Daily Economic Update: September 27, 2024

China continues with stimulus. AI stocks (sans Supermicro Computer) continue to have legs and overall everything is perceived as bullish for equities.  Powell didn't say anything about monetary policy, so that was that. 

On the data front, you still can't get fired with jobless claims at a 4 month low, this despite constant headlines about layoffs (so maybe they'll make it to claims eventually).  Pending home sales slightly higher than expected, Durable Goods orders held up and 2Q GDP was confirmed at 3% and most of the revisions to previously reported growth estimates were positive.  The 7Y auction solid.

Away from data there is still war, there is the threat of East coast port strikes next week and Mayor Adams was indicted (if he goes to jail will he be in the same jail as Diddy and SBF?)

On the day ahead it's PCE Day!  

XTOD: These BEA revisions seem material. A common recession narrative has been GDP would "catch down" to weaker GDI, and that low savings rate indicated consumer stress. But today it was GDI revised significantly higher due to greater interest income, leading to higher savings rate.

XTOD: Revised GDP for Q2, the more interesting news is in the revisions which go back the last five years.  Notably: Remember the debate over whether there was a recession in 2022 because of two quarters in a row of negative growth? Well, one of those quarters was revised to positive.  https://pbs.twimg.com/media/GYZ446XbIAAi_3S?format=png&name=small

XTOD: The $NVDA bull & bear case summarized in 2 minutes by Zuck.  It is that simple.  https://x.com/i/status/1839304406938038624

XTOD:  The game of football is officially broken.   NIL, transfer portal, 6th year seniors, high school kids being offered money to play college ball or transferring 2-3 times between freshmen - senior year in high school, youth select travel teams, personal trainers making more money than Bill Gates from training 9 year olds how to run routes. We are just chasing after the wind. Good luck catching it.  

Football was once built on the foundation of commitment, grit, finish what you start no matter the cost. 

We should apologize now to future employers, wives, and children for the young men that are learning to quit or leave when things are difficult or times get tough.

XTOD (READ the full thread if interested) : A #Refinance Solicitation: True story from a client call yesterday.  "They told me I'd save about $300 per month and it would only cost me $1,219. Sounds like a good deal to me! Can you tell me what you can offer before I proceed with them?"   The Devil is in the details! https://x.com/AdvisorJohn/status/1839347434612498864

XTOD: Clarity comes from subtraction, not addition.  Remove the noise, the distractions, and the unnecessary.  What truly matters will emerge.

Daily Economic Update: September 26, 2024

So long Apple Vision Pro, hello Meta Orion.  I wrote this in augmented reality.  I, like Sam Altman, have been lobbying the government in hope that we can further build out our electric grid so that we have electricity available to power data centers so AI can do a better job writing this blog. 

Mortgage refinancings surge 20%.  Sales of new homes in August were lower than July, but better than expected. If they give first time homebuyers more money prices will go____?

Putin talking about potentially using nukes. Israel preparing for ground ops in Lebanon. A Hurricane in the gulf.  Possible strikes at ports. Stocks near all-time highs (yes they were down slightly).

5Y auction was on the screws at 3.591% with decent internals, but no uptick in demand.  The long end of the curve continues to sell off post last week's FOMC.  The 2Y is at 3.56% and the 10Y at 3.79%.

Today we get updates to GDP, GDI, including revisions to data going back something like 5 years.  Durable goods data,  Powell at 9:20am and the 7Y auction at 1pm.

XTOD: A trader has placed the single biggest ever trade in SOFR futures today 🤯 Why? No idea.

XTOD: It is fascinating that yimbyism started with sensible democrats (as the problem is so much worse in places like sf), but then republicans rather than say great, you discovered property rights and markets, let’s get this done, moved to reflexive opposition.

XTOD: In the future, I think this era is going to be looked at critically in this regard. The ratio of attention that market participants have to give to the Fed, and the amount of communication that the Fed gives to the market on a regular basis, has kind of reached banana land.

XTOD: Almost one third of our life is spent at work.  But only 20% of people are passionate about their jobs.  This is one of the key reasons why:  45% of people have not felt true happiness for more than 2 years.   25% don't know, or have forgotten, what it means to feel happy.

XTOD: Do It Your Way  You do your best work and have the most fun when you’re not burdened by fear that someone else thinks you’re doing it wrong. 

https://collabfund.com/blog/your-way-is-the-only-way/

Daily Economic Update: September 25, 2024

China eases, cutting their RRR by 50bps which should open up over $140bln in new loans.  Chinese authorities also cut certain repo and mortgage rates by 20bps, while making some regulator changes to spur demand for homes and stocks.  Elsewhere in Asia, BoJ talked tough on inflation and the Aussie central bank held rates at 4.35% for the 7th straight meeting, so far abstaining from the rate cutting frenzy as they remain vigilant against inflation risk.

Stateside, the Conference Board's Confidence data dissappointed with an uptick in recession probability and a worsening "labor differential".  Not in most of the headlines, the survey also showed an uptick in inflation expectations for the next 12-months to 5.2%.

In fedspeak, Bowman, AKA 'the dissenter', expressed concern that the Fed's fight against inflation may stall and that the neutral rate may be much higher than it was pre-pandemic.  She also expressed concerns around geopolitical risk related to supply chain disruptions and fiscal policy as creating upside risk to inflation.  She didn't seem overly concerned about labor markets, but noted the cooling.

Stocks at all-time highs again, led by tech.  Caroline Ellison going to jail for 2 years.  The 2Y auction was 'meh', but probably as expected with yields having fallen as much as they had recently.  Closing the day, the  2Y at 3.54% and 10Y  at 3.74%.    Witht the 2s10s uninverted are you betting on a further steepening?  Bill Gross provides some context see XTOD down below.

XTOD: The trends in China are really quite worrying.  This isn't a crash like scenario where demand will suddenly be destroyed and intl markets will drawdown. It isn't 2015.  But I'm afraid China is in a decaying spiral that is getting impossible to climb out of.

XTOD: R.I.P. inverted yield curves. 

XTOD: Yield curve trades working well   Would not add here — due for a few weeks rest but last 25 years 2/10 curve avg — 107  Now — 18

XTOD: Almost everything is noise. A tiny fraction of things are enormously valuable. They are hidden many layers below the surface.

Daily Economic Update: September 24, 2024

Euro area PMI's were weak, while U.S. PMI's were solid with services leading the way.  

In Fed land, Bostic supported 50bps because he was convinced inflation was sustainably heading back to target while risk to employment were increasing.  Bostic's full speech is here.   

Kashkari was also out with an essay in support of cutting 50bps, largely echoing Bostic's view and like Bostic emphasizing that policy remains restrictive, but that they view the balance of risk as having shifted.   Kashkari does not rule out that the neutral rate may be structurally higher.  Kashkari then also asks how might the Fed be surprised and of course hits on largely the same two questions I posed in my kinda a FOMC recap.  Those questions are: (1) could the economy be closer to recession than we think and (2) could inflation be reignited.  Positing that he doesn't see much risk that either of those are major risk at present.  He also doesn't rule out the inevitable "shocks".   Overall he is very much in the "soft landing" camp and that there is no need to move too fast with rate cuts. You can find Kashkari's essay here.

If you want to go full dove, Goolsbee comments would lead you to believe rates should probably be zero.

The Fedspeak reminded me of what I wrote at the start of the year:

I have no clue what views will be right in 2024, but I'm going to guess that the advice Paul Volcker left in his 2018 biography, "Keeping At It", may not be entirely lost on JPOW.  That advice is: "A lesson from my career is that such successes [in maintaining low inflation] can carry the seeds of its own destruction. I've watched country after country, faced with damaging inflation, fight to restore stability.  Then, with victory in sight, the authorities relax and accept a "little inflation" in the hope of stimulating further growth, only to se the process resume all over again."

Clearly the Fed believes inflation is nearly or completely beat, but I guess we'll see.  Don't worry there are only like a dozen more Fed appearances this week.

Either way stocks hit new highs, so did Gold and bond yields rose a little.  The 2Y was 3.59% and the 10Y 3.75% as the 2s10s curve continued to steepen.

On the day ahead it's home sales and the 2Y auction.

XTOD: Chinese policy makers keep running into the issue that lower rates and more programs to lend to the private sector aren't the solution to a debt deleveraging.   That's b/c it's not a supply or price of credit problem. Its an asset price & demand problem.

XTOD: A visualisation of why the fees you pay, matter: https://pbs.twimg.com/media/GYLcllYakAIgh9P?format=jpg&name=900x900

XTOD: "...just 86 stocks accounted for half of the total stock market wealth creation over this 90-year period...less than half of the stocks in the universe generated any returns for investors...only 42% earned more than risk-free Treasuries over the entire period...less than 4% of the thousands of stocks in this universe accounted for virtually all of the market gains. Harvey D Shapiro Henrik Bessembinder 

@barronsonline .  there are no words for how important this Shapiro essay is...

XTOD: Retirement starts when you stop sacrificing today for some imaginary tomorrow. 

You retire by saving up enough money, becoming a monk, or by finding work that feels like play to you.

Daily Economic Update: September 23, 2024

From: 'The Devil's Financial Dictionary" by Jason Zweig

The irony of maintaining a daily economic update blog while firmly believing it is best to ignore all of the noise and false stimuli is not lost on me. If you’re paying attention it’s the message of this blog that you can’t predict the future and it's a waste of time to focus on the noise or "what the world looked like ten minutes ago."

"the "short-term crowd" responds constantly to "false stimuli" whether it's the latest economic data point or the trivial news that a company has beaten analysts' expectations.  "You need to be wired not to believe the bullshit, to not be listening."  - William Green discussing and quoting Nick Sleep (if you don't know who Nick Sleep is google Nomad Partners investment letters)

 "All of humanity's problems stem from man's inability to sit quietly in a room" - Blaise Pascal

Speaking of noise, on Friday, Fed Governor Waller said he saw inflation falling much faster than he anticipated, which pushed him into the 50bp camp, while dissenting Fed Governor Bowman released this statement which included: "Although it is important to recognize that there has been meaningful progress on lowering inflation, while core inflation remains around or above 2.5 percent, I see the risk that the Committee's larger policy action could be interpreted as a premature declaration of victory on our price stability mandate." as she argued in favor of a 25bp cut which "would also avoid unnecessarily stoking demand."  Speaking of demand, nothing is stopping demand for AI as we're firing up nuclear reactors to power data centers.

We ended the week with equities at or near all-time highs and with the 10Y ~10bps higher than it was prior to the FOMC meeting, trading near 3.75%.   The 2Y yield at 3.60% is little changed from pre-FOMC.  The geopolitical situation looks no better than it was with Israel and Hezbollah firing rockets.  The only situation worse than geopolitics might be Diddy's.

On the week ahead PCE will be in focus along with PMI's and talk from Fed officials like Powell.

Mon: Flash PMI's, Fedspeak

Tue: Home prices, 2Y Auction

Wed: New Home Sales, 5Y Auction

Thur: Durable Goods, 2Q Final GDP, Jobless Claims, Powell, Pending home Sales, 7Y Auction

Fri: PCE & Income, UofM final

XTOD: Why indeed! To recognize market imperfections, even serious ones, is one thing; but to claim, in light of experience, that governments are generally better able than the market system is to husband scarce resources, you have to be a moron, or a fiend, or both.

XTOD: "Nobody believes this, but Charlie Munger and I have been buying stocks and business for 50 years. In that entire time, we've never had a discussion of macroeconomic factors in making a decision as to whether to buy, or sell a business — buy a business, or buy or sell securities. 

We just — it just doesn't get into it — our consideration. 

And if I were buying a farm, I would not be thinking about what the Fed was going to do. If I were buying an apartment house, if I were buying a business outright I wouldn't do it. 

So, when I buy a piece of a wonderful business, say Coca-Cola or American Express, it is not a matter of consideration. So Charlie and I will talk about the business. We will not get into discussions about the Fed, or — or Government."  - Warren Buffett

XTOD: This is how the world works. The stupid ones can never break free of the apparent complexity. Haruki Murakami

XTOD: “So, Cheryl, it’s called a freak-off, and Diddy asked me if I could bring the whale head and, well, things got out of hand.”

XTOD: Jamie Dimon has doubts about a "soft landing":“I hope it’s true, but I’m also more skeptical that inflation is going to go away so easily.” It´s gone already!  https://pbs.twimg.com/media/GX80emHXIAAiMdd?format=jpg&name=900x900

XTOD: "Success on Wall Street was getting the most money. Success for us was having the best life." - Ed Thorp

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.