Daily Economic Update: October 22, 2024

Stocks fell and yields rose.  All of the worries were on display in financial media yesterday.  Stocks, well Goldman says you won't make money in stocks.  Bonds, well deficits.  Cash, well inflation.  Even crypto and gold didn't work for the day.  Investing is hard. 

We ended the day with the 2Y back up over 4 at 4.04% and the 10Y at 4.20%. 

There's an idea of market cycles and reversions to the mean, ‘trees don’t grow to the sky’.  Contrasting to that is the idea that the we're in a new age and there are some companies that have learned to scale at levels not seen before in history, a new Industrial Revolution, an exponential age with increasing returns to scale. 

In the "new" economic system the thinking is summed up in a 2019 in an essay called "Graham or Growth" by investor James Anderson:

"They have endured for decades even at massive scale. I don’t see this as a contention but as an observation. Ironically they’ve altered the patterns of stock market return sufficiently that the very utility of the ‘mean’ has been undermined. The mean is now so far above the median stock that our entire notion of the distribution of returns has to be reviewed. The first chance to reassess came with Microsoft over 30 years ago. The investment community has been slow indeed. We can react to economic data or quarterly earnings in seconds but adjusting our world view has proven far harder.

Separately, one can wonder what if the recent higher interest rate environment somewhat counterintuitively helped repair balance sheets, stopped the proliferation of "zombie" firms, and allowed for the reallocation of capital to more productive uses, thus helping fuel growth (an idea once posited by Claudio Borio).  

Further, despite all the deficits, what if we're poised for more growth than we think.  After all, in the fiscal theory of the price level: "I emphasize: fiscal theory says you get inflation if debt exceeds faith in a country’s long run ability and will to repay. There is no hard and fast debt/GDP limit. Argentina has debt crises at 40% debt to GDP. Japan lasted a decade at over 200%."  This John Cochrane substack post on debt sustainability is worth a read (in the last two paragraphs that's about as optimistic as Cochrane seems to get).

It’s all a lot to think about with political and geopolitcal risk abounding, so it’s important to have intellectual humility.

Jason Zweig recently described how Ben Graham’s concept of margin of safety was also meant to apply at the individual level, to yourself as an investor. In the personal context he posited:  "Do I know what I think I know? How do I know what I think I know?  What evidence is there that I might be wrong?... Why do I know something about this asset that other investors haven't figured out? Why exactly would I be right when all of them are wrong?  

Somewhat related to humility, Morgan Housel's latest post "A Message From the Past (Thoughts on Nostalgia) does a nice job of adding some perspective around the current environment.  In it:

"Are we now forgetting that at virtually every moment of the last 15 years, smart people argued that the market was overvalued, recession was near, hyperinflation was around the corner, the country was bankrupt, the numbers were manipulated, the dollar was worthless, on and on?

I think we forget these things because we now know how the story ends: the stock market went up a lot. If you held on tight, none of those past events mattered. So it’s easy to discount – even ignore – how they felt at the time. You think back and say, “That was so easy, money was free, the market went straight up.” Even if few people actually felt that way during the last 15 years.

So much of what matters in investing – this is true for a lot of things in life – is how you manage the psychology of uncertainty. The problem with looking back with hindsight is that nothing is uncertain. You think no one had anything to worry about, because most of what they were worrying about eventually came to pass.

“You should have been happy and calm, given where things ended up,” you say to your past self. But your past self had no idea where things would end up. Uncertainty dictates nearly everything in the current moment, but looking back we pretend it never existed.

Concluding with "The past wasn’t as good as you remember. The present isn’t as bad as you think. The future will be better than you anticipate."

And that's about as much optimism as you're going to get from me.

XTOD: The World Series between the Dodgers and Yankees is sold out and there are no tickets under $1,000 on the secondary market. 

XTOD: If there is not radical reduction of government expenditures, then, just like an individual who has taken on too much debt, America will become de facto bankrupt.  The interest on the debt is trending to rapidly absorb all tax revenue, leaving nothing for critical needs.

XTOD: The speculative public is incorrigible. In financial terms it cannot count beyond 3. It will buy anything, at any price, if there seems to be some “action” in progress. It will fall for any company identified with “franchising,” computers, electronics, science, technology, or what have you, when the particular fashion is raging. --Benjamin Graham

XTOD: Understand: the greatest generals, the most creative strategists, stand out not because they have more knowledge but because they are able, when necessary, to drop their preconceived notions and focus intensely on the present moment. That is how creativity is sparked and opportunities are seized. Knowledge, experience, and theory have limitations: no amount of thinking in advance can prepare you for the chaos of life, for the infinite possibilities of the moment. The great philosopher of war Carl von Clausewitz called this “friction”: the difference between our plans and what actually happens. Since friction is inevitable, our minds have to be capable of keeping up with change and adapting to the unexpected. The better we can adapt our thoughts to changing circumstances, the more realistic our responses to them will be. The more we lose ourselves in predigested theories and past experiences, the more inappropriate and delusional our response.

Daily Economic Update: October 21 2024

As we approach the election, increasingly we are inundated with experts expressing with much certainty their financial views.  This is often done with much confidence, yet generally short of much more than abstracted terms like increased volatility, horrible consequences, game ending outcomes, big down turns, etc.  Sometimes the discussions center around something of a paradox whereby without massive deficits the economy will fall into some disaster, yet with further deficits we are certain to end in disaster.  Other times it is about the yet to be felt consequences of the "lags" of monetary policies or some other topic which again has generally been on the radar for a long time now. 

Whoever the expert and whatever the view there is generally some explicit or implicit message that you must do something now.  Perhaps it's more wise to consider whether there is more wisdom below than what you hear there:

"We will continue to ignore political and economic forecasts which are an expensive distraction for many investors and businessmen." - Warren Buffett

 "Often we tell ourselves, “Don't just sit there, do something!” But when we practice awareness, we discover that the opposite may be more helpful: “Don't just do something, sit there!" -  Thich Nhat Hahn

 "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."  – Mark Twain.

We all know elections occur regularly, often an investor might experience multiple elections over the hold period of an investment.  We also know that the cost to insure against risk is generally not when it's being experienced, you probably want to buy the fire extinguisher before the fire.

The point is not whether the views of the experts are right, or to argue that you should bury your head in the sand, it's not.  The point is to more clearly know the difference between investing and speculating (discussed here and here and here) and to remember that even when experts tell you that you must do something around the election even in the vein of "risk management", that "risk management" is actually a process, one that is generally well served by understanding why you are taking any risk in the first place, a goal. Often good advice is to build a risk management culture.  Perhaps your risk management process coupled with new information that comes to light might lead to action, perhaps not, and likely not in some alarmist way.

With respect to risk management perhaps there is more wisdom here than in all the expert calls to do something you'll continue to hear:

"Taking a risk without a goal is just like getting in a car and driving around aimlessly expecting to wind up in a great place" - Allison Schrager

“[Risk management] is not just in responding to anticipated events but in building a culture and organization that can respond to risk and withstand unanticipated events. In other words, risk management is about building flexible and robust processes and organizations.”  - John Coleman

Of course as Jason Zweig noted:  

"All investors labor in a cruel irony: We invest in the present, but we invest for the future. And, unfortunately, the future is almost entirely uncertain. Inflation and interest rates are undependable; economic recessions come and go at random; geopolitical upheavals like war, commodity shortages, and terrorism arrive without warning; and the fate of individual companies and their industries often turns out be the opposite of what most investors expect.  Therefore, investing on the basis of projection is a fool's errand; even the forecasts of the so-called experts are less reliable than the flip of a coin. For most people, investing on the basis of protection - from overpaying for a stock or from overconfidence in the quality of their own judgment - is the best solution."

Thinking in terms of preparation over prediction, discipline and process over emotion, recognition of the folly of certainty are probably better mental frameworks than the soundbites designed to get clicks.

 In the words of Benjamin Graham in his classic book "The Intelligent Investor", Margin Of Safety is

 "in essence, that of rendering unnecessary an accurate forecast of the future".   

 A prudent way to navigate the inherent uncertainty in the world and economy is by maintaining some flexibility, a buffer, a margin of safety and a level of creativity in planning.  This flexibility isn't free, it's the extra turn of leverage not taken, it's the liquidity not deployed, or other analogous things, but it also provides a valuable option to change course when things aren't working out.  It creates a condition to increase the odds of survival and survival is what allows individuals and businesses to adhere to Charlie Munger's first rule of compounding: "The first rule of compounding is to never interrupt it unnecessarily".

Anyway, that's my speil to start your week. 

We start a new week at new all-time highs, people still loving Netflix, a 2Y at 3.95% and a 10Y at 4.08%.  On the week ahead, it's earnings, Fedspeak, PMI's and Durable goods as highlights.

Mon: Fedspeak

Tue: probably rest

Wed: home sales, Beige Book, Bank of Canada

Thur: jobless claims, home sales, PMI's

Fri: Durable Goods, UofM final

XTOD: The McRib is back. BTC historically goes up >2x after the McRib returns. Don't fade the McRib.   Not financial advice.  https://pbs.twimg.com/media/GaMkC2qbUAAHl9Q?format=jpg&name=900x900

XTOD: From Edelweiss Holdings PLC Owners Manual - Anthony Deden's firm.   Excerpt from "Chapter 7 - Value is not a Number" https://pbs.twimg.com/media/GaLIQ1YW4AAdM4z?format=jpg&name=900x900

XTOD: GOLDMAN: "We estimate the S&P 500 will deliver an annualized nominal total return of 3% during the next 10 years (7th percentile since 1930) and roughly 1% on a real basis."

XTOD: Getting really into finance is bad for investment performance, past a certain point. You're fine with a simple investment program and chilling. You will outperform most other investors over the long run.  But - if you're really into finance you'll get shiny object syndrome.   "Oh, leverage that portfolio up. Oh, futures. Maybe I should hedge. Oh, I heard this guy on a podcast with a great macro take. Perhaps I should act on that. This commodity is at a 50-year low. This merger is gonna go through and the market is wrong. I should short China because demographics. I should go long China because valuation. This s*itco is net cash. Maybe this is the next Monster Beverage." etc.  That's why it's good to have a small account to get that stuff out of your system & scratch the itch so you don't screw up the boring portfolio that's actually gonna work.

XTOD: "Most of what I know about writing I’ve learned through running every day." Murakami

Daily Economic Update: October 18, 2024

Yesterday the ECB cut 25bps to 3.25% on their main deposit facility.  Lagarde commented that they haven't yet reached 2% medium term inflation target, further stating "We're in the process of "breaking the neck on inflation"".   Of course she also said they are going to be data dependent, specifying they are not data point dependent and of course they'll be flexible. The over emphasis from central bankers on phrases such as data dependent always leave me wondering if that means previously they weren't making decisions based on the data?  Perhaps Stanley Druckenmiller (and others) have been correct in stating that central banks were "trapped" by their forward guidance. 

Stateside, headline retail sales increased 0.4% MoM, up from August and above the consensus estimates.  When you strip out the volatile components like gas sales, it was 0.7% on the "core retail sales", the highest in three months.  That doesn't sound like an indication that monetary policy is restrictive.  Jobless claims fell as hurricane related distortions fell out.  Speaking of hurricanes they seemed to have impacted the industrial production data and as did the Boeing strike. 

Yields rose and stocks rose as TMSC restored optimism in the chips sector and NVIDIA hit new all time highs.  The 10Y is back around 4.10% and the 2Y remains a touch under 4 at 3.98%.  The Atlanta Fed GDP Now rose again and is now at 3.4% for 3Q.

On the day ahead it's building permits and housing starts and of course fedspeak.

XTOD: Peter Lynch: "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves."

XTOD: Economists who map the CPI and PPI into the PCE think core inflation for the Fed's preferred gauge will be around 0.26% in September, a touch below the Sept CPI (which was 0.31%) but the highest m/m reading since March

XTOD: "Money buys happiness in the same way drugs bring pleasure: Incredible if done right, dangerous if used to mask a weakness, and disastrous when no amount is enough."  — Morgan Housel

XTOD: The year is 2027. Blackstone has raised a $1 trillion fund to invest in Private Government Credit.  They promptly sign a deal with the US Treasury at a 6% yield.

Daily Economic Update: October 17, 2024

Equities had a solid recovery, as big bank earnings season has proved at least the largest financials are able to generate solid returns.  As we are awaiting retail sales and ECB (expected to cut another 25bps) the 2Y is 3.94% and the 10Y is 4.02% ahead of the data.  We had oil dip below $70 on WTI before recovering. Concerns over supply continue to dominate fear of attacks on oil assets that could impact supply (betting markets seem to be pricing in only a 21% chance of an Israel attack on Iran by Friday).  

In other news, there is an increasing narrative coming from betting markets and DJT stock that the market is pricing in a Trump victory.  Away from politics, we're going to use nuclear to power all data centers and unrelatedly, all of Florida is for sale.  There, you are caught up.

Setting that aside, for me the Druckenmiller interview, was the hihglight of the day.  You can find tons of takes on it, including plenty of people who honed in on his comments on politics, perhaps cherry picking some of those comments.  Setting that aside the two things I found most interesting were:

1. "We don't see any restriction whatsoever" (as it relates to monetary policy). He believes the Fed is acting very assymetrically, waiting forever to hike rates (13 months), only hiking 25bps at first and was trapped by their forward guidance, now they cut 50bps and signal they are restrictive, will they be trapped by their forward guiance again?  The risk is if they are wrong and inflation isn't killed, he believes it will have major implications for markets and perhaps the Fed's independence.
   
   
2. "I don't know what very short means, we shorted bonds the day the Fed cut 50".  He views the risk reward related to bonds as one where by being short you can see a scenario where yields rise 100s of basis points, while being long maybe yields fall 50bps.  Why?  He was taught the golden rule for bonds is that the 10Y yield should be equivalent to nominal GDP, which he believes is 5.5%.

On the day ahead it's Retail Sales and ECB action as the highlight. 

XTOD: ever since i was young i wanted to transform unstructured data into actionable business insights

XTOD: Very lucky to have Bethany McLean @bethanymac12  come to speak to us at the @StanfordGSB . One of my favourite sessions of the year. The best investors are able to perform the kind of investigative research she does.  A few points hit home:

1) The worst crimes in history have been committed by those who believe they are doing the right thing - yes, this is more philosophical than investing related, but it did hit me hard.

2) Just because financials have been signed off by auditors or regulators, doesn't make them right. The incentives for these parties just aren't aligned with drawing out the truth.

3) The key to good writing is clarity. The key to clarity is writing. Writing is an iterative process than forces me to face your my own lack of understanding and continue to work until I grasp it.

4) Low interest rates breed greed, and greed breeds fraud. I guess we better be on the lookout!

5) Believing in something that may not be entirely (or yet) true is the mark of a visionary or a fraud. What differentiates the two is often a case of luck or timing. Society needs visionaries and believers, but we need very healthy cynicism to avoid being fooled.

6) The hardest thing is to get started, or to take the first step. After that, the momentum can often carry you forward, even if you remain terrified!

Thanks Bethany for the great session!

XTOD: “You need to know if you're going to set up business in a country, that you can do it quickly, predictably, and that the stuff you produce won't just be taken from you. Venezuela lost that. Many places have lost that. Cuba didn't even allow it to begin with. The places that have really grown, like Japan, Singapore, South Korea, you know if you start a successful business, you'll be allowed to see it through.” -Tyler Cowen

XTOD: Think of it this way: There are two kinds of failure. The first comes from never trying out your ideas because you are afraid, or because you are waiting for the perfect time. This kind of failure you can never learn from, and such timidity will destroy you. The second kind comes from a bold and venturesome spirit. If you fail in this way, the hit that you take to your reputation is greatly outweighed by what you learn. Repeated failure will toughen your spirit and show you with absolute clarity how things must be done.

XTOD: “The game is a process of discovering: who you are, what you’re interested in, what you’re good at, what you love to do, then magnifying that until you gain a sizable edge over all the other people." - Li Liu

Daily Economic Update: October 16, 2024

Stocks fell from an all time high as chips and AI didn't win the day given ASML earnings.  Oil continued to fall on a lessening of concern around Israel's presumed attack agains Iran and increasing concern over China's economy which will dampen demand.  Falling oil prices helped Canadian inflation fall to 1.6% on a headline basis, I guess that's good, even though rent inflation runs at like 8% up there.  In geopolitics Trump called "tariffs" "the most beautiful word in the dictionary" and N. Korea is destroying roads between the themselves and S.Korea.

The NY Fed Mfg Index posted it's worst level since May driven by lower new orders, but it nonetheless posted solid employment component and rising prices paid.

The NY Fed Survey of Consumer Expectations showed an increase in consumers 3Y and 5Y inflation expectations. The survey also showed no major concerns on the unemployment or spending sides.  

We hear all the time from the Fed about the importance of anchored inflation expectations, nothing in this survey shows any unanchoring, but equally the readings continue to remain above target.  Some economist believe that higher inflation expectations can be self fulfilling as people demand higher pay and returns to shield themselves from inflation.

It's a light data day ahead before a full Thursday.

XTOD: How to read recent US-Israel leaks re: oil attacks

1) US-Israel have a deal for limited military strikes

2) Netanyahu says one thing -- but may do another

3) Netanyahu never intended to bomb nuclear / oil sites, but used the threat to get other US concessions

XTOD: Trump: "I've been a very successful businessman. ... I don’t think I should be allowed to order it, but I think I should have the right to put in comments as to whether interest rates should go up or down."

XTOD: Feel bad for any CRE investor/family that 1031 exchanged into one of these Walgreens thinking they were going to have a safe/secure asset for decades... not many could have predicted this a decade ago

XTOD: As bull markets are built up, the large and quick profits shown by common stocks as a whole are sufficient to dull the public’s critical faculty, just as they sharpen its acquisitive instinct.

--Benjamin Graham

XTOD: “A good bet in economics: the past wasn’t as good as you remember, the present isn’t as bad as you think, and the future will be better than you anticipate.” — 

@morganhousel

XTOD: The highest return on investment is in the things you don’t do.

Daily Economic Update: October 15, 2024

Stocks again at fresh all time highs, that's like 40+ times this year that they've set new highs.  Not bad.  Mr. Market was more optimistic than the day prior.  

I'm sure you were dieing to know who won the Nobel Prize in Economics well it was Daron Acemoglu, Simon Johnson, and James Robinson “for studies of how institutions are formed and affect prosperity.”  There work has provided influential research into the critical role institutions have played in long-run economic growth and development.  Their book "Why Nations Fail" contrasts extractive political and economic institutions, which impede growth, with inclusive institutions that support market economies and broadly shared prosperity.  In full disclosure I haven't read their book, so I'm only reguritating what I've learned of it from other sources, nonetheless it certainly is worth thinking about the importance of institutions in fostering prosperity in an age where politics and the Fed are so divisive. 

In Fed news, we had Gov. Waller with his Waller, speech here where the press keyed in on this line: "I view the totality of the data as saying monetary policy should proceed with more caution on the pace of rate cuts than was needed at the September meeting". The highlights:

• recent GDP/GDI revisions: These revisions suggest that the economy is much stronger than previously thought, with little indication of a major slowdown in economic activity.
• watch demand for goods: there is considerable pent-up demand for durable goods, home improvements, and other big-ticket items - couple that with lower interest rates and boom.
• labor market: moderation but not a deterioration. 
• inflation: feels like a rollercoaster, too soon to know if the last print is a noise or signal
• Taylor rules: one set says to proceed gradually, the other agressively with cuts. But Taylor rules are subject to subjective estimates of the 'stars'.
• Wallers 3 Scenarios to inform future cuts:
• Strong economy, no major labor concerns --> slow and deliberate cuts (probably less 50's)
• Inflation falls below 2% for some time and labor deteriorates --> front load cuts
• Inflation escalates even if due to supply shocks with no material labor concerns --> no cuts
• In the longer run: less clear the final destination/terminal rate

Waller still "think(s) the larger message of the SEP is that there is a considerable extent of policy accommodation to remove, and if the economy continues in its current sweet spot, this will happen gradually."  

He didn't sound like a guy looking to cut another 50bps quite yet.

In geopolitics we had the U.S. sending missile defense capabilities to Israel and Chinese war games around Taiwan.  That usually inspires confidence, but nonetheless oil continues a little lower as reports emerge that Israel is not planning to strike oil related infrastructure, at least for now.

Empire Mfg and more Fed stuff on the day ahead.

XTOD: It’s called private credit, T. Earnings are made up but the doc is fuckin’ tight and get this…these weirdos let us mark it at whatever the fuck we want.

XTOD: btw watched roughly 60 hours baseball in the last week plus and I don’t even know what I’m supposed to be buying from Strauss

XTOD: American Airlines will operate 1,600+ flights to the destination cities throughout each weekend of the final stops of Taylor Swift’s Eras Tour.

• Nearly 75% of passengers on those flights are female (+33% from a year ago for the same dates and destinations). • Roughly 60% of passengers are Millennial or younger (+30%) • About 40% of passengers are traveling in groups of two or more.  

XTOD: Channel 14 in Israel is reporting that the Israeli Retaliation against Iran will be Significant, not Moderate, and will likely cause Iran to Respond; with them further stating, “We need to prepare for a Significant Exchange of Blows, that might drag the Americans in, which Iran certainly would not want.”

XTOD: U.S. President Joe Biden has instructed his National Security Council to make it clear to Iran, that an Assassination Attempt against Former President Donald J. Trump would be seen as an Act of War.

XTOD: "If I make extreme changes, they are not sustainable. But moderate, incremental changes - they are sustainable."  - Tom Gayner (quoted in Richer, Wiser, Happier by  @WilliamGreen72)

Daily Economic Update: October 14, 2024

SIFMA bond market closure for Columbus Day while stock markets are open.   The 2Y is 3.97% and the 10Y is 4.10%.

Last week ended with stocks at all time highs.  Investors don't yet seem wary of the old proverb that "trees don't grow to the sky".  And why should they be wary, when you have seemingly unending demand for AI and the chips that power them, we've got events with robots, rockets that get caught by their launching towers, banks that earn money from the Fed irrespective of whether they actually do banking, politicians globally promising to stimulate everything, everywhere all at once. But I digress.

 Friday's PPI data quelled some inflationary fears, though energy prices were a big piece holding the overall reading flat month over month, which could reverse in the coming months with rising oil prices, the core reading was up 0.2% MoM which was slightly below expectations. The UofM data showed some softness in consumers confidence in the current conditions and their expectations for the next 12 months while also showing an increase in consumers expectations for the next 12 months.  Speaking of inflation data, China's inflation continues to slow, did China ever follow through with all of that stimulus investors loved a week ago?

For the week ahead we move on from inflation to retail sales and industrial production as well as corporate earnings.   The ECB meets and is expected to cut 25bps.  Thursday looks to be the big day for activity on the data front.

Over the course of last week, markets seemed to start to discount the probability that an Israeli response against Iran will be something impactful. 

Mon: Fedspeak

Tue: Empire Mfg, NY Fed survey about consumer inflation expectations, Fedspeak

Wed: nothing major

Thur:  ECB Decision, Retail Sales, Jobless Claims, Industrial Production

Fri: Building permits, housing starts, more Fedspeak

XTOD: Power is the worst drug on Earth and you have no idea how many addicts are running around.

XTOD: This but for the whole economy.  Not a joke either:  “Years of having financial engineers as CEO, rather than real engineers, finally catches up to Boeing…

XTOD: Sitting on the sidelines?  In money market accounts?    Nope, that’s smart money.   

Congrats, you’re in the cheapest part of the curve, with the least amount of interest rate risk. 

There are other cheap, safe, floating-rate assets that float off of this part of the curve.

XTOD: @AtlantaFed ’s sticky price CPI (slow-to-change consumer prices) rose 3.9% on an annualized basis in September, following a 3.5% increase in August. Graph and track the index in FRED: https://ow.ly/CTfp50TJcQ1

XTOD: "We should all just acknowledge that we operate within a fully managed financial system where the authorities have all of the tools to ensure that we never have a 2008-style crisis again or even a recession or recessionary conditions in markets again.  So, the big risks now don't really exist in the areas of the market that most people typically consider; rather, they're externalized to the political and social domain.  For example, the big risk I see is that a political party in Europe, the US, or some other major economy will recognize people's frustrations and anger about various issues like feeling left out or left behind, and will perceive central banks to be a major instrument responsible for propagating this accelerating gap, and decide to take away their power to use their tools on behalf of markets.  This is the type of thing that market participants need to price in, and these things don't just break out in one direction or another. When we do lose equilibrium, things break out fast and to a much larger extent than they used to. These are real risks that could generally derail the economy and financial markets…risks like the people wrestling control of the monetary system from the Fed, which is not on people's radars…"  @GestaltU   on  @HiddenForcesPod  (10/14/2024)

XTOD: The reason most people can’t walk away is simple: they operate from a scarcity mindset.

XTOD: You lack discipline because you fear success

Daily Economic Update: October 11, 2024

 Yesterday's CPI report was hotter than expected posting a 0.2% MoM and 2.4% YoY increase on the headline figures and a 0.3% MoM and 3.3% YoY increase in the core levels.  Car insurance, airfares, food and services were all contributors to the higher than expected readings.  The initial jobless claims data was higher than expected but is somewhat murky as it captured some increases due to Hurricane Helene and the Boeing strikes, but auto sector layoffs in Michigan seem a legitimate concern.  

The inflation print didn't do anything to re-inspire confidence in a 50bp cut in November.  Bostic even commented that he might be ok with standing pat at the next meeting. The recent move higher in yields lead to a strong 30Y auction, with strong foreign demand.  We ended the day with stocks backing down from all time highs, the 2Y yield actually falling a little, back under 4% to 3.98% and the 10Y climbing to 4.08%,

Speaking of inflation, the October 7 episode of Macro Musings podcast featured an interesting discussion of a paper titled: *Why Do Workers Dislike Inflation? Wage Erosion and Conflict Costs.* which the author, Jonathon Hazell describes as:

"employers don't automatically give workers raises when inflation is high. Instead, workers have to fight for these raises. That places them in conflict with employers. That's the key idea of the paper. It's bringing forward this notion of conflict. It's saying that when inflation is high, for nominal wages to catch up, to catch up with prices, people need to be doing conflict. That's difficult. That's painful."

and is furhter summarized in a quote from Vox's Dylan Matthews:

"Inflation is a tax on conflict-averse people who are bad at negotiating— me."

It's an interesting take on why people hate inflation so much, despite data showing that generally worker's raises keep pace with inflation over time and timely in the sense that you clearly have seen more worker strikes as a means to achieve pay increases since inflation has taken hold.  In other words inflation imposes an additional unmeasured cost on workers through this "conflict" channel.

Another interesting inflation related article comes courtesy of Mark Higgins substack post.  Mark as a financial market historian, blatanty views the Fed's 50bp cut as possible a "BIG Mistake" at least through the lens of history.  Mark cites the Aurther Burns Fed easing prematurely and, tieing that back to the idea of the "conflict cost" of inflation, how the failure to contain inflation lead to strikes that in some ways then made it harder to control inflation.  

Higgin's view is that the Fed is violating the most important rule established after the Great Inflation:

"The rule is quite simple: It is not enough for the Fed to merely extinguish the visible flames of inflation; they must also extinguish the embers that threaten to reignite it."

Futher characterizing the recent employment and CPI data as evidence that the "embers" remaining aglow.

Time will tell if Higgin's is correct and inflation will reignite, but for the day at least nothing in the data seemed to signal an "all clear" on the battle against inflation.

On the day ahead it's PPI and UofM in data and the threat of an Israeli retaliatory strike against Iran looms large.

XTOD: Israel’s public television just published an “inside-the-room” of the Biden-Netanyahu phone call. Major points: 1) Biden pushed against attack on nuclear / oil; 2) Israel’s current thinking is for a retaliation larger than what Biden would like | #OOTT

XTOD: Big takeaway from the CPI: Disinflation is still becoming entrenched. It was a touch above expectations, but nothing to panic about.   I've been saying this for over a year, but outside of a commodity boom it's hard to see how inflation surges again because the shelter disinflation is so firmly entrenched that something very significant would need to offset it.   Although imperfect, the NTR Index continues to forecast falling shelter prices. It leads by 12 months and is now at the widest spread since its creation. Shelter will continue to put downward pressure on CPI in the coming 12 months. Very hard to see inflation being a big problem in the next 12 months given this....

XTOD: Overall the same story as recently: IF you believe the last six months of numbers are correct and everything before that is outdated or anomalous then we're still in fine shape.  But if some of the last six months is anomalous (in reverse) then inflation is more of a concern.

XTOD: Why is the 10-year above 4%?   This summer, the economy was a party that was winding down. Then, Jay Powell showed up with some booze and China brought the snacks. Party is picking up!   The risk? Trump is pulling up in an Uber outside, wearing a Hawaiian shirt... and bringing cocaine!  The 10-year could be at 5% by January! Will stocks like that? I don't know... I don't think anyone wants to party that hard...

XTOD: “Any time I’m telling myself, ‘But I’m making so much money,’ that’s a warning sign that I’m doing the wrong thing.”   Looking back at his career, B.J. Novak noticed that he could have stalled in a number of places. Instead, he became very well known for The Office and other mega-successes.  

How did he repeatedly choose the right fork in the road? He attributes a lot of it to heeding the above rule of thumb.   If you find yourself saying, “But I’m making so much money” about a job or project, pay attention. “But I’m making so much money,” or “But I’m making good money” is a warning sign that you’re probably not on the right track or, at least, that you shouldn’t stay there for long.   Money can always be regenerated. Time and reputation cannot.