Changing the Fed’s Target – FAIT non-accompli?
E-piphany
by Michael Ashton
2d ago
As the steadier measures of inflation (core, median, or sticky depending on your preferences) have started to overshoot expectations slightly – the y/y measures continue to decline, but slower than expected as the m/m numbers have surprised on the high side – the markets have continued to price Fed policy becoming increasingly easier over the course of 2024 and into 2025. While Fed officials continue to push back gently on this assumption, it seems that most of the FOMC is comfortable with the idea that there will be at least some decrease in overnight rates later in the year and the only ques ..read more
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Four Quick Thoughts on Fed Day
E-piphany
by Michael Ashton
1w ago
Four fairly quick observations on this Federal Reserve meeting day, not all of which have anything to do with the Fed: 1. The FOMC today announced unchanged policy for now on the overnight interest rate, on the pace of QT runoff, and on the collective expectation of the Committee for the number of rate-cuts in 2024 (three, 25bp cuts). But it beats noting that while three cuts is the median expectation, the mean expectation dropped substantially. Only one official sees four rate cuts in 2024, compared to five who saw that many or more, as of the December survey. Those four folks moved to ‘three ..read more
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Understanding Biden’s Poll Numbers Despite a ‘Strong Economy’
E-piphany
by Michael Ashton
2w ago
The Biden team keeps talking about how they can’t believe how underwater the President’s poll numbers are, when the economy is so frickin’ good. “As soon as people figure out how frickin’ good it is, they’ll come running to vote for him.” At some level, one can be sympathetic with that view. Inflation is down to only 3.1%, the Unemployment Rate is still sub 4% even with the most-recent rise, well below the levels when he took office; Average Earnings are up and gasoline prices are down around $3 after being above $5. What’s not to like? Moreover, put this record next to Trump’s record! When Tr ..read more
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AI: Even a Big Deal is Smaller Than You Think
E-piphany
by Michael Ashton
1M ago
So, we are back to the argument about whether we have reached a new era of permanently higher growth and earnings, and because of productivity also a permanent state of steady disinflationary pressures. Live long enough, and you’ll see this argument come around a couple of times. In the late 60s with the “Nifty Fifty” stocks, in the 1990s with the Internet, and now with AI. As a first pass, it’s worth noting as an equity investor that the first two of those eras were followed by long periods of flat to negative real returns in equities. But my purpose here is simply to revisit the important fa ..read more
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Inflation Subcomponents – Time for Trading Draws Near
E-piphany
by Michael Ashton
1M ago
The topic of this blog is somewhat different than my other posts. In these articles, I am typically taking the role of an economist or analyst (talking about some particular insight into how inflation is evolving), an educator (explaining some aspect of how inflation works, or how one might forecast it or a piece of it), or a trader/investor (describing how prices for securities in inflation-linked or inflation-adjacent markets are discounting different possible…or sometimes nearly impossible…outcomes). Today, I want to write in my role as an evangelist. Almost exactly 20 years ago, I delivere ..read more
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Inflation Guy’s CPI Summary (Jan 2024)
E-piphany
by Michael Ashton
1M ago
This is the reason that serious people don’t choose a trend length that happens to fit with their narrative. For the last few months, supposedly-serious economists have crowed about how the 3-month average of seasonally-adjusted CPI was at a new post-COVID low. (Most of those same economists, only a few months ago, were focused on the 6-month average, but when that started crawling higher they switched to the 3-month average.) And indeed, it was exciting. Headline CPI was down to 1.89% on a seasonally-adjusted-three-month-average; core CPI was at 3.30%. Victory over inflation was proclaimed! I ..read more
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When to Own Breakeven Inflation
E-piphany
by Michael Ashton
1M ago
It is interesting to me that, with as important and liquid as the inflation-linked bond market is, tactical allocation between TIPS and nominal bonds is at best an afterthought for most investors. Perhaps this is because TIPS – if you think in nominal space, like most investors do – can be quirky and complex to analyze on a bond-by-bond basis. Here’s a picture of the TIPS yield curve. The red line is the way that TIPS real yields are calculated, and therefore the curve as perceived in the market. The green line is the true yield curve, adjusting for the way the seasonality of inflation prints ..read more
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Penalizing Apple Pay
E-piphany
by Michael Ashton
2M ago
Something odd happened to me several times over our Christmas holiday trip back home, and I’ve been mulling it ever since. It feels significant, albeit on a long-horizon time scale. At least three times, restaurants added a ‘credit card surcharge’ to our check, or had a sign on the door warning customers of the same. The surcharge was small, on the order of what the credit card processors charge the restaurateur (1-2% of the bill), and was often framed that way. Think about that for a moment. First of all, credit card fees haven’t changed meaningfully in a long time. Probably on balance they’v ..read more
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2024 Balance of Risks
E-piphany
by Michael Ashton
2M ago
I am a risk manager, both literally and figuratively. Literally, since whether it is with our own funds and strategies or allocations for individual investor clients, or with my trading book back when I worked on Wall Street, the hard constraints are always capital, capital, and capital and so managing risk is part of how you make sure you don’t lose that capital. But also figuratively – my natural disposition is conservative, which is why I am a bond guy (concerned with getting my original investment back at par, at the end) rather than an equity guy (filled with dreams of a 10-bagger because ..read more
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Inflation Sherpa
E-piphany
by Michael Ashton
2M ago
Imagine if you could be a hedge fund investor, or pension or wealth management CIO, thirty-five years ago instead of in 2024. With all of the inefficiencies that persisted before they were exploited and squeezed out by high-frequency trading, automated spread trading, and even fast-moving opportunistic asset allocation models, the opportunity set for alpha was rich and persistent. Now imagine that there is a market today where such inefficiencies still exist: a market which is poorly understood both at the security and portfolio structure levels, due to the absence of a granular understanding ..read more
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