Daily Economic Update: July 18, 2024

Potential economic policies seemed to be a catalyst to push investors out of big tech and into small caps.  The narrative around the trade is that the large AI sensitive names might find it challenging to procure the hardware needed to fuel the growth that is priced into those stocks, while smaller companies tend to have more floating rate debt and could be direct beneficiaries of Fed rate cuts.  According to CNBC, it was the first time in over 20 years the Nasdaq lost over 2.5% while the Dow registered a gain.  Yields were little changed.

In more important news, Howard Marks latest Memo was released The Folly of Certainty.  A quick summary in the bullets below (You can probably find my recaps of some of the other recent memos here.)

• The premise: "how can anyone be without doubt."
• Macro-forecasting is impossible: (a) we don't know what's going to happen and (b) we don't know how the markets will react to what actually does happen
• The economist consensus has been wrong about the path of rate cuts and about the odds of a recession.
• He remarks about how some people have ended up capturing massive gains in the stock market based on a belief the Fed would be cutting rates.  Clearly the Fed didn't cut but stocks rose nonetheless.  In other words, they ended up right for the wrong reasons.
• "Markets swing more than economies and companies. Why? Because of the unpredictability of market participants' psyches or emotions."
• "Intelligence, education, access to data and analysis can't be sufficeint to produce correct forecasts.".  Quoting John Kenneth Galbraith, "There are two kinds of forecasters: those who don't know, and those who don't know they don't know."
• People underestimate the role of luck in making money. There is a specious association of money and intelligence.
• Have intellectual humility - realize you might not be sure, or you don't know
• Certainty in fields like politics, economics and investing is absurd.

After reading Marks', here are some reminders from this blogger (from post on this blog over the year +):

Uncertainty is an interesting word and one that is often conflated with "risk" in the financial setting and perhaps is a little confusing. I've found the following to be a helpful guide: "risk refers to all outcomes that can be insured against, uncertainty to those which cannot." And "..uncertainty as both Keynes and Knight define it, but which the mainstream denies: a situation where we have no scientific basis for calculating a ratio (probability)."  To further illustrate: "For example, if one smoker out of ten died of lung cancer, the probability of smokers dying of lung cancer is 10 percent. This set of numerical probabilities [cardinal probabilities] is the standard domain of risk as recognized by actuaries...At the opposite extreme is uncertainty...where we have no scientific basis for calculating a ratio."  Keynes (as reported by Skidelsky) sums this up as "The magnitudes of some pairs of probabilities we shall be able to compare numerically [cardinal probabilities], others in respect of more or less only (i.e. 'more or less likely', "ordinal probabilities), and others not at all [uncertainty]."  If you're ever interested in reading more about risk and uncertainty (and Keynes views on uncertainty), author Peter Bernstein's classic "Against The Gods" is worth a read.   

While uncertainty might be scary, Bernstein laments: "A tremendous idea lies buried in the notion that we simply do not know.  Rather than frightening us, Keyne's words bring great news: we are not prisoners of an inevitable future. Uncertainty makes us free."

Or as Frank Herbert said in the Dune series:   “to know the future absolutely! All of it! What fortunes could be made — and lost on such absolute knowledge, eh?” but “what a hellish gift that’d be. What utter boredom! Every living instant he’d be replaying what he knew absolutely … Ignorance has its advantages.” 

Given the uncertainty and the bombardment of noise in the current economic environment, I was reminded of two quotes in the famous wall street book "Where Are the Customers' Yachts?" by Fred Schwed: "In this case, the notion that the financial future is not predictable is just too unpleasant to be given any room at all in the Wall Streeter's consciousness" and "For one thing, customers have an unfortunate habit of asking about the financial future.  Now if you do someone the signal honor of asking him a difficult question, you may be assured that you will get a detailed answer.  Rarely will it be the most difficult of all answers-"I don't know".

A prudent way to navigate the inherent uncertainty in the world and economy is by maintaining some flexibility, a buffer, a margin of safety and a level of creativity in planning.  This flexibility isn't free, it's the extra turn of leverage not taken, it's the liquidity not deployed, or other analogous things, but it also provides a valuable option to change course when things aren't working out.  It creates a condition to increase the odds of survival and survival is what allows individuals and businesses to adhere to Charlie Munger's first rule of compounding: "The first rule of compounding is to never interrupt it unnecessarily".

On the data side, housing starts beat expectations lead by a beat in multifamily.  Building permits also beat expectations and industrial production beat after auto assemblies surged.  In Fed news, NY Fed Prez John Williams seemed to indicate that the data between July and September would be important for the Fed to gain more confidence on the fight against inflation, which would seem to potentially make a July cut a long shot.  Gov. Waller continued to express belief that we'll pull off a soft landing and also the need to see "a bit more evidence" over the next couple of months before penciling in a rate cut.

In the real world people still seemed to largely be employed, taking vactions, flying, dining out, etc. 

On the day ahead, it's ECB (expected to be on hold), jobless claims, Philly Fed and Fedspeak.  Markets will also look to parse and further react to overnight comments from VP nominee Vance.

XTOD: Part 1 Here is a contrary opinion on the emergence of Silicon Valley support for former President Trump. Which like all my opinions on here, probably won’t be popular.    It’s a bitcoin play.  

Not because the former President is a far stronger proponent of crypto. That’s nice. But doesn’t really impact the price of crypto. It makes it easier to operate a crypto business because of the inevitable, and required, changes at the SEC  

What will drive the price of BTC is lower tax rates and tariffs, which if history is any guide (and it’s not always ), will be inflationary. 

Combine that with global uncertainty as to the geopolitical role of the USA, and the impact on the US Dollar as a reserve currency, and you can’t align the stars any better for a BTC price acceleration

Part 2  How high can the price go. Way higher than you think.  Remember, the market for BTC is global.  And the supply has a final limit of 21m BTC, with unlimited fractionalization.  

Keep that in mind as you consider what happens if because of geopolitical uncertainty and the decline of the dollar as the reserve currency, BTC becomes a “safe haven” globally.  Which means that BTC could be what countries and all of us look to buy as a means to protect our savings.  

Crazy ? It already happens in countries facing hyperinflation.  

And if things really go further than we can imagine today (and I’m not saying they will.   Just that this has a possibility somewhere above zero) , then BTC becomes exactly what the Maxis envision.   A global currency

XTOD: The biggest outperformance of small-cap stocks over large-cap stocks, over a 5-day period, in history.

XTOD: The problem with this Trump ticket is that most these economic policies are predicated on proven to be totally inefficient measures like tariffs, devaluation, etc… 

I sure hope these are election rhetoric and that Trump will prove his usual opportunistic self by using the ideas to get voted in but not actually toying with implementation.

XTOD: “On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous.”  - Buffett

XTOD: Keep the goal. Change your mind about how to reach it.  One sign you’re getting in your own way is not changing your tactics when you’re not getting the desired result.

FOMC Recap: It's a Vibe

IT'S A VIBE

• As expected, the FOMC is on hold for the second straight meeting, leaving the Fed Funds target range at 5.25% to 5.50% and leaving QT unchanged
• The Fed remains committed to returning inflation to its 2 percent target
• Powell is not confident yet that rates are sufficiently restrictive to bring inflation back to 2%, not thinking about rate cuts
• The rise in long-term yields has been viewed as being driven by exogenous factors that should slow the economy and effectively do the job of additional rate hikes as long as there is a persistence of these higher yields

About a week ago, a few days after BEA data shows the U.S. economy grew at 4.9% in the 3Q2023, I was awakened to the text message above, a text which is emblematic of how it seems many people feel about the state of the U.S. economy. While statistically the U.S. economy is by all accounts in pretty good shape, with current low unemployment, strong GDP, household net worth at record levels, and slowing inflation, the overall sentiment seems to be pretty bad.  The recession calls of the past 18 months continue to plague the psyche, the recent geopolitical actions have reminded us that the world is indeed a scary place, there are economic concerns tied to the government financing, commercial real estate, regional banks, China's economy and the list goes on.  

The term "vibecession" was reportedly coined by Bloomberg Opinion contributor Kyla Scanlon to describe such a situation where sentiment risks creating narratives that actually lead to consumer and business behavior that does in fact lead to a decline in real economic activity.  In my opinion this is "vibecession" thinking is a form of Keynes "animal spirits" .  Post-Keynesian economist would probably say we should be fairly concerned about the bad vibes.

How much expectations matter for inflation and central bank policy is a source of debate, but with nominal GDP growth sporting an 8 handle, it might be hard to see an immediate impact from sentiment.  Nonetheless, I believe the Fed is cognizant of the "vibes" as they continue to assess the cumulative impact of rate hikes to date, the potential lagged impacts and the uncertain impact of policy on financial conditions.

In my opinion, the text message above and the term "vibecession" are really problems in risk management and dealing with uncertainty.  The Fed is also dealing with this risk management problem and inherent uncertainty when asking "should we hike more?"  While Powell believes the risks are more two-sided at present, he noted that there are risks that policy may not be sufficiently restrictive even with uncertainty over the impact of lags.

I'm not an expert on Keynes, but Robert Skidelsky is one such expert.  In his book "What's Wrong With Economics?"  he spends some time discussing Keynes perspective on risk and the differences between risk and uncertainty.

"risk refers to all outcomes that can be insured against, uncertainty to those which cannot."

" ..uncertainty as both Keynes and Knight define it, but which the mainstream denies: a situation where we have no scientific basis for calculating a ratio (probability)."

Effectively, Keynes (as reported by Skidelsky), defined risk and uncertainty as being on a continuum: "The magnitudes of some pairs of probabilities we shall be able to compare numerically [cardinal probabilities], others in respect of more or less only (i.e. 'more or less likely', "ordinal probabilities), and others not at all [uncertainty]." 

Fortunately one of the great triumphs of Finance is that it gives us ways to manage risk through innovations such as insurance and hedging. Unfortunately, it cannot eliminate all uncertainty, and of course taking some level of risk is necessary to meet return objectives.  

A prudent way to navigate the inherent uncertainty in the world and economy is by maintaining some flexibility, a buffer, a margin of safety and a level of creativity in planning.  This flexibility isn't free, it's the extra turn of leverage not taken, it's the liquidity not deployed, or other analogous things, but it also provides a valuable option to change course when things aren't working out.  It creates a condition to increase the odds of survival and survival is what allows individuals and businesses to adhere to Charlie Munger's first rule of compounding: "The first rule of compounding is to never interrupt it unnecessarily". Perhaps this is why the Commercial Real Estate industry has clung to the motto "survive to '25".

Just the other day economist Brad DeLong shared a substack post which discussed the long-run outperformance of U.S. equities over U.S. government bonds.  After reviewing the data, which shows the 65004-to-41 wealth gap in favor of stock investors since 1870, he posits: "But if stocks are such a good deal for the long run, why are our investors in the stock market not richer?" to which he retorts: "there is a reason why they are not even richer. It takes time for the law of averages to work itself out. And "average" is only "typical" if you have that time. If you lose your stake and cannot continue to play, you do not have that time. Mathematically, your strategy may have had a high expected return. But the typical investor who undertakes that strategy never sees that expectation."

It is unfortunate that the ideas of market efficiency and staying the course seem to be fighting an uphill battle of late. After all, if we all thought there was certainty that a financial crisis was right around the corner, we would all act on that information today and in essence we would cause that crisis today.  In theory all of this negative sentiment, and the beliefs about fiscal and monetary reaction functions are already "priced in" to today's markets   We also generally know that investors who try to time the market fail, or even if they can get out at the right time (top), they fail at redeploying their capital when the market truly does look cheap (even based on whatever metrics led them to sell in the first place). Perhaps the reason these ideas sometimes fall by the wayside is that people find it much more interesting to read a post about recession or doomsday than to read a post about risk management.

Back to the Fed, can the Fed engineer a "soft landing", can they get inflation back to 2% without pain? I don't know.  In my last FOMC recap, I described what I see as the three main "endings" to the current rate hike cycle that I see most commonly discussed in financial media, these are broadly (1) soft landing, (2) financial repression or (3) hard landing.

I don't know how the economy will unfold from here, or what other "shock" will hit in the interim, but I think that I know that surviving through whatever downside scenarios you can imagine will allow you to most fully maximize returns in the long run.

Daily Economic Update: September 14, 2023

Ahead of ECB decision and the U.S. data today (jobless claims, PPI and retail sales), the 2Y is 4.98% the 10Y is 4.26% both down ~5bps from yesterday morning. Yesterday's CPI was largely in line with market expectations, all but cementing the Fed holding rates steady next week.  On the heels of CPI, this post from the BLS hit my feed, "There were 236 work-related suicides in 2021, down from 259 in 2020. Work-related suicides in these years were down from 307 in 2019, which was the highest number since the data series began in 2011. There were 229 work-related suicides in 2015, the lowest number over this 11-year period."  It probably says something about the plight of workers when the government decided to start tracking this statistic (I feel like Karl Marx in writing that sentence).  Speaking of labor the UAW appears "likely" to strike at midnight tonight with UAW President Fain saying: "It’s a battle of the working class against the rich; the haves versus the have-nots; the billionaire class against everybody else.” 

ECB decision day. At Jackson Hole, Lagarde focused on some of the uncertainties around supply-side factors (geopolitics, near-shoring) and technology shocks that under certain labor condition could lead to sustained "tit for tat" inflation.  My favorite quote of hers from J-Hole was that "we should also be clear about the limits of what we currently know and what our policy can achieve. If we are to maintain our credibility with the public, we will need to talk about the future in a way that better captures the uncertainty we face."   (because you wanted to know - my favorite Lagarde quote of all time is "If inflation is the genie, then deflation is the ogre that must be fought decisively.")

Uncertainty is an interesting word and one that is often conflated with "risk" in the financial setting and perhaps is a little confusing. I've found the following to be a helpful guide: "risk refers to all outcomes that can be insured against, uncertainty to those which cannot." And "..uncertainty as both Keynes and Knight define it, but which the mainstream denies: a situation where we have no scientific basis for calculating a ratio (probability)."  To further illustrate: "For example, if one smoker out of ten died of lung cancer, the probability of smokers dying of lung cancer is 10 percent. This set of numerical probabilities [cardinal probabilities] is the standard domain of risk as recognized by actuaries...At the opposite extreme is uncertainty...where we have no scientific basis for calculating a ratio."  Keynes (as reported by Skidelsky) sums this up as "The magnitudes of some pairs of probabilities we shall be able to compare numerically [cardinal probabilities], others in respect of more or less only (i.e. 'more or less likely', "ordinal probabilities), and others not at all [uncertainty]."  If you're ever interested in reading more about risk and uncertainty (and Keynes views on uncertainty), author Peter Bernstein's classic "Against The Gods" is worth a read.   

While uncertainty might be scary, Bernstein laments:

 "A tremendous idea lies buried in the notion that we simply do not know.  Rather than frightening us, Keyne's words bring great news: we are not prisoners of an inevitable future. Uncertainty makes us free."

Or as Frank Herbert said in the Dune series:

 “to know the future absolutely! All of it! What fortunes could be made — and lost on such absolute knowledge, eh?” but “what a hellish gift that’d be. What utter boredom! Every living instant he’d be replaying what he knew absolutely … Ignorance has its advantages.”

Back to the ECB, faced with slowing output in parts of the EU, the betting line is for the ECB to hold their key policy rates with the main refinancing rate at 4.25% and stress data dependence. 

We also still have casino hacks, the first day of Arm trading in the public markets and China with another rate cut

XTOD: Under the Master Plan the pressure on the Fed to "do something" wont start until the banks have offloaded their CMBS and LL exposures to the non-bank tapeworms via "credit risk transfers." That will be 2025 at the earliest.

XTOD: From Goldman, potentially three big hits coming to economic activity. Student loan resumption, UAW strike, and government shutdown

XTOD: An economist looks at this and says hey, grocery prices aren't adding to inflation any longer. A normie looks at this and says hey groceries still are 17% more expensive than 2 years ago. Why aren't they going down?

XTOD: Overall I still feel better than I did a few months ago about the possibility of a soft landing. But I feel a bit worse than I did yesterday.  And if you over-updated based on the noisy June and July data you should probably be over-updating back again based on the August data.

XTOD: Whilst I am not a fan of a 0 deficit policy: there is a limit. The fed government was right to spend more during Covid. But that should never have been more than a temporary response to help out those who sacrificed for the rest of us. Making that spending permanent is reckless.
We are creating new dollar valued assets equal to 10% of GDP every year. The Fed has an inflation target of 2% and, to hit that target, it will need to continue raising rates. As interest rates go up, the deficit will explode further to finance the existing debt.
The likely outcome will be a resurgence of inflation that will act as a stealth tax to help finance the shortfall. This will not end well.

XTOD: Many people will look at this trend and think "it's not sustainable b/c debt service becomes impossible." Nope (not for U.S., at least). It's unsustainable b/c inflation will reverse trend (by making NGDP grow ever more rapidly)...Yes. But when push comes to shove, does monetary or fiscal policy capitulate? Fed is obliged to support Treasury at auction, so unless one is expecting Volcker II...

XTOD: I have yet to find a system that's a good way to track:
- media recs to come back to later
- random ideas I want to spend more time noodling on
- future tasks I have to do
- daily/weekly activities i want to track
i want all of this together, organized, and easy to add to

XTOD (reply): this does not and will never exist. let it go <3

XTOD: Possible Sign Of Life Found On A Planet 120 Light-Years Away https://trib.al/ieel60f

Daily Economic Update: October 9, 2024

I wrote this before the airing of HBO's documentary "Money Electric: The Bitcoin Mystery" where rumors have been swirling that the real Satoshi Nakamoto will be unvieled which will reportedly send "shockwaves" through markets and the election.  I guess I'll take the under on the impact of this documentary and side with Charlie Munger's sentiment on the importance of Bitcoin, perhaps best summed up in his quote: "It's like somebody else is trading turds and you decide, ‘I can't be left out.’"

Chinese stimulus hopes fading for now. Oil prices fell despite uncertainty around the Mid-East turmoil, but for now mixed messaging around the possibility of an Israeli attack on Iranian oil, coupled with a lowered expectations for Chinese stimulus might be helping to slow the recent price spike.  Speaking of uncertainty we have Hurricane Milton and uncertainty of the path as well as the secondary and tiertiary knock on impacts that could arise from the storm.  Lastly, on uncertainty, yesterday's NFIB Small Business Optimism highlighted this quote:

"Small business owners are feeling more uncertain than ever,” said NFIB Chief Economist Bill Dunkelberg. “Uncertainty makes owners hesitant to invest in capital spending and inventory, especially as inflation and financing costs continue to put pressure on their bottom lines."

This reminded me of a quote by legendary economist Irving Fisher, which I referenced here:

 "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."

Perhaps a feeling that the Fed is willing to let the inflation rate run a little hotter in order to provide more certainty for the labor market will paradoxically create instability for the labor market by causing business uncertainty due to inflation.  

Speaking of the Fed, Jamie Dimon spoke on BBG noting he thought the Fed was right in beginning to cut rates, but he really focused on structural issues such as regulation, deficits and geopolitics.

Bond markets didn't love the 3Y Note Auction with a 0.7bp tail and a poors showing from indirect bidders (generally foreign demand).  The 2Y is 3.97% and the 10Y is 4.03%.   Nonetheless equity markets were up, because tech only goes up.  The latest Atlanta Fed GDP estimate for 3Q is 3.2%, a number I don't think many expected for a year that has had a 5 handle interest rate policy.

On the day ahead the highlights will be the FOMC Minutes and the 10Y Note Auction.

XTOD: IOW, NGDP growth > 5%. Aggregate demand growth remains robust. No slowdown in sight.

XTOD (long but good read by Michael Pettis, here's 1 of 11) : 1/11 Adam Tooze suggests that "If your aim is restoring the competitive position of US industry, a large dollar devaluation would do more than a sprinkling of industrial subsidies."

XTOD: "Microsoft has become more cautious about paying for ever-bigger server  clusters for OpenAI as the cloud giant aims to ensure it won’t take a  loss on costly data centers that may not generate consistent revenue in  the coming decades"

XTOD: NEW FROM US:Roblox—Inflated Key Metrics For Wall Street And A Pedophile Hellscape For Kids  https://hindenburgresearch.com/roblox/ $RBLX 

XTOD: Lou Simpson: “The essence [of investing] is simplicity.” https://pbs.twimg.com/media/GZXWSwSX0AAHoRM?format=jpg&name=900x900

XTOD: Simplification is the art of organizing your life around purpose.

Daily Economic Update: May 30, 2025

Matt Levine’s Titled His Column: Tariffs Are Illegal

As you already read, yesterday started with the news that Federal courts blocked Trump’s tariffs. By the afternoon the Trump Administration appealed and the tariffs were reinstated. It seems likely this will end up in front of the Supreme Court, but as some analysts have pointed out, there are other avenues the administration can use to impose tariffs, though each seem to have some limitations. In the meantime some reports continue to state that the trade negotiations between some countries and the U.S. continue.

To state the obvious, the future of tariffs is uncertain and if there’s one thing markets hate, it’s uncertainty.

But What If You Need Uncertainty?

I’m sure you know that Fisher Black is famous for his work on option pricing and the famous Black-Scholes (and later Merton) model.  And you might remember my post where I mentioned the DIKW theory of knowledge, where the “I” stands for “information”, or data made useful, where we can make useful inferences.  So what does this have to do with Fisher Black, well back in 1986 in a paper titled Noise he made the point that uncertainty is a necessary condition of financial markets. 

Black defined information in markets as data that allows us to estimate true value and everything else as noise, simply data that appears informative, but really adds nothing to our ability to estimate true value. 

He argues that absent this uncertainty, in the form of noise, is essential because without it “there will be very little trading” in individual assets. Further providing, “Noise trading is trading on noise as if it were information. People who trade on noise are willing to trade even though from an objective point of view they would be better off not trading. Perhaps they think the noise they are trading on is information. Or perhaps they just like to trade. With a lot of noise traders in the market, it now pays for those with information to trade. It even pays for people to seek out costly information which they will then trade on.”

So the next time you hear someone complain about how much uncertainty topic XYZ creates, just remember without that uncertainty there would be no liquidity and markets lose meaning.

“Differences in opinion make a market” or as Dune put it: “to know the future absolutely! All of it! What fortunes could be made — and lost on such absolute knowledge, eh?” but “what a hellish gift that’d be. What utter boredom! Every living instant he’d be replaying what he knew absolutely … Ignorance has its advantages.”

Perhaps The Real Uncertainty Is The Limit Of Central Power

What do tariffs and “the whiskey rebellion" have in common, almost everything or maybe nothing.

Tariffs today and the whiskey tax of the 1790s may seem worlds apart, but they share a common thread: a federal government, burdened by debt, reaching for revenue in pursuit of what it defines as national interest.  Today, that national interest is domestic manufacturing and national security, specifically strategic sectors like steel and semiconductors. In the 1790s, the interest was the westward expansion and asserting control over the Northwest Territory. Today, the tariff actions imposed by the executive branch, which supposedly will be paid for by exporting countries, but in reality are paid by the importer (though who bears the actual tax incidence is debatable), are the actions that are justified in supporting the national interest.  Back then it was a Congress enacted tax on whiskey distillers, part of a plan to fund the war debt and build federal legitimacy in the west.  Both tariffs and the whiskey tax appeared to unevenly economically squeeze some groups more than others: back then western PA whiskey distillers bear a heavier burden than eastern counterparts, today it’s small and medium sized businesses feeling the tariff brunt.  

The policies of today and of yester-year were viewed by some as being too top-down, and solutions that ignored economic realities. Thankfully today’s resistance is judicial and procedural, as contrasted by those of the 1790s were resisted with rifles. The overarching parallel is one as old as this republic, which is one of the limitations of central power.  Whether it has been frontier stills or modern ports and factories, American history is filled with moments where citizens have questioned the reach of central power.  The song remains the same, who decides, who pays, and who pushes back.

Speaking Of Pushing Back On Central Power

Trump invited Powell to the White House to tell him to lower rates.  Powell reiterated (at least through the Fed statement) that the Fed will “make decisions based solely on careful, objective, and non-political analysis.”   For all the media hype around Trump and Powell’s relationship, it’s really not a new political story.  Paul Volcker has written about pressure from politicians on himself during his tenure in his memoir.  Nevertheless, I’ve written about this tension a few times and perhaps my favorite lens to view this falls under the concept of “fiscal r-star” which you can read about in this post from back in January.

Maybe We Need Information - But All We Get Is Data
In data, we got a slight improvement in GDP in the second estimate with 1Q estimated to be -0.2% vs. the previous estimate of -0.3%, but consumption was revised down. With all the “noise” and speculation of whether there was tariff front-loading, etc. in 1Q, it’s hard to know what to make of these estimates.  Over in jobless claim land, claims remained low.

And the treasury was able to sell the 7Y note at 4.194%, printing 2.3bps through where WI was trading with again signs of strong foreign demand.

We ended the day with the S&P 500 up slightly to 5,912.  The 2Y yield moved down to 3.95% and the 10Y yield down to 4.42%.

PCE hits this morning. Let’s see what new uncertainty it can gift us.

XTODs:

XTOD: "I encourage you to continue pushing the boundaries of our knowledge, to ask the difficult questions, & to pursue the answers with rigor & dedication. Your efforts today will shape the policies of tomorrow, influencing the economic well-being of millions." https://federalreserve.gov/newsevents/speech/kugler20250529a.htm

XTOD: If $WFC Asset Cap gets lifted that’s huge capacity to absorb Treasuries & Agencies… already they have started to buy CLO AAAs…

XTOD: The stock market isn't where you get rich. You get rich developing skills & using those skills to provide goods & services to other people for income which allows you to save. 

The stock market is where you allocate some of that savings to help protect & plan for future spending.   Index funds are a wonderful stock market savings vehicle as they're low cost, diversified and will likely beat 80%+ of higher fee strategies.

XTOD: When there is a lack of clarity, people waste time and energy on the trivial many.  When they have sufficient levels of clarity, they are capable of greater breakthroughs and innovations – greater than people even realise they ought to have – in those areas that are truly vital.

XTOD: Investor Rick Buhrman on the kindness of mastering your craft:

INTERVIEWER: What is the kindest thing that anyone's ever done for you?​

BUHRMAN: ... our oldest son, Theo, who just turned seven, spent the first six months of his life in several NICUs. He was eventually helicoptered to Indianapolis at Riley Hospital for Children. And while we were living in that NICU for almost a half a year we saw a lot of kids who passed away. Most of those kids were not as sick as Theo was.

I don’t know exactly why Theo survived, but I know that a major part of how he survived was because for several decades leading up to that moment, numerous nurses, nurse practitioners, respiratory therapists, doctors, surgeons had committed themselves wholeheartedly to mastering their craft. I can give you tons and tons of examples of these people. And I know that in the moment, it wasn’t necessarily viewed as kindness.

But maybe in some sense, the kindest thing that all of us can do is to pursue something radically that in some way is in service to others, because you just don't know how it's going to change the trajectory of human life. And so for all of those medical practitioners, none of whom I'm sure are listening to this, I owe everything to, because they gave me the gift of being Theo's dad.

https://x.com/DavidKotokGIC/status/1928163547520880992

https://x.com/gamesblazer06/status/1928160833852281106

https://x.com/cullenroche/status/1928102254336168440

https://x.com/GregoryMcKeown/status/1928164457848655978

https://x.com/ericvishria/status/1928191518294299156

 

Daily Economic Update: February 27, 2025

Let’s face it, your day could have been worse, you could be some guy named Evan who is apparently still dating Mary Kate Cornet.  Don’t worry there is already a Memecoin dedicated to this “news” story - I think it was up 800% at one point.  I can only imagine that Mary Kate Cornet will relocate to the AI generated Gaza with Evan’s dad soon.

The long awaited earnings report from Nvidia showed numbers beat across the board on both revenue and earnings. As of the time of this writing the stock reaction was fairly muted, which was unexpected as reports were that options markets were priced for moves around 10%.  The messaging around Blackwell chips seemed promising and Jensen Huang expressed a sentiment that we’re still in the early innings of AI and that there is still plenty of need for increased compute.  I’d summarize Huang’s case for Nvidia with him stating, “I’m fairly sure that we’re at the beginning of this new era.”  I guess we’ll have to wait a little longer to see if investor’s continue to buy into the growth story or whether the overhang of the Deep Seek story, questions around data center capex and concerns about tariffs will weigh on investor optimism.

Post Nvidia earnings, if you're looking for a reason to be bearish, the yield curve inverted between 3m yields and 10 year yields.  The inversion, where 10Y yields fall below 3m yields, has historically been considered a leading indicator portending a recession.  In this blog we’ve spent a good bit of time discussing the inversion between the 2Y and 10Y, you can find a good link to a summary of the yield curve inversion and recessions in this post.  It’s hard to know the current predictive power of yield curve inversions given the October 2022 inversion failed to predict a recession in the usual timeframe. But as some say, the four most dangerous words in the English language are “This Time Is Different.”

With uncertainty seemingly very high, it might be wise to revisit some of our previous discussions on the topic of “uncertainty”.  You can find a bunch of posts that discuss “uncertainty” here.  Some of my favorite advice around this topic are from Peter Bernstein:

“In making decisions under conditions of uncertainty, the consequences must dominate the probabilities"   And "The more uncertain the outcome, the greater may be the value of procrastination."

Unfortunately, the procrastination advice doesn’t always tend to lead to good business and economic results - business always seems to be injured by uncertainty.  However, the reality is that decisions are always made under uncertainty - being able to think in terms of opportunity cost can sometimes be a superpower.

In economic data the 10.5% decline in new home sales exceeded expectations for a less steep decline. It’s likely high interest rates coupled with high prices are weighing on sales and I wonder if the “great stay” in the labor market is a factor as well.  Of course, when in doubt, you can also blame the weather, which was something a few commentators on the report did.

Fedspeak this week has been uneventful.  The 7Y Treasury auction was solid, printing at 4.194%, which was through where When-Issued was trading.  Foreign demand was solid, but not as spectacular as previous auctions this week. 

If you’ve missed it, Tesla shares are somewhat quietly down ~25% this year. The S&P closed down very slightly at 5,952.  The 2Y yield is 4.08% and the 10Y yield is 4.26%.

With Nvidia out of the way, attention turns to today’s GDP report and tomorrow’s PCE report.

XTOD: Much of investing is avoiding FOMO buying and panic selling.

XTOD: All the alleged details and alleged pictures you need about this alleged story about a girl allegedly named Mary Kate who allegedly slept with her boyfriend’s dad. Allegedly.

XTOD: I shared this note with the Washington Post team this morning:  I’m writing to let you know about a change coming to our opinion pages.   We are going to be writing every day in support and defense of two pillars: personal liberties and free markets. We’ll cover other topics too of course, but viewpoints opposing those pillars will be left to be published by others.   

There was a time when a newspaper, especially one that was a local monopoly, might have seen it as a service to bring to the reader’s doorstep every morning a broad-based opinion section that sought to cover all views. Today, the internet does that job.  

I am of America and for America, and proud to be so. Our country did not get here by being typical. And a big part of America’s success has been freedom in the economic realm and everywhere else. Freedom is ethical — it minimizes coercion — and practical — it drives creativity, invention, and prosperity.   I offered David Shipley, whom I greatly admire, the opportunity to lead this new chapter. I suggested to him that if the answer wasn’t “hell yes,” then it had to be “no.” After careful consideration, David decided to step away. This is a significant shift, it won’t be easy, and it will require 100% commitment —  I respect his decision. We’ll be searching for a new Opinion Editor to own this new direction.  

I’m confident that free markets and personal liberties are right for America. I also believe these viewpoints are underserved in the current market of ideas and news opinion. I’m excited for us together to fill that void.     Jeff

XTOD: Imagine being max long Orange Juice futures and getting smoked -40%, getting shoulder tapped at your job, and then having to go home to your wife and explain why the kids need to move to a cheaper school district.

XTOD: Charlie Munger: "It's hardly a competence if you don't know the edge of it. If you have a misapprehension regarding your own competency, that means you lack competency. You're going to make terrible mistakes."

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Daily Economic Update: May 8, 2025

A Great Deal Of Uncertainty - So Much Uncertainty

We all knew the Fed was going to hold at 4.25% - 4.50%. I skipped the recap out of respect—for your time and your intelligence.

So what, if anything did we learn.  In my opinion, not much. Here were my takeaways:

• There’s no rush to cut rates from their “modestly restrictive” level.

• Risks have risen to both sides of the Fed’s dual mandate and the reality is no one knows whether high unemployment or high inflation will be the more pressing problem.

• Patient Powell: “We’re in a good place to wait and see” “The cost to waiting is low” “Appropriate to be patient”

• “My gut tells me uncertainty about the path of the economy is elevated…the right thing for us to do is await further clarity.

My other major takeaway was that at least 80% of reporters seemed to be begging for rate cuts. I’d have to review the transcript, which I don’t care enough to do, but in real-time, the sentiment of most of the questions seemed to be pressing Powell for an explanation as to why “preemptive” rate cuts shouldn’t occur at present.

Below Is More Value Than Yesterday’s FOMC - You’re Welcome

“In making decisions under conditions of uncertainty, the consequences must dominate the probabilities" - Peter Bernstein.  There, that quote was more valuable than the press conference.  Most of this blog is simply writing about uncertainty. Author Robert Greene once wrote, "The need for certainty is the greatest disease the mind faces."  

And The Source Of Uncertainty - Tariffs (for now)

In response to a reporter's question about exempting certain baby products from Chinese tariffs, Trump indicated that he’s not open to removing the 145% tariffs on China as a means to getting the Chinese to the negotiating table.

We’ll see how the reported talks between Bessent and the Chinese go in Switzerland and in the meantime CNBC have their cameras watching to see if ships are coming into the Port of Long Beach.

But At Least AI Didn’t Destroy the World Today

Unless you were Google that is…Alphabet shares were down 8% as Apple exec said that search is toast as AI answers will replace those blue hyperlinks we’ve all become accustomed to seeing.

Overall the S&P finished slightly higher at 5,631. The 2Y and 10Y yield were little changed with the 2Y at 3.79% and the 10Y at 4.28%.

We’ll see if the BoE can be more exciting than the Fed.  

Utter Boredom
Until then you can reflect on this quote from Dune:  “to know the future absolutely! All of it! What fortunes could be made — and lost on such absolute knowledge, eh?” but “what a hellish gift that’d be. What utter boredom! Every living instant he’d be replaying what he knew absolutely … Ignorance has its advantages.”

XTOD’s:

XTOD: Gem after gem.   1/ Mediocrity is invisible until passion shows up and exposes it.

2/ Time is the best filter. It is the only filter I trust. 3/ Victory is spelled survival.

4/ The hard way is the right way. 5/ What you want is money, but what you really want is meaning.

XTOD: China Slashes Rates and Reserve Ratios: Liquidity Lifeline or Desperation Signal?

China just fired a monetary bazooka. On May 7, 2025, the People’s Bank of China (PBOC) announced a 50 basis point cut to the Reserve Requirement Ratio (RRR) and a 10 basis point cut to key lending rates, unleashing an estimated ¥1 trillion (~$138 billion) of liquidity into the system. This is Beijing’s most aggressive monetary easing since the early COVID era. But don’t mistake this for routine stimulus. This is a signal and it’s flashing red…..Bottom Line:

Don’t let the mild rate cut fool you this is a liquidity distress signal from the world’s second-largest economy. Markets will celebrate short-term stimulus. But underneath, Beijing is bracing for impact

XTOD: The world doesn’t run to growth when things go wrong. It runs to shadows.  Today, two of those shadows — Switzerland and Hong Kong — are screaming.  The Swiss franc, too strong again. A currency not rising on strength, but on fear.  Prices in Switzerland? Flatlining. Demand, evaporating.  The SNB is watching inflation disappear — and with it, its reason to hold.  Zero is coming. Maybe negative. Again.  Half a world away, the Hong Kong dollar slammed into its upper bound.  The HKMA stepped in. First time since 2022. Not because the city’s thriving — but because the capital is clawing its way to safety.   Out of Asia. Out of credit. Out of risk.  These aren’t technicalities. They’re tremors. Tiny economies. Heavyweight currencies. Both surging not on confidence — but on risk aversion.  This is what stress looks like in a world of financial scaffolding.  When the safe havens get crowded, the system is telling you something.  The pipes are creaking. The air is thinning. Risk is rising. Rates are falling. 

Soft landing?  No. This is what remembering how to do worse looks like.

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Daily Economic Update: April 17, 2025

Definitely A Loser

So much for decent tariff vibes in the stock market.  Tech dragged down the major indexes with the Nasdaq falling over 3% and the S&P 500 down over 2%, closing at 5,276.  The catalyst for the decline was chip export controls which caused Nvidia to take a $5.5 billion dollar charge. 

At least bonds were well behaved, with the 10Y yield falling a few bps to 4.28%, the 2Y yield also fell, closing at 3.78%

Bonds will close at 2pm ET today and all markets will be closed in observance of Good Friday tomorrow.

Powell Rangers Can’t Find The Right Megazord

Powell will play wait and see with the rest of us. He acknowledges there may come a time when growth is falling and both unemployment and inflation are rising.  If we reach that time of tension for the dual mandate the Fed will have to make decisions as to which gap they can best fill with their policy tools. With lowering inflation unlikely as tariffs take hold, the Fed doesn’t seem poised to cut rates anytime soon.

For the time being it seems the Powell Rangers aren’t going to be able to morph into the rescuers of the stock market….at least not yet.

Everybody Gets A Car

In data, retail sales rose more than anticipated as consumers looked to take advantage of current prices before tariffs kicked in, with autos being a beneficiary.  Hope they enjoy the ride.

But For How Long No One Knows

Of course we’ve all seen data on auto loan delinquencies and repossession rates, so we’ll see how this mini auto binge ends.

Radical Uncertainty

With heightened uncertainty around tariffs on rare earth metals, pharmaceuticals, and other areas, the data seems to continue to take a back seat to “sentiment”.  Or said in the terms that economists would reference that the hard data and soft data continue to diverge with the impact of tariffs evident in soft data but not yet glaring in the hard data. 

As Keynes well knew, there are times where there is little to know scientific basis for calculating a probability, this is one of them.  Sometimes you just have to embrace the fact that the economy is a complex and adaptive system.  This is a time where the messiness, unpredictability and deeply human nature of the economy are at the forefront of economics as a social science. 

The risk is falling for overly simplistic and purely quantitative approaches to today’s market challenges. 

Combat Uncertainty With Fortitude

Risk refers to all outcomes that can be insured against, uncertainty to those which cannot. Mainstream economics does not recognize this distinction. They believe individuals can accurately calculate the odds of any action turning out one way or the other.  This is because they treat the economy like a closed system.

Fortitude is the courage to face danger and to stick things out under pain. As Nassim Taleb says it’s not delayed gratification that creates an advantage for the investor, it’s the courage to live without promises.

“Under uncertainty, you must consider taking what you can now, since the person offering you two dollars in one year versus one today might be bankrupt."  So what this idea is about isn't delayed gratification, but the ability to operate without external gratification - or rather, with random gratification.  Have the fortitude to live without promises.” - Taleb

Markets can't promise clarity. Neither can policymakers. But maybe that's the point, fortitude isn't about knowing, it's about showing up anyway.  As C.S. Lewis said “courage is not simply one of the virtues, but the form of every virtue at its testing point.”

XTOD’s:

XTOD: Fyre Festival 2 has been "postponed," according to the organizers  But don't worry, your deposit refund is in the mail

XTOD: Q: Is there a Fed put for the stock market? Powell: "I'm going to say no, with an explanation..."

XTOD: Bret Taylor quit as Salesforce’s co-CEO because AI changed everything he knew about success.   Now he’s building that future himself. Bret explains exactly why traditional companies aren’t prepared for AI, why engineers can beat seasoned CEOs, and the surprising insight he gained rewriting Google Maps from scratch.  

Listen—your career depends on it.

XTOD: If you're on the wrong train, get off https://pbs.twimg.com/media/GomBN1SWAAA6cze?format=jpg&name=900x900

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