Daily Economic Update: February 19, 2025

Yields rose and stocks found a way to set a new record high.  The S&P finished at 6,129, despite Meta snapping its winning streak.  The 2Y ended the day at 4.31% and the 10Y reclaimed 4.50, now yielding 4.56%.

There was little in the way of tangible data, but home builder sentiment fell as tariff concerns on the cost side.

Gold hit new record highs at 2,934. Gold was also in the news as Elon toys with the idea of auditing Fort Knox at the urging of Rand Paul.

I’d write more, but I gave you a decent amount yesterday, did you read it all?  If so and you’re bored, use the search function and search for something like “uncertainty”.

On the day ahead we get new housing starts, FOMC Minutes and the 20Y auction.

XTOD: Pershing Square has submitted a proposal to Howard Hughes Holdings (NYSE: HHH) http://howardhughes.com to acquire 10 million newly issued shares of the company at $90 per share.  When combined with the 18.9 million shares that are currently held by the Pershing Square Funds, we will own 48% of the company.   If the transaction goes forward, I will become Chairman and CEO, Ryan Israel, CIO, and Ben Hakim President, and we will make available the full resources of Pershing Square to HHH to build a diversified holding company, or one could say, a modern-day Berkshire Hathaway.  

The new HHH will acquire controlling interests in private and public companies that meet Pershing Square's criteria for business quality.  HHH's principal subsidiary, Howard Hughes Corporation, led by David O'Reilly CEO, will continue on its mission and strategic plan to develop, grow, and own small 'cities,' or master planned communities. HHH's major holdings include the Woodlands in Houston, Summerlin in Las Vegas, Teravalis in Phoenix, and a 60-acre condominium development project on Waikiki Beach in Hawaii called Ward Village. 

Owning small and growing MPCs that will eventually become large cities in the best pro-business markets in the country is a great long-term business.  It's a lot better than a dying textile company.  You can learn the details about the transaction here: https://businesswire.com/news/home/20250218932320/en/Pershing-Square-Announces-Revised-Proposal-to-Howard-Hughes-Holdings  We look forward to sharing more about the story tomorrow at 9am EST.  The presentation will stream live from my X account 

@BillAckman

XTOD: Bill, why are you asking to get paid 1.5% of HHH's mkt cap every year? This is obviously not the way Buffett does it.

XTOD: "why shouldn't I charge a fee on market cap and call myself the next Warren Buffett?"

XTOD: Worth noting that all the recent news over plane crashes is probably just the result of attention bias Plane crashes are still on a downward trend  https://pbs.twimg.com/media/GkFizhBWEAA745U?format=png&name=small

XTOD: Three questions determine 99% of the happiness in your life:

1. What am I working on and why? 

2. Who am I spending time with and why?

3. How well am I treating my body and why? 

Everything else is noise.

.

https://x.com/BillAckman/status/1891957378603491339

https://x.com/Seawolfcap/status/1891960752027627890

https://x.com/FrederikNeckar/status/1891985556449460422

https://x.com/IAmMarkManson/status/1891851918575599955

Edward Quince's Wisdom Bites: The Marks Series - The Futility of Macro Forecasting and the Value of "I Don't Know"

Edward Quince (EQ): Howard, one of the prevailing themes on this blog is the inherent uncertainty in financial markets, often summarized by the difficult answer, "I don't know". You've written extensively about the value—or lack thereof—in forecasting the future. Why is macro forecasting an area you advise investors to largely ignore?

Howard Marks (HM): Macro predictions are unlikely to give you an edge. There are two main problems. First, we don’t know what’s going to happen. The world is too complex, too erratic, and too full of surprises to make spot forecasts of anything of significance. Second, even if a forecast turns out to be correct, we don't know how the markets will react to what actually does happen. Forecasting is uncertain, so it's safer not to try to time markets based on predictions.

EQ: You mention that in efficient markets, correct forecasts are potentially very profitable, but also hard to make consistently. Is the consensus view of economists any better?

HM: The consensus view is usually an extrapolation of the current condition and is already embedded in the price of an asset. Most forecasts tend to cluster around historic norms and call for only small changes, underestimating the potential for radical change. If you are merely forecasting the most likely outcome, you are highly unlikely to hang your spreadsheet on predicting a discontinuity. Furthermore, most forecasters have average ability, and we rarely see their track records.

EQ: You advocate for the "I don't know" school of investing. What does this intellectual humility require of an investor in terms of action?

HM: The "I don't know" investor must face up to the uncertainty that surrounds the macro future. Instead of trying to divine the next economic move, we should devote ourselves to specialized research in market niches that others find uninteresting or overly complicated. We will continue to try to "know the knowable". This means focusing on micro factors relating to companies, assets, and securities where it is possible to obtain a knowledge advantage through the expenditure of time and effort. By concentrating on avoiding pitfalls and investing based on in-depth analysis, conservatively estimated tangible values, and modest purchase prices, we can proceed without relying on macro-forecasts.

EQ: So, the valuable forecasts are those that call for radical change, but those are rarely right. In lieu of perfect foresight, how do we protect ourselves?

HM: We must acknowledge the limits of our knowledge. This humility should drive us to employ the Margin of Safety. The margin of safety is, in essence, rendering unnecessary an accurate forecast of the future.

The Edward Quince Takeaway

Embrace intellectual humility: recognize that "Nobody knows" the macro future, and those who claim certainty should be met with skepticism. Focus your efforts on knowing the knowable—deep, bottom-up research in niche areas where superior insight is achievable—and rely on a robust Margin of Safety rather than unreliable predictions.

Daily Economic Update: September 13, 2023

$29 dongles, an attempt to impeach Biden, MGM casino cyber attack, covid, UK GDP contracting, but it's CPI that is in focus today. At the last FOMC meeting, the Fed had identified five pieces of economic data that would inform their upcoming decision, those were: the Employment Cost Index back on July 28, the two Jobs reports (8/4 and 9/1) and the two CPI reports (8/10 and today's upcoming report), most commentators and the market believe those reports, which have shown some slowing in labor data and cooling inflation, will likely leave the Fed on pause next week (CME FedWatch has probability of a pause at 93%), but we'll see what happens with today's CPI.   To start the day, the 2Y is up 3bps to 5.03% and the 10Y is higher by 3-4bps to 4.31%.   On the cap we get CPI and the 30Y Bond Auction.  If you're looking for bank forecast for the inflation read you can find them here.

If you missed it yesterday, Howard Mark's put out his most recent memo. As is typical of Howard's memo's, it's worth a read.  He spends some time using tennis as an analogy, harkening back to Charlie Ellis' classic "The Loser's Game" in which Ellis argues that argues that lay investors have the best chance of success in investing in the stock market by avoiding costly mistakes, minimizing cost and focusing on asset allocation and passive investing.  Mark's states: "The amateur doesn’t have to hit winners to win, and that’s a good thing, because he or she generally is incapable of doing so dependably."

As we look ahead today's inflation reading, it's always "fun" to reflect on inflation, so here's a few gem's from Irving Fisher's classic "The Money Illusion":

• "Money Illusion"; that is the failure to perceive that the dollar, or any other unit of money, expands or shrinks in value.
• "As long as a dollar is not safe, any agreement to pay a dollar is not safe. However certain it may be that you are going to get the promised dollar, it is not at all sure what the dollar is going to be worth when you get it."
  
• "In short if more money pays for the same goods their price must rise, just as if more butter is spread over the same slice of bread it must be spread thicker, the thickness represents the price level, the bread the quantity of goods."
• "..the only important fact, in so far as the price level is concerned, is the relation between these two circulations [money and goods]...if the circulation of money increases relatively to the circulation of goods, the price level will rise. If, on the contrary, it decreases relatively, the price level will fall; that is, whether the butter is thick or thin depends on whether there is much or little butter relative to the bread."
• "War has always been by far the greatest expander of paper money and credit, and therefore the cause of the greatest price upheavals in history."
• "[Inflation] It would, indeed, be of no importance if everybody's income were adjusted to the change in prices. But this is not and cannot be the case...a change in the money yardstick, the dollar, is far more serious, and for three reasons:
• it affects all sales
• it is used for long-term contracts...we are constantly contracting to pay present dollars for future dollars...it makes tremendous difference, for instance, to a bond holder.
• these disasterous effects are not perceived because of money illusion
• "when your house is burglarized, society is none the poorer..that would be cold comfort to you..in somewhat the same sense this burglarizing dollar is defrauding people...it is social injustice."
• "while inflation is going on, the general public finds it hard to admit that there can be too much money....After rapid inflation once starts, the clamor for more money often grows louder and louder."
• "When prices are rising wages and salaries are, as it were, running after a lost train."
• "Business is always injured by uncertainty. Uncertainty paralyzes effort, and uncertainty in the purchasing power of the dollar is the worst of all business uncertainties."
  
• "As inflation goes on, the workers continually grow more dissatisfied and attribute their plight to an intentional plundering by a social system of exploitation." "Out of such discontent, therefore came Bolshevism and other radical theories."
  
• "worst examples of inflation have come from unbalanced government budgets. As we have seen, when a government cannot make both ends meet, it pays its bills by manufacturing the money needed."

XTOD: A picture of inflation as a tax on the average family: https://bloomberg.com/news/articles/2023-09-12/us-inflation-adjusted-incomes-fell-2-3-in-2022-from-prior-year?srnd=undefined#xj4y7vzkg

XTOD: Every Twitter economist is saying the same brain dead, out of touch thing…“Why are the American people so negative on the economy? GDP is up!”  Maybe because they just watched their purchasing power be annihilated by generational inflation, real household incomes have fallen for 3 years in a row and wealth inequality continues to expand. All while their tax dollars are being wasted and/or sent overseas.  GDP doesn’t come up at the kitchen table for normal Americans you clowns.
“Honey… the credit card bill is due and we don’t have enough to cover it this month. Our groceries have doubled and student loans are restarting soon. There’s also a possibility of layoffs coming at work.”  “Oh don’t worry about that. GDP is trending stronger than expected!”

XTOD: Today we broke the record for the longest streak of trading days (210) with an inverted 10yr/3mth yield curve.  What that means, you be the judge...

XTOD: "We don't have enough Americans to afford what is going on out there right now."  Housing Market Set For A "Cat 5" Storm, Worse Than The Great Financial Crisis.

XTOD: Let me make one thing clear on  @IRSnews  ERC.  Small business owners who qualified rightly claimed this. GOOD. Law was designed FOR THEM.  Years later, most new claimants are being SOLD the ERC for 25-30% commission. Most new claims are fraud.  Danny Werfel knows it. Good for him!

XTOD: Don't believe me? Since 1983, whenever entitlement spending pushed deficits too high, Congress responded by cutting defense and social spending (education, veterans, kids), and raising middle-class taxes. And it will get much worse.

XTOD: A CDC advisory panel met to come up with a recommendation on whether updated COVID shots approved by the government should be used broadly or targeted to specific at-risk populations, setting the stage for the launch of a re-vaccination campaign

XTOD: Government: "OK so there's a pandemic, but don't worry we're going to let you not make payments for 3 years." 
Borrowers: "OK cool, I'm going to buy a house with that money." 
G: "Wait no, that's not what we said..."
B: "OK I also bought a new car"
G: "Wait stop, that's not how this works."
B: "We're in Europe on vacation, AirBnB does Klarna now."
G: "......"

Daily Economic Update: September 13, 2024

ECB cut their deposit rate by 25bps as expected to 3.50% while also cutting their growth forecast through 2026 and showing somewhat sticky inflation in their forecast, noting base effects.  There were also 60bp cuts to the main refinancing rate and marginal lending rate in what was viewed as a technical change necessary to reduce the premium banks pay to borrow relative to what they earn on deposits at the ECB.  Markets are pricing in a possible pause at their next meeting. 

Stateside PPI showed higher core PPI than expected and inital claims were relatively benign.  Yields rose a little more and stocks continued to rally.  The 2Y is 3.66% and the 10Y is 3.69%

Also making the news was that Berkshire Hathaway's Vice Chair Ajit Jain sold half his stake in the company, which of course leads to a ton of speculation as to why?

As I probably remind readers every few weeks, following day to day data is largely a waste of time because the shelf life on this data is so short, it's immediately replaced by the next most important thing (like next week's retail sales) and we frequently fall for noise and completely miss the signal.  We also fail to develop any good filters.  What information do you actually need to better determine if your investment or decision will help reach your goals for it over the horizon.  If you don't know what's important, the qualitative, you can get trapped in the noise.

I posted this back on January 17, 2023:

"providing you with a stream of data and opinion is a business, a business predicated on a demand by investors (including speculators) to be told by someone else what to do (credit to Ben Graham's writing for this phrase).  The incentives are such that adding noise, complexity and a constant pressure to do something is part of the business. 

Morgan Hounsel wrote about this in a blog post Trying Too Hard in which he tells the story of Jon Stewart interviewing CNBC's Jim Cramer:  "Years ago Jon Stewart interviewed Jim Cramer. When pressed on CNBC content that ranged from contradictory to inane, Cramer said, “Look, we’ve got 17 hours of live TV a day to do.” Stewart responded, “Maybe you can cut down on that.” He’s right. But if you’re in the TV business, you can’t."

Anyway, enjoy your Friday and the UofM sentiment.  Listen to Howard Mark's in XTOD below.

XTOD: One of the most interesting things the PPI tracks that the CPI doesn't is retail markups. Retail markup growth has slowed considerably & this has been a contributor to disinflation. In August in particular, growth in grocery markups fell to 0.7% YY, the slowest in 3 years.

XTOD: A masterclass by Howard Marks on how to think about risk.

https://youtu.be/WXQBUSryfdM?si=rmI9woorI_QpTrWq

XTOD: "Great leaders have streak of unorthodoxy. They’re creative innovators.” https://pbs.twimg.com/media/GO6pO3EXUAAZBBm?format=jpg&name=medium

XTOD: Most people wait too long to go into action, generally out of fear.  They want more money or better circumstances.   You must go the opposite direction and move before you think you are ready.

XTOD: Intelligence without courage leads to anxiety because you will spend your time overthinking instead of acting, taking risks, improving your life.

XTOD: When there is an opportunity, I do not hit. It hits all by itself.

Edward Quince's Wisdom Bites: The Marks Series - The Market Pendulum: Mastering Cycles and Extremes

Edward Quince (EQ): Howard, welcome. My blog often laments the financial world's short memory. When you look across history, what principle about the markets seems most dependable, and yet most consistently ignored by investors?

Howard Marks (HM): It is simply the inevitability of cycles. The mood swings of the securities markets consistently resemble the movement of a pendulum. While the midpoint of the arc best describes the location of the pendulum "on average," it spends very little time there. Instead, it is almost always swinging toward or away from the extremes of its arc, moving between euphoria and depression, or between celebrating positives and obsessing over negatives.

EQ: That sounds intuitive, yet we constantly see people caught off guard. If cycles are so reliable, why do investors repeatedly fail to heed them?

HM: The error stems from an excessive proclivity to believe the positives—and disregard the negatives—prompted by the desire to make money. This leads to the most dangerous phrase in investing: “This time is different”. This phrase is a recurring bull-market cliché that always bears scrutiny. The greatest mistakes regarding the economic cycle result from a willingness to believe that it will not recur. Although history does not repeat itself exactly, it "does rhyme" because of the tendency of investors to forget lessons and repeat behavior.

EQ: So, the extremes of investor psychology are really the primary driver?

HM: Absolutely. Patterns in investor behavior rhyme from cycle to cycle, creating profound opportunities at the extremes. When attitudes of euphoria are widespread, prices assume the best and incorporate no fear, which is a formula for disaster. Conversely, when others are frightened and pull back, their behavior makes bargains plentiful, signaling an opportunity to be aggressive. Importantly, the movement toward the extreme itself supplies the energy for the swing back toward the midpoint.

EQ: Given that we cannot predict when the pendulum will reverse, how should a thoughtful investor approach market conditions informed by cyclical extremes?

HM: While we may never know where we’re going, we’d better have a good idea where we are. The circumstances must inform our behavior. Emotion must be resisted. I find myself using one quote more often than any other: "The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs". This means leaning away from the direction chosen by most others—selling when they’re euphoric, and buying when they’re afraid.

The Edward Quince Takeaway

Recognize that markets are rarely in the “happy medium,” but rather constantly oscillating between emotional extremes. Your goal is not to predict the next swing, but to be acutely aware of investor psychology—the more complacent and euphoric the crowd is, the more caution and prudence you must exhibit in your own actions.

Edward Quince's Wisdom Bites: The Human Calculus of Value – Beyond Prices and Pundits

Welcome back, discerning investors, to Edward Quince's Wisdom Bites! In our fast-paced world, where markets swing on every headline and narratives shift quicker than a meme coin's price, it's easy to get lost in the "noise and false stimuli". But as this blog consistently reminds us, true understanding comes from looking beyond the superficial, embracing uncertainty, and focusing on timeless principles. Today, we dive into a recent memo from investment titan Howard Marks, "The Calculus of Value", a piece that, despite its August 2025 publication date, offers profound insights perfectly aligned with our core investment philosophies.

Marks, known for his incisive market observations, opens his August 2025 memo by reflecting on the 25th anniversary of his "bubble.com" memo. He updates his perspective on asset values, building on his previous conclusion that while U.S. stock market valuations were "lofty but not nutty", they didn't necessarily signal a bubble due to a lack of extreme investor psychology.

Marks distinguishes between value and price, a fundamental concept for any investor:

• Value is subjective – what an asset is "worth" at a point in time, and it cannot be definitively found, "not even by AI, as far as I know".

• Price is concrete – it's simply the amount you pay to obtain something.

The essence of good investing, Marks asserts, is accurately estimating this subjective value and then purchasing it at a reasonable price. He notes that while his education at the University of Chicago taught a purely mathematical discounting process of future cash flows and earnings to determine a fair price, "in the real world, price is set by a different discounting process, which consists mostly of people applying their subjective opinions and attitudes about what the asset and its earning power are worth".

This brings us to Benjamin Graham's enduring analogy, which Marks also highlights: "in the short run the market functions like a voting machine, reflecting assets’ popularity. But in the long run, it’s a weighing machine, assessing assets’ value". Marks himself refers to a "calculus of value" that seems "entirely logical and almost mathematical," but crucially, it's "applied by people who aren’t". This human element – the subjective opinions and attitudes – is what truly drives pricing in the market.

Marks observes several factors currently "firing investor imaginations" and contributing to bull markets:

• The positive psychology and "wealth effect" from recent gains in markets, high-end real estate, and crypto.

• The belief that, for most investors, there's "no alternative" to U.S. markets.

• The excitement surrounding "today’s new, new thing: AI".

A central theme in Marks' memo, and a powerful warning, is the "this time is different" cliché. He quotes Sir John Templeton, who said that "20 percent of the time things really are" different. Marks struggles with this paradox, stating, "I just have no idea which of those two concerns is more valid today" – whether it's the cliché always bearing scrutiny, or the failure to recognize when things actually are different. He emphasizes that failing to recognize genuine shifts "stands between the average investor and superiority".

Marks' "The Calculus of Value" deeply resonates with this blog's core investment philosophies, particularly its emphasis on intellectual humility and filtering noise. Marks' admission that he has "no idea" which side of the "this time is different" paradox is more valid exemplifies the very "I don't know" mentality this blog advocates. It reinforces that "Nobody knows anything, and that's okay", particularly when it comes to complex market dynamics.

His distinction between objective value and subjective price underscores the importance of focusing on underlying fundamentals rather than getting swept up in market popularity or "fleeting narratives". The "calculus of value" being logical but "applied by people who aren't" perfectly illustrates how human nature and behavior "matters more than your forecast". It's a reminder that emotions and psychology, rather than pure logic, often dictate short-term market movements.

Marks' call to understand "the other side of the issue," as per John Stuart Mill's quote ("He who knows only his own side of the case knows little of that"), aligns with the blog's promotion of critical thinking and seeking diverse perspectives beyond mere "group think". This intellectual rigor helps cut through the "noise bottleneck" that bombards investors daily.

Ultimately, Marks' memo, like the timeless wisdom shared here, urges investors to move beyond the "daily deluge of financial 'news'" and the "constant pressure to do something". Instead, cultivate patience – because "the big money is not in the buying and selling, but in the waiting". It reinforces the wisdom that "Never interrupt compounding unnecessarily" by reacting to every "new, new thing".

In a world constantly seeking instant answers and quick gains, Howard Marks' "The Calculus of Value" serves as a powerful reminder of enduring investment truths. It reaffirms our belief that true success in finance, and in life, comes from embracing intellectual humility, discerning value from price, filtering out the pervasive noise, and adhering to patient, long-term principles. As always, "Clarity comes from subtraction, not addition". So, understand the human element, scrutinize every "this time is different" narrative, and let your discipline triumph over market drama.

Daily Economic Update: November 21, 2024

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

- Innovation a public good - everyone uses the best ideas

- Top talent leveraged and clusters 

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

XTOD: Howard Marks' interview with Bloomberg just dropped: 

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

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

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

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

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

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

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

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

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

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

2.  Stop adding. Start deleting. 

3.  Their minds were stronger than their feelings.

4.  You can't buy a map to the top.

5.  Motivation is entry level.

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

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

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

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

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

Daily Economic Update: 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 9, 2024

Yesterday the Swedish central bank cut their benchmark rate by 25bps to 3.75% in what some believe will be the first of many developed country central banks to cut rates this year.  On the day ahead we'll get the Bank of England rated decision, they are not expected to cut rates.  

Stateside, the large 10Y Treasury Auction tailed by a full basis point, the 13th of the last 15th auction to tail, perhaps showing that the market appetite for longer dated treasury paper has some fragility, but we'll see what the 30Y auction does today.  In Fedspeak, it's been more of the same kind of data dependent talk that everyone has become accustomed to of late.  Yields rose a couple of bps and stock grinded out another day of gains on the Dow and was nearly flat on S&P.

In other news Howard Marks dropped his latest memo titled The Impact of Debt.  It is his second "short" memo, following up on his last memo which I reviewed here. Readers will know I enjoy Marks' work and have covered some of his other recent memos here and here.  Perhaps my favorite Marks' quote is "Leverage doesn’t add value or make an investment better. Like everything else in the investment world other than pure skill, leverage is a two-edged sword – in fact, probably the ultimate two-edged sword. It helps when you’re right and hurts when you’re wrong."  

In this most recent memo Marks' reference the work of someone else I very much enjoy reading, Morgan Housel.  Here are some takeaways:

• "It's the presence of debt that creates the possibility of default, foreclosure, and bankruptcy."
  
  
  
• "Does that mean debt is a bad thing and should be avoided? Absolutely not. Rather, it’s a matter of whether the amount of debt is appropriate relative to (a) the size of the overall enterprise and (b) the potential for fluctuations in the enterprise’s profitability and asset value."
•  This reminds me and reminded Marks of one of my favorite Marks' memos https://www.oaktreecapital.com/docs/default-source/memos/2008-12-17-volatility-leverage-dynamite.pdf?sfvrsn=c7bc0f65_2
  
  
  
• "As Housel puts it, “ as debt increases, you narrow the range of outcomes you can endure in life.”
  
  
• The reason for taking on debt is simple, it's cheaper than equity, allows you to 'bet' more and when you're right you end up winning more.
• Of course when you're wrong you lose more...
  
  
• And this is where Marks' makes his mark in the memo: "But levered portfolios face a downside risk to which there isn’t a corresponding upside: the risk of ruin. The most important adage regarding leverage reminds us to “never forget the six-foot-tall person who drowned crossing the stream that was five feet deep on average.” To survive, you have to get through the low points, and the more leverage you carry (everything else being equal), the less likely you are to do so. "
  
  
• And in referencing Housel referencing Taleb, Marks' provides "It’s the isolated “tail events” that saddle levered investors with the greatest losses" and "One is thus capable of unwittingly playing Russian roulette – and calling it by some alternative “low risk” name. " and " as illustrated by recent events, we rarely consider outcomes that have happened only once a century . . . or never."
  
  
• So where does that leave things with regards to Marks' views on using leverage:
• "investors should usually use less than the maximum available. Successful investments, perhaps enhanced by the moderate use of leverage, should usually provide a good-enough return – something few people think about in good times."
• The risker the asset, the less leverage you should use and
• Adhere to Buffett's "Margin of Safety"

What's "Margin of Safety", there are many good definitions you can find that I've written on this blog, but I think this sums it up: think creatively and be open to things unfolding in ways different from what they expect....flexibility comes with a cost....retain the option to change course when our plans go awry and have the humility to follow through. 

On the day ahead it's BoE, jobless claims and 30Y Auction.

XTOD: There are many people here with serious gifts and talents—intelligent, witty, thoughtful—and those talents constitute a great power. Unfortunately, most choose to use that power in stupid and/or dangerous ways: the sharp-tongued pundit on here wreaking insecure havoc on everyone that disagrees with him in the slightest way; or the amount of time and energy thinking of funny memes for cheap engagement.

I often imagine what good is being lost to the world—what great good could be added to the world—if these same people used those gifts and talents, that power, to build others up and do something productive. 

What books will never be written?

What genuine words will never be said?

What time and attention is not given to a spouse that is given to a social media critic?

XTOD: If you do things you don’t enjoy for long enough without understanding why you’re doing them, you develop the bad habit of doing things you don’t enjoy without understanding why you’re doing them. And you end up with a lot of people who are miserable at work.

XTOD: Want to understand what's going on in the commercial real estate market right now, especially office properties?  Watch what's happening with 1440 Broadway.  The $400 million loan backing 1440 Broadway helped push up the serious delinquency rate for office loans to 7% in April, its highest level since early 2017,  https://bloomberg.com/news/articles/

XTOD: What I want 2 understand is where all the ratings agencies downgrades are. Crickets. Even CRE CLOS-- where the losses to the AAAs stand a real chance of repeating the 2008  meltdown that saw Our Heroes taking the "First." They LITERALLY claimed a 1st Amendment pass to avoid suits

XTOD: DavidBeckworth

𝘔𝘺 𝘱𝘳𝘰𝘮𝘱𝘵 𝘵𝘰 𝘊𝘭𝘢𝘶𝘥𝘦 𝘈𝘐: can you imagine a world where the combination of (1) big data and (2) AI enables the Federal Reserve to become more automated and less reliant on human beings? 

@pmarca

 𝘊𝘭𝘢𝘶𝘥𝘦 𝘈𝘐 𝘙𝘦𝘴𝘱𝘰𝘯𝘦:

Yes, I can envision a world where the combination of big data and advanced AI technologies enable the Federal Reserve's decision-making processes to become more automated and less reliant on human input. Here's how this scenario could potentially unfold:  

𝗕𝗶𝗴 𝗗𝗮𝘁𝗮 𝗜𝗻𝘁𝗲𝗴𝗿𝗮𝘁𝗶𝗼𝗻: The Federal Reserve could leverage big data analytics to integrate vast amounts of economic data from various sources, including financial markets, banking systems, employment statistics, consumer spending patterns, and global economic indicators. This comprehensive data integration would provide a real-time, holistic view of the economic landscape.

𝐀𝐈-𝐃𝐫𝐢𝐯𝐞𝐧 𝐌𝐨𝐝𝐞𝐥𝐢𝐧𝐠 𝐚𝐧𝐝 𝐅𝐨𝐫𝐞𝐜𝐚𝐬𝐭𝐢𝐧𝐠: Powerful AI algorithms and machine learning models could be trained on this extensive data to analyze economic trends, identify patterns, and make accurate forecasts about inflation, employment, economic growth, and other key indicators. These AI models could continuously learn and adapt, improving their predictive capabilities over time.

𝐀𝐮𝐭𝐨𝐦𝐚𝐭𝐞𝐝 𝐏𝐨𝐥𝐢𝐜𝐲 𝐃𝐞𝐜𝐢𝐬𝐢𝐨𝐧𝐬: Based on the insights derived from AI-driven modeling and forecasting, the Federal Reserve's decision-making processes related to monetary policy, interest rate adjustments, and other interventions could become increasingly automated. AI systems could recommend optimal policy decisions based on predefined objectives and constraints, minimizing the need for human deliberation and decision-making.

𝐂𝐨𝐧𝐭𝐢𝐧𝐮𝐨𝐮𝐬 𝐌𝐨𝐧𝐢𝐭𝐨𝐫𝐢𝐧𝐠 𝐚𝐧𝐝 𝐀𝐝𝐣𝐮𝐬𝐭𝐦𝐞𝐧𝐭: With real-time data feeds and AI-driven monitoring, the Federal Reserve's policies and interventions could be continuously evaluated and adjusted based on changing economic conditions. AI systems could dynamically adapt policies to maintain economic stability, without the delays associated with human decision-making processes.

𝐑𝐞𝐝𝐮𝐜𝐞𝐝 𝐇𝐮𝐦𝐚𝐧 𝐈𝐧𝐯𝐨𝐥𝐯𝐞𝐦𝐞𝐧𝐭: While human oversight and governance would likely still be necessary to some extent, the day-to-day operations and decision-making processes of the Federal Reserve could become significantly less reliant on human input. AI systems could handle the bulk of data analysis, modeling, forecasting, and policy recommendations, with human expertise focused on setting overarching objectives and ensuring the system's integrity.

However, it's important to note that such a scenario would also raise concerns about transparency, accountability, and the potential for unintended consequences or biases inherent in AI systems. Careful governance frameworks, ethical considerations, and robust monitoring mechanisms would need to be in place to ensure the responsible and trustworthy deployment of such AI-driven systems in critical economic domains like central banking.