Daily Economic Update: November 11, 2024

Stocks at fresh all time highs, coming off the best week of the year. We start the week with the bond market closed for Veteran's Day.  As we start the week, #endthefed gained some traction on social media with endorsement from Elon.  

I'll keep it short.  To start the week the 2Y is 4.25% and the 10Y is 4.30%.  Despite Powell not being willing to speculate on policies that haven't yet been enacted, Minneapolis Fed Pres Kashkari expressed some concern around tit for tat tariff wars having an impact on inflation.

On the week ahead we get a CPI report on Wednesday and retail sales on Friday. 

Today: no data

Tuesday: Fed Waller and other Fedspeak

Wed: CPI, Fedspeak

Thur: PPI, Powell speech,  Fed Williams

Fri: Retail Sales

XTOD (long thread on the Fed): But Wall Street has an addiction to speculative investments and demands lower rates, while the narrative is that the economy is doing well. When no average worker can afford a home without going deep in debt, this is an elite, high inequality economy. 7/n..The Fed is the main actor fueling the speculation, and inequality, and the proof is in their "transitory" narrative a while back. 9/...The current Fed scheme is outdated and elitist. It assumes that the objectives of banks and large corporations match those of labor. 10/n...Conclusion: I don't expect a shift to pro-labor policies but instead a continuation of pro-capital policies and higher inequality until workers realize they have been fed hopes and dreams by political actors from all sides. The Fed must be reorganized to focus on labor. 12/12

XTOD:  "It’s a race between technology-driven abundance and government-driven poverty." 

• Governments rarely make things better  • They're terrible at spending • And they go into huge debt

The government isn't going to save you. Save yourself.

XTOD: Let's start with my long term basic point that should be where you stop reading this thread and go about building your wealth through your profession.    Owning a long only diversified portfolio of assets (what I call beta) is free money.  And should be your ONLY investment strategy to build your savings   That is MY CALL.  It will always be my call and anything I write on Twitter or at DampedSpring or 2GrayBeards is an order of magnitude LESS important that this CALL 

Why?  Because any deviation from this plan requires market timing or identifying those who can. It requires an investor to underweight or go short or overweight and leverage in order to outperform MY CALL. 

XTOD: The money supply is not currently in the hands of the central bank, for those unaware of this fact....They set the overnight interest rate. They do not in any way control the supply of money. Textbook nonsense. 

XTOD: Zen and the Art of Motorcycle Maintenance, what a paragraph...https://pbs.twimg.com/media/Gb37hLdWgAAixZC?format=jpg&name=900x900

Daily Economic Update: November 8, 2024

The Fed cut rates 25bps to 4.5-4.75%, you can find my recap here.  The BoE also cut rates 25bps to 4.75% citing inflation returning to 2%, a need to proceed with cuts slowly, and that future cuts will continue as things play out as they expect.

Labor cost rose faster than expected. Jobless claims remained benign.  Post FOMC markets remained higher with the S&P closing in on 6,000, led higher by the tech stalwarts while bond yields fell almost 10bps.  The 2Y fell back to 4.22% and the 10Y 4.33%.

This Friday will feature UofM and otherwise not much.  Ahead of a bond market close on Monday for Veteran's Day, you might as well make it a long weekend.

XTOD: 40+ Monkeys escape U.S. research facility Police have apparently set traps and are using thermal imaging to find them. Residents are advised to keep doors and windows shut and report sightings to 911.

XTOD: US expands bird flu testing after finding symptom-free infections in people http://reut.rs/40CuApn

XTOD (decent thread on betting markets): quick rip on why @Polymarket matters and why the future of information is markets markets are efficient at pricing information. if you have information or insight that others don't, there's a huge opportunity to generate alpha. alpha generation requires information edge.

XTOD: The Cult of Experts (an excerpt from Wanting)—in a world where there are few polymaths and little synthetic knowledge, guys like Silver can emerge projecting wisdom they do not possess and fool people. It’s a modern day gnostic impulse. Voegelin was right. https://pbs.twimg.com/media/GbyRYQRWkAk5ES8?format=jpg&name=900x900

XTOD: Be extra careful in the work environment with those who like to maintain their position through charm and being political, rather than getting things done. They are very prone to envying and hating those who work hard and get results. They will slander and sabotage you without any warning.

FOMC Recap: Got Debt?

• Fed cuts 25bps to 4.50% to 4.75% range as expected
• The statement removed the sentence that the Committee had gained greater confidence that inflation was moving sustainably to 2%.
• "In the near term the election will have no effect on our policy decisions." "We don't guess, we don't speculate, we don't assume what policies will get put into place."
• Powell seemed to characterize the recent run up in bond yields as being driven largely by expectations around growth and decreased risk.  He further questioned whether there will be any persistency to the recent yield moves, characterizing the moves as "not a major factor" in how they are thinking about things"
• "We don't comment on fiscal policy" he further characterized the path of fiscal policy as "unsustainable" and a "threat to the economy" over time.
• Powell comments that he will not resign.

Raise your hand if you've heard a lot of recent talk about fiscal policy and deficits recently?

" Deborah Lucas was the moderator, and she asked a much more pointed question just right out of the gate when the panel started, and she asked, how much bearing does the fiscal theory of the price level or some version of that have on your thinking at the Fed?"

" if you take this theory seriously, it really undermines the whole point of the Federal Reserve"

The quotes above are from the David Beckworth's most recent episode of Macro Musings, during which he was discussing the Hoover Institution’s recent monetary policy conference, *A 50-Year Retrospective on the Shadow Open Market Committee and its Role in Monetary Policy*  with his guest Jon Hartley.

With so much post-election talk about the sustainability of debt, deficits and the like, along with some talk heading into the election around the Fed's independence and the occassional calls to end the Fed, I thought the comments above were interesting to consider.  After all if fiscal policy is a major driver of inflation how is the Fed supposed to fulfil their price stability mandate?

Is it an unspoken secret that the macroeconomic models include some budget constraint and some fiscal-monetary coordination.  As one of the leading proponents of the Fiscal Theory of the Price Level, John Cochrane would say that the Central Bank can move or smooth inflation over time, but that ultimately they don't have full control:  "the Fed’s interest rate target sets expected inflation, fiscal policy sets unexpected inflation."  and "the Fed makes a threat: If unexpected inflation doesn’t go where the Fed wants it to go, the Fed will blow up the economy with hyperinflation or hyper deflation. "  He also says "If you don’t like my little fiscal theory model, we don’t have a good model of the most basic question, how higher interest rates lower inflation, without a contemporaneous fiscal tightening." and "The news is that without such contemporaneous austerity, higher interest rates don’t lower inflation at all in standard models. Intuitively, if the Fed raises interest rates, that raises interest costs on the debt. Taxes must rise or spending must fall to pay those interest costs. If not, no reduction in inflation."

Which bring me back to my favorite quote about the role of central banks:

"I define central bank independence in one sentence, it's the ability to raise interest rates when the Treasury doesn't want you to. And the Treasury almost never wants you to, because of the cost of the debt.” – Peter Stella

I think my general commentary over the years (and here)  has been to remember that there is a lot of economics and finance that we just take for granted as to our understanding as to how it all works. If you’re reading this and are now questioning your worldview of interest rates and FOMC policy — good. 

Irrespective of the economic models you believe in, it's undeniable that that they all contain unobservable variables and are difficult to test empiracally. 

As for the FOMC today, Powell was well prepared for election related questions, including questions around whether he could legally be fired by the President.  He admitted that there are policies that come through Congress can have an impact on economic variables that will ultimately be taken into account.

Listening to the Powell presser, I was left largely with an impression that the FOMC is struggling to communicate what lane they are driving in, they're largely trying to say in the "middle" of the road. It sounds like they originally set a goal in the rate hiking cycle that they would bring inflation back to target, without declaring victory in terms of meeting that goal, they started to drive out of that lane and are now "in the middle".   

I'm sure there are some blogs or even self-help books out there about being stuck in the "messy middle".  Since I haven't read any of them, for my advice to the Powell Fed, I'll stick closer to my knitting and encourage Powell to listen to the wisdom the late, great Mr. Miyaki of the 1984 movie classic "The Karate Kid" gave to Daniel-san with regards to the risk of only being moderately committed to your goals.

“Walk on road, walk right side, safe. Walk left side, safe. Walk middle, sooner or later, get squish just like grape” 

 

Daily Economic Update: November 7, 2024

FOMC Thursday. 

Markets beat polls this go around, as betting markets and the market as a whole seemed to be much better barometers of this election than polls.  The story of the French guy who made a bunch of money betting on Polymarkets is pretty fascinating, he argues that pollsters should use "neighbor polls" where you ask respondents who they expect their neighbor might vote for, as apparently people will indirectly reveal their preferences in that manner. 

With the Trump election victory and a likely Red sweep in Congress, so-called ‘Trump trades’ performed well. How much of the move is a reaction to expected policies versus simply “relief” that the election is over is somewhat hard to disentangle, but certainly some areas that will benefit from expected tax, trade and deregulatory ideas benefited from the election news.

Crypto, yields and stocks all moved higher. 

Stocks hit their 48th new year to date high even as bond yields soared.  The reaction in bonds is likely some combination of expected inflation, deficits (perhaps a driver of inflation) and growth expectations.

The 2Y heads into the Fed at 4.27% and the 10Y at 4.43%.  We'll see where we end up after the BoE and the Fed today. Keep an eye on Germany as well where the coalition government is collapsing.

XTOD: The Fat Joe curse continues

XTOD: So the French Polymarket guy woke up $80m richer today by simply betting that polls were wrong yet again, just like they were in 2016 and 2020.  “The simplest outcome is always the most likely.”

XTOD: Inflation has been an incumbent-killer everywhere. The U.S., it turns out, was not an exception.

XTOD: Upcoming deregulation wave will create an economic sonic boom.

XTOD: "I'm short bonds. I'm not mega-short...I'm like 25% NAV short 10-year equivalent."  LOL. Druck is a GOAT.

XTOD: We are often so focused on being right that we miss the advantage of simply avoiding stupidity.  https://pbs.twimg.com/media/GbswynnXYBM8Z5j?format=png&name=900x900

Daily Economic Update: November 6, 2024

As of the time of this writing, the election outcome was unkown.

Markets were pretty happy during the election trading day. Stocks indexes rose almost 1%, there was some interesting trading in DJT stock, but hard to know what the drivers were.  The 10Y ended the day at ~4.30% falling in the course of the morning and holding that changes through the day. the 2Y remained around 4.20%.

ISM non-mfg pmi comes in at 56 v. 53.7 est. the employment component and prices component were both firm and above expectations.  The 10y UST auction was pretty good, printing slightly through where WI was trading and a solid bid to cover.

Boeing strike is over.  West coast Canadian port strikes begins.

Limited data, so it's probably just a lot of hearing from pundits about policies.

XTOD: We need Blackstone to take America private, right-size our cost structure, clean up the capital structure, and get us ready for an IPO before the next election

XTOD: Millennials are aging faster as they spend >8 hours/day sitting.   30 min of daily intense exercise can counteract, making your body 5-10 years younger.  A study published today showed that US millennials (28-49 years) spent >8 hours a day sitting which leads to faster aging indicated in markers including higher body-weight and increased fat in the blood at a younger age.   Fortunately, Intense exercise mitigates this effect of longer sitting hours, as millennials working out vigorously for 30 minutes a day demonstrate a BMI (Body Weight relative to height) and blood fat levels (TG/HDL ratio) equivalent to that of 10 year and 5 year younger peers that do not exercise.

XTOD: "Fannie Mae...wrote that it anticipates decreases in the multifamily property values it projected, reflecting 'uncertainty relating to property values and the ongoing investigation of multifamily lending transactions with suspected fraud.'"

XTOD: Election "break even" analysis... 

UST 10yr rate:  17bps; 1.33 points

$MOVE now @ 136 

SPX:  1.8% or 102 points

$VIX now @ 20.3

Gold:  1.6% or $44

Let's hope it's a clear victory....either way

XTOD: When you hear the call to 'do more' and 'be more,' do you ever pause to ask:  At what cost to my soul?  Have you weighed what you are trading for the achievements you pursue?

Daily Economic Update: November 5, 2024

"Elections have consequences." - Obama

"I conjecture that if you gave an investor the next day’s news 24 hours in advance, he would go bust in less than a year.” - Taleb

Are you familiar with the "crystal ball trading challenge"?  Basically it's an experiment where participants are given the front page of the WSJ in advance and you basically get to trade knowing that information.  The result was people did poorly, you can read more here.  In a post by Victor Haghani, the conclusion is summarized as:

Most stories involving people seeing into the future... don’t have “happily ever after” endings. There are usually unintended consequences that come with perfect prescience – a reminder that even prophets can’t escape risk and uncertainty. The best we mortals can do is make our decisions with a framework that explicitly accounts for the presence of risk in just about every big choice we face.

Whether we know the election results by the end of the day or not, doesn't necessarily mean we will understand the market reaction.  On top of that we often forget that everything can change because of some tiny event that no one is thinking about (ex. don't forget about Iran, Russia, etc.). 

In yesterday's new Factory Orders fell in line with expectations but showed decent growth in core durable goods.  The 3Y Note auction tailed by 0.9bps, printing 4.152%.  Bond yields fell with the narrative centered around increasing odds of Harris winning.  

Heading into the day we have the S&P at 5,712, the Nasdaq at 18,179, the Dow at 41,794, the 2Y at 4.18% and the 10Y at 4.29%.  Where will it be this time tomorrow?

On the day ahead we get services data and the 10Y Auction.

XTOD: Time to trot out the Hindsight Bias Buster.  To keep yourself from saying, after the election, that you knew all along that what did happen would happen, take a moment to leave a record for yourself. 

Your predictions for:

the Electoral College vote (must sum to 538):

Trump _____

Harris  _____

the popular vote:

Trump ___%

Harris  ___%

XTOD: Goldman has some potential reaction functions: 🇺🇸  

* Trump w/ Republican Sweep = 25% probability; S&P +3% 

* Trump w/ Divided Government = 30% probability; S&P +1.5%

* Harris w/ Democratic Sweep = 5% probability; S&P -3%

* Harris w/ Divided Government = 40% probability; S&P -1.5%

XTOD: NOBODY:         WALL STREET/ SILICON VALLEY: what if private credit bubble was combined with AI bubble and then Nvidia related-party transactions were thrown in just for fun???

XTOD: Iranian-Backed Channels in Iraq are claiming that a Large Swarm of Drones have been launched from Iraqi and Syrian Territory towards Israel.

XTOD: Al Pacino. Love the work. "I want to do this forever." https://pbs.twimg.com/media/GbfVw0CagAAeWgD?format=png&name=900x900

Daily Economic Update: November 4, 2024

"There are decades where nothing happens; and there are weeks where decades happen"--Vladimir Ilyich Lenin.

The media would probably make you feel like this statement is true most weeks, but nonetheless, a huge week ahead with the Election, the FOMC and a number of Treasury auctions in the mix.  It's gonna be lit! 

"Risk is what you don't see...The biggest news, the biggest risks, the most consequential events are always what you don't see coming. - Morgan Housel

If you've paid attention to this blog over time there is probably a message of avoiding market forecast, about preparation over prediction, being able to survive the volatility that comes from uncertainty, about patience, humility, avoiding complexity and noise. 

"If you are merely forecasting the most likely outcome over the next year or two you will be most unlikely to hang your spreadsheet on predicting a discontinuity. It’s much more sensible to predict a continuation of current business or to follow guidance. It’s rare for us to know when a dramatic change will occur but frequent for it to be close to inevitable at some point. Certainty is an abject temptation. The world is too complex, too erratic and too full of surprises to make spot forecasts of anything of significance. I’d push this further: trying to be ‘correct’ is the enemy of good investing. It’s much more valuable to have doubt and to make portfolios the beneficiaries of potential Black Swan. Therefore the best we can do is to come up with a set of possibilities and probabilities, endeavour to make them extreme, blend them with each other and then think about the potential returns. Then we watch. It’s better than acting. Or as Charlie Munger urges “this habit of committing far more time to learning and thinking than to doing is no accident”. Occasionally we

adjust our sights as time, learning and our thoughts progress. We need to give up the excessive arrogance implicit in forecasts if we are to maximise returns." - James Anderson, "Abberration or Premonition" (2018)

 As for the end of last week. Jobs missed big, but didn’t seem to matter, as investors seemed to look through the noise that was generated by weather and strikes.  The establishment survey had a very low response rate and the household survey showed a large weather impact.  Yields rose further even as markets price in 25bps of cuts at Thursday's FOMC decision (delayed a day due to the Tuesday elections).   The 10Y is nearly 4.40% and the 2Y is over 4.20%.

ISM manufacturing missed but prices paid component beat by a lot, looking a little stagflationary, but really when was the last time ISM manufacturing really mattered, aren't we a services oriented economy?

Warren Buffett is sitting on over $300 billion of cash. 

Mon: Factory Orders, Durable Goods, 3Y Auction

Tue: Election Day, ISM Services, 10Y Note Auction

Wed: Mortage Apps

Thur:  BoE Decision, FOMC Decision, Jobless Claims, Productivity

Fri: UofM sentiment

XTOD: Sure looks like Warren Buffett sees a storm coming.  He’s liquidating out of the stock market. 

Cash reserves now sit at a whopping $325 billion.

XTOD: “It's so easy to get so busy that you no longer have time to think—and you pay a huge price for that.”

XTOD: So why not buy the building and simply rezone it?  Well... rezoning in NYC isn't a 'simply' sort of thing. The details of what that process entails are for another post.  (You're not the first person to think of that 😉)  The city has recognized this area is obsolete and has been working on a plan to rezone the "M" zoned areas of midtown south.  But the plan is yet to pass. A draft of the plan is public, and there have been several public meetings about it.  There is definitely progress.  However, there is no certainty regarding the requirements or when exactly the change will go into effect.  This means that the only possible value of 29W 35th Street is uncertain while the building continues to incur in costs. 

Perhaps a low-enough basis can make it an attractive investment if an investor is willing to take the risk of an uncertain timeframe and an uncertain set of requirements-- which may cap the asset's value to an unknown degree.   So far, it seems that the basis isn't yet low enough for anyone to accept those risks.

XTOD: “Look for the job that you would want to hold if you didn’t need a job.”  — Warren Buffett

Daily Economic Update: November 1, 2024

Jobs Day in 'merica.  Consensus for the headline is +105K, with strikes and hurricanes (mostly Helene due to timing of Milton) expected to distort the data.  The range of estimates seems larger than normal, with Bloomberg's Anna Wong at/near the low end expecting -10K.  We go into jobs with a 10Y ~4.28% and a 2Y at ~4.18% compare that to where things sat prior to the last report back on October 4th where yields were 3.84% and 3.71% for the 10Y and 2Y respectively.  Remember it was that report that came in way above consensus and led the market to start to price out the possibility of a 50bp cut.  We'll see what happens this go around.

Stocks fell as the prior day's tech earnings disappointments (MSFT and META) filtered through.  After the bell Apple and Amazon earnings are likely to help boost market sentiment as AMZN revenue and margins were up.   Apple earnings were mixed, with iPhone sales exceeding estimates, but shares were trading mixed.

Later day news around Iran preparing for a potentially large retaliatory strike against Israel through Iraq made headlines, but didn't seem be a major mover, though it's a reminder not to discount the risk of attacks around the U.S. elections.

Yesterday, PCE rose 0.2% on headline basis and 0.3% on Core PCE, the highest in 5 months, with the Core PCE YoY rate of 2.7%.  Jobless claims were super low again (216K v. 230K est), ECI up 0.8% below estimates (0.9%), spending rose 0.5% which was above estimates.

Over in the UK, I guess the budget situation is not quite Liz Truss level, but the rise in the amount of borrowing over the next several years definitely spooked investors, sending yields rising.  Gilt yields are up something like 40bps over the last two weeks.

Payrolls and ISM on the day ahead.  Sentiment out there in the X/Twitter verse is always interesting.  Here's some bearish takes to start the month.

XTOD: $IBIT took in more cash than any other ETF in the world over the past week. This is out of 13,227 ETFs, which includes $VOO $IVV $AGG etc. It's so hard to beat those veteran Cash Vacuum Cleaners, even for a week, especially for an infant ETF (3mo-1yr old) 

XTOD: Market’s message is crystal clear: governments wanting to steer away from austerity will need financial repression. It’s coming and with it capital controls.

XTOD: Here’s my advice regarding next week’s election. Don’t stay up all night on November 5th because I sense we will not know who actually won the electoral college vote. This will be the mother of all contested elections replete with recounts and legal challenges. It will be Gore vs Bush in November 2000 on steroids. Remember that period of political uncertainty lasted a full month and went all the way to the Supreme Court. The playbook: long gold, bonds and the VIX; short the SPX and the USD.

XTOD:  suspect that, on the whole, this is not what the #FederalReserve expected data-wise when it suddenly decided last month to increase the pace of interest rate reductions from 25 basis points to 50 bps.  According to today’s data, core PCE #inflation, widely regarded as the Fed’s favorite measure, was 0.3% in September, its highest level since last April (2.7% annually, 2.1% for headline).

The distribution of the price increases will also capture the #Fed’s attention, as will the robust increase of 0.4% in real consumer spending. Having said that, not all of today's data releases point in the same direction. At 0.8%, the quarterly estimate for the #employment cost index, another data series closely followed by the Fed, showed the smallest gain since the middle of 2021.

XTOD: The biggest quagmire of this market.  You have two choices:

1) Sit in cash and watch your wealth get destroyed by currency debasement. 

2). Take on tremendous risk and buy overpriced equities and attempt to keep up with inflation. 

What’s an investor supposed to do?  Neither of these are great options but neither presidential candidate has any interest in slowing government spending so the investment environment isn’t going to change.  So you pick your poison and stick w it or do a little of both to hedge yourself.   Plus buy some gold/crypto  Unfortunately sitting in cash is no longer as safe an option as it used to be thanks to our deficit and out of control government spending.

XTOD: How to know if you are doing the job? by legendary NFL coach Bill Walsh https://pbs.twimg.com/media/GbMahHnW0AARbnY?format=png&name=small