Not much.
Monday – Existing home sales.
Tuesday – PPI.
PPI is the bigger item as it will indicate how much inflation or how much margin compression is coming down the pipe. Inflation happens when manufacturers can pass along costs and margin compression happens when they can’t pass along costs.
Take a look around. Imagine the US moves on from Iran and focuses again on Greenland. They are no in discussions to open more bases. And during the middle of those discussions, as the US has done multiple times now, the US attacks. And let’s say the Danes blow the runways and are able to stymie the initial attack. How does the US respond? It could be to lean on Google and Microsoft and shut down Azure and AWS in Denmark, or for any Danish company. It would certainly deny (in any way it could) access to US weapons, such as software for mission planning. Spare parts would stop, as well. F-35s would be useless. American anti-air systems would be useless. American made missiles would be useless.
What if Germany and the UK and France help. They might see their payment systems shut down, along with those electronic services. Imagine not being able to use a credit card in most places in Europe, because American companies block transactions. Imagine not being able to fuel a commercial airliner. American troops would not have to leave their bases to create massive chaos across Europe, just by shutting off a few services.
All of it has to be dual-stacked. No EU government and no NATO government should rely on services from US companies, and they might need to do that a lot sooner than expected. There won’t be time for a five year plan to introduce the legislation necessary to facilitate the adoption of …. It will happen in short order. Not all EU cloud providers are safe. As they depend heavily on software and components from the US. But they need to have versions of their stack, or alternates, that could operate if they were sanctioned by the US government.
It’s a big job. It’s expensive. And it involves a lot of low-level, technical toil. But I don’t see, at this point, how Europe has a shot at avoiding catastrophe, given the current administration. But it all ends in January 2029, right? Will it? Trump’s supporters aren’t going away. The anti-immigrant xenophobia isn’t going away. The beer-hall patriotism that wants to solve everything by dropping iron bombs isn’t going away. 79 million Americans won’t just go back to “normal” after years of being unhinged.
The jobs report came out with a spicy 178,000 jobs created, after last month’s [insert sad trombone], job losses. Looking down the list, the bulk of the jobs came in from health care, leisure, and transportation. Health care might be creating a lot of jobs as baby boomers start arriving at their 80s, but health care workers can be low margin jobs. While it may produce jobs, it may not produce investment opportunities. And like many difficult, uncomfortable jobs in America, it is largely staffed by immigrants, against which the current administration has initiated a pogroms as part of ethnic-cleansing lite. Construction, likely because of data centers, did fairly well. With information and financial services being the biggest losers.
Of course, as we’ve seen, the jobs report can be subject to a lot of revisions. A quick scan down indicates the revisions for January were a +27% change, while February a -45% change. Which is actually the opposite I would have expected, with large deviations from the mean pulling back to the mean as more data comes in. This means, until March is revised, we stand a net 171,000 non-farm payrolls for the year. Meaning we created just under 60,000 jobs a month. If we had a normal influx of immigrants increasing the population (many arriving already working age), that would be medium bad. But with no population growth, it’s likely a good number. Prior to the current hell-scape, we needed 100,000 to 150,000 jobs a month to absorb new entrants.
To get some context around the jobs report, let’s look at JOLTS, which only covers up to February (jobs data covers March). We see, in fact, February was a rough time. With openings, quits, and hires, all trending down, indicating it’s harder to lose a job and harder to find a job. This is in line with anecdotal stories about businesses being slow to fire (after spending months unable to hire just a couple of years ago). And in line with job seekers, especially new job seekers, finding limited opportunities.
What does this mean for interest rates? And that’s the real question, isn’t it? Does Jerome Powell and company reduce rates? It’s motivation to reduce rates at some point. If our economy adds 60k jobs a month, that might be more than adequate with a stagnant population, but historically ‘meh’. But it does not scream bad labor market as February’s job report did. And with oil going through the roof, combined with tariffs finally(?) biting, the pressure may be to hold rates. I don’t think there’s any serious talk of raising rates. Maybe if inflation went back to a the high-side of a 3 handle?
We’ll have to watch the CPI, over the coming months, as higher oil prices work their way through the system. We also don’t know how the oil shocks will play out. While Americans rend their garments and gnash their teeth over a dollar per gallon (0.25 per liter) change in pricing, countries in Asia have to decide if the limited supply they receive will go into making Tupperware for said Americans, or they have keep their infrastructure going. Countries throughout Asia, where Persian Gulf oil flows, are looking at rationing. For them it’s not about paying more, it’s about availability.
Which would start other knock-on effects. Plastics and other products are made either from natural gas feed stocks or from petroleum. That can include, I recently found out, medicines, or the compounds that go into making medicines. The price for many things, ranging from Zip-Loc bags to the anti-depressant keeping you going for the next three years, may increase, if they are available at all. And then there’s the issue of fertilizers, which are also either shipped out through the Persian gulf or made with natural gas shipped out of the Persian Gulf. A second order effect, such as the supply of precursor compounds for medicines being interrupted, may be a massive crisis in its own right.
And while that’s on the horizon, we’re not there yet. And that assumes there isn’t and adjustment to mitigate some of these impacts. If the shooting stopped today, product would flow through the gulf. There would be less, until the damage from the war is cleaned up and halted production is restarted, but the spice would flow. And there’s no reason the shooting can’t stop right now. People just have to stop shooting. But they won’t, so as this drags on, more infrastructure gets damaged and restarting will be slower and more painful.
What was once my nightmare scenario may now be the outcome, and no longer my nightmare. And that is Iran turning the Strait into a toll road, with the ability to limit traffic for political reasons. Iran didn’t have that ability before the war started, but they might get it now. As there is no way, short of a ground invasion of a country of 90,000,000 people, who could fire missiles and drones from their mountainous region, to open the Strait without their cooperation. A country that puts religion and institutions over the comfort an survival of individual people, might decide to close the Strait every time Israel decides to bomb Syria or Lebanon (like every other Tuesday), or murder its ethnic minorities (which happens only on days that end in ‘y’). Or if the Jets don’t win the Superbowl.
The nightmare now is Iran and the US trade blows (including the loss of American Marines and paratroopers as the US tries to open the Strait by invading), and more and more infrastructure gets destroyed. And essentially zero oil flows until Venezuela can be ramped up. Which would take months, and possibly US help to provide security to the oil producers. The “new normal” in oil prices becomes $150 a barrel and fertilizers go through the roof (and sometimes aren’t available). But because the infrastructure needs to be rebuilt, when the shooting stops, it will be months before we see consistent supplies and maybe a year or more before we get below $100 a barrel. While the US goes through recession and is bogged down in guerilla fighting in Venezuela.
I would bet folding money that rate cuts aren’t on the table for the rest of year, unless the AI bubble implodes so hard it threatens systemically important banks (not likely). But it could take a couple of points of GDP and therefore jobs. Unless we get the Strait open soon, we might be looking at rate increases, unemployment to push toward 5% and inflation pushing 3-4%. The rate increases keep it from going to 5, 6 or 7%. (The OECD is predicting 4.2% US inflation). And Asia will be fucked. Countries from India to Japan may deal with uprisings with China making hay and inroads while the US fails to put out the fire it started. I also bet folding money that the Russian sanctions are loosened as a stop-gap, and Zilenskyy is threatened by the US if he keeps blowing up Russian oil infrastructure.
In the 1980s, coming out of the 1970s stagflation, people just “extended the line” and saw a world with same shit, but more extreme outcomes and better technology. This was the cyberpunk dystopia, which even predicted the global, omni-present internet. (We had bulletin boards and dialed around to send messages and post our stupid opinions even back then, plus universities had the web-free internet). This is not a future we wanted, because it was assumed we would get there on the backs of venal and incompetent politicians who favored wars and the rich over the welfare of the whole population. And while the Republicans have been obligingly providing said politicians, for the most part we’ve been competent. We don’t have to go down that road. We could stop shooting today, if one person wanted to stop.
Wednesday – Manufacturing ISM
Friday – Payrolls
That and the needless war of choice. The White House has made sure that no one will trust the US to keep its word in negotiations. If any negotiations are going on. About 1/8 of the US long-range command and control E-3s was destroyed on the ground. Along with KC-135 losses, reduces US ability to conduct combat operations.
Nothing. This is a slow news week. Well, except for the war in the Middle East that could wind up sending Brent to $150 a barrel, even if the orange shit-gibbon doesn’t blow up Iran’s nuclear power plant. And if e did that, I bet $200 or more would the going price for Brent.
Or rather about the under developed sense of empathy. As I look across multiple polling I see a common pattern from the media, when they write the headline. That the majority of Americans oppose the war or disapprove of Trump. Or maybe a large majority of independents think Trump is doing a bad job. What they often omit is that among Republicans, his support is upwards of 90-95%. They’re no closer to abandoning Trump than I am close to abandoning coffee. And yet, even among those people there is discontentment about the war and the direction of the country. And what is it, exactly, they are unhappy about?
They are unhappy when the consequences of supporting Trump slaps them in the fact. It’s when their farm workers disappear, leaving them in the lurch, or fertilizer prices skyrocket, or it costs more to fill their tank. Or their friend or relative gets swept up by ICE. That is a complete lack of empathy for the other damage Trump has done. And a lack of empathy or sympathy (they are different and suited to different situations), is why gas prices are the thing that pisses them off. Shoot American citizens in the street. Detain American citizens because they “look foreign.” Detain people we’ve given green cards to, and haven’t committed any crime more serious than a speeding ticket. All those things are fine, but god forbid they have to pay fifty cents more a gallon to fill their truck.
These are self centered people, who only care about what impacts them. Now that their kids are grown, the school board can go fuck itself, they’re not getting more of their tax money. Screw those stupid people on food stamps until they’re on food stamps and that’s being cut. They think babies are cute and adorable, but don’t give a damn about helping people raise children. That’s their problem. But they feel bad for the adorable babies, with the exact same energy they have for puppies or kittens. They want you to do what their religion dictates because how dare you take away their freedom of religion. But god forbid someone from another religion wants to give the prayer at an event. That makes them feel bad.
And to be fair, these people exist all over the place. However, they have gravitated to Trump. Take the anti-vaccine people who are endangering their own children, and other peoples’ children, by not following vaccination schedules. If they want to kill or cripple their own children, it’s sad but there are limited options in a free society where it’s hard to compel behavior. It’s that they don’t care about other peoples’ children. Or that they promote “cures” they don’t themselves take, or only imply they are taking, because they like the attention they get on line. They don’t care that it kills, disfigures, or damages people. They don’t care they’ve convinced some poor slob to not start chemo, while the cancer spreads and becomes terminal.
And they exist in groups that were once marginalized. It’s why you have Hispanic Trump supporters going into the 2024 election. Or Muslim Trump supporters, even though this messaging is crystal clear. They like the influencer attention. They like the vice-signalling. It makes them happy. But at no point do they sit and think how it will play out. What empowering someone like this will do to their communities. Maybe to the people around them that aren’t citizens or are awaiting asylum hearings. Not even, in some cases, to the safety of their spouses.
As the right shares video clips of buildings getting blown to hell in Iran, and are wondering why Europe isn’t racing to open the Strait, realize it will only matter when it hurts them. It’s when they can’t fill a grocery bag on their income and it’s the fourth straight night of pasta, or they can’t fill the gas tank because their credit card is maxed, or it’s their farm that’s losing money every day because fertilizer is through the roof, that they will want this shit to end. But also remember when the pain is gone, they will just go back to the way they were. Once the farm subsidy comes through, or the price of gasoline drops, or they get a job at Don Jr’s drone factory, they will go back to ‘owning the libs.’
There is a giant problem with trading, and that’s exogenous events. A piece of bad or good news (like a super-strong or super-weak jobs number) create their own instability. Sometimes these blips represent buying opportunities. The initial reaction is almost always to read too much into one reading, which may get revised in a future month. I’m not suggesting you do that, but rather don’t retire early or panic because of one number. The bigger problem are singular events that come of the blue (or nearly out of the blue) and create lasting impacts in the system. These are hard to model and can blow up your ideas pretty quickly. So, what’s my thinking on the Iran war… I mean incursion… whatever. Normally these events happen, they change things, and we move on. But now we’re stuck in limbo.
My first take, back in February, on the S&P 500 was we were in a trend channel. I drew the original channel as the bright yellow lines sometime in lat 2025. These are not exact but, when we get to the top of the channel, buyers tend to lose enthusiasm and they come back when we’re toward the bottom of the channel. it’s okay when drawing these lines not to include all the price action and to move them so they capture the majority of the price action. It’s also okay to re-draw them as the evolve. They represent rules of thumb as to when investors think it’s gone to far up or dropped too low. Although I had serious concerns about the labor market and the concentration in the Mag 7, the chart is telling me the rest of the market did not.
Then, the S&P 500 failed to make a higher high in February, which is when I added the orange (brown) line signalling resistance. That was at the end of January, when we get to 7,000 and then back off. However, selling seemed to crap out as well, with buyers stepping in around 6,800, so we have a support line in green. Now we’ve transitioned from an upward trend channel to a likely range between 6,800 and 7,000. There’s no evidence on the chart we’ve reversed trends. In February I didn’t now if this was a double-top (possible) or just consolidation after many consecutive months of upward travel. I tend to be more pessimistic, so I thought we might be rolling over. But the support line was holding through February. That’s the chart telling me the market wasn’t ready for a pull-back.
We have Schrodinger’s labor market, which is doing okay or poorly depending on when you look at it. Through February we’re just wandering around in the range. I attribute this period of indecision to the mixed number we’re getting and the first pangs of worry about AI build-out costs. The Fed doesn’t have to lower rates if the job market is doing well and the “last mile” on inflation is proving to be sticky. The inflation from tariffs hasn’t materialized in the way I anticipated (and I think others as well). But there are reasons why it may be working its way through the system. Therefore rates aren’t going to go up, but the likelihood of a cut is very low. These mixed messages makes a side-ways period seem completely logical. And barring any big change…
We attack on the 3rd, but the S&P stays in a range until March 6. At that point the attacks have gone long enough that it dawns on investors it won’t be just a series of air strikes. With oil going up, we drop out of the range. Now, that support at 6,800 tends to act as resistance. I’m not sure why that happens more often then not, but it’s a decent rule of thumb. Then I add a little line, marking what might be a new level of support around 6,600, where buyers seem to show up. I don’t think this will hold, but I’m watching it.
What does a chart do for me? It helps me understand market psychology. Every day the beliefs of millions of investors are reflected in the market prices. Some are doing nothing more than buying index funds in their 401(k) accounts. Some are gambling on 0 days to expiration options contracts. But their collective behavior comes together to set a price. I don’t expect a pattern to “play out” just because I see it forming. I expect to see the market behave and if I match it to a common pattern, anticipate what buying and selling pressures may be coming int he future. Some call it horoscopes for bros, but only if you treat (mistakenly) the pattern as constraining or predicting the future. All it tells me, is where the buying and selling pressure may lie. And if I can correlate that to other data, maybe get a better interpretation of how that information is moving the markets.
I personally think that the Iran war isn’t going the way the Administration hoped. I think they expected the regime to be much weaker than it actually is and that US popular opinion would rally around the strikes. When the line at 6,600 continued to provide support at the outset of the war, I took it to mean that other investors also thought this might be over in a day or two. In my mind, and likely in the minds of others, that made this a buying opportunity, which is why the support worked. It’s only until we got signals this war… incursion… might last for longer, do we start to make new plans.
The problem with is there is no clear goal. And every day it drags on is another day that Iran can adapt to US tactics. Or Russia could smuggle in some shoulder-launched anti-air missiles (ManPADs). Or Iran gets super lucky and manages to seriously damage a US warship. Or we wind up with a bunch of Marines on the ground that can’t safely leave until hostilities cease, which this administration won’t do until Iran “surrenders.1” It could be over tomorrow or a year from now. We just don’t know because we don’t know what we hope to achieve by being there. And every day of elevated oil prices is a day that both stokes inflation and dampens economic activity.
Are we looking at a buying opportunity, which it would be if hostilities cease quickly. The less damage to oil production, the faster fuel prices will move lower. I’m not an oil expert, but what I’ve read indicates that fields that stop production may take weeks or months to return to their full output. And the longer they’re stopped, the longer it takes to turn them on. And the more they’re bombed, the longer it will take to repair those fields. As I understand it, a one day interruption is no big deal. A one week interruption will leave a mark. Longer periods require a degree of rebuilding. But I don’t know that it will cease today, tomorrow, or next week.
It could be this drags on for many months. Especially if Russia is able to supply Iran with weapons. Fortunately, Russia is bogged down in Ukraine and can’t spare the materiel. China could covertly send arms, with the intention of creating a quagmire to pin down the US. They targeted 2027 as their “readiness” date for Taiwan, but this might present a unique opportunity, especially if they damage enough F-35s (which take months to repair). North Korea might want to arm Iran, but I’m not sure how they get arms there. The Houthis might start firing missiles again. But who knows? Shaheds are easy to make and the launcher isn’t much more than a couple of hours of welding tube steel, according to many sources. In addition to the fact many regional governments are easily bribed to look the other way while Iran smuggles in Western electronics for the Shaheds.
In fact, the weakness this ware demonstrates is the inability of the US to spin up production of key munitions. The excuse “we gave it to Ukraine,” is mostly bullshit as we gave older, sometimes about to be de-commissioned, equipment to Ukraine. And we didn’t have to pay to properly dispose of it, as the side of a Russian tank is a fine disposal sight. All China needs to do in a fight for Taiwan is to make through an initial period and then our destroyers are running home to port, to reload their vertical launch tubes (which we can no longer do at sea). And once the current stockpile is gone, new rounds only trickle in. And airplanes that are either lost permanently, as we no longer make that air frame, or take months of painstaking care to repair their stealth exteriors. In some cases it will take years for production to restart on a key munition.
War fighting aside, what do I do? Buying opportunity, prep for recession, or prep for stagflation. Who knows? Each one is essentially unpredictable. I’m mostly sticking tight, but I’m picking up some ex-US funds here and there. Mostly because this is likely to cause even further damage with our allies. Who we don’t need, but should totally come and help us out? Not sure how that works, especially since we did not consult with them and the energy costs are hitting Europe harder. That makes the long-term prospects for the dollar less bright, which is also what the administration wants. However, people did seem to buy dollars as a safe haven, as gold did not jump, and money moved out of the Euro. But if they did buy anything, it had to be short term debt, because the longer term yields are rising.
Also, I’m not seeing positive trends in US politics. The Republicans have largely abandoned rule of law at a broad, constitutional level. An extra-legal, internal power struggle will have lasting, permanent damage to the US economy and the status of the US as an economic engine. I don’t mean revolution, I just mean it’s decided outside legal norms with protests to force action and lawsuits to compel following the law. If there is a serious attempt to suppress voting, or invalidate entire House and Senate races, US politics could be seriously broken. Countries lend money to the US and people come here to start businesses because the US has been a rule of law country with business friendly policies. If that reputation is seriously damaged, the US ceases to be the cleanest shirt in the laundry. And that has implications for US interest rates, the dollar, and future US growth.
That would mean a defensive short term horizon, even though short term bonds are not paying enough to cover taxes and inflation. Long term bonds would loose even more value, as long rates move up. That will depress economic activity, especially if the dollar isn’t as valuable and fails to appreciate, given the higher rates. Nothing meaningful is being done on the deficit, and if the economy slips into a recession, we could exceed 7% of GDP in deficit spending. That limits the ability of the US to stimulate the economy other than to reduce rates. That will drive up asset prices (good for stocks) but will be fighting the higher rates implied by higher inflation and more instability. That might mean the Fed as to perform non open-market actions, such as buying securities or injecting money through the repo markets. Liquidity actions tend to be inflationary.
Sitting in cash through money-market accounts doesn’t look so bad until you consider the inflation risk if the Warsh Fed decides to lower rates and that stokes inflation. You would do better than stuffing it in your mattress, but it’s likely you would not keep pace with inflation. And your purchasing power would erode. If interest rates are low, that’s going to inflate the value of assets, like land. Housing prices would stop their slow slide and start going up again. However, holding and buying land requires a rule of law country. If you don’t have that, how can you be sure your claim to a piece of land would be honored. REITs with deep pockets would be the way to mitigate that risk, as they would be better connected to make any necessary bribes.
Wow, as I work through it, this is what I think investing as a citizen of a country like Argentina must look like. The investing world outside the US is starting to look better than the options inside the US. Just like many countries find their internal markets are not as lucrative as external markets. If only we’d had a long tradition of being a rule of law country we could fall back on…
This is not investing or investment advice to you, or anyone. It’s is provided for your entertainment purposes only. And if you are investing, contact a professional before making any decisions. Buying and selling stocks, futures, or any investment is a risky activity and can cause you to lose money, including the principal which you invest.
The Producer Price Index (PPI) came out hot again. Higher prices for producers may or may not be passed onto consumers. For businesses that can pass on the costs, that implies higher inflation. (They raise their prices and the consumer accepts prices going up). For businesses that cannot pass on the cost, that implies lower margins. (Their costs go up and they have to absorb those costs). Either way, it’s going to put pressure on the job market.
Let’s say it’s the former, and the costs are just passed on. The Fed is going to look at the inflationary impact and make a decision about rates, or possibly liquidity. They will try to prevent an inflationary spiral, where those cost increases accelerate. I’m beginning to suspect that the current rates are near “r*” or the neutral rate. Where lower rates are stimulative, higher rates are restrictive, but these rates are close to neutral. And there is no absolute r*, it’s just what makes sense for that economy.
The Fed will be combating deficit spending, which stimulates demand. We take out a lot less in taxes than we inject in spending and that is goosing the economy. And there are plans to increase that spending by a 45% increase in DoD spending. We’ve had deficit spending, and at high levels, for so long I’m certain we’d fall into a recession if we just reduced deficits to a more sustainable 2% of GDP. Rates would go up to slow economic activity and account for the additional stimulus that would come from more deficit spending. So far Jerome Powell and the FOMC has done what I thought was impossible, reduce inflation without sending unemployment to 8 or 10 percent. The next round may not go as well.
Next, let’s look at what happens when margins shrink. Margins are the difference between revenue and expenses. As expenses go up, margins (and profit) shrink. Firms generally react by reducing costs. The first thing that go are travel and perks. But those are normally not a big part of the budget (or shouldn’t be). Next, speculative projects are cut or sold off, such as the AI team hired to bring chat bots to your lawn care business. Once sales start to fall off, because all other businesses are reducing their spending, you don’t need as many workers. Now it’s time for the large-scale layoffs.
Of course, many businesses are aware of the pattern and want to get ahead of it. Their very clever staff economists know that business will fall off in a few months as other businesses are spending less. The try to front-load some of the layoffs to coast on what will be accumulating inventory to try to avoid larger layoffs later. And all layoffs lead to morale problems. If many companies do this, it’s a self fulfilling prophecy, right? We all expect a recession in three months, so we all lay of 10% of our staff now, to avoid firing 15% or 20% later. Guess what happens? We guarantee a recession.
What do I expect from Warsh when he takes over? First, the Federal Open Market Committee chairman does not set policy. It’s a vote of the board. But I don’t know what Warsh is going to do or how he’ll throw the decision making into disarray at the behest of Trump. So we might get a degree of chaos we won’t need. But let’s say he push policy toward lower rates and we get inflation. I suspect that may not be unwelcome among Trump and the rest of the leadership, along with the oligarchs who back him.
Higher inflation is a back-door default on the US debt. A default normally means non-payment of interest or principal. (Which is something I would not put past the administration – with regards to not paying interest to foreign bond holders). There inflation adjusted bonds, but the bulk of the market just takes inflation into account when they’re calculating an acceptable price for the bond. That’s based on a stable inflation rate of around 2%. I have 10 year bonds yielding 4.9 to 5% and that’s fine in a 2% inflation regime. I get 5%, the government takes about 1.5%, inflation takes 2%, leaving me a 1.5% real return at zero risk every year for 10 years. If inflation shoots up to 5% and stays there, now the math is ugly. The government still takes its 1.5%, Inflation now takes 5%, and I’m left with a real return of -1.5%. What would I do if I saw this as a possibility? Move away from long-dated bonds. That means selling long duration bonds (as the market is currently doing) and driving the interest rate up.
But the real damage to the bond is the principal of the bond drops in real value much faster. The price of the bond includes the principle to be returned in 10 years. After 10 years of 2% inflation, 1,000 USD is not worth about 817 dollars in real terms. That’s accounted for in the price of the bond, along with the stream of payments and the expected inflation rate. That doesn’t mean I get 817 dollars in 10 years. I still get 1,000, but it has the spending power for 1,000 today. And that’s the difference between nominal and real. If the economy just treads water (little real growth but it’s growing at least as fast as inflation), inflation will shrink the value of the bonds relative to GDP. If the nominal GDP goes from 30 trillion to 60 trillion in 20 years because of 3.6%, but no real growth, then you are no better off than you are today. However, any assets that have a fixed denomination, like cash an bonds, are worth half as much.
We currently have debt at about 120% of GDP. If we inflate the dollar at 3.6%, and we don’t add to the debt, that debt will be 60% of GDP in 20 years1. Of course we’ll add to the debt, so we won’t cut it in half. But we make interest on the debt a smaller and smaller part of the budget in real terms. Nominally, the amount of interest will still increase, but the nominal size of the budget and the economy will increase faster. It’s as if we decided to reduce the interest paid on the bonds. But, if we actually just paid less interest, that’s a default.
Nothing is guaranteed and it could be that Warsh and the oligarchs backing Trump decide money is important and keep the system functioning in good order. We get inflation, interest rates go up (maybe not as much as I think they should, but enough). Inflation calms down and we lower rates to get people working again. (And jack up the price of assets like land, housing, and stocks – something the oligarchs love even more than statutory rape). And I sell my long bond positions for nothing. But, with inflation at about 2.5% to 2.7%, as we’re currently seeing, my real return on those bonds is cut in half or basically gone. A money market or long bond is basically keeping pace with inflation at this point, until we see inflation drop to 2%. And even “good Warsh” won’t want to irk his boss by pushing for that.
Technology, Economics, or Politics. Pick one and stay in that lane. In the US, especially, the topics are distinct swim-lanes. You can study political science and not economics, and vice versa. In part this is due to a belief economics itself is non-political. The math and the data should guide you to conclusions. You can have economics class that discusses how a change in a law impacts micro or macro economic decisions, but you don’t discuss overtly political topics. Even a publisher like Bloomberg has separate categories for economics and politics.
And yet, they are inextricably linked. For one thing, it’s more than obvious to most economists that political leanings shape your economics. Some people think it’s the other way around, but for people who are supposed to be data focused, they tend to pick sides on non-economic issues that reflect their political beliefs. But that’s not the important way in which they’re linked. They’re linked because political discussion leads to economic choices, which create a sense of the politically possible and impossible, which in turn, shapes more economic decisions.
And technology is linked to economic development in a way it hasn’t been for much of history. Technology generally expanded the boundaries of commerce, with great efficiency or more capabilities. Today, however, the markets go up or down directly on technological news and changes. If the AI bubble pops, and Tesla shareholders come to their senses, and a few other things happen, the economy will contract. Technology stocks and technology news is driving markets like no other time in history. If GE expects to sell more washing machines next quarter, no one cares. If NVidia is expected to sell not enough chips, possibly signalling a slowdown in AI build-out, its stock tanks, along with Micron, Broadcom, Oracle, and a host of other companies. That in turn will impact private credit and ripple across the economy.
Economics and politics have always been inseparable. And technology has always had an impact on production. But right now, they are so incredibly linked it’s hard to untangle them. Especially in an era where the presidency is won by someone who believes things about economics that are completely counter-factual. And it’s not a talking point. They act on it. As it stands, I don’t see them as separate things right now. Like the shamrock, they are three parts of the same whole. Happy St. Patrick’s day!
This is a light week. The big number will be Wednesday with PPI. However, I’m going to also watch for the announced foreign bond purchases. It’s not normally a pivotal number, but I’m seeing the dollar strengthen against other currencies, and it looks like it’s sitting in cash or near cash.
Oh, and …
Wednesday – FOMC interest rate announcement.
We’re expected to see rates stay stable. A surprise cut might initially drive asset prices up but it would be happening because of weakness in the labor market. As I’ve said before, the labor market looks good and bad, at the same time. However, there are two trends I think help explain the weirdness. The first is the role of the gig economy in absorbing workers that would normally have gone into unemployment insurance. If you make more than unemployment, driving for Uber, you can’t apply for an unemployment check. The second is the lack of population growth. That’s US population growth did not come from making new Americans, but by importing working age adults. If no new working age adults are showing up, then no new jobs need to be created.
As I’m not a working economist, trying to research these issues, along with a plucky team of graduate students, I’m largely guessing. But I do know that the gig economy is under-researched among economists, because the numbers are opaque and without a standard process to collect. Therefore it’s unresearchable. (Is that a word?)
But getting back to what a surprise rate cut would mean: that the FOMC has data or models that indicate the labor market is worsening. And if you point to Meta announcing a 20% staff cut, I’ll caution you that they are a very small part of the job market. And they over-hired during the pandemic. And they’re spending all their money on AI build-out, meaning they need to cut costs as much as possible, even though they are making money. Also, remember that this is the company that changed its name to reflect its future, the metaverse. Something that does not exist, and I thought was a stupid idea at the time. No one wants to sit around being a legless icon, while wearing a headset that makes like 1/3 of people motion sick. They are devoid of new revenue ideas but can’t bring themselves to focus on operational efficiency and becoming a dividend stock.
This is not investing or investment advice to you, or anyone. It’s is provided for your entertainment purposes only. And if you are investing, contact a professional before making any decisions. Buying and selling stocks, futures, or any investment is a risky activity and can cause you to lose money, including the principal which you invest.
I wish I was like you/easily amused 