Daily Economic Update: November 26, 2024

 "Keeping your organization simple is not simple, but it is very important."  Robert Kierlin (The founder of Fastenal)

  "the more simple anything is, the less liable it is to be disordered…" - Thomas Paine in Common Sense

Daily Economic Update: November 25, 2024

One of the things the Federal Reserve does correctly is implement a blackout period, every once in a while it's good to cut the noise out, especially when it comes to financial news.  As I've done in the past this holiday-shortened week my economic update will consist solely of one quote.

The week ahead does feature some relatively important data with FOMC Minutes on Tuesday and PCE along with GDP data on Wednesday ahead of the market close on Thursday and a shortened day for fixed income trading on Friday. 

 "The great defect of scale, of course, which makes the game interesting—so that the big people don’t always win—is that as you get big, you get the bureaucracy. And with the bureaucracy comes the territoriality—which is again grounded in human nature...And in a bureaucracy, you think the work is done when it goes out of your in-basket into somebody else’s in-basket. But, of course, it isn’t...So you get big, fat, dumb, unmotivated bureaucracies...They also tend to become somewhat corrupt...you get layers of management and associated costs that nobody needs.Then, while people are justifying all these layers, it takes forever to get anything done. They’re too slow to make decisions and nimbler people run circles around them..." - Charlie Munger

Daily Economic Update: November 22, 2024

For all the talk that Nvidia earnings were more important than the FOMC and really everything else in the year, it just didn't seem to be the major event that options markets had implied.

Duct tape banana sells for $6.2mm, and I thought NFTs were crazy.  The DOJ continues to push towards Alphabet spinning out the Chrome browser.  SEC Gensler announces his resignation effective Jan 20, no shocker as Trump wasn’t keeping him around.  Bitcoin $100K.  Stocks were positive on the day.  Yields were little changed with the 

In U.S. data, you still can't get fired and you pretty much still can't buy a house.  In Asia, Japanese inflation data is in focus.

On the day ahead it's really just UofM survey.

XTOD: Just keeping a running list for myself to repost in future:

1. MSTR now represents a mid single digit of all converts in US

2. Meme coin bro buys 6.2m banana to eat 

3. 10 year old rug pulls greedy meme coin people for $30k -> someone kidnaps his dog and asks for money back 

4. Some of the best L/S guys I know giving up shorting stocks 

5. 2/3 my feed is not ICBM rockets but “retardio” and “fartcoin” 🚀🚀

6. DJT rumor to be buying BAKKT (FT)

7. James Howell is paying 10s of millions to search landfill for lost bitcoin 

8. SBF would be richest man in world right now 

9. Scottie Pippen knows Satoshi and talks to him in dreams

10. TikTok “ChillGuy” meme coin is now $400m mkt cap and up 400,000%

Feel free to add so we can catalogue this time in

XTOD: Nvidia keeps crushing because Jensen runs it unlike other CEOs:

- No 1:1s

- No 1 or 5-year plans

- No status reports

- 60 direct reports

Once you see why he does it, you can't unsee it  And it explains everything wrong with the traditional way of running a compan

XTOD: Breaking: Top hedge fund managers are growing wary about the debt situation — $35 trillion and counting but also how they believe  @SecYellen  and the  @JoeBiden  were manipulating interest rates in the run up to Nov 5 by selling so much short dated debt so as not to cause a spike in longer dated yields, which would upend stocks and could cause a significant economic slowdown. Now  whoever  @realDonaldTrump  nominates for  @USTreasury  will be stuck with a mess of a balance sheet, a mismatch to unwind that will put pressure on bonds and markets. Story developing

XTOD: Limiting your options now will expand your opportunities in the long run because you can remain focused enough to master something.  Keeping your options open now will reduce your opportunities in the long run because you divide your attention and end up doing an average job on seven different things.  Are you falling into the pattern of always mastering one thing or always chasing the next thing?

Daily Economic Update: November 21, 2024

Why does it take so long to count votes in Cali?   The G20 wrapped up and to the best of what I read, didn't seem like there were too many major takeaways other than the usual dysfunction.

10Y remains range bound around 4.40% and the 2Y in much the same boat around 4.30%.  There doesn't seem to be an imminent catalyst that will cause a break out in either direction, though perhaps an escalation in Ukraine in the Middle East or a surprise Treasury Secretary pick could be such a catalyst in the near term.

High mortage rates, higher gas prices and rising inflation in the UK were all in the picture.  Stocks fell into Nvidia earnings.  The Hawk Tuah Girl thanked Michael Saylor for getting her into crypto, to which responses generally are in the realm of "emergency 100bp intra Fed meeting rate hike needed", and "has there ever been a sentiment signpost as big as this?".

After the bell Nvidia earnings beat estimates, but shares traded lower as of the time of this writing on what was characterized as disappointing guidance, whatever that means in the context of that stock.

In other news you likely missed, the Treasury Office of Financial Research put out it's 2024 Annual Report on Financial Vulnerabilities, you can read the full 111 pages here.  In full disclosure I did not read everything in the report, but some of the high level takeaways are that: 

• CRE credit remains a risk, specifically office and particularly at smaller banks
• Asset valuations are likely streched and the use of leverage and complex strategies is elevated
• Runs on money-like instruments are always a risk, including risks associated with stablecoins
• The debt ceiling poses risks as do basis trades in the Treasury market
• There are still areas where data is limited, such as Private Credit and other non-bank financial areas that could pose risks
• Technology comes with risks, including cyberattacks

Some quotes you can use if you want to impress your relatives with your financial market knowledge over Thanksgiving:

" Equity valuations and investor sentiment are high relative to historical averages, raising the risk of large, sudden price declines. In Treasury markets, the design of the U.S. debt ceiling is a major vulnerability. Exposures to some complex and opaque trading strategies are high"

" The increasing interconnectedness of digital assets with the traditional financial system is an emerging vulnerability."

" The cyclically adjusted price-to-earnings (CAPE) ratio for the S&P 500, for example, is 36 and in the 98th percentile of historical values"

" Trading liquidity in the Treasury market can become stressed in other circumstances as well. One potential source of stress is an abrupt unwinding of the Treasury cash-futures basis trade."

" The spreads on investment-grade and high-yield bonds are low by historical standards"

" about half as many employees are physically working in the office compared with before the COVID-19 pandemic"

" OFR researchers find that while PoS saves energy and provides for greater scalability of a crypto asset, it may be unstable because a significant drop in the crypto asset’s price may cause validators to exit their investments"

" The number of transactions occurring outside of the traditional exchange system, or off-exchange, is substantial"

" Nonfinancial corporate business debt contributed to financial instability at least three times during the past 40 years: 1989-91, 2000- 02, and 2007-09.17 Each episode featured a mix of unusually high borrower default rates and constraints on weaker firms’ ability to issue or renew debt. Often, the two interact and form a debt-default spiral. "

" The price of insurance, where insurance is available, is rising rapidly, especially in areas experiencing adverse climate events." "The researchers estimate that the average homeowner stands to lose approximately $11,000, or 4% of their home value and 34% of their home equity at the time of home purchase if prices change to reflect climate risk"

" The 2024 cyberattack on Change Healthcare (Change) illustrates how a cyber event that disrupts the business sector can transmit stress to the financial system."

" Since the 2023 banking turmoil, banks have increasingly used reciprocal deposits as a tool to expand FDIC insurance coverage and to reduce liquidity risk from runs. Through thirdparty reciprocal deposit network sponsors, such as IntraFi and others, banks swap customer deposits with one another to keep the amount in each account at or below $250,000. This makes it possible for a bank customer to hold tens of millions of dollars in insured accounts with a single relationship bank. "

"  Since private lenders are connected to the rest of the financial system through funding arrangements and shared credit exposure, their distress could propagate rapidly. The lack of data about private lenders’ portfolio risk and leverage may obscure or worsen vulnerabilities in the financial system"

" Vulnerabilities associated with stablecoins remain elevated. Issuers of the dominant stablecoins continue to invest a material fraction of their reserves in illiquid or volatile assets. For example, as of June 30, 2024, more than 12% of the assets that support Tether’s value were in Bitcoin, precious metals, and secured loans"

XTOD:  What makes superstars so powerful:- Can't substitute quality  (10 bad phones ≠ 1 iPhone)

- Innovation a public good - everyone uses the best ideas

- Top talent leveraged and clusters 

Result: Winner takes all (Rosen (1981, 1982)). POST LINK https://siliconcontinent.com/p/it-is-all-about-the-superstars....If you look beyond tech giants. US economy isn't that special: - Banking? Worse than EU - Insurance? Worse - Manufacturing? EU growing faster  But superstars change everything. 5 tech firms spend 2x more on R&D than entire EU public sector.

XTOD: Howard Marks' interview with Bloomberg just dropped: 

- Be less aggressive, but don't exit the market. Nobody can time the market. Instead, calibrate your behavior between aggressiveness and defensiveness.  

- You can be right about the events but wrong about how the markets react.  There are many speculations about the new administration, but the truth is, nobody knows how it will play out.  

- He doesn't think things are crazy high now and doesn't believe it is time to get out of the market.  

- China is trying to calibrate the right amount of stimulus. They're wary of overshooting.  

- Howard Marks sees the Chinese market as a bargain right now.   

- The problem with the property surplus will take time to be absorbed. It doesn't just disappear with new policies. He believes the government will do what it takes to digest these excess properties and implement policies to prevent this from happening again.   

- When people say China is uninvestable, it becomes music to their ears.

XTOD: Archegos founder Bill Hwang was ordered to spend 18 years in prison for fraud and market manipulation tied to the stunning 2021 collapse of his $36 billion family office, capping a case that riveted Wall Street.

XTOD: 10 observations about Michael Jordan and Kobe Bryant —from their trainer: 

1.  Everyone wanted to be like Mike. Mike did not want to be like anyone else.

2.  Stop adding. Start deleting. 

3.  Their minds were stronger than their feelings.

4.  You can't buy a map to the top.

5.  Motivation is entry level.

6.  They didn't allow themselves to be told what to think.

7.  If you can't master the fundamentals, you can't master anything else.

8.  They each possessed an unshakable confidence in themselves that never wavered.  

9.  When you're giving everything you have, making every sacrifice, and devoting every part of your life to winning, it's hard to tolerate anyone in your circle who isn't doing the same.

10.  The greats figure out what works for them, regardless of what everyone else does.

Daily Economic Update: November 20, 2024

The news that Ukraine struck targets inside Russia using U.S. weapons and that Russia would consider responding to an attack considered to be backed by a nuclear power by using nuclear weapons did little to dissuade equity investors on the day.  In equities Walmart earnings provide some indications that the U.S. consumer is doing well and poised for a healthy holiday season.

In data, housing starts fell by more than forecast largely due to the impact of weather in the south.  Buidling permits fell by more than expected as well but the deline seemed to be driven by a decline in multi-family permit component which tends to be volatile.

Away from data, Trump cabinet nominees remain a hot topic.  Kevin Warsh is the increasing betting favorite for Treasury Secretary.  In Fedspeak, KC's Schmid expressed confidence in lowering rates, and a belief the Fed can offset fiscal deficits through higher interest rates.

The dollar, gold and Bitcoin all traded well, while the Euro is a currency that has steadily declined post Trump election.

The word of the day is DePINs, you may already be familiar with this term, but it was new to me. DePIN is the acronym for Decentralized Phyiscal Infrastructure Networks that are based on blockchain.  Somewhere in that acroynm is the idea of using tokens to fund physical infrastructure somehow.  I'm not 100% sure what problem it solves, but figured I'd share in case one day it leads you to lead a massive DePIN project.

On the day ahead, all eyes are on NVDA earnings, but there is UK inflation data out in the morning if you're into that.

XTOD: My journey from energy to crypto comes full circle with DePIN. Scaling decentralized infra demands novel financing models rooted in credit, cash flows, and decentralized coordination 

XTOD: French farmers continue protests as union threatens food supply disruption http://reut.rs/3OepXun

XTOD: Didn’t expect Ben Affleck to have the most articulate and realistic explanation where video models and Hollywood is going https://x.com/i/status/1858211286066073922

XTOD: Special Forces Vet. Evan Hafer & Joe Rogan on Trump Declaring War on the Cartels: 'It Is Going to Get Wild Come January 20th'  "If we declare war on the cartel, these dudes are not gonna understand what the f*ck is going on. They are in for a world of ultra-violence they've never actually felt before ... They have f*cking no clue if we organize these Tier 1 units against them ... What I would be doing if I was down there ... I would be getting ready to retire right now because if Delta Force is hunting me, bro I would be so terrified."

XTOD: “Companies that focus on their stock price will eventually lose their customers. Companies that focus on their customers will eventually boost their stock price. This is simple, but forgotten by countless managers.”   — Morgan Housel

Daily Economic Update: November 19, 2024

Concerns over NVDIA blackwell chips overheating weighed on their shares ahead of their earnings this week, but other tech names performed well with Tesla continuing a Trump bump.  A little under the radar shares of dental related companies were rising as investors consider what a removal of flouride from drinking water might mean for dental health.  Overall the S&P 500 rose.  

Treasury Secretary pick remains a hot topic with list of candidates seemingly growing and Polymarkets now sees former Federal Reserve board member Kevin Warsh as the favorite, with the other contenders now including Marc Rowan (Apollo) to go along with Bessent and Lutnick.   

Yields rose with a steeper curve. as the 10Y rose to nearly 4.47% before trading back to 4.42% while the 2Y remains around 4.30%.  Bitcoin and crypto continues to trade well.

Israel says last months attack hit some part of Iran's nuclear capabilities and Biden approved the use of U.S. long range missiles by Ukraine to hit further into Russia.  On geopolitics in general, reports of attacks on underwater internet cables, and some production shutdowns in Norway, all lead to rising oil prices.

On the day ahead it's Housing Starts.  

XTOD: BetMGM says that Tyson-Paul was its most bet combat sport fight (MMA & boxing) in its history.  The fight had 3 time the bets and 4 times the money vs. any other combat fight in its history.

67% of the money was on Tyson.

XTOD: Scoop: @BlackRock’s Larry Fink and at least one senior  @BlackRock  exec has been contracted by Team Trump as they search for  Treasury Secretary,  @FoxBusiness  has learned. 

@realDonaldTrump  has had a long relationship with Fink, who is one of the best risk managers in the business and has often leaned on him for his views on the market etc. Fink will not be a candidate for Treasury but it tells you something about  @realDonaldTrump  that he has a big tent idea on how to run economic policy. Refreshing

XTOD: Texas is the energy capital of the world.  We’re ready to be #1 in advanced nuclear power. Today, we released our plan to build that industry in Texas.  By utilizing advanced nuclear energy, we’ll enhance the reliability of our state grid & provide affordable, dispatchable power.

XTOD: In September, Russian President Putin said if the US were to lift the ban on long-range missile use it would be seen as NATO's "direct participation" in the war.

He added: "This, of course, will significantly change the very essence, the very nature of the conflict."

XTOD: Eliminating the unnecessary is more powerful than automating the unimportant.

Daily Economic Update: November 18, 2024

The dissappointing spectacle that was Tyson v. Paul only added insult to a week that ended with an equity sell-off.  The downward move in equities was perhaps a response to a growing sense of “higher for longer”. Retail Sales data did little to dissuade an attitude that more rate cuts might not be as necessary.  Other data was decent, including a really strong Empire Mfg report.

There's still a good bit of discussion and debate around possible Trump economic policies, including tariffs.  John Cochrane had an interesting post reminding people that while he doesn't defend tariffs as a policy, he argues they do not, in and of themselves, cause inflation.  He poses this statement which is worth thinking about:

It is curious that many economists who bemoan Trump’s tariffs for their inflationary effect also want to raise corporate taxes. Corporate taxes are also passed along to consumers though higher prices. If tariffs raise inflation, so do corporate taxes! And if the revenue from corporate taxes (if there is any, after long-run Laffer effects) lowers inflation, so does the revenue from tariffs.

Sales taxes are paid by the seller. Yet everyone understands that sales taxes are passed along entirely to consumers in the form of higher prices. That tariffs work the same way should not be too hard to understand.

We start the week with the ATL Fed GDP estimate for the 4Q at 2.5%, at 10Y at 4.44% and the 2Y at 4.33%.  

The Trump pick for Treasury Secretary remains hotly debated in the media and social media, that will possibly be resolved this week.

I was going to summarize the week ahead but El Erian wrote this on X: This week, corporate earnings will attract a lot of attention in the global economy/markets, including Nvidia’s, Target’s, and Walmart’s releases. In a relatively light week for economic data, watch for  PMIs, UMich consumer sentiment, and existing home sales;   UK inflation, retail sales, and October budgetary gap; and  Eurozone PMIs and consumer sentiment. On the central bank front, expect many Fed speakers, the ECB’s financial stability review, and closely watched comments from Bank of Japan Governor Kazuo Ueda.

XTOD: His metaphor for what happened:"The left became like Imperial Stormtroopers—identical, programmed, no individual thought." "We became the ragtag Rebel Alliance - diverse, messy, but real.".....But Thiel warns: The real challenges are just beginning.

• Blue state bankruptcies loom 

• Student debt crisis exploding 

• Border chaos intensifying 

• Foreign threats multiplying

"The problems are harder than 8 years ago."

XTOD:  Correct. Economic theory predicts that tariffs will change relative prices. They will not create a persistent increase in the rate of change of prices, aka inflation. The puzzle, to me, is why the government budget deficit — currently running at 7% — has not — at least not yet — been reflected in domestic inflation.  The answer, I suspect, is because 30% of the dollar assets created by the Treasury are being soaked up by the rest of the world — largely China — and stoking a current account deficit. 

The 60k dollar question, is how much the Yuan/$ exchange rate will react to a 60% tariff. We have promised to repay China with pieces of paper. In exchange we have received a flow of consumer goods. That is about to end.  @JanJekielek @jeffreyatucker  @michaelxpettis  is worth following for anyone interested in this issue.  

If U.S. companies respond to the tariffs by repatriating manufacturing, and if the promised mass deportations of undocumented aliens occur, American workers may well end up better off. Wages may rise more than the cost of the consumption basket of the average worker contrary to recent claims from the Peterson Institute  @PIIE

XTOD: We live on a thin crust of solid rock, beneath which is vast ball of molten rock.   Earth’s core, which generates most of our magnetic field is ~85% iron and moves independently from the surface plates, which is why the magnetic pole changes position.

XTOD: Life hack - always be the one at work who sets up the meeting. That way if you completely forgot to prepare slides for the touch base in 45 mins, you can just say ‘pushing to next week to accommodate schedules’ and no one will question you. I do this like 3x a week

Daily Economic Update: November 15, 2024

Stocks fell yesterday.  The likely catalyst of the next market move is of course tonight's Mike Tyson v. Jake Paul fight.

In Fed-land.  Fed governor Kugler says Fed needs to pay attention to both sides of their mandates, implying inflation hasn't been firmly defeated.  Powell said he doesn't think "we need to be in a hurry to lower rates", which of course leads to questions as to why they started this rate cutting cycle with a 50bp cut.  When asked how and when we'll know if we hit the neutral rate, he ambigiously answered that the best way to find the neutral rate is by moving carefully and possibly slowing the pace of cuts.  He was asked, "why are we cutting rates?", his response was to "look at the labor market", that it's cooling and he stll still sees inflation's downward trend intact.  Overall Powell comments appear to be taken by the market as somewhat "hawkish".   

Powell combined with the data discussed below lead to a higher front end of the curve, the 2Y is 4.36% (up about 10bps on the week) and the 10Y up to 4.46% (up about 15bps on the week).

PPI came in line with expectations with services leading the way and core PPI slightly exceeding expectations. I’m always amazed when portfolio management services rise 3.6% as "Over one-third of the rise in the index for final demand services can be traced to prices for portfolio management, which advanced 3.6 percent."  The BLS definition of portfolio management is: 

"Price movements for this index are based on changes in the amount of revenue a mutual fund manager receives for providing investment advice. To track price movement for the index, data on management fees are collected. The management fee is most often based on a percentage of assets under management or a certain number of basis points."

Does this imply that rising portfolios are inflationary?  In other words if people are paying AUM fees and asset prices are rising, it seems like this portfolio management component rises.  Whether or not that has follow through to inflation, I guess is debated, but it touches on the "wealth effect" and "financial conditions". 

Irrespective, it reminds me of one of my favorite Charlie Munger talks on the "Febezzle":

Munger’s “febezzle” occurs when an investment manager earns compensation from the rising value of the assets under management during periods of rising asset prices. In his example, the asset manager receives the “wasted” asset management fees and other stock compensation from the investors as income, making them richer, and the investor, despite paying the asset management fees, also feels richer. Both parties believe they are “virtuously earning income” and can sustain spending from what they believe is income but is in reality spending from a “wealth effect,” which dissipates if asset prices decline. Munger went on to bemoan the impact “febezzle” can have on the misallocation of capital to unproductive projects and foolish spending which cannot support the continued increase in values, the fall of which led to real and long-lasting macroeconomic consequences once the “febezzle” starts to unwind. Munger’s advice: “when the financial scene starts reminding you of Sodom and Gomorrah, you should fear practical consequences even if you like to participate in what is going on.” 

In other data, despite continued announced layoffs the jobless claims data remains super benign. 

On the day ahead it's retail sales data as the highlight.

XTOD: I doubt Fed Chair Powell will do another interview like this anytime soon.  He struggled with some of the smart questions, often deflecting with historical explanations, and he confused the economics of different possible scenarios. His response to the question on a new monetary framework will likely leave many perplexed.

XTOD: Donald Trump picks Blackstone’s entire Real Estate Private Equity team as Secretary of Housing and Urban Development  

XTOD: US Investment Grade Credit Spreads have moved down to 0.77%, their tightest levels since July 1998.  US High Yield Credit Spreads have moved down to 2.61%, their tightest levels since June 2007.  Investors are reaching for yield and behaving as if there will never be another default cycle again.

XTOD: Charlie Munger: "No matter how wonderful [a business] is, it's not worth an infinite price. So we have to have a price that makes sense and gives a margin of safety."  "The reason that our ideas have not spread faster is they are [so] simple."

XTOD: "Each year Buffett is asked what’s the main difference between himself and the average investor, and he answers: 'Patience.'"  — N. Sleep

XTOD: This hits different in today’s hustle culture. Burnout isn’t about working long hours or pushing hard. It’s about working in systems that drain your soul. Quote by @adam_chal https://pbs.twimg.com/media/GcRJ-wyWIAAXGNO?format=jpg&name=900x900