Daily Economic Update: October 10, 2024

This was written before Hurrican Milton made landfall, which will no doubt be devastating to many people, an apt reminder of what really matters.  But since this blog is focused on economics and markets, the recent hurricane activity will no doubt have ramifications for economic data going forward.

The FOMC Minutes seemed largely in line with Powell's post decision press conference and should the debate over exactly how restrictive monetary policy has been.  "Participants emphasized that it was important to communicate that the recalibration of the stance of policy at this meeting should not be interpreted as evidence of a less favorable economic outlook or as a signal that the pace of policy easing would be more rapid than participants' assessments of the appropriate path." The minutes also showed a lack of concern around the labor market as a source of inflation and an overall view that inflation was sustainably moving to target. Overall the minutes couple with the recent jobs report seem to support the idea of a 25bp cut at the next meeting, but we'll see what the CPI report shows today.

Not even the antitrust talk against Google could keep stocks from making new record highs for stocks. Bond yields continued to rise, oil continued to fall and for all the Bitcoin talk, it sold off on the day.   The 10Y Note auction tailed 0.4bps to where WI was trading, alloted at 4.066%, metrics didn't look great compared to the last auction which had a much lower yield and higher bid to cover.  How much of the backup in yields is tied to inflation concerns, election concerns or something else is tough to say.  Though we know that the MOVE index implies that yields will remain volatile through the election.  We ended the day with the 2Y at 4.03% and the 10Y at 4.07%.

Did you watch the Bitcoin documentary on HBO? I eventually did and personally didn't find it all that interesting and it didn't seem to change the world.  What I always find paradoxical in the crypto discussion is that they incessantly value their "currency" in terms of USD.  A basic thread of thinking is something like, think of how many dollars Satoshi must have if he has X million Bitcoin, imagine if he sells it all.  When the documentary speaks that way, to me it implies, that in order for his Bitcoin to be worth something he needs to trade it back into USD?  I'm sure I'm wrong in the intent of the framing, but I find it somewhat ironic nonetheless.

On the day ahead, CPI and jobless claims will be the all the rage and NY Fed President John Williams will speak at 11am.

XTOD: Proposed motto for a new social-media platform:  You don’t have to have an opinion on everything—and shouldn’t listen to those who do.  If only!

XTOD: Bond market worries of post-election panic... The #MOVE Index measures the Implied Volatility of a constant one-month bond option.  On Monday the election fell into this 30-day window. 

This jumped the MOVE from 100 to 124  The market is bracing for an 18bp rate change on the day(s) after the election.  Similar Equity options jumped by 20%, but have since given back most of that increase to only 9% higher.   As has been the case since mid-2022, financial risk is all concentrated in bonds, not stocks.

XTOD: the Credit Suisse group acquired by Apollo was not ready for the Apollo lifestyle: 

https://bloomberg.com/news/articles/2024-10-09/apollo-s-bet-to-take-on-banks-hit-snags-before-atlas-ceo-s-exit  https://pbs.twimg.com/media/GZdKUfWX0AAI7Bn?format=jpg&name=small

XTOD: The hallmark of expertise is no longer how much you know. It's how well you synthesize.

Information scarcity rewarded knowledge acquisition. Information abundance requires pattern recognition. It's not enough to collect facts. The future belongs to those who connect dots.

XTOD: Having good health isn’t everything, but not having it is.  Having money isn’t everything, but not having it is.  You don’t need 6-pack abs or a million dollars to be happy, but it is worth learning the fundamentals of fitness and finance.   They bring a margin of safety.

Daily Economic Update: October 9, 2024

I wrote this before the airing of HBO's documentary "Money Electric: The Bitcoin Mystery" where rumors have been swirling that the real Satoshi Nakamoto will be unvieled which will reportedly send "shockwaves" through markets and the election.  I guess I'll take the under on the impact of this documentary and side with Charlie Munger's sentiment on the importance of Bitcoin, perhaps best summed up in his quote: "It's like somebody else is trading turds and you decide, ‘I can't be left out.’"

Chinese stimulus hopes fading for now. Oil prices fell despite uncertainty around the Mid-East turmoil, but for now mixed messaging around the possibility of an Israeli attack on Iranian oil, coupled with a lowered expectations for Chinese stimulus might be helping to slow the recent price spike.  Speaking of uncertainty we have Hurricane Milton and uncertainty of the path as well as the secondary and tiertiary knock on impacts that could arise from the storm.  Lastly, on uncertainty, yesterday's NFIB Small Business Optimism highlighted this quote:

"Small business owners are feeling more uncertain than ever,” said NFIB Chief Economist Bill Dunkelberg. “Uncertainty makes owners hesitant to invest in capital spending and inventory, especially as inflation and financing costs continue to put pressure on their bottom lines."

This reminded me of a quote by legendary economist Irving Fisher, which I referenced here:

 "Business is always injured by uncertainty. Uncertainty paralyzes effort, and uncertainty in the purchasing power of the dollar is the worst of all business uncertainties."

Perhaps a feeling that the Fed is willing to let the inflation rate run a little hotter in order to provide more certainty for the labor market will paradoxically create instability for the labor market by causing business uncertainty due to inflation.  

Speaking of the Fed, Jamie Dimon spoke on BBG noting he thought the Fed was right in beginning to cut rates, but he really focused on structural issues such as regulation, deficits and geopolitics.

Bond markets didn't love the 3Y Note Auction with a 0.7bp tail and a poors showing from indirect bidders (generally foreign demand).  The 2Y is 3.97% and the 10Y is 4.03%.   Nonetheless equity markets were up, because tech only goes up.  The latest Atlanta Fed GDP estimate for 3Q is 3.2%, a number I don't think many expected for a year that has had a 5 handle interest rate policy.

On the day ahead the highlights will be the FOMC Minutes and the 10Y Note Auction.

XTOD: IOW, NGDP growth > 5%. Aggregate demand growth remains robust. No slowdown in sight.

XTOD (long but good read by Michael Pettis, here's 1 of 11) : 1/11 Adam Tooze suggests that "If your aim is restoring the competitive position of US industry, a large dollar devaluation would do more than a sprinkling of industrial subsidies."

XTOD: "Microsoft has become more cautious about paying for ever-bigger server  clusters for OpenAI as the cloud giant aims to ensure it won’t take a  loss on costly data centers that may not generate consistent revenue in  the coming decades"

XTOD: NEW FROM US:Roblox—Inflated Key Metrics For Wall Street And A Pedophile Hellscape For Kids  https://hindenburgresearch.com/roblox/ $RBLX 

XTOD: Lou Simpson: “The essence [of investing] is simplicity.” https://pbs.twimg.com/media/GZXWSwSX0AAHoRM?format=jpg&name=900x900

XTOD: Simplification is the art of organizing your life around purpose.

Daily Economic Update: October 8, 2024

Yields continued their march higher as markets reassess the stance of monetary policy and the outlook for growth and inflation.   Oil also continues to climb due to concerns in the middle east, where prospects of an Israel attack on Iranian oil loom large.  In equity land, ahead of the start of earnings season, NVIDIA helped keep indexes from experiencing larger losses than the 1% loss they experienced.

With corporate earnings and inflation data on the come as well as the backdrop of extreme weather and national and geopolitical politics, there will certainly be continued catalyst that could pose risks to whatever views are priced into markets over the coming weeks. 

Nothing major came out of Fedspeak, so we'll look to the day ahead with very little data and more Fedspeak.

XTOD: Musalem says his baseline outlook is for continued economic expansion over the next several quarters, supported by a gradual easing of monetary policy and accommodative financial conditions

XTOD: Amos Yadlin, a Former Major General in the Israeli Air Force as well as the Former Head of the Israeli Military Intelligence Directorate, stated earlier today on CNN, “The Israeli Attack on Iran will be something that has never been seen in the Middle East.”

XTOD: With the confusion around Fed policy and the upcoming CPI release, I was thinking about Powell’s focus on Supercore inflation during the tightening cycle (and particularly in his November 2022 speech).   It’s another example of how policymakers with a buffet of 100s or even 1000s of data points can pick and choose based on their prior taste for the direction of monetary policy. In November 2022, they were hiking, so they cared about Supercore. Now, they’re cutting, so they don’t talk about it anymore.  We hang on every new indicator they claim is important. Then they just pick some new ones. It’s fun. https://pbs.twimg.com/media/GZULPuXWsAALRE6?format=png&name=small

XTOD: Real talk. Am i getting screwed on taxes?   I pay 50% of everything I make to the Gov.  Is Kamala saying teachers, nurses and firefighters pay more than 50%?  I've asked my accountants for this super wealthy tax break and they cant seem to find it.

XTOD: The bond market is revolting against the Fed   This morning, yields on the U.S. 10-year bond soared over 4%. This continues a non-stop rise in yields following the Fed’s 50 basis point rate cut on September 18.  Normally, long term rates follow the path of interest rates in the overnight lending market, which the Fed controls. But this isn't a normal environment.   Consider last Friday’s "blowout" jobs report, which was entirely driven by the biggest government hiring spree on record outside of COVID-19. Whoever believes our economy is strong, must think borrowing unsustainable amounts of money, printing money to pay for those loans, and then hiring people to do wasteful government jobs is the path to prosperity. It isn’t.  The U.S. government is running deficits equal to 6% of GDP, and only generating 3% economic growth. In other words, if you remove government spending from the equation, America's economy is shrinking.  We are on our way to a Soviet-like collapse in our economy as more and more of everything we do – including our jobs – are controlled by the government. 

Mr. Market is starting to sniff this out. That’s why investors are dumping Treasuries and flooding into gold, stocks, and real estate at record high prices.  Meanwhile, we’re witnessing an entire presidential election campaign without either major party bothering to address the single most important issue at stake in our country: America’s unsustainable debt burden and the coming insolvency of the federal government.  It is only a matter of time now until, one day, the U.S. Treasury market suddenly realizes that no amount of printing will stop the collapse: there will be “no bid” for our country’s bonds. 

And on that day, everything you think you knew about America will be completely gone.

XTOD: In the first and comprehensive analysis of the candidates’ plans, we find Vice President Harris would add $3.5 trillion to the debt ($0 to $8.1t) and President Trump would add $7.5 trillion to the debt ($1.4t to $15.2t).   See https://crfb.org/papers/fiscal-impact-harris-and-trump-campaign-plans

XTOD: 'I had coffee with the head of a large family office today, and he said something really profound that I’d never quite put together.    Paraphrasing: “Capital structure ripples through management and ultimately ripples through employee experience”  If you work in a business run for cash flow, a PE-backed platform, a business run for growth or a business run for long term hold, your experience as an employee could not be more different.   

The cash flow capital demands low overhead, fast ROI, had little patience for capacity building.  

The growth capital spends aggressively to build the company of tomorrow, today. Nobody worries much about profitability.  

The PE capital is all about the exit, and everyone is managed aggressively quarterly to maximizing strategic value and EBITDA at time of sale.   

The long term hold capital worries about downside more than upside and tends to err on the side of conservatism. It’s a marathon, not a sprint.   

No one right way, but it’s worth remembering that it’s the capital that ultimately designs the game that everyone else plays.'  -Xavier Helgesen   My own personal add:  'The same owner/ownership group can go thru multiple capital structures depending on ambition, goals, & just where they are personally.   

Time frame being the easiest way to spot who's in what camp. And while you may not agree w/ their choices, understanding their time frame will at least give you understanding for why they are doing what their doing.'

Daily Economic Update: October 7, 2024

We start CPI week with the 2Y at 3.93% and the 10Y at 3.96%.  It is also the anniversary of the October 7th terrorist attacks on Israel, heightening tensions and risks for the day.

On Friday, headline jobs crushed expectations, coming in at +254K, prior revised higher.  Unemployment falls to 4.1% and AHE beats at 0.4% MoM.  About those rate cuts?  Immeadite reaction in bonds was a double digit rise in yields and market expectations for a 25bp cut at the November FOMC meeting. 

With respect to the Jobs report, there was some talk of the impact of college students dropping out of the workforce as they return to their schools as a factor in this report, but to me that sounds like something that happens every September and these economist should have already accounted for that in their estimates.  I guess everyone will have to choose their narrative, but for the month of September at least it looks like job growth outpaced the growth in labor supply.

As many readers know there is also a narrative that these data points are all lagging and that therefore survey data might be more relevant.  There was an interesting CFA blog post that attempts to identify what macroeconomic factors explain changes in business and consumer sentiment as measured in surveys.  Their finding is that a lot has changed post-Covid:

"By the post-COVID period, an increase in GDP did not lead to an increase in consumer sentiment. An increase in unemployment also had no impact on sentiment. In fact, only two variables out of eight had significant power in predicting the direction of consumer sentiment: inflation and the stock market returns."

Speaking of sentiment and inflation, I thought this quote from economist John Cochrane was good: "Expectations are conveyed by institutional structures."  You can read more about Cochrane's views on inflation and his fiscal theory, which he calls a theory of inflation which can also be the fiscal theory of no inflation, in his recent post here.

On the week ahead it's CPI week as the highlight.

Mon: Fedspeak

Tue: Small Biz optimism, Balance of trade, Fedspeak

Wed: Fedspeak, Inventories, 10Y Note, FOMC minutes

Thur: CPI, 30Y, moar Fedspeak

Fri: PPI, UofM prelim

XTOD: Higherer for Longerer island after one number is suddenly seeing a lot of fast ferry traffic from soft landing and recession islands. Aloha!

XTOD: I believe   the Fed will now end Balance Sheet Runoff sooner than  originally planned. They will cite an unexpected decline in bank reserves and end it at one of the next two FOMC meetings

XTOD: Maybe, just maybe, nominal income growing at 5% is a sign that labor markets were not cooling down.

XTOD: The problem is right there: highly skilled people can be used remotely. But you can't clean bathrooms, mow the lawns, plant trees, etc. with remote workers & rich countries are now structurally addicted to cheap unskilled labor. Structurally?  Size of houses, yards, etc.

XTOD: Tonight or tomorrow morning, think of a decision you’ve been putting off, and challenge the fuzzy “what ifs” holding you hostage. If not now, when? If left at the status quo, what will your life and stress look like in 6 months? In 1 year? In 3 years? Who around you will also suffer?

Daily Economic Update: October 4, 2024

Jobs Day in 'merica.  Equity markets largely on hold, the movers have been the continued rise in oil related to middle-east tensions, a continued rise in yields and a stronger dollar which is benefitting from dovishness out of other central banks.  The 10Y is up to 3.84% and the 2Y at 3.71%.

Yesterday's jobless claims were largely in line with expectations and did not appear to be impacted by Helene which hit at the end of the measurement period.  The ISM services data looked strong and also showed an increase in the prices paid component, for whatever that's worth. Factory orders looked relatively weak, but in my mind it's a generally noisy set of data. 

It looks like there may be a pause in the port strike until January 15, and that a tentative deal may be in hand.

On the day ahead Jobs is the highlight, estimates are generally around +150K on the headline, though the whisper number seems lower.  Of course markets will look to see if the unemployment rate creeps up from 4.2% and average hourly earnings looks with 0.3% MoM as the estimate. In geopolitics the question of how Israel will respond and will it involve targeting oil assets or nuclear assets or something different entirely.  Time will tell. 

XTOD: A great example of what Palantir does in an easy to understand way:In 2016, Airbus showed how Palantir Foundry transformed their business by connecting complex systems of data to make quick & accurate decisions.   Imagine using this in ’24 with AIP to deploy LLMs within it https://x.com/i/status/1841494176799588765

XTOD: A reasonable counterfactual for 2020 is a severe financial crisis like we experienced in 2008. Yes, different origin stories for 2020 and 2008, but shutting down an entire economy in 2020 should have caused a severe financial crisis. The fact that it did not happen is amazing.

XTOD: In my 55 years as a global macro investor, I have seen, traded through, and studied many big debt crises (48 are covered in my book, “Principles for Navigating Big Debt Crises.”) It is that perspective that leads me to believe that China is at a fork in the road and can either: deal with its debt by beautiful engineering or deal with its debt crisis in a way that drags on. To me, this one in China looks like “another one of those” that can and should be treated in big, classic ways— but more is required. I go over this in my latest article. As always, I welcome your comments and suggestions. https://linkedin.com/pulse/beautiful-deleveraging-chinese-characteristics-ray-dalio-d7aue/?trackingId=gMQCFX85TbuJ4Ok1RZ8aUg%3D%3D

XTOD: It sounds obvious that reading is important in investing (or life). But in today's information environment, reading is practiced less and less. If practiced at all, the reading is in bite-size snacks, with not enough nutrition in it to develop key investment skills like visualization, recall and self-awareness.

Daily Economic Update: October 3, 2024

Markets shrugged off geopolitics, politics and ports to finish higher, despite Tesla finishing lower after missing on quarterly sales.  Bond yields moved higher as well with the 10Y closing at 3.79% and the 2Y at 3.65% after a solid ADP report and a lack of response from Israel yet was enough to quell the fears of yesterday.  In money markets repo markets seemed tight with SOFR continuing to rise, printing 5.05%, above the upper band of Fed Funds target.

After writing about Japan's Ishiba's hawkishness yesterday he quickly turned around and said Japan is currently in no environment to raise rates further.

As we get jobless claims today, a question going forward will be what impact does the Hurricane and port strikes have on the data going forward.

XTOD: Old enough to know when they told us SOFR was gonna be awesome….. coz u know it wasn’t LIBOR & all….Uhm…. $2.5 Trillion traded yesterday at 5.02% at the 75th percentile.  This is well outside IORB.   This is NOT Normal.

XTOD: Congrats on hitting your Q3 numbers. Here is an even bigger Q4 number that you will be fired if you don't hit, you fucking moron

XTOD: OpenAI says it has closed its new funding round raising over $6.5 billion at a $157 billion valuation.

XTOD: Successful investing is investing that lets you sleep peacefully at night. Success is not about who makes the highest returns or who makes the most money.   It is about achieving our financial goals in a timely manner with the lowest possible risk.

XTOD: “Money doesn't change men—it merely unmasks them. If a man is naturally selfish or arrogant or greedy, the money brings that out.”  ― Henry Ford

Daily Economic Update: October 2, 2024

Well, 4Q is off to a great start as Iran's missile attack against Israel weighed on equity markets and caused oil to spike, and bond yields to fall in a classic flight to quality move.  In case you forgot Iran attacked Israel back in mid-April with drones and missiles.  Will we forget this attack just as quickly?  I posted some thoughts on geopolitcs back then in this post.  The 2Y yield fell back to 3.62% and the 10Y back to 3.74%. 

The east coast and gulf port strike is in effect, with a sticking issue being the unions fight against increased automation (in addition to wanting a large pay increase).  I don't know about you but I can't help but associate dockworkers with the HBO classic "The Wire".  In fact the risk of automation was a topic on this episode from circa 2003.

Admittedly I haven't read enough to know anything to have a strong opinion about the port strikes, but it does make me wonder why the issue of automation at the ports has taken this long to become a major  sticking point.

In economic news JOLTS was solid on the surface with openings increasing more than estimated, but under the surface the continued low hiring rate and quit rates is a troublesome sign to some labor economist.  Whether or not low hiring and quits portends a problem or is simply a consequence of above average period of time when both measures were evelated over the past couple of years is something we'll find out over time.   On the ISM front the data was in line with weakening employment but increased production and new orders.

In the fallout from Hurricane Helene there are continued reports that one of the primary quartz plants in NC, a plant that supplies the quartz that is used in the manufacture of silicon wafers used in semiconductors, will likely continued to be shutdown due to flooding, leading some to question the second and third order effects.

A little under the radar is the new PM in Japan, Shigeru Ishiba, calling for elections on October 27th.  Ishiba is viewed as "hawkish" and largely opposed to low rates and low taxes.

On the day ahead ADP, Fedspeak, whatever happens in the Middle East. 

XTOD: Martin Wolf: Have we seen the end of cheap money? https://t.co/fmuagR0989

XTOD: Cerebras is an unprofitable AI company utterly dependent on selling chips to one of its biggest investors, which might not actually be able to take them out of the country.  Naturally it is seeking an IPO with an $8bn valuation.

XTOD: The amount of time young men spent gaming was not exactly low in 2019. Usually when you see dramatic growth it's from a low starting point, but this is dramatic growth from a high starting point.  https://pbs.twimg.com/media/GYy6QOgXUAMxJtl?format=jpg&name=small

XTOD: Another month of weak JOLTS data.  1/ Hiring rate at 3.3%, comparable to where we were with an unemployment rate of over 8% (!!!) last cycle.  It's a really tough time to find a job. The ongoing labor market weakening is intensifying the "Great Stay". Quits rate at 1.9% in August, aside from COVID the lowest since 2015.  Last cycle, we saw this level of quits when the unemployment rate was 5.5%-6.0%. People know it's a not-great labor market.

XTOD: Stanley Druckenmiller at Grant’s conference: “Bipartisan fiscal recklessness is on the horizon.”

He’s short bonds; equivalent of 15-20% of his portfolio.  “George would be embarrassed of me” for not making it a bigger bet.

XTOD: $APO just dropped the Private Equity meme of the decade in their investor presentation Savage

https://pbs.twimg.com/media/GYz79C2WIAI2me1?format=jpg&name=900x900

XTOD: “Your days are numbered. Use them to throw open the windows of your soul to the sun. If you do not, the sun will soon set, and you with it.”        — Marcus Aurelius, Meditations

Daily Economic Update: October 1, 2024

Port strike on the horizon.  Continued messy situation in the middle east, with Israel invading southern Lebanon.  What a port strike and continued escalations in MidEast tensions might mean for inflation is something that will likely get further attention, but in the meantime crude oil prices are down over 20% from last year.

In everyone's favorite topic Fedspeadk yesterday we had the guy who used to work for Obama (Goolsbee) call for lots of cuts.  Then we had the guy who runs the Fed say the Fed is data dependent and seems to think they can take their time and are in no rush to cut: "not something that we need to go fast on. It’ll depend on the data, the speed at which we actually go.”  Barring bad data, whatever that actually means, I think you can pencil Powell in for 2 more 25bp cuts.

Initially stocks didn't like Powell, but they nonetheless hit new highs.  Yields backed up a little with the 2Y up ~8bps to 3.65% and the 10Y up ~4bps to 3.79%. 

 

Interesting paper out of NY Fed called "The Central Banking Beauty Contest", it kind of reminded me of a paper I wrote about here on the "Hall of Mirrors" effect of information feedback loops, but in this case it approaches "expectations" from a game involving the Fed and market participants and the impact of their beliefs about one another's beliefs.  My summary, are we doing economics anymore or psychology or game theory, or a realization that the economy is dynamic and all of the above?

On the day ahead JOLTS will be the highlight, along with ISM Mfg.

XTOD: Multivariate Core Trend (MCT) #inflation increased to 2.6 percent in August from 2.4 percent in July (revised down from 2.5 percent).  The 68 percent probability band is (2.2, 3.0). https://nyfed.org/3NY8FCh

XTOD: “360 substations are out… There is a high likelihood that the substations are not reparable, and replacement of the substation equipment will be necessary.”  This is devastating. We do NOT have 360 substations worth of transformers and other electrical equipment sitting in stockpiles waiting to be deployed. It could take a very long time to restore power to everyone. Are we facing a Hurricane Maria-type impact on grid infrastructure?

XTOD: You’ve heard of Founder Mode, now get ready for …https://pbs.twimg.com/media/GYqY3z_bQAACp97?format=jpg&name=medium

XTOD: "Damodaran Bot has read everything that I have ever written, watched every webcast that I have ever posted and reviewed every valuation that I have made public."  https://t.co/6TRwh23Pth

XTOD: The ultimate status symbol is time. Time is the new money.