Daily Economic Update: September 4, 2024

ISM mfg came in below estimates with declining new orders and employment, while also showing rising prices.  Wait that sounds like stagflation, right?  Yields fell and stocks sold off as markets decided they care about manufacturing in the U.S. or they sold off because it's September and it's all just seasonal.  NVIDIA gettng more DOJ attention probably doesn't help either.   The 2Y ended at 3.87% and the 10Y at 3.84%, both near recent lows and both just not willing to uninvert.

Cam Harvey, a Duke finance professor, who in some ways popularized talking about Yield Curve inversions was recently on a CFA podcast, I didn't listen, but someone wrote a nice summary .  Anyway, the point is he still believes this portends recession.

The Atlanta Fed GDPNow is back at 2.0%, down from 2.5%, but you'd take 2% real growth with 5 handle rates all things considered.

Over in Asia add Japan and China's tit for tat over chips to your list of things to have to pretend to read about.

Back to labor in forcus with JOLTS today.

XTOD: "An inverted yield curve is no longer a reliable sign of a recession in the new monetary system of ample reserves and where the core money-market instrument is repo...." 

@LondonSW

XTOD: Why haven’t recent rate increases slowed the economy more?  Higher policy rates haven’t passed through to the rates paid by private firms and households as much as usual.  

This Economic Bulletin has more: https://bit.ly/3YOVE3Q

XTOD: Risk assets have rallied back to their highs, gold likewise, Fed cuts baked in at the ATH, history doesn't repeat but it'll be interesting to see how we deviate from the 2007 September flight path. I still believe Fed cuts are slow, slow and then really friggin fast because something always cracks when real rates are 3% or more for an extended period.

XTOD: Stock market bull Tom Lee said today on CNBC:  “I think a 7-10% pullback can happen over the next 8 weeks, but it would be a situation to buy the dip” ... "It's a strong market... Don't think we've seen the tops for 2024."

XTOD: At this stage in my career, I really only want to work on things that are educational and don't contribute to the din. Like if you acted on the information in one of my articles and presentations and I never saw you again, you'd be OK.    Kind of like this. https://t.co/6OQTupOAay

XTOD: “In my whole life, I’ve never succeeded much in what I wasn’t interested in. So I don’t think you're going to succeed if what you’re doing all day doesn’t interest you."  — Charlie Munger

Daily Economic Update: September 3, 2024

I don't know about you but I already forgot about last week's data and last Friday's PCE.  So I guess in honor of Oasis reuniting we won't look back in anger, not that PCE was dissappointing and personal income hung in there, so nothing to be angry about.  Nonetheless we'll turn our attention to labor market data as the headlining act this week. 

Speaking of labor:

"If a workman's wages be sufficient to enable him comfortably to support himself, his wife, and his children, he will find it easy, if he be a sensible man, to practice thrift, and he will not fail, by cutting down expenses, to put by some little savings and thus secure a modest source of income. Nature itself would urge him to this. We have seen that this great labor question cannot be solved save by assuming as a principle that private ownership must be held sacred and inviolable. The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners." - excerpt from Rerum Novarum, Encyclical of Pope Leo XIII on Capital and Labor, May 15, 1891

I think we already forgot about R-Star and all that's left is now whether Jobs data is going to mean 25 or 50bps of rate cuts.

We shouldn't forget about geopolitics and upcoming elections. 

On the week ahead:

Tuesday: S&P mfg pmi, ISM mfg, construction spending

Wed.: JOLTS, factory orders, durable goods

Thur: ADP, jobless claims, ISM services

Fri: Jobs Day, Williams and Waller

XTOD: It’s so commonplace to see stuff like this now. You should see this for what it really is, an attack on civilization and prosperity. Misery is not virtuous. We are not here for managed decline. Don’t fall for it. Civilization and prosperity are good, actually. We are going to win

XTOD: “I'm not terribly affected by the fact that the crowds are agreeing with me or disagreeing with me. I'll do whatever my own sense tells me. The trick is simply to sit and think.”  — Warren Buffett

XTOD: Most people don’t lack talent or intelligence, they lack faith in themselves, they lack a clear vision of who they want to be, they lack the patience to follow through their long-term goals.

XTOD: Now is the time to stop drifting and wake up—to assess yourself, the people around you, and the direction in which you are headed in as cold and brutal a light as possible.  Without fear.

XTOD: “A majority of life’s errors are caused by forgetting what one is really trying to do.”  — Charlie Munger

XTOD: It was always an awkward moment when someone needed the red bat.

“Yeah, Timmy, you can play but you gotta use the red bat.”

“But I wanna use the yellow bat like everybody else.”

“Motherfucker, you went 0-for-46 yesterday. The yellow bat is no longer an option for you.”

https://pbs.twimg.com/media/GWQYvsWWsAAPxI7?format=jpg&name=large

Daily Economic Update: August 30, 2024

The last trading day of August, a month in which the crazy moves attributed to an unwind of Yen-carry trades now seems long forgotten, will end with PCE data.   Yesterday, the Dow and S&P finished up despite NVIDIA dragging down tech and Dollar General hitting a 6 year low. 

Yields rose some as economic data showed the economy was "resilient" and 2s10s remained inverted by 3bps with the 2y at 3.89 and 10y at 3.86.  On the data front the 2nd revision to the 2Q GDP showed that the economy grew at a 3% annualized real rate which was above consensus and seemed to show continued strong consumption. Inventories grew in line with expectations and the jobless claims didn't show any major concerns, though some will note the increase in continuing claims as an indicator that those unemployed are having a harder time finding new employment.

With the soft landing narrative feeling firmly enchrenched, is there a concern that perhaps the market's pricing of rate cuts is discounting the chance that the Fed will need to keep rates a little higher for a little longer and that there will need to be more "pain" in the labor market to bring down inflation back to target?  After all inflation is still above target with the market expecting PCE data in the 2.5% YoY tomorrow, of course some quarterly annualized and nowcast numbers are indicating we're at or back to running at 2% target.  Time will tell.

XTOD: With this release & Q3 tracking at around 2% the economy is looking in fine shape overall. The Fed should still cut because, as Powell said, the unemployment rate is higher than it should be. But absent an (unlikely) rise in the urate in August no pressing reason for a 50bp cut.

XTOD: A story in four parts:

1) US GDP growth has outpaced all other G7 nations

2) it's outpaced pre-COVID projections

3) inflation-adjusted wages are up, and most for low-wage folks

4) wages at the bottom rose so much, income inequality is down, undoing 1/3 of its growth since Reagan

XTOD: Pretty good year so far for financial assets: 

S&P 500 +19.2%

Gold +22%

Bitcoin +39.8%

Nasdaq 100 +16.8%

Russell 2000 +10.3%

MSCI EAFE +12.4% 

Double-digit gains as far as the charts can see

XTOD: Dreams are fun when they are distant. The imagination loves to play with possibilities when there is no risk of failure. 

But when you find yourself on the verge of action, you pause. You can feel the uncertainty of what lies ahead. Thoughts swirl. Maybe this isn't the right time? Failure is possible now. 

In that moment—in that short pause that arises when you stand face to face with your dream—is the entirety of life. What you do in that pause is the crucible that forges you. It is the dividing line between being the type of person who thinks about it or the type of person who goes for it. 

When I really think about it, I want that moment to be my legacy. Not that I won or lost. Not that I looked good or looked like a fool. But that when I had something I really wanted to do, I went for it.

XTOD: 1. If you had a heart attack and had to work two hours per day, what would you do? 

Not five hours, not four hours, not three—two hours. It’s not where I want you to ultimately be, but it’s a start. Besides, I can hear your brain bubbling already: That’s ridiculous. Impossible! I know, I know. If I told you that you could survive for months, functioning quite well, on four hours of sleep per night, would you believe me? Probably not. Notwithstanding, millions of new mothers do it all the time. This exercise is not optional. The doctor has warned you, after triple-bypass surgery, that if you don’t cut down your work to two hours per day for the first three months post-op, you will die. How would you do it? 

2. If you had a second heart attack and had to work two hours per week, what would you do? 

3. If you had a gun to your head and had to stop doing ⅘ of different time-consuming activities, what would you remove?

Simplicity requires ruthlessness. If you had to stop ⅘ of time-consuming activities—e-mail, phone calls, conversations, paperwork, meetings, advertising, customers, suppliers, products, services, etc.—what would you eliminate to keep the negative effect on income to a minimum? Used even once per month, this question alone can keep you sane and on track.

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.”