Daily Economic Update: September 16, 2024

FOMC week is upon us.  People are seemingly up in arms that there is true uncertainty around whether the Fed will cut 25 or 50bps. Is this the slow end of a form of "forward guidance"?  There's still a chance that Nikileaks puts out another piece cementing either 25 or 50 ahead of the Wednesday decision.   Anyway it's a big central bank week with Fed, BoE and BoJ. The 2Y is 3.57% and the 10Y is 3.65%.

Where do things stand (economically speaking) going into the meeting?  Well I think that very much depends on your narrative, but one thing we can probably all agree on is our economy is currently doing better than China's where stocks and bond yields are hitting new lows and even there manipulated data doesn't look great.  Stateside, last week ended with stocks on a 5 day winning streak and are back near all-time highs. The UofM sentiment was above expectations and at a 4 month high.  The survey showed a continued decline in inflation expecations 1 year out, but showed an increase in inflation expectations in the 5-10 year horizon.  Of course, it's largely a survey about politics and gas prices, so who knows what it means. 

Whatever the news flow, your time is still better spent reading this summary of Howard Marks recent video "How to think about risk" (you should watch the video).  

Or, reading this article, "False Profits" from Jason Zweig about often promoted trading strategies. 

Or, watching all the episodes of Industry while reading Matt Levine talk about investment bank analyst hours being a "floor, not a cap" which formerly "was “it’s about 100 hours a week, unless you need to work more,” and the new standard is “it’s 80 hours a week, unless you need to work more” and how AI will potentially be "making junior bankers’ lives easier in the short term, but undermining their development in the long term: They won’t learn, at a deep level, what drives returns on an LBO, because the AI does all the math for them. The apprenticeship model will break down."

Outside of the financial news there was another Trump assassination attempt, which is an apt reminder of risks in general and about election risk in the specific. 

On the week ahead: 

Mon: Empire St. Mfg survey

Tue: Retail Sales, Industrial Production and Capacity Utilization

Wed: Building Permits, Housing Starts and FOMC

Thu: BoE, jobless claims, existing home sales

Fri: BoJ

XTOD: Cashier at trader Joe's asked me what I do (I leave it at finance), and then asked if he should buy calls ahead of the rate cut.

XTOD: I get it that people lost money betting into the blackout period only to get rug pulled under their feet by Timmy, but I think this is a better place for FOMC. I don’t really get all the talk about them having absolutely to guide more to shift the odds of 25 bp or 50 bp into certainty. 

They probably have odds exactly where they want them and they will now turn a decision that was fully priced into one that will carry a signal. 

They will either out-dove or out-hawk the 50% and in that their decision carries important signaling vs being just a fully priced ritual where everyone second guesses small language tweaks. 

I hope this is a structural shift in their communication going forward. Market needs to be kept on it’s toes.

XTOD: 7/ On risk management grounds, a half point cut is easy to correct for if inflation stays stubborn or the economy takes off; just don't cut again. A quarter point cut is harder to correct for if real data weaken further; it leaves the Fed further behind the curve.  8/ Probably the best argument for a quarter vs half is that when the Fed starts a new cycle, it usually starts small, because it likes the optionality a drawn-out series of small moves provides. (Brainard principle: when uncertain, move slowly.)

XTOD: The short-term crowd is always too distracted to notice the long-term crowd slowly compounding.   An investor obsessing over daily economic data misses the big picture. A teenager chasing fleeting popularity neglects to develop genuine interests and skills. A co-worker stops paying attention to the details to chase attention. All chase false stimuli at the cost of lasting value.  

Never try to win the moment at the expense of the decade.

XTOD: The need for certainty is the greatest disease the mind faces.

XTOD: There are a thousand different ways that you can "find a niche" and exploit it to make a ton of money, and yet not get any closer to living out your calling

Daily Economic Update: September 13, 2024

ECB cut their deposit rate by 25bps as expected to 3.50% while also cutting their growth forecast through 2026 and showing somewhat sticky inflation in their forecast, noting base effects.  There were also 60bp cuts to the main refinancing rate and marginal lending rate in what was viewed as a technical change necessary to reduce the premium banks pay to borrow relative to what they earn on deposits at the ECB.  Markets are pricing in a possible pause at their next meeting. 

Stateside PPI showed higher core PPI than expected and inital claims were relatively benign.  Yields rose a little more and stocks continued to rally.  The 2Y is 3.66% and the 10Y is 3.69%

Also making the news was that Berkshire Hathaway's Vice Chair Ajit Jain sold half his stake in the company, which of course leads to a ton of speculation as to why?

As I probably remind readers every few weeks, following day to day data is largely a waste of time because the shelf life on this data is so short, it's immediately replaced by the next most important thing (like next week's retail sales) and we frequently fall for noise and completely miss the signal.  We also fail to develop any good filters.  What information do you actually need to better determine if your investment or decision will help reach your goals for it over the horizon.  If you don't know what's important, the qualitative, you can get trapped in the noise.

I posted this back on January 17, 2023:

"providing you with a stream of data and opinion is a business, a business predicated on a demand by investors (including speculators) to be told by someone else what to do (credit to Ben Graham's writing for this phrase).  The incentives are such that adding noise, complexity and a constant pressure to do something is part of the business. 

Morgan Hounsel wrote about this in a blog post Trying Too Hard in which he tells the story of Jon Stewart interviewing CNBC's Jim Cramer:  "Years ago Jon Stewart interviewed Jim Cramer. When pressed on CNBC content that ranged from contradictory to inane, Cramer said, “Look, we’ve got 17 hours of live TV a day to do.” Stewart responded, “Maybe you can cut down on that.” He’s right. But if you’re in the TV business, you can’t."

Anyway, enjoy your Friday and the UofM sentiment.  Listen to Howard Mark's in XTOD below.

XTOD: One of the most interesting things the PPI tracks that the CPI doesn't is retail markups. Retail markup growth has slowed considerably & this has been a contributor to disinflation. In August in particular, growth in grocery markups fell to 0.7% YY, the slowest in 3 years.

XTOD: A masterclass by Howard Marks on how to think about risk.

https://youtu.be/WXQBUSryfdM?si=rmI9woorI_QpTrWq

XTOD: "Great leaders have streak of unorthodoxy. They’re creative innovators.” https://pbs.twimg.com/media/GO6pO3EXUAAZBBm?format=jpg&name=medium

XTOD: Most people wait too long to go into action, generally out of fear.  They want more money or better circumstances.   You must go the opposite direction and move before you think you are ready.

XTOD: Intelligence without courage leads to anxiety because you will spend your time overthinking instead of acting, taking risks, improving your life.

XTOD: When there is an opportunity, I do not hit. It hits all by itself.

Daily Economic Update: September 12, 2024

Yesterday CPI came in mostly in line with a bit higher than expected core reading.  CPI Core came in at 0.3% MoM v. 0.2% est.  Rents rising more than expected was a bit of a surprise to most, with OER hitting its highest pace since January.  Of course some of the narrative is that housing inflation doesn't really matter, it’s backwards looking, so we should strip this stuff out.  In an event, unless something crazy comes about with PPI, seems hard to see the 50bp cut.

In Fed news Bostic violated some trading policies, but what else is new at the Fed. His defense was o was just tracking the Pelosi portfolio.

Stocks were falling until NVDIA wasn't.  Yields rose.  The 2Y was volatile but rose to 3.66% and the 10Y to 3.67%

ECB rate decision, PPI and Jobless claims on the day ahead.

XTOD: J Powell called supercore CPI "the most important category for understanding the future evolution of core inflation." Yet, he's going ahead with cuts with supercore CPI at over 4.5%. Bottom line in soft-landing there's no reason to own bonds.

XTOD: A lone bonfire ignites on H4L Island

XTOD: Three possible explanations for the painful meltdown in commodities:

- Global growth is slowing hard

- China has hit a brick wall

- Someone (a trading house? A large hedge fund? An investment bank?…) has funded large commodity trades with JPY borrowing and is now being “tapped on the shoulder”

The recent strong daily correlation between the JPY and the oil price leads me to believe that it is the latter…

XTOD: You’re not consuming content; you’re being consumed by a medium

XTOD: This is one of Charlie Munger’s favorite biographies and one of my favorite paragraphs in the book: "Success in life is being a good husband, a good father and you end up being a second father to hundreds of other men and women.

Last night I attended a wedding of a young man from our office.This young man told me that two men had influenced his life, his father and me.  That’s worth more than money."

Daily Economic Update: September 11, 2024

 

As a reminder of what's important see above. That said it is the most important CPI print since the last one.  Riding on this one might be the fate of a 25 v. 50bp cut at the upcoming FOMC meeting next week. The closely watched components of the report are likely to be shelter (duh), but also the same recent faves around autos and auto insurance. Going into it we have the 2Y at ~3.60% and the 10Y at ~3.64%.  Seemed like demand for the 3Y Treasury was solid given a record Bid-to-Cover.

Speaking of inflation, oil prices are getting smoked with crude falling to $66/bbl (from over $80 not to long ago) despite wars and a hurricane as analyst believe global demand is weak. I guess that might mean something for inflation at some point, or not.

I wrote this before the debate so you'll have to find interesting commentary elsewhere. 

XTOD: “The economics profession has become insular and status-obsessed, and not focused enough on making a positive impact on the world.”  https://t.co/rdfbzef8aE

XTOD: Commute to NY City This Morning: Distance: 19.1 miles  Door to Door: 2 hours, 47 minutes!

XTOD: An ETF for private credit, which is inherently supposed to be away from public marks?

We truly are in the Golden Age of Private Credit.

XTOD: August NFIB Small Business Optimism Index Declines by Most in 2 Years (-2.7%) to 91.2

Particularly outsized declines in the net share of firms reporting positive earnings trends (down to -37% from 30% in July), expecting higher sales (-18% vs -9% prior), expect better economy (-13% vs -7%). 

Other notable declines include the net share of firms planning to hire (13% vs 15%), higher selling prices (20% vs 22%), and plans to increase inventory (-1% vs 2%)  The uncertainty index also rose to 92 from 90,  its highest level since the peak of the pandemic.   I’ll dig in more later, but the rather large and broad-based deterioration in small businesses confidence aligns with the downbeat August Beige Book.

XTOD: US Treasury says Yellen tests positive for COVID, working from home http://reut.rs/3XOoBw5

XTOD: Better to be out of a trade, wishing you were in it, than in a trade, wishing you were out of it.

XTOD: Dear Fed, please pay attention to the markets! Stocks tumbling, 10-year yield now at 3.65% as oil plunges to $65 per barrel & gasoline tumbles to $1.86 per gallon. Whatever CPI and PPI show, they are lagging indicators. Markets lead. Stick the soft landing with a half-point cut!

XTOD: By far the best measure of success I’ve found is how pleasant the passage of time feels to you.

Daily Economic Update: September 10, 2024

 The NY Fed's Survey of Consumer Expectations showed generally stable views around employment and inflation, with some increase in the 3-year ahead inflation expectations.  Of course expectations and how consumers form expectations, how they impact prices, etc. is an area for economist to debate.  The other point in the survey that is making the rounds is that the average perceived probability of consumers missing a debt payment increased to its highest level since April 2020.

Stocks rallied as bonds were relatively unchanged.  Inventory data was generally a non-event.  Speaking of events, Apple had one.  I think I still have an iPhone 12 or something.

Over in Europe, former ECB Head Draghi reminded Europeans that they are over regulated and under productive. In a 400 page report he calls for spending to make Europe innovative amongst other remedies for the "slow agony" that is European economics.

If you're looking for something to read, you know I like to write about the difference between risk and uncertainty (you can find some of it here).  I thought this article was a good read on the topic https://www.bankeronwheels.com/are-you-overconfident-in-predicting-equity-risk/

Debate is the highlight of the day.

XTOD: Today’s data out of China will add to worries about the underlying health of the world’s second largest economy. The across-the-board downward misses on the price data are consistent with other metrics, suggesting that the combination of weak consumption and investment risks developing into a vicious cycle that would also complicate the authorities’ ability to implement structural reforms.

XTOD: Never underestimate Wall Street's willingness and ability to meet investors' want for extreme leverage...https://pbs.twimg.com/media/GXDA59JWIAcYmDZ?format=jpg&name=900x900

XTOD: What stage of the market cycle is it when people are making Nvidia purses?

XTOD: He died doing what he loved most: Shorting Treasuries and making up monetary policy conspiracies

XTOD: Springfield, Ohio, police say there are no reports of pet being stolen or eaten in Springfield, Ohio (by Haitians or anyone else).

XTOD: IN CONSTRUCTION  Human beings are only healthy when they are still in construction (intellectually). Aging starts when they become a self-museum.

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…