase in the headline number.

Stocks rallied and yields fell.  The 2y is 3.94% and 10y is 3.85%.  We’ll see what CPI says today, I’m sure rents and OER will be a topic of discussion.

Since CPI is so important I don’t think I can write anything else today.

XTOD: Starbucks CEO Laxman Narasimhan recently said that he doesn't work past 6pm and that if anyone at Starbucks gets a minute of his time after 6 pm they "better be sure that it's important." He was just fired today.

XTOD: There’s been a record number of CEO ousters at US companies this year. Of the 191 chief executive officers who have left companies in the Russell 3000 Index this year, 74 were considered to be fired or forced out

XTOD: Gosh, it almost makes one wonder where the willingness/ability to pay those higher prices came from in the first place

XTOD: Mastery requires lots of practice. But the more you practice something, the more boring and routine it becomes. Thus, an essential component of mastery is the ability to maintain your enthusiasm. The master continues to find the fundamentals interesting.

XTOD: Beyond the basics, money doesn’t make you happier because, beyond the basics, nothing makes you happier.

Daily Economic Update: August 13, 2024

Per the NY Fed survey, consumers revised lower their expectations for 3y ahead inflation to a low not seen since 2013 (2.3%), all while leaving their inflation expectations unchanged for 1y ahead (3.0%) and 5 year ahead (2.8%).  I guess the answer is consumers believe inflation will really fall 2 years and 3 years from now and then rise again, or something like that.  Or the answer is consumers surveyed don't really understand how to estimate inflation?  For some reason the NY Fed made it a point to call out that the biggest decline in 3y ahead inflation expectations was in the the demographic with incomes below $50K.  This is perhaps somewhat puzzling given the outsize toll inflation has had on lower income households.  The 2Y is sitting 4.01% and the 10Y at 3.90%.

U.S. troops building up in the Middle East has been sending oil higher, lest you forget geopolitical impacts on inflation.

Inflation data starts today with PPI.

XTOD: As the world awaits Iran/Hezbollah's retaliation against Israel, the price of crude oil is up ~12% in a week and showing no signs of peaking (at least not yet).

XTOD: If Microsoft and Google were their own countries, they would each rank between Serbia and Jordan in total electricity used in 2023.

XTOD: Report: NFL sets meetings with private equity groups http://reut.rs/4fJ8OWc

XTOD: "I’ve seen men die at the age of 25, yet buried at the age of 75."   -Benjamin Franklin

Daily Economic Update: August 12, 2024

The most important CPI print of your lifetime is Wednesday, are you ready?  Why does it seem like every week we are told that some data point is going to be the secret to the future.  Can you find the signal from the noise?  Here's a quote to think about as you digest PPI Tuesday, CPI Wednesday and Retail Sales Thursday and UofM inflation expectations on Friday (these things do happen every month...):  blinded by noise

Markets will certainly react to the data (the Fed has conditioned them to with "data dependent"), but isn't Action better than Reaction?  Action from clarity of perception and accuracy of response. That's deep.

Today there is No data, so talk about the Jobs report and Sahm Rule...after all there was a Hurricane and some temporary layoffs, and Claudia says this rule is just an early warning system.  When you're done, figure out "R-Star".  Now that's a great start to the week.  Option 2, there is no data, take the day off and prepare for the inevitable CPI discussions.  After all your reward for absolutely killing yourself with an impossible client last week will be to get to do it all over again this week.

XTOD: No matter how efficient or inefficient markets may be, the returns earned by investors as a group must fall short of the market returns by precisely the amount of the aggregate costs they incur. It is the central fact of #investing.  - Jack Bogle

XTOD: “Hard work, honesty, if you keep at it, will get you almost anything.” — Charlie Munger

XTOD: Steve Kerr said, "You gain more respect as a leader when you admit you don’t know everything."   "When you let somebody else make a decision it makes you more powerful." 

It takes humility to lead.   It means valuing others' insights.

XTOD (Question) :  A brief, satisfying explanation for why the multiplication of two negative numbers yields a positive number?

XTOD (Answer): t is the simplest way to keep the pattern going. For example,

-1 x 3 = -3

-1 x 2 = -2

-1 x 1 =  -1

-1 x 0 =  0

Notice the numbers on the right side of the equal sign keep increasing by 1. 

So to keep the pattern going, we define 

-1 x -1 = 1

XTOD (Answer Continued):  Official answer: this definition uniquely allows us to extend the distributive law to negative numbers. Consider 

-1 x (1 + -1). 

This is -1×0, which should = 0. 

If the distributive law holds, then this 0 = 

 (-1 x 1) + (-1 x -1)=  -1 + (-1 x -1), which requires  -1 x -1 = 1

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.