Daily Economic Update: May 22, 2025

I have many leather-bound books and my apartment smells of rich mahogany.

I don’t know what the big deal is, I accept all gifts related to this blog.  You should see the helicopter in my library.  Wait, I haven’t received any gifts?? - Why do I keep doing this?

Can I Sell You Some Bonds Instead

After the overwhelming outpouring of support in favor of a monthly subscription fee following yesterday’s post [did you see how many comments I received??? [Checks blog, sees one comment from a guy who only scrolls down the XTOD’s (smart - it’s the best part)].  I have taken the next logical step that any financial blogger would take, going straight to securitization.

How would you like exclusive access to a first loss tranche of TROLL (Tranche of Royalties from Online Literary Labor)? Like any great securitization, it’s high risk, no liquidity, and absolutely zero transparency — but you get yield in the form of XTOD’s and Fedspeak sarcasm.

If Michael Saylor can turn Bitcoin into a perpetual money machine, I see no limits to what my blog can do. 

Speaking of giving money in return for things with returns of questionable value.

Treasury Yields Rose

So much for just flirting with key levels. Yesterday longer term bond yields decided to move from just flirting to second base. The 2Y, at least anchored to Fed policy moved to 4.03%, but the real action was out on the curve and followed a “weak” 20Y Treasury Auction which printed at 5.047%.  The 10Y and 30Y ended at 4.61% and 5.09% respectively.

The talk is that the move in bond yields is due to “bond vigilantes” who are possibly trying to “reverse TARP” the tax bill being negotiated at present.  Reverse TARP meaning, pressure Congress not to pass a bill that will increase deficits, rather than what the market did when TARP deficit spending failed to pass on the first try during the GFC.  Whether this is indeed the driver of higher bond yields is anyone’s guess, but the most recent run-up in yields hasn’t been isolated to the U.S., go see Japan’s 40 year.

Are we overreacting to these moves in yields?  I mean weren’t they higher in 2023?  Click here to read cool posts about 10Y yields near 5% that start with cool epigraphs from HBO’s The Wire.

And You Thought Deficits Didn’t Matter?  MMT?

We probably don’t spend enough time actually thinking about why money has value and why anyone would want to work to trade their hard earned labor for bonds.  The reason might be “to pay taxes”, a reason that dates back to Adam Smith, but MMT seems to diss.  They also diss the idea that there can be bond vigilantes.  A competing argument would be that all government liabilities whether they be issued currencies or notes/bonds (IOU’s for currency) have value to holders because they are “backed” by future tax revenue or other public assets.

Is this germane or fundamental to the discussion around deficits - the market will decide.

Or Are Is All The Market Talk Just A Distraction 

We could talk about the Middle East, rumors Israel might bomb Iran, the situation in Gaza…We could talk about Bitcoin at all-time highs and other headlines…or we could talk about competitive exclusion, frictionless experiences and algorithmic optimization.

As I mentioned in yesterday’s post, a much more successful financial writer, Kyla Scanlon, was writing about The Screwtape Letters. As she tells the story, she was stopped in a bookstore and apparently bought a copy of one of her favorite books, C.S. Lewis’ The Screwtape Letters and it must have struck a cord for her as it relates to today’s economy.  So much so that she decided to write a piece viewing our current economy in the lens of Lewis’s work.  A focus on the dichotomy of an economy where we focus on “what happens to us” vs. “what we do”, a focus on the future vs. the present, and overall how the modern economy of rejection, convenience, and predictability leads to spiritual fatigue.  You can find her full post here.

Summarizing, she provides “These [signs] are emerging from the simple recognition that the frictionless life is ultimately unsatisfying. Even the secular, modern, economic soul hungers for something deeper than convenience!

On this blog, we often highlight how navigating the market's noise and unpredictable events ("what happens to us") requires a focus on what we do – cultivating our own discipline and perspective in the present moment, rather than deferring life for some future outcome or chasing futile forecasts. Just as the relentless push for frictionless convenience and the illusion of certainty can feel ultimately unsatisfying, this blog aims to find deeper meaning, value, and humor beyond the surface-level headlines and cultivating clarity, humility, and a focus on the things that truly matter.

….But you’re going to buy my TROLLs right?

XTOD’s

XTOD: Yields up, dollar down, equities down: Bond vigilantes have arrived.

XTOD: So the largest generation in US history is dying at the fastest rate in history, 70% of which own a home.   Are all trying to sell to the 49% of millennials who don't own, 80% of which can't afford these prices.

XTOD: Could have a reverse TARP moment here where market forces them not to pass the tax bill

XTOD: Did the 2020 framework change cause the Fed to be late in 2021? Jay Powell's former senior adviser, Faust, says no. "When the history of this episode is ultimately settled, 'the framework made them do it' will garner little more than a footnote."   "Blaming the delayed inflation response on a failure to be forward looking actually gets things exactly backwards.  A failure to act on forecasts was not the problem: the problem was taking (erroneous) forecasts too seriously." "The episode is a cautionary tale about forward-looking policy, not an argument for it."

XTOD: Most people don’t design their lives—they react to them.  They wake up and instantly dive into chaos: checking their phones, scanning emails, jumping into meetings, responding to texts.  By the end of the day, they’re exhausted... but despite all the activity, they haven’t moved the needle on what actually matters.  Because here’s the truth: If you don’t decide what your life is about, the world will decide for you.  

And life is far too precious to live on someone else’s terms.

https://x.com/FedGuy12/status/1925243131693351004

https://x.com/VladTheInflator/status/1924890281851420955

https://x.com/Fullcarry/status/1925243729943711778

https://x.com/NickTimiraos/status/1925255708817465445

https://x.com/TonyRobbins/status/1924835983184232665

Daily Economic Update: May 21, 2025

Not 7

The S&P 500 index’s 6-day winning streak ended yesterday, with the index closing at 5,940.  The recent 6-day winning streak was better than any of the current winning streaks in the MLB (the Reds are currently at 5 at the time of this writing). There were no major catalysts on the day as investors await further tariff or tax news.  The latest news on the tax bill front was that there remain about a dozen GOP holdouts.

Playing Hard To Get With Key Levels

Bond yields remain largely range bound: with the 2Y Treasury yield flirting with 4%, the 10Y Treasury yield flirting with 4.50%, and the 30Y Treasury yield flirting with 5%. It’s like investors are dancing with levels, the 2Y loves 4% unless something comes along to have them reassess the Fed’s path.  The 10Y loves 4.5% unless they fear growth or inflation. And the 30Y loves 5% as they weigh the U.S. deficits and geopolitics.

There was Fedspeak yesterday, but I didn’t listen to it.  Though one central bank did act and that was the RBA which cut rates 25bps to 3.85%, one of the drivers of the cut was, you guessed it, trade uncertainty.

We’ll have another light data day today, with the 20Y Bond auction as the highlight.

On a light news day, I’m going to keep this short and try not to contribute to the noise. 

Speaking of Words

One thing I did find interesting was financial writer Kyla Scanlon, of “vibecession” fame, posted on X recently about how she was “Reading CS Lewis again and banging my head into the wall because of the continuous realization that it always the same problems just a different time in history.”  and posted an image with an excerpt from Lewis’ Screwtape Letters, referring to the following passage:

“Once they know that some changes were for the better and others were for the worse, and others again indifferent. We have largely removed this knowledge. For the description of ‘unchanged’ we have substituted the emotional adjective ‘stagnant’. We have trained them to think of the Future as a promised land which favored heroes attain - not as something which everyone reaches at the rate of sixty minutes an hour, whatever he does, whoever he is.”  - Screwtape

If you’re unfamiliar with the Screwtape Letters, google it, but it’s written as a series of letters from a senior devil to a junior devil regarding the best ways to keep humans from virtue.

In my opinion the central idea underlying Kyla’s X post was that human nature never changes.

But Here’s The Cool Thing

I smiled because I beat her to the punch last year, referencing Screwtape on the topic of noise.  .  In fact in March 2024, I referenced this from The Screwtape Letters and one of my favorite quotes on “noise”, also from The Screwtape Letters here (and as follows):

"Noise, the grand dynamism, the audible expression of all that is exultant, ruthless and virile.... We will make the whole universe a noise in the end. We have already made great strides in this direction as regards the Earth.  The melodies and silences of Heaven will be shouted down in the end."

But The Point Really Is This

The point really is that I read the “About” section on Kyla’s Substack and (1) I should probably switch to substack (2) I should probably write a book and (3) while..”The goal of my newsletter is for it to *always* be free - but there is work that goes into writing, of course! If you think the content is valuable or would like to buy me a coffee once a month :-) I would sincerely appreciate your support.”

Do you think I could charge you $10/mo.  for this blog?  If so, feel free to let me know in the comments or better yet Venmo me.

I’ll hold my breath.

XTOD’s:

XTOD: Google introduces real time translation for video calls

XTOD: The Google demos today are insane. Somewhat ironic given the origin of OpenAI being "we shouldn't let Google dominate AI", but right now, Google has the global lead in every price point and every latency for LLMs, and for image gen, and video. Plus they own the complements

XTOD: Every day for the next 10 days is a palindromic date (the same number backwards):

5/20/25   5/21/25  5/22/25   5/23/25  5/24/25 5/25/25 5/26/25 5/27/25 5/28/25 5/29/25

XTOD: Cash-strapped Harvard joins with Franklin Templeton, to sell its (troubled) Private Equity and Private Credit assets to retail investors..... Like we said.....

XTOD: "Like Warren, I had a considerable passion to get rich, not because I wanted Ferraris—I wanted the independence. I desperately wanted it."   — Charlie Munger

XTOD: 1. Find an activity you love to do. 2. Build a business around that. 3. Never stop.

https://x.com/0xgaut/status/1924895003593089457

https://x.com/todayyearsoldig/status/1924912266228728091

https://x.com/rcwhalen/status/1924794462141648969

https://x.com/InvestingCanons/status/1924624613641683366

https://x.com/FoundersPodcast/status/1924857378454851936

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