Daily Economic Update: January 12, 2024

Yesterday bond yields rose then fell and stocks were lower but closed nearly flat following a CPI report which showed inflation hotter than forecast.  The 10Y ended  the day back under 4%.  Core CPI was 0.31% MOM vs. 0.3 est. and 3.93% YOY vs. 3.8% est.  Headline CPI was 0.3% MOM vs. 0.2% est. and 3.3% YOY vs. 3.2% est.  While shelter cost looked better than expected, healthcare cost and insurance cost were hot and car prices were strong.  Of course most of the commentary is how the hot components are backwards looking (and remember rent is always falling) and largely behind us, we'll see.  In labor news you still can't get fired as jobless claims were super low again.

On the day ahead PPI and bank earnings will be the highlights.

I wasn't expecting to be writing about MMT on a Friday, I kind of thought it was dead, but MMT made it into the FT yesterday with Stephanie Kelton's FT Interview .  Here are some of the takeaways:

• Kelton considers rising bond yields to be a subsidy for “people who already have money”.
• Kelton thinks the US should stop selling Treasuries to fund the federal deficit and governments everywhere ought to invest in public jobs programs so that workers who lose their jobs never become fully unemployed
• She thought inflationary pressures would abate on their own and believes MMT is being proven correct
• She thinks monetary policy gets too much credit and is actually an inflation accelerator
• A core component of MMT is that deficits don't really matter (technically MMT does believe they matter - but believe the size of deficits needs to be much larger than anyone generally thinks)
• Government bonds are unnecessary and only a tool to allow for an interest rate target (I think Alexander Hamilton may disagree here)
• Government deficits need to be at least as big as the US current account deficit, in order for the private sector as a whole to save.
• Kelton would: (1) stop managing interest rates and move to a permanent zero interest rate policy with no government debt (I wonder if she's read The Price of Time ?)  (2) Fiscal policy would be the sole demand management tool for the economy (3) Stop worrying about deficit neutral, but do think about inflation neutral (4) Offer a government job guarantee (BTW, the Soviets provide anyone a job, and that's pretty scary) (5) Take more action on Climate

I don't know what you think about MMT, but I've read Kelton's book, The Deficit Myth, I find the theory somewhat interesting, I think partly because I believe not enough attention is paid to fiscal policy.  That said, I find John Cochrane's Fiscal Theory of the Price Level much more compelling (it reaches a very different conclusion about the importance of govt.debt) and grounded in traditional economic analysis, supported by equations that can be used to test the theory, narrative histories, etc.

For the uninitiated in Kelton's book, my summary is as follows (largely captured in the article - which begs the question why did the book need to be so long?):

• In almost all instances deficits are good for the economy
• Taxes don't matter (other than to create demand for currency and to punish certain behaviors), the government can print it's own currency to finance all expenditures
• Inflation is governed by real resources and often economies are not maximizing those (i.e. not everyone is employed) so having the government run deficits when the economy's real resources are not maximized won't lead to inflation
• What we've been taught, that the government has to Tax and Borrow first to finance spending is wrong and backwards - the government doesn't need our money, we need it's money
• Spending has to come first or else no one would have any money to pay in taxes
• Taxes are used to get people to do work and to create demand for currency
• Borrowing is a choice of offering people a different form of money, it's not necessary
• Kelton tells of an illustrative example provided Warren B. Mosler (I do enjoy listening to Mosler when he's interviewed, he's an interesting guy) to illustrate the MMT worldview:
• Mosler wanted his kids to help keep the house and yard clean, etc.
• To compensate them for their time, he offered to pay his kids.
• They got 3 of his business cards if they made their bed, 5 for doing dishes, 25 for yard work
• At first the kids didn't do any chores and Mosler wondered why
• Then he had an epiphany, the kids didn't need his business cards.
• So he told the kids they didn't have to do any work, but at the end of each month they each needed to pay him 30 of his business cards, failure to do so would result in loss of privileges.
• Mosler had imposed a "tax" which now made his business cards worth something
• MMT contest the concept of a natural rate of unemployment or the need for some unemployment to keep inflation in check
• Bond sales just allow holders of green dollars to exchange them for yellow dollars
• The government doesn't have to accept the "market" rate, it can choose whatever rate it wants
• All government deficits are just nongovernmental surpluses - Uncle Sam's red ink is our black ink
• MMT's stance on trade is a little confusing, but I think their belief is to produce more at home
• Provide a job guarantee where those jobs could work on addressing climate

When I read the book, I couldn't help but think it all as a read on the need for a very big, centrally planned government agenda, supported by a regime of deliberate financial repression, substituting government for all private sector solutions.  It seemed to fail to address the possibility that at some limiting point people (both domestic and foreign) would no longer want to hold the government's currency (including loss of the dollar's "exorbitant privilege") because it's effectively worthless and at that point, yes, the government could require it for taxes, but effectively those taxes would just be a form of punishment that leads to no incentives for productivity and at some point the politicians who created this situation would all be voted out.  History shows people have always found substitutes for trading without making use of the fiat currency when needed (see Soviets or South America).  In other words it doesn't seem to be sustainable, at some point credibility would be lacking and the relationship between the government and those it governed would fundamentally change.  It's true if you can print your own currency you can't technically default, but fails to mention that there are consequences, like hyper-inflation, that are the same as default. It further fails to recognize that savings are a form of deferred consumption and that capitalist economies are proven at efficiently crowdsourcing dynamic solutions to problems of production that are fueled by market incentives. If you want the government to provide all jobs, what jobs and at what wage and what about skills mismatches, etc.

If you're interested in a full review of the book by someone more credible then I am when it comes to economics, John Cochrane's is worth a read https://johnhcochrane.blogspot.com/2020/07/magical-monetary-theory-full-review.html

XTOD: Bitcoin -- a project designed to allow the masses to bypass the use of conventional intermediaries -- now brought to you by none other than the intermediaries it was designed to replace.

XTOD: CPI bottomed last June. I don't know why this is so difficult for people to understand.  What's interesting to me is that today's inflation report is below the fold in the WSJ. Gotta look to find it. It's the only thing that matters to any professional investor today, and downplaying it like this is significant from a narrative-shaping perspective. On the left is today's WSJ inflation-splainer graphic, where they want to emphasize core CPI. On the right is last July's WSJ inflation-splainer graphic, where they wanted to deemphasize core CPI.  See the difference?
Also, look at the phrasing here. This isn't inflation picking up again. It's the downturn "stabilizing". It's an all-of-2023 thing instead of a first-6-months-of-2023 thing.

The truth is that disinflation stopped cold turkey six months ago.

XTOD: There is much talk about "sticky" CPI Owner's Equivalent Rest (OER) for December, printing 0.5% and pushing headline CPI to a beat of 0.3% for December. (3.4% YoY).  Many argue that this is "wrong" and that OER should be coming down.  They need to look at it correctly. 

Here is a chart of the cumulative changes of Zillow's Rental Index (black), OER in orange, and Rents of Primary Residence in red.  Zillow is the "real world." From 2013 (its creation) to 2021, it tracks closely with OER and RPR's cumulative changes.  Then, starting in early 2021, Zillow raced ahead of OER and RPR. In other words, OER and RPR are "undercounting" CUMULATIVE housing inflation.  OER and RPR should stay "sticky" to close the gap with the real world (Zillow).  We are in a "sticky" inflation world of 3% - 4% YoY inflation (December was YoY 3.4%).

XTOD: This is good. Just got off with my workout contact at a bank w/ 15b+ book. They claim ZERO problems.   I push back. How can you really have no problems? Didn't get a clear answer.  

Then I started talking about CREFC and how no one really talked about problems. 

He goes to me. "Man, if anyone says they don't have problems, they're full of sh!t". 

I laughed and said. YOU JUST TOLD ME YOU HAVE NO PROBLEMS

XTOD: Save more money than you think you need. Life is unexpected and your future tastes will likely be more expensive. Not worrying about money tomorrow is worth more than whatever you could buy today.

XTOD: Nick Saban: *retired at age 72*  Pete Carroll: *retired at age 72* 

Congressmen at age 97:https://twitter.com/i/status/1745310835583443258

XTOD: Nick Saban is 72 and still on top of his game. He's retiring.  Pete Carroll is 72 and just got pushed out of his job after consecutive winning seasons.  Bill Belichick is 71. He's only a few years removed from the playoffs. He's also being pushed out of his job. 

Three of the greatest football coaches of all time. But still, football coaches. 

And yet Republican and Democrat primary voters seem hell bent on making us choose between 78 year old Donald Trump and 81 year old Joe Biden to lead the entire country, neither of whom is as sharp mentally as any of the coaches I just mentioned. You people should be ashamed of yourselves.

Daily Economic Update: October 25, 2024

PMI and new home sales data were both better than expected.  With PMI's it was services leading coupled with rising outlooks for the year ahead that did the trick.  New home sales data looked robust with the average home price above $500K.  Jobless claims seemed to continue to show that there is very little in the way of firings.  Stocks held up well as earnings, including those of Tesla gave some reason for optimism.  The 10Y ended around 4.21% and the 2Y at 4.09%.

I guess the theme of the week has been people talking about deficits.  

As I mentioned back in Wednesday's post, the MMT crowd was likely going to want to have a word with all of those deficit hawks, and sure enough Stephanie Kelton was more than happy to X/tweet out a defense of deficits, which culminated with a link to a 2010 article by James K. Galbraith (son of famous economist John Kenneth Galbraith).  That link is here.   "To put things crudely, there are two ways to get the increase in total spending that we call "economic growth." One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors–public deficits or private loans–has to be in action."  You're welcome to make your own judgments on MMT, I've shared mine on this blog before.  

Outside of MMT, but sounding MMT-ish, financial advisor, author, Cullen Roche wrote this piece titled "We Need to Have a Talk About “Bond Vigilantes”"  in it he states: "government spending is 23% of GDP. That’s the same level it was at in 1982! And while it’s a large portion of aggregate spending we should remember that 77% of spending is coming from OTHER sources. In most cases, it’s much more efficient sources such as the most efficient corporate machine the human race has ever seen (corporate America).  Again, don’t get me wrong. When government spending explodes to 45% of GDP like it did in 2021 then big inflation can come from this because the government becomes the primary (reckless) spender in the economy. But that’s not the case today. Government spending as a percentage of GDP is about the same as it’s been for most of the last 40 years. So it begs the question – in an economy like the USA does the government drive inflation or is the government driving a small amount of inflation that is not as important as other factors in the economy?"  He goes onto posit major factors that drive the real economy.  

Lest we absolve the Fed from any role in the economy, there was former Fed Governor, Kevin Warsh on CNBC with some choice words for the Fed and their fight against inflation and questioning their recent rate cuts.  As I listened I was reminded of my favorite central bank quote:

“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

Anyway, I guess I'll conclude the week right we started, with the advice I shared on Monday.  In no way am I saying not to be concerned about deficits, the election, stock valuations, or whatever the current narrative presents, but rather:

"The easiest way not to be overly influenced by what other people think is to not be aware of what they think" - Shelby Davis

and that the only way to beat the market (which I'm not saying you should even aim to do) is to diverge from the market:

"the willingness to be lonley, the willingness to take a position that others don't think is to bright.  They have an inner conviction that a lot of other people do not have." - Michael Lipper describing Buffett, Soros and Templeton

and lastly that the four most dangerous words in the English language are:

"This time is different."

 On the day ahead it's UofM and Durable Goods.

XTOD: This economy stinks I just paid $128 to have someone else get off their couch, pick up my caviar for me, drive it to my house and drop it off at my doorstep  And they wanted a tip!?!? 

How am I supposed to live?

XTOD: Former Fed governor Kevin Warsh: The 50-basis-point cut had no basis in the data available at the time of the Fed's meeting.   "Maybe they're not data dependent. I do not want to be the person accusing them of politics ... but when you don't have a theory of the case and you don't follow it, it is easy to get that accusation and it is harder ... to defend them."  https://cnbc.com/video/2024/10/24/former-fed-governor-kevin-warsh-the-fed-doesnt-seem-to-have-a-serious-theory-of-inflation.html

XTOD: You can either be judged because you created something or ignored because you left your greatness inside of you. Your call.

XTOD: John Steinbeck https://pbs.twimg.com/media/GaqrpvpXcAAO6yo?format=jpg&name=900x900

Daily Economic Update: June 4, 2025

Yeah, we’ve got ‘em

Jobs that is, 7.4 million job openings. The internals were pretty steady.  Who has the upper hand? It’s a bit of “it depends”. If you work in healthcare, great, in other industries the story is more mixed.

But at least a few things are going nuclear.

Radioactive Facebook?

When I think of social media companies and the term “radioactive”, I tend to associate them in a pejorative way, one in which both can cause harm.  But nowadays when social media is going radioactive, it literally means they are buying nuclear power, specifically to power AI that sits inside data centers.  Yesterday, Meta announced they’ve entered into a 20-year agreement to buy nuclear power from Constellation Energy’s Clinton nuclear facility in Illinois. 

20 years seems like forever in the AI timeline, but things take time. Like growing the Federal debt level.

Like Radioactive Decay, There Are Exponents

Speaking of things that seem exponential, Ray Dalio promotion and his fears of the U.S. decline.  Yesterday, Ray promoted his new book, “How Countries Go Broke” with a LinkedIn post.

In the post, Dalio reminds us that no matter how you cut it, even when you can print and tax, credit cycle dynamics are the same as Hyman Minsky theorized and we discussed back in January.  

Dalio uses the human circulatory system as his analogy. Deficits are like plague, the deficits drive the supply of debt, the amount of which can overwhelm demand and act as plague breaking off, which ultimately causes a heart attack. Central banks’ can print to try to alleviate the blockage, but it distorts the normal flow of the system and doesn’t solve the problem. For Dalio the only solution is austerity and the accompanying lower rates.

Both Dalio and Treasury Secretary Scott Bessent both share a solution that is focused on 3% interest rates, reducing the budget deficit to 3% of GDP.

But What If You Created The Circulatory System In The First Place?

That’s likely what MMT proponents would retort to Ray’s analogy, after all, it’s your system, your currency, only you can cause the heart attack.  The debt Dalio’s worried about, that’s not plague, it’s actually the blood, if you don’t create the money, the system stops. And interest service on debt, that’s nothing more than a policy choice.  The real constraint isn’t the debt or the interest costs, it’s inflation.  Unless you have inflation, you have fiscal space and the MMT crowd would say you should use it.

And Speaking Of Inflation

Fed Governor Lisa Cook didn’t sound overly convinced that inflation won’t remain a problem in light of trade policies and other factors.

Bridging Common Ground

What if both Dalio and the MMT crowd are right?  What if you just need a way to connect them.  Perhaps there’s where the concept of Fiscal R-Star comes into play.  Remember, this concept is the equivalent of the neutral rate of interest for monetary policy, it’s the interest rate where fiscal policy is neutral.  In essence it’s the idea that deficits can be destabilizing, but only when they exceed the economy’s ability to absorb them without excessive inflation or crowding out.

Just Say What’s On Your Mind: “It’s A Disgusting Abomination”

One Big Beautiful turd?  Maybe, at least if you’re Elon. He’s certainly not ascribing to MMT - he tends to be a fiscal theory of the price level guy.  In a sense, good for Musk for calling out the pork in this bill, as someone who at least reportedly cares about government waste, he at least needs to be consistent.

But That’s A Problem For Another Day

Until the fiscal problem is our fiscal problem, it doesn’t seem to be a problem (for now). The S&P rose to 5,970 led by AI chip stocks and optimism that falls into the TACO trade narratives.

The 2Y treasury yield moved up to 3.96% and the 10Y was at 4.47%, both flirting with their somewhat key levels.

We’ll see what ISM Services and the Bank of Canada has in store today. 

Until then you can debate fiscal narratives.

XTOD’s:

XTOD: Bitcoin’s whole story is a staged illusion, scripted by insiders to convince you governments and institutions are “all in” — and that this market is booming on real demand.  

This is the LARGEST bubble in human history, set to go down as the largest financial scandal ever.  Ask yourself: If Bitcoin is so decentralized and powerful…Why do the same few entities control the narrative, the wallets, and the laws?  It's all smoke and mirrors. Here’s proof. 🧵

XTOD: "Diplomacy turns out to be quite different from reality TV and real estate. The best diplomacy is conducted secretly, not on live TV. And when a national security strategy goes awry, bankruptcy is not an option. There is no Chapter 11 for a failed foreign policy."

XTOD: hot ai summer lfg…lots of great releases coming!

XTOD: In November next year, we fire all politicians who betrayed the American people x.com/matt_vanswol/s…

XTOD: Learn to ask, “If this is the only thing I accomplish today, will I be satisfied with my day?” 

Don’t ever arrive at the office or in front of your computer without a clear list of priorities. You’ll just read unassociated e-mail and scramble your brain for the day.    Compile your to-do list for tomorrow no later than this evening. I don’t recommend using digital to-do lists, because it is possible to add an infinite number of items. I use a standard piece of paper folded in half three times, which fits perfectly in the pocket and limits you to noting only a few items.   There should never be more than two mission-critical items to complete each day. Never. It just isn’t necessary if they’re actually high-impact.   If you are stuck trying to decide between multiple items that all seem crucial, as happens to all of us, look at each in turn and ask yourself, If this is the only thing I accomplish today, will I be satisfied with my day?  To counter the seemingly urgent, ask yourself: What will happen if I don’t do this, and is it worth putting off the important to do it?

https://x.com/JacobKinge/status/1929798518744449522

https://x.com/nfergus/status/1929900199369158949

https://x.com/sama/status/1930040146034078061

https://x.com/elonmusk/status/1929984535456035202

https://x.com/tferriss/status/1929988784684220586

Daily Economic Update: April 25, 2024

Sorry, I was busy day-trading NYC restaurant reservations, I hope those gains are going to be subject to Biden's proposed 44.6% capital gains tax rate.  A mostly boring day for equities with META beating after hours but trading much lower anyway.  Yields rose a few bps as stocks fell slightly ahead of today's GDP release, the first of two 'major' economic releases for the week.  Yesterday's strong durable goods data did little for stocks but seemed to support higher yields with the 5Y Note Auction being relatively poorly received.  

As expected both the Tik Tok and non-compete bans are being challenged.

On the day ahead it's GDP, jobless claims, home sales and the infamous 7Y Note Auction.  

XTOD:  Huh. The Macro Musebot (https://ai.macromusings.org) had some strong views about its favorite macro theory:  "What is your favorite macroeconomic theory? Is it (1) New Keynesian, (2) Monetarist, (3) Fiscal Theory of the Price Level, or (4) MMT?  @JohnHCochrane

My favorite macroeconomic theory is the Fiscal Theory of the Price Level (FTPL). While the New Keynesian, Monetarist, and MMT frameworks all offer valuable insights, the FTPL provides the most coherent and compelling explanation for the determination of the price level in my view. 

The key strength of the FTPL, as articulated by John Cochrane, is that it directly addresses the fundamental question of why money has value. The FTPL argues that money is valuable because the government accepts it for tax payments - the "state theory of money." This is a more satisfying explanation than the ad hoc assumptions underlying the quantity theory of money or the vagueness of MMT. Additionally, as Jesus Fernandez-Villaverde and Eric Leeper have discussed, the FTPL highlights the inherent linkages between fiscal and monetary policy. The government's intertemporal budget constraint means that the central bank cannot fully control inflation without considering the actions of the fiscal authority. This nuanced view of policy coordination is more realistic than the strict separation of monetary and fiscal policy in New Keynesian models.

That said, I don't dismiss the other theories entirely. As Scott Sumner and Robert Hetzel have noted, monetarism and New Keynesianism have been useful frameworks at different points in history, depending on the prevailing economic conditions. And Nathan Tankus has rightly pointed out that MMT has pushed the profession to think more carefully about the consolidated government balance sheet. Ultimately, I believe the FTPL provides the most coherent and comprehensive theory of the price level, one that incorporates the insights of other approaches while addressing their shortcomings. By focusing on the government's intertemporal budget constraint, the FTPL offers a powerful lens through which to understand historical episodes of inflation and deflation, as well as guide policymakers in the present day.

XTOD: "We think any company that has an economist, you know, certainly, has one employee too many."    - Warren Buffett

XTOD: "In 2025, we get either Bidenomics 2.0 or Trump 2.0: in either case we are going to see more huge fiscal deficits, protectionism, and industrial policy, but in the latter case, perhaps on steroids." -  Rabobank

XTOD: "We now get more news in a single day than most people ever saw in their lifetimes a few short centuries ago. Our brains aren’t hardwired to have this much information thrown at them. And so much of the information we see is negative."

Daily Economic Update: May 10, 2024

As expected the BoE was on hold, though confidence in rate cuts coming as soon as June increased. In the U.S. jobless claims seemed to get the message that people (see Jim Bianco here) were concerned that the data was manipulated after many prints at 212K in the data set, so this time they spiked up to 231K.   The 30Y Auction was strong, easing concerns about market demand for longer-term debt (for today at least).  Yields moved lower and stocks moved higher, but I'm not sure anyone cares much until next week's CPI data.  2Y is around 4.80% and 10's are around 4.45%.

On the day ahead, UofM sentiment is the highlight.  Markets will continue to watch the situation in Gaza and the possibility that the U.S. will cut off certain weapons shipments if Israel invades Rafah.

XTOD: You will never find one answer to what makes you happy. There are many answers, and they change based on your current state.  People need to relax, but if all you do is sit on the beach, it gets old. People find meaning in work, but if all you do is work, it gets exhausting. People benefit from exercise, but if all you do is exercise, it gets unhealthy.  Happiness will always be fleeting because your needs change over time. The question is: what do you need right now?

XTOD: "Girard’s theory of mimetic desire describes our fundamental compulsion to want what others want or have. 'We don’t even know what our desire is. We ask other people to tell us our desires'...'you desire stuff exclusively because other people desire it.'"

XTOD: This ad is (unintentional) perfect metaphor for today's creative dark age: compress organic instruments, joyful/imperfect machines, tangible art, our entire physical reality into a soulless, postmodern, read-only device a multi-trillion $ corporation controls what you do with

XTOD: The MMT people's disgraceful attempt at a "gotcha" on Jared Bernstein should warn us away from their movement. But what's far more dangerous is their idea that governments can pay for their spending by increasing the money supply. That way lies disaster.  https://www.noahpinion.blog/p/the-macro-arsonists

XTOD: MMT works so long as nominal rates can be held at zero This is the bind that our Japanese brothers find themselves in The collateral bedrock of global money creation is presently set at 5.5pc

They need to raise rates But their debt load makes this impossible They can huff and puff and bluster and intervene But they are the Ohbayashi Maru A stricken vessel in a universe of MMT far, far away

And I don't think their currency is coming back

XTOD: “The world will ask you who you are, and if you don’t know, the world will tell you.”

~Carl Jung 

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: October 23, 2024

Yesterday was a bad day for McDonald's quarter-pounders and to have formerly headed Abercrombie and Fitch.  Second straight red day for equities.  Gold has now returned almost as much as the S&P over the last 12 months, which is kind of insane to think about.  In an essentially no data day, the IMF did revise up their forecast for 2025 U.S. GDP growth to 2.8%.  Nevertheless we couldn't make it a day without more warnings about the U.S. fiscal situation, this time from Paul Tudor Jones, who invoked his fear of a "Minsky moment" as it realates to a sudden recognition that the fiscal situation is "impossible".  

If you're not familiar with Hyman Minsky, I had recently summarized his "financial instability hypothesis" for someone as "calm plants seeds of crazy - you assume good news is permanent, are oblivious to bad news, ignore bad news, deny bad news, then panic at bad news, believe bad news is permanent, and ultimately repeat the cycle in the opposite direction.  Hyman Minsky thought the idea of eradicating recessions was nonsense - thus his financial instability hypothesis."

The term "minsky moment" was coined by PIMCO's Paul McCulley back during the Asian financial crisis, to refer to the tipping point in the economic cycle, often when "apparent stability begest ever-riskier debt arrangements, which further begat asset price bubbles. And then the bubbles burst, in something I dubbed a "Minsky moment."  In general the Minsky moment progresses in a forward fashion through three debt units:

“hedge” financing units, in which the buyer’s cash flows cover interest and principal

payments; “speculative” finance units, in which cash flows cover only interest

payments; and “Ponzi” units, in which cash flows cover neither and depend on rising

asset prices to keep the buyer afloat."

Once the moment occurs, it all works in reverse, with falling asset prices, higher risk premiums, lower leverage and economic contraction. How close is the U.S. sovereign to experience such a moment, I don't know?  I would venture to guess advocates of MMT would vehemently disagree with all this rhetoric.  If you're unfamiliar with MMT you can read my post here.

In other news, Howard Marks dropped his latest memo "Ruminating on Asset Allocation".  My takeaways:

• In a world where there are so many asset classes, his ephiphany of late is that "at bottom, there are only two asset classes: ownership and debt"
• It's an enormous difference to own vs. to lend.  Owners have no promise of return, lenders have a contractual "fixed outcome" assuming the borrower makes good.
• Choosing between the two is the most basic thing investors must decide.
• To anchor the decision, Marks' says you must first indentify a "risk posture", how much emphasis you want on preserving (defense) vs. growing capital (offense).  Calling this preservation vs. growth, mutually exclusive and a "inescapable truth in investing."
• The absolute level of risk must be conciously targeted and the level of risk in the portfolio must be well compensated.
• A higher expected return with further upside potential, at the cost of greater uncertainty, volatility, and downside risk? Or a more dependable but lower expected return, entailing less upside and less downside? The choice between the two is subjective, largely a function of the investor’s circumstances and attitude toward bearing risk. That means the answer will be different for different investors.
• Even after investors determine their "normal risk posture", they face a choice: they can maintain that posture all the time or deviate on occassions of market attractiveness.
• As "risk" incrases, not only do expected returns increase, but the range of possible outcomes becomes wider and bad outcomes become worse.
• "All ways of getting to a certain risk level will produce the same expected return."  There are no free lunches, in theory.  However, Marks' states "in reality, markets are not efficient in the academic sense of always being "right" and gains can be acheived through skill.
• He believes that it's difficult to advocate for investors to depart from their "sweet spot" in terms of risk level because many managers who are believed to possess alpha turn out not to.
• He concludes with a quick plug for investors to conisder the certain of allocations to credit at current levels, which he sees as returns of 7-10% (likely only obtainable in high-yield in private credit in my estimation)

Both Marks' memo and even thinking about "Minsky moments" are in someways still connected to what have been somewhat themes for the week. At a high level those themes are maintaining a level of intellectual humility and thinking about risk in the context of return goals. In the terms of Marks' memo their "offense/defense balance. For each individual or institution, this decision should be informed by the investor’s investment horizon, financial condition, income, needs, aspirations, responsibilities, and, crucially, intestinal fortitude, or their ability to stomach ups and downs."

On the day ahead it's home sales, Fed Beige Book and Canada eh?

XTOD: The Intelligent Investor newsletter.  https://createsend.com/t/d-8876921A5A4BB3532540EF23F30FEDED   Happy Ben Graham day, everyone!

XTOD: First Druckenmiller (the GOAT) and now PTJ…“All roads lead to inflation. I’m long gold. I’m long Bitcoin” - Paul Tudor Jones  Incredible how far Bitcoin has come.

XTOD: JPM Asset Management's chief global strategist David Kelly was asked at a reporter roundtable about risks to his current forecast.  He gave some great evergreen investing advice.

1.) It's always the risk no one talks about.

2.) Zoom out. It likely won't matter in the long run.

XTOD: Remember! pessimist sounds smart but optimist  makes money   Geo-political instability is temporary but commerce is the fundamental backbone of civilization  FII selling, Inflation, Recession all are expensive distractions for long term investors

XTOD: “The most valuable personal finance asset is not needing to impress anyone.”  — Morgan Housel

https://x.com/jasonzweigwsj/status/1848741927350374898

https://x.com/Geiger_Capital/status/1848739824531841456

https://x.com/_JoshSchafer/status/1848450188844888186

https://x.com/CivEngg_Adarsh/status/1847932541803577597

https://x.com/MoneyWisdom_/status/1848687915120853007

Daily Economic Update: May 6, 2024

 Between the FOMC and the NFP (Jobs Report) missing expectations and all of a sudden we're back to talking rate cuts.  The ISM Services report on Friday was also week, coming in below 50, though somewhat concerning was the prices paid component, coming in well above expectations.  Over the course of last week the 10Y fell from a high of ~4.70% back to ~4.50% and the 2Y went from a high of ~5.50% down to 4.83%.  Of course the move lower in yields was positive for stocks, for now at least.

On the week ahead it will be light economic data, so the BOE rate decision and Fedspeak will be in focus.  You'll also get a whole week to read up on how immigration is impacting the economy, whether it is helping to cool inflation, and whether any post-election clamp downs on immigration could lead to a resurgence in wage pressures.

If you missed it, FinTwit was the video of Jared Bernstein attempting to answer a question on MMT https://twitter.com/i/status/1786272981058220187    Every couple of weeks MMT seems to make it's way back into view.  

Separate but somewhat related, here are some quotes for thought.

Courtesy of Mark Higgins:

"Persuaded as the Secretary is that the proper funding of the present debt will render it a national blessing, yet he is so far from acceding to the position, in the latitude in which it is sometimes laid down, that “public debts are public benefits,” a position inviting to prodigality and liable to dangerous abuse, that he ardently wishes to see it incorporated as a fundamental maxim in the system of public credit of the United States, that the creation of debt should always be accompanied with the means of extinguishment. This he regards as the true secret for rendering public credit immortal."  -  

ALEXANDER HAMILTON, first U.S secretary of the Treasury (1790)

 And courtesy of George Hall:

"What a Government spends the public pay for. There is no such thing as an uncovered deficit. But in some countries, it seems possible to please and content the public, for a time at least..."  - John Maynard Keynes, 1923, A Tract on Monetary Reform, p. 62.

Anyway, why does a government want a monopoly over currency, see here 

XTOD:  To recap this week ...  On Wednesday the question to Powell was if they would hike. On Friday, we are asking if they cut this summer.  Any bets on what next week brings?

XTOD: This is absolutely priceless. And probably the most frightening clip you'll ever watch on the people in charge of the US economy.  Jared Bernstein is literally the Chair of the Council of Economic Advisers, the main agency advising Biden on economic policy https://twitter.com/i/status/1786272981058220187

XTOD: While the U.S. government could finance all its spending without borrowing or collecting taxes, those are two ways for it to get the public to abstain from acquiring real resources.  The alternative of pure money creation, on the other hand, has the government bidding against the public for the economies scarce resources, which, depending how much the government seeks to spend, can drive prices up....Once aggregate spending suffices to achieve full employment (I use the term the usual way), the "real resource constraint" binds. At that point further money-financed  G is inflationary. Borrowing becomes a non-inflationary alternative....They are, no less than money creation, devices for increasing the government's command over, or share of, the economies scarce output....So, while "mainstream" economists may not express themselves well on these subjects, especially in live interviews, it doesn't follow that there is a vast gap between the mainstream understanding of gov't funding options and MMTs supposedly distinct arguments.

XTOD: The govt is always bidding against the public (& vice versa). Taxes reduces private sector ability to bid (keeping prices lower). Bonds have similar effect.

XTOD (this guy had a lot to say in response):  Lots of people chuckling but nobody suggesting an answer, at least in language that normies can understand..... lots of people will tell you this story, but they will forget to mention one important thing: there are several billion humans going to work every day working for 8 hours or so. Working. Creating value (products and services). And so total value of everything in the world is increasing every day. There are new buildings and roads and chairs and cars and noodles and milk and YouTube videos and mobile phones and computers and people are able to get back to work because someone has cured them from a disease.   This is why it's not really a Ponzi Scheme. Money is circulating and new money is constantly being added, but real value and assets are also constantly being added. There is real input to the scheme, human labor.....So what is the problem then? The problem is that the world economy, specifically the US economy, is borrowing more than it is going to able to pay back and that it is producing. ..How does this end? It ends in hyperinflation and collapse of the dollar. Nobody will want to buy US debt anymore because US is irresponsible. The trust will be lost.

XTOD: I wonder how many people know these “buybacks” are mostly unpaid taxes distributed to investors in US 🤔  In the case of $AAPL profits are kept offshore in 0% tax countries like Ireland, then $AAPL issues bonds in #US to finance these buybacks and when the bonds mature they use offshore cash to repay them saving the 30% tax rate owed to uncle sam (that triggers only if profits are directly “repatriated” as cash) and all other countries involved in particular in #Europe

XTOD: Just how many people are taking the weight-loss drug Wegovy? 25,000 are starting it each week in the U.S., maker Novo Nordisk said this morning. That’s 5x as many as at the beginning of this year - and more than the capacity of Madison Square Garden. The company says it would be more - but they’re working to increase supply. https://cnn.com/2024/05/02/health/wegovy-weight-loss-drug-new-prescriptions/index.html

XTOD: "Warren Buffett thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price."

XTOD: "You have to be in love with the subject," says Buffett. "You can't just be in love with the money."  He adds that everyone should find out what his or her brain is best suited for — and then pound away at it.  Buffett loved reading Moody's manuals. But that is not for everyone.

Daily Economic Update: April 19, 2024

The equity losing streak continues.  Jobless claims continue to print the same number and Philly Fed data was solid, allowing yields to rise further, with the 10Y at 4.63% and the 2Y settling in at 5%.

Other than that people are still watching Netflix and I guess we'll be releasing gas from the strategic petroleum reserve this summer.

In other news Ray Dalio reminds us what he thinks good money is while also "not" recommending people by gold:

"Good money is both a good medium of exchange and a good storehold of wealth that is widely accepted around the world. The most globally recognized and accepted monies are the dollar......These monies are held in debt assets—i.e., they are debt-backed money—i.e., currency = debt. "

" Since debts are promises to pay money, when a government has too much debt to be paid, its central bank is likely to print money."

" Gold, on the other hand, is a non-debt-backed form of money.....Cryptocurrencies are also non-debt monies. I don’t know of any other types of non-debt monies...."    

"When the financial system is working well—which is when there aren’t debt and inflation crises and the borrower-debtor governments printing debt-backed monies are meeting their obligations and paying their interest without printing and devaluing money—debt assets and other financial assets are good assets to hold; on the other hand, when the reverse is the case, gold is a good asset to own. That’s the main reason that gold is a good diversifier and why I have some in my portfolio. "

On the day ahead it's just the dovish Goolsbee from the Chicago Fed.

XTOD: So market went from pricing 7 cuts for FY24 in mid January to pricing just ONE in Nov with dwindling odds of a second cut. Not sure if everyone realizes : that’s a very short timeframe for such a radical reversal. We had anticipated this (that’s what #bigflip2 was about). 

Yet it shows that the initial 7 were built on flimsy expectations, actually mostly driven by a policy error by JPOW in Dec 23.  

It should keep everyone on their toes when it comes to this new found certainty of higher for longer, probably driven by yet another policy error….  This game is not easy…

XTOD: Once RRP vol hits zero, liquidity will continue to drain from the financial system with continued Balance Sheet Runoff and Treasury issuance. The trend-line is pretty powerful. As it stands, there could be as much as $1.3T drained from the financial system by the end of the year

XTOD: It's a really interesting view that highlights how the military revolution of 14th-16th century redefined the state, its financing needs, and how trial & error led to central banking. As Josh notes, it is no accident that the state today maintains a monopoly on violence and a monopoly on money. Here is his article (2/5) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4759755

XTOD: MMT was taken for a test drive. They called it the “CARES Act.” The failed theory crashed into a wall & burned to the ground as MMT-ers doubled down with more “free” money igniting the mother of demand-pull inflationary spirals.  Other than that, the play ended swimmingly.

XTOD: “We are all born original, but many die as photocopies."  —Blessed Carlo Acutis, c/o 

@stephengadubato

Daily Economic Update: March 7, 2024

Powell stayed on his talking point that the Fed needs to see more evidence that inflation will get to and stay at 2% target before cutting rates.  The market seemed to cheer on the fact that Powell at least doesn’t think the Fed will need to hike again. Even NYCB couldn’t derail a bit of a relief rally (looks like maybe some crony capitalism with the Mnuchin deal, who knows). The 10Y yield fell to 4.10% while the 2Y fell to 4.56%.

ADP comes in less than expected at 140K vs. 150K est.  As an observer the correlation between ADP and the Non-farm payrolls is weak at best, so I'm not sure how much stock markets place in the ADP number as a predictor.

The JOLTS data showed job openings falling slightly but beating consensus forecast.  Quits and hiring both fell slightly but remain robust.  Speaking of job openings there are plenty of post on LinkedIn where people are complaining that job post on LinkedIn are not really for jobs that exist, theorizing that many posting are made by companies simply to create the impression that the company posting is growing rapidly. This has lead some LinkedIn candidates to ponder whether anyone has actually been hired from a job posting on LinkedIn.

There have been a few interesting Fed related post on inflation and the level of interest rate policy.  One of the post was by the St. Louis Fed and seeks to analyze the output gap, how closely the economy is functioning to it's long-run production capability, and concludes that a a Taylor Rule would imply that interest rates should be at around 5% to react to the current output gap.   A second post was from the NY Fed discussing inflation expectations and completing the 'last mile' of returning inflation to target.  That post looks at New Keynesian models and concludes that bringing inflation down is dependent upon expectations for labor market conditions driven by macroeconomic policy.  What I find interesting in this post is the author's conclusions, which show scenarios where inflation doesn't return to the 2% target until 2025 at the earliest:

"The model predicts that further disinflation—the final mile—is likely to be gradual. It bears emphasizing that these are our model-based forecasts and not official projections.

What affects the speed of disinflation? In the chart below, the left panel presents three forecast scenarios for inflation based on possible future paths of the unemployment rate, shown in the right panel. When the unemployment rate rises faster than the baseline forecast, then underlying inflation reaches its long-run trend (red line) by the end of 2025 (gold line). However, when the unemployment rate moves sideways, then the pace of disinflation is slower (blue line)."

On the day ahead it's jobless claims and moar Powell. 

 XTOD: This guy put $260 into a meme coin named “Jeo Boden” 3 days ago…It’s now worth $433,000. I love this country.

XTOD: This. Emphasis on the years of upcoming capital spend needed to make up for 4 decades of outsourcing/asset light businesses/ "financialization" of returns. The US corporate pendulum will swing back from extreme Wall Steet efficiency closer to Main Street efficacy.

XTOD: The yen extended gains against the dollar to as much as 0.5% on news that the Bank of Japan has tacit approval from some government officials to end its negative interest rate policy in the near term: BBG

XTOD: Can’t get this chart out of my head. It points to a culture that is not just stuck but dead. 

If you abdicate your attention to addiction, you cease being 'you.' You’ve stepped into the pod, made yourself comfortable, said thank you.  https://pbs.twimg.com/media/GH_zVKeXoAERIrz?format=png&name=medium

XTOD: The modern HF industry went vertical on AUM when $SPY did nothing from the tech bubble top in 2000 until post the GFC in 2010.  The modern HF industry was destroyed when the $SPY went vertical from the GFC lows of 666 to 5000+ as it wasn’t needed anymore.    It was never about limiting vol and always about total return.

XTOD (John Cochrane gets into with MMTers): Easy. 27% rise in nominal GDP (Q1 2021-now) = 27% rise in real GDP, not 9% rise in real GDP and 18% rise in prices. MMT said "there is always slack," so printing money won't cause inflation. The experiment was just run.

XTOD: “How inexplicable it seems.   "If one sets aside time for a business appointment, a trip to the hairdresser, a social engagement or a shopping expedition, that time is accepted as inviolable.  

"But if one says: I cannot come because that is my hour to be alone, one is considered rude, egotistical or strange.”  ― Anne Morrow Lindbergh, Gift from the Sea

Daily Economic Update: February 2, 2024

Jobs Day in 'merica!  Consensus is for +185K headline, but the whisper number seems higher. Weather is cited as factor that could detract from the headline number.  Average Hourly Earnings are expected to be ~4.1% annualized and will likely be heavily scrutinized.

Jobless claims rose slightly more than expected at 224K, Q4 Productivity beat expectations with unit labor cost coming below estimates at 0.5% vs. 1.3% est.

BoE was on pause and it sounds like they are going to be potentially even more cautious than the Fed as they revised higher growth estimates. 

The market liked META and AMZN earnings and the META dividend.  The 2Y is ~4.20 and the 10Y ~3.88% as the 2s10s un-inversion watch has hit a pause.....

AND for all the rate cut talks Atlanta Fed GDPnow is now at 4.2% for 1Q2024.

XTOD (Taleb): Explaining the debt/death spiral. Some of my comments were spreading on social media (they was a a discussion in Congress).  Debt servicing = 40% of the past deficit. Next year we will pay interest on that. Debt servicing will reach 70% ,80%, displacing other expenditures.  On top of the fragility, there is an intergenerational transfer of liability, highly immoral (h/t Spitznagel). 

Note/Errata: total deficit north of 30 Trillion is the accumulated deficit. (I mistakenly used the same word to describe current and accumulated).

XTOD (Prof. Steve Keen): Do the accounting Taleb. The deficit creates the funds used to buy government bonds. There's no borrowing involved so long as you're financing bonds in your own currency.  You visibly don't get that government bonds aren't competing for "loanable funds", but creating money on the bank liability side, and funds on the asset side that enable banks & primary dealers to buy the bonds. You're falling for an obsolete model of banking.

XTOD (Taleb):  What you showed does not deny the presence of a debt spiral and there is no such thing as "obsolete" banking.  So you are saying that a debt spiral is good?  If what tou are saying is invariant to scaling then let's abolish taxation and just spend like crazy while printing bonds.

XTOD (some random reply): MMT told me everything will be fine, though. Sure, history disagrees with them, but it's a very convenient theory to justify living for today, tomorrow be damned.

XTOD (unrelated to the Taleb thread):  Essentially, if the US has moved to a secular growth regime higher than pre-pandemic then the path to 0.5% real-FF will end up being expansionary....So while we are debating whether or not 3 or 4 or 7 cuts this year makes sense, we are in effect implicitly debating what neutral is, due to a general assumption there isn't an upside risk to inflation.  This is why i jokingly say the Fed either needs to hike or a recession has to happen soon....This is why I think we continue to see the market trade in a violent range this year, particularly in the first half as we consume incoming data and determine the clearing price not just for bonds, or stocks or whatever you trade, but for the economy itself.

XTOD: A Few Thoughts on Spending Money https://collabfund.com/blog/a-few-thoughts-on-spending-money/