Daily Economic Update: August 29, 2024

I didn't feel like writing about NVIDIA earnings or the 2s10s inversion almost uninverting.

Have you listened to Howard Marks' and Morgan Housel on Oaktree's Podcast discussing Mark's memo that was titled "The Impact of Debt"?  If not and you work in finance or invest, it's worth a listen.  

• Apple: https://podcasts.apple.com/us/podcast/behind-the-memo-the-impact-of-debt-with/id1521551570?i=1000666742345 
• Spotify: https://open.spotify.com/episode/1ewk6BeHzcHadH5vfJvZSy

I covered this memo back on May 9th, you can find the original post here.  "There's nothing more volatile than attitudes."  That includes attitudes towards leverage.

Day ahead is Jobless claims, inventories, GDP, 7Y Auction

XTOD: 76% of Nvidia employees are millionaires, with 1 out if 3 having a NW over $20million

XTOD: Has policy really been restrictive

XTOD: “If I had to summarize money success in a single word it would be ‘survival.’  Not ‘growth’ or ‘brains’ or ‘insight.’   The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference.”  -  @morganhousel

XTOD: “He who jumps into the void owes no explanation to those who stand and watch.” — Jean-Luc Godard

XTOD: The greatest battle of all is with yourself—your weaknesses, your emotions, your lack of resolution in seeing things through to the end. You must declare unceasing war on yourself.

Daily Economic Update: August 28, 2024

I'm not sure where I stand on PE ownership in sports, I know they are allowed to own non-controlling stakes in many sports, but now it's making headlines in the NFL.  I guess the major concern would be that over a time financialization will trump the quality of the sport and the connection with the fans and community, but it would seem that keeping the quality of the on the field product high is generally well aligned with financial success.  Maybe it doesn't matter anyway as gambling culture already has varying impacts on fan engagement. 

Of course once the mosquitos take over we won't have sports. I'm kidding, but I do keep seeing stories about cities and towns dealing with West Nile and closing parks.

Sorry, back to economics and markets. The Conference Board, Consumer Confidence survey showed an increase in confidence and readings in line with the last two years and don't seem to be too concerned with a recession: "consumers did not change their views about a possible recession: the proportion of consumers predicting a recession was stable and well below the 2023 peak.” 

Stocks were largely flat.   We got a little further steepening of the yield curve with the 2Y at 3.90% and the 10Y at 3.82%. 

Of course there is always something to read about the Fed, here are a few recent reads:

" Many investors and economists are already celebrating the achievement of a soft landing even though U.S. financial history strongly suggests that such celebrations are premature......The question in 2024 is whether the Fed’s pivot to accommodative policy will resemble the premature pivots of the 1960s and 1970s, or whether the Fed truly has threaded the needle and orchestrated an unprecedented soft landing. My hope is that the Fed has deftly combined critical lessons from the past with shrewd analysis of the present and will achieve an unprecedented soft landing. But my belief is that the Fed is merely repeating the mistakes that their predecessors made in the late 1960s and early 1970s." - Mark Higgins on his Substack

 "I am late to this, but a few comments on Chair Powell's speech at the Jackson Hole symposium. First, his speech was an implicit but emphatic declaration that we are not in a fiscal dominance regime.  The Fed is still determining the trend path of the price level.... Powell was very clear in his speech that (1) the unwinding of pandemic disturbances and (2) Fed tightening/credibility is what saved the day on the inflation front. Number (2) is a clear indictment against  the fiscal dominance view....heights of the pandemic when the Fed bought up most of the treasury issuance and kept rates at 0%. What is remarkable to me is that despite the worsening trajectory of expected primary budget deficits over the past few years, all we got at best was this passing moment of fiscal dominance.  - David Beckworth on X

Waller, Bostic, 5Y and NVIDIA on the day ahead.

XTOD:  My version of the article PRIVATE EQUITY OWNERSHIP COMES TO THE NFL:“Flush with ‘dry powder’, another word for few attractive assets to buy after gigantic inflows, investors are now going to pay the ungodly fees for #volatilitylaundering AND for their PE managers to make vanity purchases after a historic run-up in franchise prices, all at worse terms than franchise purchases are usually done at.”  But I’m a known cynic.

XTOD: Super Bowl 2026 gonna be the Apollo Browns vs. the Blackstone Lions

XTOD: The Spokesman for the White House National Security Council, John Kirby has stated that Iran is now preparing for an Attack against Israel, and that the United States will aid in the Defense of Israel if or when the Attack occurs.

XTOD: The facts about Australia's new 'right to disconnect' law for employees http://reut.rs/3XiWtRq

XTOD: You don't need to worry about progressing slowly. You need to worry about climbing the wrong mountain.

Daily Economic Update: August 27, 2024

 Durable goods orders far exceeded expectations thanks to a pickup in aircraft orders while the ex-transport and core numbers were ok, but less optimistic.  The Atlanta Fed GDP Now estimate remains at 2.0%.

Stocks saw somewhat of a rotation out of tech ahead of Nvidia earnings as the Dow rose while Nasdaq declined. Yields rose some with the 2Y back up to near3.94% and the 10Y at 3.82%.  Geopolitical tensions remain a concern, but not enough to have seemed to change much in positioning today, even as oil continues to rise.

Home Price Index and Consumer Confidence, 2Y Auction on the day ahead.

XTOD: Trump and NY Governor Hochul Are Pivoting on Nuclear.  Trump: "We will create tremendous electricity for our country, and that will allow AI to compete. And you're right. Whoever gets that, it's got to be a big advantage, you know, that's going to be sort of the oil of the future. And we have to be the main player."  Hochul: Bloomberg reports the New York Governor is Eyeing Nuclear to Help the State Reach its Climate Goals

XTOD: What happens if/when the Houthi Strategy comes to the Caribbean and the world learns who the ELN is, and how essential the Panama Canal and Trinidad shipping corridors are to Western Hemisphere commerce and security?

XTOD: DOJ and 8 states sue RealPage for facilitating price fixing between large landlords around the country.

XTOD: "That's what separates great from average. It's what attention to detail do you have. Can you do the simple things better? Do you get bored with the simple things? You can't get bored with the simple things because they're what makes you different."

XTOD: A person who puts in continuous effort for ten years may achieve more in one week than someone who, having started six months ago, will achieve in an entire year.  - The Joys of Compounding

XTOD: We're all making it up as we go.

Daily Economic Update: August 26, 2024

You already know the line from Friday's J-Hole: "the time has come for policy to adjust".  After reading the speech again, I'm not quite sure if one of the takeaways is supposed to be that inflation was always transitory after all. Hard to argue with "transitory", I mean biologically I think our cells are constantly changing so we're all transitory at some level.  The speech was heavy on disruptions in supply due to Covid and Russia-Ukraine, but seemed short on discussing any of the factors leading to increased demand besides pent-up pandemic demand.  No discussion of the wall of fiscal stimulus that helped fund that spending. 

I guess the second lesson from Powell comes from this line: "An important takeaway from recent experience is that anchored inflation expectations, reinforced by vigorous central bank actions, can facilitate disinflation without the need for slack.".   I read this as Central Bank credibility with rational expectations means you don't need to raise interest rates above the rate of inflation to bring inflation down (even though they did). That wasn't always central bank orthodoxy, but seems to be true of the recent thinking.

Anyway, go read the J-Hole papers, they might be more interesting than Powell.

Yields start the post J-Hole week and the current PCE week at near lows of the year with the 2Y at 3.92% and the 10Y at 3.80%.  Stocks like low rates, at least for now. And why not like low rates?  You get to discount cash flows back at lower rates leading to higher values today.  That's all good, unless the reason for low rates should cause you to doubt your forecasted future cash flows.

Attention turns back to the Middle East with a major clash of missiles between Israel and Hezbollah.

On the week ahead:

Monday: Durable Goods, Daly

Tuesday: Home Price Index and Consumer Confidence, 2Y Auction

Wednesday: Waller, Bostic, 5Y Auction

Thursday: Jobless claims, inventories, GDP, 7Y Auction

Friday: PCE, UofM

XTOD: A question for people out there. Do you believe that a sufficiently restrictive monetary and fiscal policy could have kept inflation near target in light of the shocks affecting the global economy? If your answer is yes, then it was policy that permitted the inflation. Note, Admitting this does not imply that a non-inflationary set of policies should have been adopted. Flexible inflation targeting permits such an outcome in some circumstances.

XTOD: Interesting paper from @GautiEggertsson  and  @PierpaBenigno  (as are the other Jackson Hole papers). They argue that the inflation surge can be substantially explained by labour shortages (which gives us non-linearities in the Phillips curve) 1/nhttps://kansascityfed.org/Jackson%20Hole/documents/10385/Eggertsson_Paper_JH.pdf

XTOD: A new paper from the Kansas City Fed explains how bondholders lose during “unfunded fiscal expansions,” unless the Fed bails them out with QE. But when the Fed bails then out with QE, it’s taxpayers who lose via higher taxes and inflation. 

Source: https://kansascityfed.org/Jackson%20Hole/documents/10341/Hanno_Lustig_Paper_JH.pdf

XTOD: Trump tariffs and mass deportation, taken together, would be the largest adverse supply shock ever inflicted on the American economy. They would in all likelihood generate a combination of inflation and depression America has never before seen. Our macroeconomic troubles... ...would dwarf anything we saw in the 1970s or at any other time:

XTOD: .@AdamPosen : “Evidently, current US monetary policy is meaningfully looser than many Federal Open Market Committee (FOMC) members and market participants think it is.” @ProSyn

https://www.project-syndicate.org/commentary/federal-reserve-monetary-policy-remains-loose-and-ignoring-key-real-world-indicators-by-adam-posen-2-2024-08?

XTOD: “Reading chapters eight and chapters twenty of the Intelligent Investor is really all you need to do to get rich in the world.”   - Warren Buffett

XTOD: “Your time is limited, so don’t waste it living someone else’s life.”  — Steve Jobs

Daily Economic Update: August 23, 2024

 

Another J-Hole Day is upon us. J Pow on the docket for 10am.  For as anticipated as Powell is, your time is likely better spent reading Howard Marks' latest memo titled ' Mr. Market Miscalculates'.  I've talked about Mr. Market back on January 23, 2024  and covered Marks' last memo here. 

So what's in Marks' latest memo?  Well, the starting point is the nod to Ben Graham's Mr. Market and the fact that market prices can diverge from underlying fundamentals because humans are emotional.

Graham himself would say: “The intelligent investor shouldn’t ignore Mr.Market entirely. Instead, you should do business with him - but only to the extent that it serves your interests." Benjamin Graham.  Or as Charles Ellis said: 

“Ben Graham and Warren Buffett have talked about a charming, seductive manic-depressive gentleman named Mr. Market. Every day he shows up on your doorstep offering to do business with you, When he's manic, he'll offer to buy your stocks or sell you his for absurdly inflated prices. When he's depressed, his prices go ridiculously low. The mistake most people make is answering the door just because Mr. Market knocks. You don't have to let him in. Why should you buy just because he's excited? Why should you sell just because he's down in the dumps? A long-term investor shouldn't care about market prices.” Charles D. Ellis

 Anyway, back to Marks' he starts by discussing the recent events from Covid to the recent volatility associated the unwind of the Yen funded carry trade.  He poses the question that if reality changes very little (i.e. if fundamentals of the economy don't change that quickly) why investor sentiment shifts so quickly.   Marks' points to cognitive dissonance as a driver of market reactions as well as investors tendency to view all news in the lens of their particular mood or bias.  Psychology vs. rules.  Marks' notes how there are no immutable rules in the markets.  Reminding me of the words of John C. Bogle:

" The laws of probability don't apply to our financial markets.  For in speculation-driven financial markets there is no reason whatsoever to expect that just because an event has never happened before, it can't happen in the future." 

 Ultimately I think the message in Marks' message is broadly that investors win, speculators lose.  Who are investors?  Those who understand that in the long-run what the investor earns is what the business earns.  As Keynes said: Investment = forecasting a business enterprise  whereas Speculation = forecasting the market.   Speculation is focusing on short-term trading, pieces of paper, not a focus on business. Remember that when the market overreacts to somebody like Powell talking.

As for markets yesterday, manufacturing flash PMI's stunk, services PMI's were ok and we had rising jobless claims and rising home prices.  On that news we had stocks down, yields up.  We head into Powell with the 2Y at 4.02% and the 10Y at 3.87%.

XTOD: I love this @GSpier  story about the design of Berkshire Hathaway's website and annual report.

https://pbs.twimg.com/media/GVdFV9YWQAAXUOx?format=png&name=900x900

XTOD: Physical AI is here. At Robust AI we have developed the foundations for physical robots that do real work in real installations, and we have deployed them in both factories and warehouses. One key is to make them aware of humans so that they play nice, another is zero integration needs because they understand the world. https://aimresearch.co/ai-startups/physical-ai-the-next-breakthrough-led-by-these-startups

XTOD: The astounding efficiency of the human brain and the way babies and toddlers can learn: GPT3 took 1.3 million kWh to train. Converted to calories and assuming 2k calories/day, that's 1,500 years. think about what kids learn in 10! From discussion with  @TerranMott  this morning

XTOD: Ronald Reagan used to say that a Trivial Pursuit game designed for economists would have 100 questions and 3,000 answers.

XTOD: “Genius has the fewest moving parts.”

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.