Daily Economic Update: August 22, 2024

Target beat on earnings, perhaps showing the consumer is still alive.  The BLS benchmark revisions to nonfarm payrolls were delayed in terms of their release timing (for some at least), which of course led to some conspiracy theories. When they were reported, they showed that job creation from April 2023 to March 2024 were revised down by 30%, which was largely expected and presumably priced into markets.  The payrolls revision are again subject to debate in light of illegal immigration, so it's hard to discern exactly how much weight should be placed on these revisions (and on the original data).

Anyway, if you're interested in the history of numbers created by government agencies, may I point your attention to this 2008 article https://harpers.org/archive/2008/05/numbers-racket/

Yesterday's highlight was the minutes to the July 31 FOMC meeting.  Overall the assessment in the minutes reads as one where both the upside risk to inflation had decreased concurrent with the downside risks to employment (very Phillip's curve esque).  The minutes explicitly call out: "several observed that the recent progress on inflation and increases in the unemployment rate had provided a plausible case for reducing the target range 25 basis points at this meeting or that they could have supported such a decision."  And, "The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting. "  There were several participants who did note the risk to inflation that could occur from easing too early.

Stocks seemed to like the minutes and bond yields continued to move lower with the 2Y trading back to levels near the lows (low 3.90's) seen during the yen-carry debacle the other week.

On the day ahead it's Jobless claims, S&P PMI's, Home Sales, J-Hole agenda released

XTOD: At least three banks managed to get advanced word on Wednesday’s hotly anticipated payroll numbers while the rest of Wall Street was kept waiting by an unexpected delay.

XTOD: Want to get people to take action? The magic word is because. 🌟 Humans crave reasons, and when you give them one—even a simple one—they’re more likely to follow your lead.

XTOD: Stupid question maybe. But if I'm an investor in a hedge fund, do I just pay the performance fees when I cash out? 

Or do the hedge fund managers collect their annual 20% take, even if my gains are unrealized?

XTOD: Huh, weird. I thought taking from unrealized gains was unreasonable and insane?

XTOD: Isn’t it crazy when something that makes sense in one context doesn’t make sense in another context?

XTOD: Being busy is not the same as being productive. The 80/20 principle, also known as Pareto’s Law, dictates that 80% of your desired outcomes are the result of 20% of your activities or inputs. Once per week, stop putting out fires for an afternoon and run the numbers to ensure you’re placing effort in high-yield areas: What 20% of customers/products/regions are producing 80% of the profit? What are the factors that could account for this?  

Invest in duplicating your few strong areas instead of fixing all of your weaknesses.

Daily Economic Update: August 21, 2024

9 days would have been too many wins in a row for stocks.  Bond yields fell again, I don't know maybe increased optimism over a dovish Powell and rate cuts  (is that the same as increased economic pessism?) and perhaps in sympathy with Canada, where inflation fell.  Talk about increased taxes on things like capital gains and unrealized gains, probably isn't good for stocks.

While we wait for Powell on Friday, we can talk about the election and taxes, but it's probably more fun and productive to talk about Fantasy Football, so I suggest going that route.

Other than that, it's probably not good to bump the control system when you're flying a plane. 

One of the interesting things you can do when you have a blog where you track daily the topics that have captured market attention each day and week is, if you pay enough attention, realize how much of it is just noise and a waste of your time.  As Taleb says: "the more data you get, the less you know what’s going on."  or as Buffett says about his sister: "instinctively knowing the pundits should be ignored."

We will get NFP revisions today (see XTOD) and Minutes from the last FOMC Meeting.

XTOD:   nobody will remember:

- your salary

- how “busy you were”

- how many hours you worked

people will remember:

- how you put a lid on your trash can

- how we sent rats packing once and for all

- the day we won the “War on Rats”

XTOD: The core problem is that MBA/finance thinking teaches you to see every company not as a fragile organization of human beings with idiosyncratic skills and knowledge, competing against other such organizations, but as a financial product in a portfolio.

XTOD: Hard to measure but I suspect upper middle class and wealthy boomers are funding millennials and younger generational spending by transferring assets/cash and paying bills, and in the process pumping retail sales and the economy. In essence they are liquidating balance sheets to pay for spending. This is likely to continue as long as stocks/housing prices stay elevated.

XTOD: The Nasdaq just had its fastest 10% rally from correction territory ever. 

XTOD (too long, but read this Nickileaks tweet on BLS Revisions if you're interested): https://x.com/NickTimiraos/status/1825966091354648849

XTOD: Matt Holliday on Parenting

• "It's their career, not mine."

• "I want to help them pursue their passions."

• "Your actions have to back up your desires."

⭐️ Forcing vs. Supporting - Let them be in total control of their journey. You can help, but they need to lead.

Daily Economic Update: August 20, 2024

Stocks up again, yields down, oil down, dollar down (and despite Yen strength, nothing blew up). Waller didn’t say anything of importance.  The NY Fed SCE Labor Survey showed some growing concerns about job security, but didn't seem to get people too anxious.  The Conference Board's leading economic indicators concluded: "The LEI continues to fall on a month-over-month basis, but the six-month annual growth rate no longer signals recession ahead..".  The 2Y is 4.07%  and the 10Y is 3.88%.

A story you may have missed is that of container volumes at California ports are hitting highs not see since Covid. One narrative is that the seasonal and precautionary build of inventories (longer shipping routes, possibility of more Chinese tariffs) might end poorly as they are facing a struggling consumer. The other narrative is simply that demand remains strong.

Markets waiting on data, data revisions and Powell.  If you're into politics there's plenty of that around.

Speaking of which some economist were talking about a Kamala Harris response in which she said spending should be thought of in terms of return on investment.  Economist David Andolfatto commented that [1] Determining the value of spending (ROI), especially for projects  w/o pecuniary returns, a difficult problem. This should be focus of debate.   [2] Financing matters, but matters less than [1]. NB: Modigliani-Miller Theorem suggests method of finance not important at all.*  Which led to a discussion of the MM Capital Structure Irrelevance Theory and referenced Merton Miller's famous Yogi Berra joke that he liked to tell as part of his discussion on the theory:

"I have a simple explanation [for the first Modigliani-Miller proposition]. It's after the ball game, and the pizza man comes up to Yogi Berra and he says, 'Yogi, how do you want me to cut this pizza, into quarters?' Yogi says, 'No, cut it into eight pieces, I'm feeling hungry tonight.' Now when I tell that story the usual reaction is, 'And you mean to say that they gave you a [Nobel] prize for that?'"

XTOD:  Don't risk it all betting against a bubble. I know it is tempting, but resist: Spitznagel's come to Jesus moment: close your eyes and imagine + 20% and ~-50%. https://finance.yahoo.com/news/august-stock-market-fiasco-stark-130900158.html

XTOD: This article is the most potentially bearish thing I read this weekend ( and have been watching this issue for awhile).   Recall Q2 GDP surge due to a curiously large positive contribution to inventory.  Which begs the question: are firms preparing for a surge in consumption?  

There are signs that businesses seem to be  optimistic about the future—there is this divergence between current conditions (bad) and future expectations in business surveys, with the latter being way more sunny than the former.   But consumer fundamentals are not supporting that outlook. Labor income cooling and unemployment rising.  So supposed that businesses are indeed frontrunning potential supply chain snares up, as this article describes, and are projecting demand held up.  Even if indeed the demand is there later, Frontrunning implies less inventories later, cannibalizing growth in later quarters.  What evidence have we seen that the front running is cannibalizing future growth? 

Production is down (see ip last week). New orders in manufacturing surveys down.

All that not consistent with a consumption boom.   Now further supposed that firms misforecast demand in the fall, they risk being stuck with excessive inventory.   That sets up for an inventory bull whip effect, possibly in q4.  You know what is often the biggest driver of growth contractions in recessions? Inventories (not consumption.. thanks, Milton Friedman, to your permanent income hypothesis ).

XTOD: Outstanding essay on the worldwide plummeting birth rates and the coming demographic winter by J. Fernández-Villaverde. The 2023 fertility rates are astonishing, e.g:

- South Korea: 0.72

- Colombia and Chile: 1.2

- Argentina and Brazil: 1.4

- Turkey: 1.51 

https://www.spectator.co.uk/article/the-global-fertility-crisis-is-worse-than-you-think/

XTOD: This article on sports gambling is devastating and is an interesting exploration of how we frame money. 

1. The paper claims to have found evidence that for every $1 spent on sports gambling reduces net investments in stocks and other financial instruments dropped by just over $2.

2. So there is an obvious interchange between 'investment' dollars and 'entertainment' dollars. 

3. But the Gambling Association is like, "Haha, no way, bud. Everyone is just having fun here! These wouldn't have gone into stocks, it's just fun money"

4. But the money going toward gambling also reduces savings, increases credit card debt, results in overdrawn accounts, and an increase in lottery play. 

5. That's not 'entertainment' money.

XTOD: Nevada state pension fund invests only in passive index funds and is managed by 1 person. 

It beats almost everyone.  The manager's only decision is whether to have BLT or tuna sandwich for lunch  https://x.com/JimChuong/status/1824138288157843594

XTOD:  Great leaders have no interest in counter-productive communication.  At all costs they avoid gossip, complaining, and dwelling on problems outside their control.  The strong act, the weak chatter.

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