Daily Economic Update: August 19, 2024

J-Hole Week is Upon us, with Powell on Friday.  In case you were wondering what Powell said there last year, check here. 

Last week ended with stocks higher as retail sales, jobless claims, consumer confidence all were better than expected.  Some optimism on progress on a middle east cease fire doesn't hurt either.  Gold at record highs, might be a sign of a loss of confidence in the instituions that support or fiat currencies, or it might just be speculators feeding on speculators.

There are some narratives out there which are centered around how high rates are causing business uncertainty and harming the economy.  That might be correct at some level, but to me it misses the bigger point that it is inflation that causes the most harm to business and interest rates rising has just been an attempt to quell the ultimate uncertainty which is inflation.  Don't take my word for it, you can take Irving Fisher's as we discussed back here:

 "Business is always injured by uncertainty. Uncertainty paralyzes effort, and uncertainty in the purchasing power of the dollar is the worst of all business uncertainties."

Speaking of Fisher, as I wrote back at the September 2023 FOMC meeting, Fisher believed tackling inflation as shared responsibility between the Federal Government and it's independent central bank.  As it relates to deficits, he noted that “when a government cannot make both ends meet, it pays its bills by manufacturing the money needed” and further that “The government has an added responsibility when its own debts are involved. To borrow billions of dollars and then to depreciate the dollar is not even fair gambling. It is stacking the cards.”

Elon Musk apparently is a fan of the Fiscal Theory of the Price Level. If you want a refresher, this post from February on this blog isn't too bad.  Feel free to search this blog for "Cochrane" and "FTPL"

On the week ahead:

Today: Waller, Leading Indicators, DNC starts

Tue: Bostic

Wed: Payroll benchmark revisions, FOMC Minutes

Thur: Jobless claims, S&P PMI's, Home Sales, J-Hole agenda released

Fri: New home sales and Powell at J-Hole

XTOD: For anyone who's interested, the macroeconomic theory Elon is espousing here is called the Fiscal Theory of the Price Level, or FTPL. It has been promoted by top economists Chris Sims, John Cochrane, and Michael Woodford, but remains a minority view.

XTOD: And if you want the FTPL history of US inflation, this is just fantastic: https://aeaweb.org/articles?id=10.1257/jep.36.4.125

XTOD: .@AtlantaFed  ’s sticky price CPI (slow-to-change consumer prices) rose 3.2% on an annualized basis in July, following a 2.6% increase in June. Graph and track the index in FRED: https://ow.ly/VOaG50SZJQa

XTOD: My firm uses a model to forecast interest rates.  She's terrible.

XTOD: Wow, @crampell  pulls no punches in her appraisal of this proposal:  https://washingtonpost.com/opinions/2024/08/15/kamala-harris-price-gouging-groceries/

"It’s hard to exaggerate how bad this policy is. It is, in all but name, a sweeping set of government-enforced price controls across every industry, not only food. Supply and demand would no longer determine prices or profit levels. Some far-off Washington bureaucrats would. The FTC would be able to tell, say, a Kroger in Ohio the acceptable price it can charge for milk. At best this would lead to shortages, black markets and hoarding, among other distortions seen previous times countries tried to limit price growth by fiat... At worst, it might accidentally raise prices."

XTOD: The return of economic idiocy is staggering and terrifying. Many things are debatable even if I or others may strongly differ. Tax rates are debatable. Transfer programs are debatable. Regulation is debatable (all within reason). But the return of politically driven idiocy that is not debatable, that history and theory have both proven destructive, is terrifying. Almost all economists of the left and right (not the extreme left and extreme right) would agree (though we haven’t heard the former economist Paul Krugman or any of his backup singers, the Krugtones, courageously speak truth to their own party about rent control of this latest asininity on price controls). 

The current top 3.

1) Rent control — has destroyed whatever it has touched, and for clear obvious reasons. The left wants it everywhere and are finally poised to get it.

2) The “blame corporations” utter nonsense on inflation, and the plan to whip inflation now through price controls, is beyond ridicule. From Diocletian to Nixon, from theory to fact, it’s insane. The left is all in on it.

3) Tariffs and trade wars out of the past destroying a ton of prosperity for both us and our trading partners all to claim to have saved some jobs (generally in the industries we don’t really want, they always say “we don’t need cheap crap from overseas in exchange for American jobs” but we don’t want those jobs making “cheap crap” either — also involving “national security” here is almost always just a lie (almost)). This one is mainly from the right but Biden didn’t repeal Trump’s idiocy here and added his own, so the left has no real high ground and is poised to make it worse just not “as much worse” as Trump if they win.

We have a democratic candidate who is economically illiterate and just a far left hack, and a republican candidate who thinks lying about his crowd size is more important than articulating anything cogent.

It is very very bad.

Good morning.

XTOD: “It’s time you realized that you have something in you more powerful and miraculous than the things that affect you and make you dance like a puppet.”         ― Marcus Aurelius, Meditations

Daily Economic Update: August 16, 2024

I thought about making this blog subscription based, but I didn't want to get thrown in with all the discussion about price gouging. Besides the value provided by this blog is no doubt priceless.  

 
All was right with the economy on Thursday.  No barking from the dog, no smog and mama cooked a breakfast with no hog. 

Retail sales data was better than expected, coming in at +1.0% MoM vs. estimates of just 0.4%, the core component was also strong.  Some of it was potentially a makeup for car sales that were slowed the prior month by a cyberattack on dealers, but nonetheless the report seemed to show the U.S. consumer is hanging in there.   Earlier in the week data showed that everyone who had really high mortgage rates refinanced their rate to a moderately high mortgage rate of 6.5%, taking advantage of a 60bp drop in mortgage rates over the last year. That should mean some additional cash for consumers. Imagine if rates fall another 100bps, maybe I should stop writing this blog and become a mortgage broker to catch that refi wave.

Over in job land, jobless claims show you really still can't get fired.  Yes there was other data like Philly Fed and Empire Mfg, but those indexes are notoriously volatile.  Import prices did rise slightly, which seemed to be ignored, even though I'm pretty sure we import like everything.  Industrial production data was weak, but ignored because the Hurricane and because do we really produce anything (we actually do)?

Across the pond UK GDP was stronger than expected, good for them.  It's only going to get better with Taylor Swift performing over there.

You put it altogether and the market seemed to discount the recession narrative for today.   The major equity indexes did very well and bonds sold off sending yields higher by double digit basis points.  As quickly as the nonfarm payrolls, Yen Carry, episode came, it seems to have gone.  And nobody (whoever that is) was talking about Russia and Ukraine, the Middle East or MonkeyPox.

As a reminder, economic data generally falls into leading, coincident and lagging.  Sometimes the narrative hinges on a lagging indicator like a CPI or Payrolls print, somtimes like Thursday it is the leading indicators that win the day.  Speaking of leading indicators or their more evolved "nowcasting", the ATL Fed lowered their 3Q 2024 real GDP estimate to 2.4% citing revised private investment growth based on recent data.  

Somewhere in the shuffle there is some analyst google searching "business cycle" and "business cycle theory" finding some article by Ed Prescott in the 1980's, feeling confused, and generally just trying to figure out how to make sense of the recent economic data. In search of a way to categorize the current state of the economy for some presentation they owe their boss.  Are we still in expansion, slowdown, contraction? You can probably find something to support each of these views, at least for various segments of the economy.

Wait, I take that back, that analyst is now no longer working 100 hours a week pondering macroeconomic questions for a slide deck, their boss watched the first 2 seasons of Industry on HBO and realized the error in their ways.

On the day ahead we get UofM asking consumers about gas prices and politics (not really, but they do seem to really drive this survey).  The 2Y is around 4.10% and the 10Y is 3.92%.

XTOD: https://pbs.twimg.com/media/GVCujATaEAQtynv?format=jpg&name=large

XTOD: “I’m not convinced the Fed should cut in September… to me, consumer spending looks strong and that’s not a surprise because income growth is still strong… we’re talking about [GDP growth] forecasts that are above 2.5%.”

XTOD: Bank of America is finally cracking down on its overworking culture after the death of 35-year-old BoA investment banker Leo Lukenas III  

Earlier this week, the Wall Street Journal revealed that BoA managers frequently required junior bankers to work late into the night, with few safeguards in place to prevent such demands 

In May, Lukenas had reportedly considered leaving his job after being pushed to work several 100-hour weeks, according to Douglas Walters, a MP at GrayFox Recruitment
After his death, widespread call for reevaluations of companies across Wall Street erupted

BoA is effectively now encouraging junior investment bankers to report to upper management or HR if they feel pressured by their managers to overwork or falsify their hours - we will see how this plays out

XTOD: Eric Schmidt says in the next year, AI models will unite three key pillars: very large context windows, agents and text-to-action, and no-one understands what the impact will be but it will involve everyone having a fleet of AI agents at their command

XTOD: Read more history and fewer forecasts.

https://x.com/morganhousel/status/1824149769314586652

https://x.com/AEIecon/status/1824144433102876855

https://x.com/exec_sum/status/1824104515718746211

https://x.com/tsarnick/status/1823500546260787607

https://x.com/morganhousel/status/1824115005949964437

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.