Daily Economic Update: May 20, 2025

Do You Even DuPont?

We see a million articles about the “fiscal disaster” of the U.S. government, the one entity that literally cannot default in the traditional sense of failing to repay as promised, but let’s be honest, do most investors have any idea how much debt is lurking in their portfolios?

Corporate debt and the amount of leverage in the corporate sector has taken a backseat to discussions around fiscal responsibility at the federal level. The most recent Federal Reserve Financial Stability report noted, “gross leverage of publicly traded corporations edged down but remained near the upper part of their respective historical ranges.”  And let’s face it that assumes the Fed can even measure all of the debt in the system appropriately.

You just don’t see a ton of articles talking about corporate debt and leverage, until you do (does anyone remember concerns over leveraged loans in 2019?), and that’s usually not until something is broken.  In the meantime corporate reports give you the data you need to help better understand how much leverage companies might be running.

We talked about leverage here. And if you want a deeper read, this Howard Marks memo is one of my favorites, summarizing leverage as: 

“Leverage is neither good nor bad in and of itself. In the right amount, applied to the right assets, it’s good. When used to excess given the underlying assets, it’s bad. It doesn’t add value; it merely magnifies both good and bad outcomes. So leverage shouldn’t be treated as a silver bullet or magic solution. It’s a tool that can be used wisely or unwisely.”

If you’ve ever nodded along while someone said “ROE looks strong,” but didn’t ask, “Yeah, but why?”, then allow me to reintroduce you to your friend DuPont.

DuPont, Not Just For Chemicals, But Decoding Returns

The starting point of DuPont analysis, or the decomposition of ROE, is that ROE is a function of how much a company earns from its assets and its use of financial leverage.  Companies can juice their ROE by earning more from their assets or taking on more debt. 

ROE = Net Profit Margin × Asset Turnover × Financial Leverage

Translation: how much you earn on each sale (margin), how many sales you wring from your assets (efficiency), and how much of it you turbocharge with debt (leverage).

But the key here is this: leverage is a multiplier. A beautiful one when things go up. A wrecking ball when they don’t.

While companies seem to be covering that interest cost currently, the potential refinancing of longer term debt can still be a source of risks to companies earnings and investors returns. And if you listened to Jamie Dimon yesterday, he sees risks to corporate earnings.

A company with 15% ROE might look like a gem until you realize it’s built on 7x leverage and burning through cash to keep the dividend alive.

Is Leverage A Risk You Don’t See?

Morgan Housel once said, “Risk is what you don’t see.” Leverage is often exactly that—hidden in leases, obscured in footnotes (remember “Repo 105” and Lehman), normalized through buybacks.  Generally unseen until it’s not. 

This isn’t just a stock-picking problem. If index returns are juiced by levered ROE across sectors, what happens when that leverage turns from friend to foe? Valuations start to compress—not just because growth expectations fall, but because debt starts to demand its due.

So yes, DuPont is dusty. But in a world where debt isn’t cheap anymore and ROE math isn’t magic, maybe it’s time to revisit the fundamentals.  

Because if you’re holding companies whose returns are just borrowed performance, you might want to check what’s backing them.

And A Day After Moody’s Downgrade…

Corporate credit spreads were little changed in the face of the Moody’s downgrade as investors don’t believe country risk extends to corporate risk.  Yields on U.S. treasuries rose some only to retreat and ended the day little changed. The S&P was able to extend its winning streak to 6 days.

Fed officials continued to stress “wait and see” and you’re likely to hear the same message today.

In the meantime, ponder how much financial leverage you own via the S&P 500…and that’s before we even get around to talking about operating leverage.

XTOD’s:

XTOD: CEO Jamie Dimon: "Forward P/E ratios are around 20 or 21 today.  And you know, tariffs do affect the E...Earnings forecasts will come down. We started the year expecting earnings to be up 12%. Now it’s more like 6–7%. My guess? In six months, that could be zero. So earnings estimates have dropped—and that probably means P/E ratios will drop too. If P/E multiples fall by just one turn, that’s another 5% down. So between earnings and valuation compression, you could be looking at a 10% market impact. I think that’s a likely outcome, in my personal opinion",

XTOD: Wild. "PE distributions have fallen from 29% of NAV from 2014 to 2017 to only 11% last year. Endowments are rushing to complete sales ahead of potential changes to taxes, which could rise from 1.4% to 21%... 'We recently looked at a portfolio at 80-85 cents on the dollar'."

XTOD: Shocking to literally no one, Buy Now Pay Later loans are a ticking time bomb

XTOD: Jeff Bezos on creating a culture for missionaries: https://pbs.twimg.com/media/GrVrWhnXEAETEg-?format=jpg&name=900x900

https://x.com/TheTranscript_/status/1924496760786874800

https://x.com/TidefallCapital/status/1924497898412118404

https://x.com/VladTheInflator/status/1924526771934032363

https://x.com/FoundersPodcast/status/1924562453624479921

Daily Economic Update: May 19, 2025

 Aa1? A-aron?

After the close on Friday, Moody’s finally showed up to the U.S. downgrade party - only 14 years after S&P and 2 years behind Fitch.  

The funny thing is always the timing.  Why now? The fiscal math hasn't changed in weeks. Maybe a decimal crossed some Rubicon. Maybe they just found out about Fiscal R-Star.

We’ll see how the markets digest this news, but it should really be a nothing burger at this stage.  Anyone with a Bloomberg terminal and a brain was already aware of the U.S. fiscal situation and doesn’t need a rating agency to tell them.  

Maybe everyone’s just coming around to The Fiscal Theory Of The Price Level?

Maybe It’s All Political

Maybe Moody’s timing is political.  After all, the One Big Beautiful Bill failed to get out of committee as some members wanted deeper cuts to programs like Medicaid (via work requirements) and food assistance to offset proposed tax cuts. Speaker Johnson believes the bill is necessary to help right the fiscal trajectory, while others say the bill is likely to exacerbate the warnings laid out by Moody’s.  Politics.

Anyway, remember the R-star that might actually matter right now is “Fiscal R-Star” - the rate at which deficits, interest costs, and growth all collide. (Spoiler: we might already be above it.)

None of the late Friday news flow was good for the vibes.

Are vibes overrated?

Put me in the camp of just not caring about sentiment data anymore. 

In a post back in May 2024, I provided a quote from Claudia Sham, 

The best I can do here is say that people are angry and scared of what’s around the corner. They are constantly told that they should be angry and scared. When asked about basic economic facts, they blast all that anger and fear at the questions.”  

At the time I added:

 “One important thing to keep in mind when it comes to talking about things like the economy is that as humans we struggle to speak about things that cannot be perceived by the 5 senses and most (all?) economic topics fall into this category…Maybe the survey's are actually showing how disappointed people are about the economy because they see words repeated in media for which they have strong negative opinions of in a metaphorical sense.”

In other words when people report that the economy feels bad or they’re worried about some economic topic, maybe they mean: “I saw something I didn’t like on TV or social media.”

Market Vibes Were Good Last Week

The S&P 500 was up 5% last week, closing at 5,958.  The 2Y Treasury is around 3.98% and the 10Y around 4.48%

Your Pre-Memorial Day Lineup (aka The Fedspeak 500)

Unless you really like listening to Fedspeak, I would just start your Memorial Day weekend early.

Monday: Fedspeak including Jefferson and Williams - is anyone listening?

Tuesday: Fedspeak

Wednesday: Fedspeak

Thursday: Jobless Claims, S&P PMI’s, 20Y Treasury Bond Auction

Friday: New Home Sales, more Fedspeak

XTOD’s:

XTOD: Chris Hohn was interviewed by  @NicolaiTang1  While the investing part is interesting, this is by far the most interesting Reminds me of Rabindranath Tagore 

“I slept and dreamt that life was joy. I awoke and saw that life was service. I acted and behold, service was joy.”  https://pbs.twimg.com/media/GrPW8gVXwAEXh_Q?format=jpg&name=small

XTOD: Raising top rates to increase SALT is like bailing out water from a boat with a hole at the bottom.   Much better to hold the line at the proposed $30K SALT cap.

XTOD: Burnout is rarely a personal problem to manage. It's usually an organizational problem to solve.   If multiple people are drained, it’s not in their heads—it’s in your culture and structure.

Widespread exhaustion is a sign that people are being overworked and undersupported.

XTOD: Was the guest of the Norwegia govt sovereign wealth fund, interested in the pricing of climate risk. At dinner I explained the unpriceability of packages that entail absorption:  

"How would you price your willingness to drink from this glass of wine with the assumption that it can contain a lethal dosage of poison with unknown probability, under the constraint that you MUST keep taking such bets." Actually, the problem is worse. You and I have a finite shelf life, humanity doesn't.

XTOD: Every leader should create a "how to work with me" guide.  This one from Keith Yandell at DoorDash is great.  https://pbs.twimg.com/media/GrPYsp4WwAAFd8n?format=jpg&name=900x900

https://x.com/patrick_oshag/status/1924117805684740143

https://x.com/GS_Watson/status/1923849136245256331

https://x.com/AdamMGrant/status/1923366493867110697

https://x.com/nntaleb/status/1923669280098222461

https://x.com/austin_rief/status/1924119794325885386

Daily Economic Update: May 16, 2025

Mar-A-Lago disinflation accord

Just when you think you have a handle on things, the data drops, the Fedspeak hits, and you're left wondering if anyone really knows what's going on.

Speaking of things making a comeback, apparently the talk of the Mar-a-Lago Accord is back. For those who may have forgotten, or perhaps just blinked and missed it like so many other headlines, this idea surfaced earlier in the year and was described as a plan to devalue the U.S. Dollar and simultaneously get China to buy longer-dated treasuries. The earlier take was to take it seriously, not literally. It seems fitting that in an environment defined by uncertainty, even the geopolitical rumors have reruns.  Volatility in Asian currencies in particular continues to be traced to rumors that weaker Asian currencies are part of trade discussions with the U.S.

Whatever the case, the markets caught a little whiff of cooperation this week—and paired it with today’s soft economic data, it was enough to send bond yields drifting lower and rekindle the disinflation camp’s hope.  The S&P 500 ended at 5,916, the 2Y treasury yield fell to 3.96% and the 10Y treasury yield fell to 4.42%.

Let’s Talk Data:

• Core and Headline PPI for April came in hot… but the other kind of hot.  -0.4% and -0.5%, respectively—both negative, and both below forecast. That’s not a typo. That’s disinflation in the flesh. Goods prices are either easing or the data is glitching. Either way, it’s something the Fed will notice, or not. Let's not forget the nuances; some earlier PPI declines didn't fully pass through to PCE.

• Retail Sales (ex-autos) were flat. Not horrible, but not healthy. Consumers might be pulling back, perhaps realizing they have to pay back credit card debt… or maybe just waiting for Memorial Day sales. 

• Industrial Production? Also flat.  Not exactly the stuff of a booming economy. If anything, it adds to the pile of “slowdown, not crash” data that’s been building.

• Jobless claims stayed benign, because this labor market just refuses to crack. Whatever slowdown we’re seeing, it’s not coming from the employment side—yet?

Adding another layer to this uncertainty, we heard from the Powell Rangers, specifically Chair Powell.  He stressed the challenges the economy and monetary policy may face from persistent supply shocks. 

Meanwhile, Powell’s Talking About a New Framework

In his latest remarks, Powell did something rare: he admitted the Fed’s framework might not be working.

“We will be revising our framework, including average inflation targeting, to be robust to many circumstances like frequent supply shocks.”

Translation: FAIT is out. Or at least getting a makeover.

The idea that we could just let inflation “average out” over time assumes a world of gentle demand cycles and steady supply chains. In other words, the 2010s. That world is gone. Powell even hinted that real rates may stay higher because inflation is more volatile now—a subtle but important shift. The Fed is now preparing for a future where inflation is not just cyclical, but structurally unstable.

Other Things That Might Need A Framework Review - Bank ALM

And speaking of things that might still be a problem, the Treasury OFR reminded us, why the unrealized losses on bank balance sheets might still be a problem

Banks still hold hundreds of billions in unrealized losses on their securities portfolios. The Fed raising the policy rate may be old news, but their effects—on bank capitalization, risk-taking, and credit growth—are still with us. And in case you forgot banks own a lot of securities that have long durations. “While unrealized securities losses alone may not have a direct impact on banks, they could amplify vulnerabilities when banks face stress and increase the chance of lack-of-confidence runs for some banks. While the Federal Reserve can influence short-term interest rates by adjusting the federal funds rate, long-term interest rates reflect financial market participants’ expectations of inflation and willingness to accept the risk of lending long term.”

Read here if you missed it.

Always Be Learning

So, what have we learned? PPI is down, retail sales and industrial production look soft, but the labor market is still tight. Powell acknowledges persistent supply shocks and potential inflation volatility while admitting the previous framework struggled with high inflation and needs revision. And those bank unrealized losses? Still sitting there, like a bad smell you can't get rid of.

It seems we're back to our favorite mantra: Nobody knows anything, and that's okay. The future is murky, the signals are mixed, and trying to predict it all is a futile exercise. Maybe the best approach is simply to embrace uncertainty, maintain patience, and focus on timeless principles of investing over futile prediction and market noise.

XTOD’s:

XTOD: The housing market has never been this unaffordable in U.S. history.  With inflation-adjusted home prices setting a record over the last three years.  We're now in the biggest housing bubble of all-time, and the only period that came close was 2006, before the big crash.  Many people like to tell you "home values will never drop". But those people conveniently don't show you this graph.  There is no historical precedent for how expensive today's housing market it is.  And homebuyers know it.

XTOD: There are 2 major forces that frame the macro picture for real estate: 

1) higher interest rates will cause real estate sector to underperform 

2) These higher financing costs are highly unlikely to cause delinquencies to rise because commercial real estate has already gone through its period of adjustment and no consumer is selling their house they locked in at a sub 3% interest rates.   So we are in a tension between these two forces.

XTOD: If $UNH is convicted criminally they would lose access to Medicare reimbursement for a minimum of 5 years. You can buy here but the stock is a zero if that happens.

XTOD: One way to stand out is to look for pockets of low competition. Wake up early—less traffic, fewer people.  Go deeper or narrower in your field—less noise, more space.

People are drawn to where it is crowded. Look for the quiet spaces inside your areas of interest. Excellence often hides at the edges.

https://x.com/nickgerli1/status/1923047634496885066

https://x.com/Globalflows/status/1923047411330511247

https://x.com/StealthQE4/status/1923013569257337133

https://x.com/JamesClear/status/1923104043431494062

 

Daily Economic Update: May 15, 2025

Utter Boredom? Or Maybe Just a Break from the Chaos?

Sometimes the market feels like a finely choreographed dance, a bewildering beat remixing everything from scandal to commerce. Other days... well, other days it feels like the choreographer went on vacation and left the dancers standing around scratching their heads.

Yesterday felt a bit like that second scenario. After all the hullabaloo we often discuss: tariffs, Fed tea leaves, or the latest twists in the AI saga – today was... quiet.

We closed the day with the S&P little changed, just sitting there at 5,892. Yields on the 2Y and 10Y Treasuries continued on their recent climb, ending at 4.06% and 4.54% respectively.  No major data bombs dropped. No headline shocks from Pennsylvania Avenue or Beijing. Just... stillness.

For those of us who spend our days swimming in the "daily madness of Mr. Market," a quiet day can almost feel unsettling. We're so used to the relentless stream of "news" and the temptation to abstract securities into flashing lights on a screen. But maybe, just maybe, a boring day is a gift.

It forces us to pause and remember that equities represent ownership in actual businesses, and bonds are promises from those businesses. It gives us a moment to step back from the noise and reflect on things that don't expire faster than a Bloomberg notification – you know, the timeless stuff.

In times like these, the "I Don't Know" mentality feels particularly apt. We don't know when the next burst of market "excitement" will arrive, or what will trigger it. Will it be the today’s PPI print,  Powell, or yet another tariff update? Nobody knows.

But perhaps, on a boring day, we don't need to know. We can embrace the uncertainty with humility and focus on the virtues: patience, discipline, and the ability to not be driven crazy by either success or the lack thereof. Time, after all, is often the best filter.

So, as we await whatever the future brings – maybe more data to ignore, maybe more tariff talk – let's appreciate the quiet. It's a rare commodity in this market.

After all it was Blaise Pascal who said “All of humanity's problems stem from man's inability to sit quietly in a room alone."

XTOD’s:

XTOD: The fiscal irresponsibility continues even as bond markets start to punish U.S.

XTOD: The two ways to get a great job in finance nowadays  From Matt Levine’s Money Stuff https://pbs.twimg.com/media/Gq200SKWQAARqdZ?format=jpg&name=medium

XTOD: Empower sill start offering private assets its retirement portfolios, working with Apollo and Franklin, the push to 'democratize' or dump (you could look at it either way) privates to retail grows.. https://pbs.twimg.com/media/Gq7UbdFXYAAx1e5?format=png&name=small

XTOD: Everyone knows about GLP-1s now, but what about SGLT2 inhibitors? They may be a miracle cure for kidney disease – but also for liver disease, dementia, respiratory diseases and even, very possibly, for old age.

XTOD: The Holy See is willing to help enemies meet, so they may look each other in the eye and so people may be given back the dignity they deserve: the dignity of peace. With heart in hand, I say to the leaders of nations: let us meet; let us dialogue; let us negotiate!

https://x.com/ProfJAParker/status/1922743635918852336

https://x.com/BoringBiz_/status/1922391432431653104

https://x.com/EricBalchunas/status/1922708130720342517

https://x.com/s8mb/status/1922669629958148098

https://x.com/Pontifex/status/1922656143312076879

Daily Economic Update: May 14, 2025

May 14, 2025

The Market Has No Memory?

Obviously the market has no memory in the literal sense, it’s not a sentient being after all, but don’t we all use anthropomorphism when discussing the markets?  The way the collective “us” that is “the market” processes past market histories, the stories and emotions we assign to them, the way we like to look at charts, all give the market some semblance of a memory. 

After all, what is price action but the sum of expectations, reactions, traumas, and dreams—layered on by people who’ve been here before? And by people who think they’ve been here before.

The ghosts of 2008, the Covid crash, even the recent rate hikes still whisper through risk premiums and investor skittishness. They don't show up in earnings reports. But they show up in how fast we sell, how cautiously we re-enter, and how reflexively we chase when FOMO flips back on.

So when the S&P swings 1,000 points in six weeks, don’t just look at inflation data or jobless claims. Look at the psychology of price. Are we fighting the last war? Repeating the last mistake? Or just trying to forget?

Just over a month ago, the S&P index dipped below 5,000—headlines screamed correction, and everyone started whispering about stagflation. And yet here we are: ~5,900 and year-to-date losses erased. Fear forgotten. Again.

But not really forgotten. Because the market does remember. Not like a robot. Like a person. Because that’s what it is—a crowd with a collective memory, triggered by chart patterns, headlines, and the X accounts that want to remind you about the GFC, tech bubble, or depression.

It remembers pain. It remembers euphoria. And right now, it’s choosing euphoria again—at least until the next “unforeseen” event we’ll all pretend to be shocked by.

Because the market doesn’t suffer amnesia. It suffers denial.  As Howard Marks’ says: "the first cause [of market euphoria] is extreme brevity of the financial memory.”

Today’s Lesson: The Market Has a Subconscious (So Do You)

“Without our knowing it, we see reality through glasses colored by the subconscious memory of previous experiences.” Not the words you’d expect to see in a finance blog, but while the finance crowd’s subconscious doesn’t get airtime on CNBC it runs the show when the market swings a few percentage points. The problem is the collective subconscious probably doesn’t match your true goals and to make matters worse our own true goals can be buried within our own subconscious. 

The market’s subconscious shows up in sentiment, in panic, in denial and probably in every algorithm that is patterned off trading behavior.  The challenge is while the market memory is “real” it doesn’t fit into any spreadsheet, but we all see the subconscious of the collective leak out into the open when we get jarring moves.

If we want to invest well, dare I say sanely, we need a better relationship with our subconscious. The part of us that flinches as losses, panics at headlines, projects every fear into the next chart and also paradoxically gets lost in the euphoria when things are going well.

The monks say that prayer trains the inner life so they can find deeper truth.  Wall Street might say it is “process” that allows them to avoid falling prey to the delusions of the masses. But both are about cultivating awareness, discipline and humility. Finding space between reaction and response. 

You don’t beat the market by outsmarting it. You beat it by not becoming a puppet of your subconscious when it matters most.

So maybe the next time volatility spikes, don’t just check your exposure.

Check your interior life…and review these past posts, here and here. 

And if you don’t think all the investing greats would agree with this lesson then you're not paying attention.  

“Some people are not emotionally or psychologically fit to own stocks" - Buffett

“The ability to keep raw irrational emotions under control" - Munger

XTOD’s:

XTOD: Trade war on, yields up. Trade war off, yields up. Inflation beat, yields up. Dollar down, yields up. Dollar up, yields up. Risk on, yields up. Risk off, yields up. 

That is why this is not a dip, this is a triple infection of the secular order, cyclical expansion, and US bubble all at once, from the highest valuations in a century, already mid-recession with no intent to ease monetarily, delinquencies at or near highs, credit turning down, rapid earnings downgrades and…Pro-cyclical fiscal austerity, if not by choice then by imposition.

XTOD: Absolutely disgusting.  For every $1 you deposit in your IRA, Basic Capital will match $4 as a loan.  But interest on that loan is 6.26% and the account costs $300/year to maintain. Plus, they charge 0.50%/year on the investments and take 5% of your gains.  GTFOH.

XTOD: In 1971, the US ran out of money and defaulted on its debts. Now, they didn’t say it that way. But by moving away from the gold standard, money as we understood it ended.  

I expected the stock market to plunge, but it went on to rise nearly 25%. That surprised me. But when I looked into it, I discovered the exact same thing happened in 1933 and it had the exact same effect. Here’s why.

XTOD: Most people endure decades of work they hate, hoping one day they’ll be free.  Naval calls this “the deferred life plan.” And he believes it’s a lie.  “Looking forward to vacations takes the joy out of every day.”  For Naval, life isn’t something to delay. It’s something to design.

XTOD: I routinely write “No hurry, no pause” at the top of my notebooks as a daily reminder. 

You can get 95% of the results you want by calmly putting one foot in front of the other. 

One former Navy SEAL friend once texted me a principle used in their training: “Slow is smooth. Smooth is fast.”  Perhaps I’m just getting old, but my definition of luxury has changed over time. Now, it’s not about owning a lot of stuff. Luxury, to me, is feeling unrushed. 

No hurry, no pause.

https://x.com/TotemMacro/status/1922334120455127417

https://x.com/dougboneparth/status/1922352672088248344

https://x.com/RayDalio/status/1922315906530869381

https://x.com/jaynitx/status/1922253635024535618

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