Daily Economic Update: September 20, 2024

One programming note, I'm old enough to remember all of the fear-mongering around the urgent need to cut interest rates to save off the all but certain recession back in early 2023, back when rates were at an upper bound of 4.50%.  That's all.  

Now almost 20 months later, markets are europhic over a 50bp cut to an upper bound of 5.00%.  I guess people changed their minds.  Equity indexes at new all time highs.  The yield curve steepens with 2Y at 3.62% and the 10Y at 3.75%.

Yesterday the BOE held rates at 5% while downgrading growth and upgrading near term inflation. Recall services inflation just printed a 5 handle in the UK. 

Stateside, initial jobless claims fell to a 4 month low.  Home prices hit a new high as sales fall and the Philly Fed Mfg index surprised to the upside. Not the usual data prints in an economy that is materially slowing.   Internationally the Middle East remains risky with the potential for escalation between Isreal and Hezbollah.

I asked David Beckworth's macromuse bot, an AI trained on the transcripts of all of his interviews on MacroMusings podcast, why a lowering of interest rates might help a weakening employment picture without leading to a rise in inflation.  The response (edited for brevity):

Lowering interest rates can help prevent a weakening in employment without risking a rise in inflation through several key mechanisms. First, lower interest rates can stimulate aggregate demand, boosting economic activity and employment. This is because lower rates make borrowing and spending cheaper for households and businesses....others caution that the Fed's Flexible Average Inflation Targeting (FAIT) framework made the central bank reluctant to raise rates until employment had fully recovered and the Fed should consider a more symmetric framework that is less tied to employment outcomes. 

Additionally, depending on the natural rate of unemployment, which may have risen temporarily due to pandemic-era dynamics, lowering rates could help bring more workers back into the labor force without necessarily stoking high inflation, as the unemployment rate may be above its new, higher natural level.

Ultimately ChatGPT agreed with the theory that timing rate cuts to when there is "slack" in the labor market coupled with a continued anchoring of inflation expectations and no perceived issues on the supply side can lead to a lowering of policy rates without running much risk of stoking inflation.

It's Friday, we get the BoJ overnight after the time of this writing.

XTOD: JP Morgan 3 days ago: “Stock won’t do much for the next decade”  JP Morgan today: “Expect a face ripping +15% rally from here”  Ok then.

XTOD: Ex-Kansas City Fed chief sees renewed inflation risk after large rate cut http://reut.rs/3MQFj7p

XTOD: 10 year treasury belongs at 3.75 based on dot plots and 2.5 % inflation  Stick with yield curve 2/5 steepner  I like mtge reits (NLY AGNC DX)  And mlps (WES)

XTOD: “Part of the game of investing is to 'come into your own.' You must find some way that perfectly fits your personality.”  — Li Lu

XTOD: “The most difficult thing is the decision to act. The rest is merely tenacity. The fears are paper tigers. You can do anything you decide to do. You can act to change and control your life; and the procedure, the process, is its own reward.”​ — Amelia Earhart

Daily Economic Update: September 19, 2024 (Kind of a FOMC Recap?)

We know the Fed cut 50bps and are "forecasting" another 50bps of cuts this year and another 100 next year.  We also know there was a Governor dissent for the first time since 2005.  Powell stressed greater confidence in inflation reaching target, no one asked if the Fed's FAIT (flexible average inflation targetting) should be symmetrical, and that Powell believes labor markets are no longer a source of inflation.  The median dots show a Fed that sees unemployment rising in the face if falling rates even as inflation slowly returns to target.  Powell said something about the possibility of the neutral rate being higher.  I don't recall much discussion about fiscal policy and overall the Fed will make decisions on the basis of the evolution of the economy. 

I didn't write a FOMC Recap for this one.  If I had written a recap, I might have focused on a Howard Marks concept I wrote about earlier in the week that he calls "the perversity of risk".  Conceptually it is the paradox that risk is highest when market participants perceive it to be the lowest.  Under that paradox there are two initial questions I think are worth considering following the FOMC meeting today: (1) is the Fed too confident about the risk surrounding inflation?  and (2) are investors too confident about macroeconomic risk in general as they bid stocks and bonds both to recent highs?  In regards to the second question are investors actually too complacent in the risk related to employment. With regards to both of these questions, I have no answers, only more questions.

If I were to have written a recap, I'd probably stick with some themes from Marks writings and try to think about how they apply to monetary policy and the current stance of the Fed's policy.   Marks says "Not trying to maximize is an important component in preparing for what life throws at you...".  I might try to discern if the 50bp cut is an attempt not to maximize the fight against inflation, or whether it's actually a 'mistake' in the Fed trying to maximize employment.  I might try to think about whether a 50bp cut leads to a less fragile economic outlook, one that will be more resilient to shocks, or whether it creates vulnerabilities to positive shocks that spur reignite inflation. 

Ultimately if I were to write an FOMC recap, I might borrow thinking from William Green's book "Richer, Wiser, Happier" and his chapter about Marks titled "Everything Changes".   I might talk about Marks thinking around impermenance.  About how we can't predict the future, not only do we don't know what will happen, often we don't even know what could happen.  About how we shouldn't cling to things that we know can't last.  About thinking in terms of preparation rather than prediction.  About discipline rather than biases and emotion.  About how we shouldn't waste our time trying to predict interest rates, inflation, growth, or other things that are influenced by so many factors with randomness.  About how investor psychology historically creates cycles.  About looking at things in terms of "Where's the mstake?"  And about "bearing risk intelligently while never forgetting about the possibility of an unpleasant outcome."

I think I'd write something about that and conclude it with a statement simply saying "I don't know."  

If you were to have written a FOMC recap what would you write?

Twitter/X Thoughts of the Day will return tomorrow.

Daily Economic Update: September 18, 2024

FOMC day is upon us all, WWPD?  We'll see what the Powell Rangers are up to later this afternoon.  The focus will clearly be on whether the cut is 25bps or 50bps and secondarily on "the Dots".  The rest will be about how they discuss "risk management" and perhaps even a nod to r* estimates.  We'll know more in a few hours.  I'm sure there might also be a question or two around cutting rates ahead of the election thrown in there. 

So retail sales coming in better than expected and really showing no major weakness.  The headline retail sales rose 0.1% MoM against an expectation of a decline of 0.2%, while the "core" (ex autos, gaso, and building materials) rose 0.3% matching expectations.  Nonetheless, the most important retail sales print of your lifetime apparently settled nothing in the Fed rate cut debate. The new narrative is that whatever decision the Fed makes around 25 or 50 that there will be some dissent.

Away from retail sales, industrail production beat expectations, rising much more than forecast helped by motor vehicle assemblies.  Following both data releases the Atlanta Fed GDP now is estimating 3% real GDP for Q3, up from 2.5%.  That certainly doesn't scream recession, but who knows.

Then there's the possibility of war between Isreal and Hezbollah following the alleged Isreali attack on Hezbollah pagers yesterday which reportedly injured 4,000.

As we had into the FOMC decision we have stocks at/near all-time highs, a 10Y ~3.65% and a 2Y ~3.60%.  

XTOD: 14 months since last @federalreserve  rate hike. Longest in history was 15 months into the eye of the Great Recession.

XTOD: The Fed faces a finely balanced set of considerations over whether to cut by 25 or 50 basis points at its meeting that begins today.   The case for 50 comes down to what Fed officials call risk management but what might be thought of as regret minimization. Per former Dallas Fed President Rob Kaplan, if you cut 50 here and you think the Fed will need to cut again after that, you are unlikely to regret such a cut even if the economy chugs along between now and your next meeting. But if you cut 25 and things worsen a lot in the coming weeks, you'll feel bigger regret as you'll be behind the curve. 

The case for 25 boils down to some combination of 1) process issues (i.e., 50 will signal something more urgent; there's an election soon; communications were not explicit enough about 50 in the run-up to this meeting), 2) a view that the economy is doing just fine and will continue to do so with more gradual reductions, and 3) that because financial conditions are easy (in part because markets expect the Fed to deliver a string of cuts), igniting risk assets could make it harder to finish the inflation fight. 

There is a gift link to the full article here:

 https://wsj.com/economy/central-banking/fed-interest-rate-cut-size-79a238ca?st=QvUaSC&reflink=desktopwebshare_permalink

XTOD: A Major Incident has happened this morning across Lebanon, leaving between 1,500 and 2,000 Senior Members of Hezbollah and other Iranian-Linked Individuals in Critical Condition, following some kind of Hack causing Encrypted Pagers used by the Organization to all Simultaneously Explode.

XTOD: "Too much capital availability makes money flow to the wrong places."  — Howard Marks

XTOD: The key to compounding is to get started.

XTOD: You don't have to be special to be successful.    Ordinary people can do extraordinary things by choosing to be what most people are unwilling to be: consistent, hardworking, patient, and determined.  Simple, but not easy.

XTOD: As you get older, you’ll realize that a $30,000 watch and a $30 watch both tell the same time.

A Gucci wallet and a Target wallet hold the same amount of money.

A $10,000,000 house and a $100,000 house host the same loneliness.

A Ford will also drive you as far as a Bentley.

True happiness is not found in materialistic things, it comes from the love and laughter found with each other.

Stay humble… the holes dug for us in the ground are all the same size.

Daily Economic Update: September 17, 2024

It's interesting to look back at what we were talking about a year ago. Does anyone even remember the UAW strike and how that would be inflationary?  Funny that the Boeing strike isn't painted in the same light.  And then go look at the September 2023 meeting (recap here). That was the first meeting following the last rate hike.  We had 2Y yields around 5% (compared to 3.56% now) and the 10Y yield around 4.30% (compared to 3.52% now).   At the time of that meeting, the median dot showed one more hike in 2023 and removed two cuts from 2024, effectively projecting just 50bps in cuts for all of 2024 at the time.  Obviously new data changed the views as 2024 progressed, but if monetary policy didn't change, must it have been "shocks" to the economy that caused the sudden slowing?  Or was it that estimates of the "long and variable lags" were wrong in 2023? Or was it the elusive r* (neutral rate) was missestimated?  Supply chains?  China's weakness?  Or none of the above? Or some combination of the above?

I'm all in favor of the mantra "When the facts change, I change my mind."  In this case the fact is the unemployment rate has moved up 40bps while the core PCE rate has moved down 90bps despite a first quarter scare. Other facts could include stocks near all-time highs (the wealth channel), credit spreads remaining tight and inflation remaining above target.  Nonetheless, Governor Jefferson told me in 2023 that 

"high interest rates raise the incentive to save, which in turn dampens consumer spending on interest rate-sensitive expenditures, like housing and automobiles, and slows businesses' investment in new equipment. The decrease in spending decreases the overall demand for goods and services in the economy, thereby reducing the demand/supply imbalances we have seen, and, consequently, reduce inflationary pressures. As a result, the inflation rate should fall back toward 2 percent, the FOMC's inflation rate target."

Should we assume rate cuts are going to spur more spending on housing and autos and businesses will invest more in equipment following the cut?  What will that do to inflation now?

Do you really know? I don't. 

People smarter than me advocate 50bps. Claudia Sahm call for a 50bp cut in an aptly titled post “Fifty”. Paul Krugman agrees. The crux of the argument is that inflation is on pace to reach target, shelter is a lagging indicator and that the labor market is weakening quickly, so why not start big as we’re obviously running very tight policy.

Other smart people, like Torsten Slok of Apollo seem to feel differently.  Take a look at some of the indicators on slide 7 of their deck.  These counter arguments, which  center on the possibility that the fight with inflation hasn’t definitely been won and that there is weak if any evidence that further loosening on monetary won’t risk reigniting inflation via the standard doctrine that it will increase spending, output, the wealth channel and ultimately inflation. 

Either way, the market seems to be leaning a little more towards 50bps, despite Liz Warren wanting 75bps.

Anyway on the day ahead it's retail sales, industrial production and capacity utlization.

XTOD: Yet even a 50-point cut would leave the Fed funds rate 300 basis points above pre-pandemic. How can this be justified? The main answer seems to be that the economy isn't in a recession (yet). But this looks like a variant on Milton Friedman's fool in the shower — the guy who alternately freezes and scalds himself because he's too data-dependent In this case the water is getting cooler but it's still tolerable — and the Fed is waiting to adjust the taps until it turns ice-cold.  Maybe it's PTSD from the unexpected inflation of 2021-22, but it's still a big mistake 

XTOD: STANLEY DRUCKENMILLER JUST NOW ON RATE CUTS: 

“I don’t care if they go 25 or 50, I really don’t. But I can’t help but point out that right after inflation was 9% with rates at zero they went 25bp. Where were all the Wall Street cheerleaders calling for 50 because real rates are too high? The asymmetry in their narrative is striking.”

XTOD: There is zero upside for the Fed to allow this level of dovishness in STIR, Equity multiples, corporate, mortgage, and municipal rates, weakness in USD, strength in precious metals, energy, and industrial commodities.   Zero need and zero upside to ease anywhere near as priced.

XTOD: Everyone knows these long hours aren’t healthy, so why hasn’t anything changed? Are banks indifferent to employee welfare or simply inefficient? The answer is more nuanced https://on.ft.com/3MKIyNI

XTOD: AMAZON TELLS STAFF TO RETURN TO OFFICE FIVE DAYS A WEEK

*AMAZON CEO: 'HAVING FEWER MANAGERS WILL REMOVE LAYERS' 

Kudos to $AMZN leadership building on recent success by getting even more fit.  Flatter is faster.  Leaner is better. 

XTOD: As a rule, whatever you need to optimize, don't do. 2/Hint: when in a car, I take the fastest route; when walking I pick the most scenic route; when cycling I take the longest route. Allora: I avoid cars if I can and when I can.

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.