Daily Economic Update: September 9, 2024

Headline payrolls worse than expected at +142K vs. 160K estimate while average hourly earnings came in at 0.4% MoM and 3.8% YoY, both stronger than expected.  The unemployment rate also fell back to 4.2% as expected.  Waller and Williams both indicated they are ready to cut, citing concerns about labor markets, but neither seemed quite ready to go 50bps at this upcomng meeting.  Of course things could change with CPI this week, but the Fed is on blackout so we won't really know.

Friday was a tough day for stocks with major indexes down solidly lead by tech.  Bonds rallied, with the 2Y down to 3.65% and the 10Y at 3.70%.

In the blogosphere, John Cochrane with one of his first post in a while, again asks whether we actually know how or if higher interest rates lower inflation.  This time he hopes to explain why this is true in a simpler, more intuitive way.

In a post titled Monetary ignorance, monetary transmission, and a great time for macroeconomics he starts by discussing the standard narrative, "The Fed raises interest rates. Higher interest rates slowly lower spending, output, and hence employment over the course of several months or years. Lower output and employment slowly bring down inflation, over the course of additional months or years. So, raising interest rates lowers inflation, with a “long and variable” lag. “Monetary transmission” complications build on this basic story. They spell out channels by which higher interest rates lower different categories of spending, or how lower output and employment affect inflation." and goes onto do the following:

• That none of the standard economic models actually work like that, they either get inflation to fall immediately or they don't get falling inflation with rising interest rates alone.
• Monetarism is not a theory about how the Fed or other central banks control inflation, because they don't control the money supply.  At least monetarism has the "right sign", it says higher money growth causes inflation.
• Firsherian, the Fisher equation, tries to solve the monetarist challenges by focusing on interest rates, not money, except the story it tells is that higher interest rates lead to higher inflation (in the long-run).  It, like New Keynesian models, have the "wrong sign".
• Current New Keynesian models also all show that higher interest rates lead to higher inflation in the long-run (the Fisher equation is part of these models), it has the "wrong sign".  Yes, sticky prices may help in the short-run, but to tell the standard story, Cochrane believes the standard current model doesn't produce the result without help from fiscal.
• "To get inflation today πt to jump down, new-Keynesian theorists assume that in addition to setting the interest rate that we see, the Fed makes a threat: If unexpected inflation doesn’t go where the Fed wants it to go, the Fed will blow up the economy with hyperinflation or hyper deflation. Adding a rule that nature abhors a hyperinflation or deflation, the Fed then “selects” one of the many possible equilibria, one of the many values for unexpected inflation. This additional “equilibrium selection policy” can give us the unexpected disinflation at time t."
• Cochrane believes that "the Fed’s interest rate target sets expected inflation, fiscal policy sets unexpected inflation. To get the decline of inflation in the left hand panel, we pair the interest rate rise with a fiscal contraction."

"The central story of how interest rates lower inflation is that the Fed threatens to blow up the economy in order to get us to jump to a different equilibrium. If you said that out loud, you wouldn’t get invited back to Jackson Hole either, though equations of papers at Jackson Hole say it all the time."

I'll leave it there, beause Cochrane's post is really long, maybe I'll do a part two (but maybe not), but it's an interesting read because it challenges you to try to actually understand the theories that many pundits use to describe the process by which the Fed's rate decisions determine inflation. 

On the week ahead, CPI, UofM, Treasury Auctions are the highlights of the week ahead

Monday: Inventories

Tuesday: Small business optimism, 3Y Auctions

Wednesday: CPI, 10Y auction

Thursday: PPI, jobless claims, 30Y Auction

Friday: UofM

XTOD: The new PE investor in the Miami Dolphins sitting Tyreek Hill down and telling him to stop fucking around with the police because it’ll impact his fund’s IRR  https://pbs.twimg.com/media/GW-LFe1WIAAx_wV?format=jpg&name=900x900

XTOD: The August jobs report wasn’t bad enough to seal a 50 bps rate cut as the Fed’s next move but wasn’t good enough to lead officials to rule it out on Friday. Officials kept their options open when they spoke on Friday, neither making an affirmative case for a larger cut nor closing the door on it. That’s making this a close call at their meeting later this month—one that in all likelihood gets decided by Powell.  One option would be to conclude that softer hiring since the Fed’s last meeting, in late July, justifies the 50 bps cut. Fed officials held rates steady on July 31 but might have cut by 25 bps at that time if they had known about weak jobs numbers that were released two days later. After another so-so employment report for August, the Fed would have followed with another 25 bps in Sept. 

A second option would be to cut by 25 in September, and then to signal several more cuts are likely to follow when officials produce quarterly economic projections that will be released at the meeting. 

https://wsj.com/economy/jobs/jobs-report-august-unemployment-economy-b869cf39?st=mrwl4etl263o105&reflink=article_copyURL_share

XTOD: "When I was 47, I was having a difficult year for a variety of reasons and Warren [Buffett] sat me down and said look, when I was 47 I thought my life was over. Susie had left me, and I had already accomplished everything I thought was worthwhile as an investor. Berkshire, as far as I knew, was at its peak. And to my surprise, my life kept getting more and more interesting since, and most of the really important things I've done happened after I was 47 and thought my life was over." - Alice Schroeder (Buffett's biographer)

XTOD: Nassim Taleb(@nntaleb) says that LLMs deliver the most likely explanation on the web and that it is impossible to make money shooting for the most likely explanations.

https://xkmato.com/#are-llms-just-chatty-calculators https://x.com/XKMato/status/1832035882372645095/photo/1

XTOD: "Most people don't stop enough and think hard enough about their priorities and focusing on the problems that are the most worthwhile for them to try to solve. And they operate on a kind of first-come, first-serve basis when it comes to their time." — Daniel Ek, CEO of Spotify (

@eldsjal

) 

Daily Economic Update: September 6, 2024

 Jobs Day in 'merica. If you didn't make it into work today because you were out late watching football or because you're getting an early start on the weekend, or traveled to Brazil for Packers v. Eagles, it's a Jobs Friday nonetheless. 

While we all obsess over the data this week, you likely missed the true highlight of the week, which was Matt Levine's Money Stuff titled: "Hedge Funds Help Companies Hedge" which might have created history by being the first somewhat mainstream piece about the topic of Deal Contingent hedging.  I mean sure Risk.net and some other publications may have covered this subject from time to time, but this was something.

Yesterday's data was mixed.  You had the notoriously volatile ADP employment data which was weak, showing the lowest number of jobs added since 2021.  Then you had jobless claims coming in better than expected, some mixed data on productivity and wages and finally ISM services coming in better than expected with strong new orders and some rising prices.  I think services is what we mostly do in 'merica, so that's good.   Put it all together and I guess we're in a phase where companies aren't really hiring, but they also really aren't firing either.  As Joe Weisenthal of BBG put it the other morning:

"But right now, we're in a "low hiring, low firing mode" as Richmond Fed President Tom Barkin put it in a recent interview. He added that this is unlikely to persist very long. One of the two is likely to pick up. And with the number of job openings falling as much as it as, that obviously increases the concern that the low hiring component is not likely to reverse soon."

I guess we'll see what the Jobs numbers show today and what Waller and Williams have to say later, from there markets might adjust the betting line on 25bps or 50bps at the upcoming FOMC Meeting.

XTOD: As we head toward another key jobs figure, it’s clear the Fed has ignored vital labor market data for months. In my latest piece, What This Job Market Really Means, I explore the intersection of jobs and economic trends as "Something is rotten in the state of Main Street."  https://prinsights.substack.com/p/what-this-job-market-really-means

XTOD: You gotta laugh - or cry - at the fact that hundreds of finance professionals (am not talking about clueless Twitter grifters trying to make a living by conning retail investors, but actual strategists, economists,…sell and buy-side) who for months on no end could not figure that layoffs are the last piece of the puzzle. That’s why bear markets exist. They cleanse the system from incompetence.

XTOD: The Internet can be a tool of social control just as easily as it can be a tool of misinformation. That's why I still listen to Madison and Jefferson, because what they warned about - states seeking tyrannical power - is still a threat, maybe even moreso now.

XTOD: The federal government is an insurance company with an army. You can’t make major spending cuts without slashing Social Security, Medicare and Medicaid and/or weakening national defense

XTOD: For many of the most successful investors I've interviewed, the freedom to construct a life that aligns authentically with their passions and peculiarities may be the single greatest luxury that money can buy." —from the Epilogue of "Richer, Wiser, Happier"

Daily Economic Update: September 5, 2024

Job Openings continued to decline in another sign of labor softening. Hiring, layoffs and quits all rose slightly, but overall, these measures look like they are back to pre-pandemic levels.  The Fed Beige book also featured some commentary indicative of a slowing labor market.

Bonds rallied with yields falling on the data, causing the 2s10s curve to finally uninvert, if only you had traded a duration neutral or bull steepener.  We still have Jobs Friday on the come.  As it stands were back to slightly inverted with 2Y at 3.77% and 10Y at 3.76%.

With the 10Y fliring with 1Y lows, should I get a job processing mortgage refis? Is that a wave that's coming?

Meanwhile the financial malaise in China continues on, remember things like the collapse of China Evergrande and the like used to make headlines, now as China sinks further into a debt and export fueled funk, you barely hear a whimper.

But let’s face it all of this pales in the face of the start of another NFL season. Sports sometimes is a good reminder that what you think might or should happen, doesn’t always happen, something unexpected can cause a change in fortunes.  It's called uncertainty.  Or this quote from a recent NY Fed Liberty Street article: 

"professional forecasters cannot really predict what kind of uncertainty regime will materialize in the future, but they seem to have a good grasp of what regime we are in at the moment."

On the day ahead it's jobless claims, ADP employment and ISM Services. 

XTOD: In sum:  Labor market in decent shape but a little looser than would be ideal and the trend is towards further loosening. With inflation getting closer to target any further loosening is unnecessary and something Powell has rightly said he would act to prevent.

XTOD: WSJ: Harris plans to propose a less drastic increase in the top capital-gains tax rate than outlined by Biden. Her advisers believe a more modest increase could encourage investment in entrepreneurship & access to capital for small businesses https://wsj.com/politics/policy/kamala-harris-to-pare-back-bidens-capital-gains-tax-proposal-14c537b1 via @WSJ

XTOD: Some statistics: Saudi oil production is today lower than 20 years ago. Oil prices, adjusted by inflation, are the same as in 2004.  Saudi population has increased >50% in the last 20 years.

XTOD: US Households now have 42% of their financial assets in stocks. That's the highest percentage on record with data going back to 1952.https://creativeplanning.com/charlie

XTOD: Lack of market concern for geopolitics is astounding. Red Sea chaos, Türkiye in BRICS, Iran attack, Libya, Russia, China... changing world order. Some investors referred to it as “simulation” - when perception of the world is different from reality

XTOD: You can never invite the wind, but you must leave the window open…

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.