Weekly Good Reads: 5-1-1
Goldilocks, Currencies Depreciation, Warren Buffett, Algebra of Wealth, How to Motivate, US Debt, AI Avatar
Welcome to Weekly Good Reads 5-1-1 by Marianne O, a 25-year investment practitioner and the author of
on investing, economy, wellness, and something new I learn in AI/productivity. All the Weeklies are here, and here is the index of charts and terms. You can easily subscribe to my newsletter by clicking below.Please also check out my conversations with Female Fund Managers, Investors, and more - new this year!
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Market and Data Comments
The Friday US jobs reports brought back the term goldilocks economy (explained in One Term to Know) front and centre in the press, despite macro signals telling different stories.
Bloomberg quipped, “On Tuesday, a broad gauge of US labour costs rose by the most in a year, sending yields on two-year Treasuries above 5%. Three days later, a Labor Department report showed the smallest increase in wages since 2021, sending yields back down. Recent reports suggest retail sales are surging along with slowing gross domestic product. Industrial production has been rising while manufacturing has been easing. Jobless claims are holding steady—yet hiring has ticked down. Exhausted? We are.” So are we!
Despite these contrasting signals, stocks and bonds both rallied for the week with the VIX and MOVE indices (stock and bond volatilities) coming down.
Two key messages of Fed Powell after the FOMC meeting supported this stock rally: (1) while the Fed acknowledged inflation progress has stalled, rate hikes are pretty much ruled out now (unless inflation data remains elevated by May) (2) the Fed will lower the monthly Treasury bond runoff (quantitative tightening) from $60 billion to $25 billion — both showing the Fed’s dovish leaning (see Econ/Invest #3).
The April US payrolls showed a slowing labour market (+175K job gains) returning to balance, with the unemployment rate rising from 3.8% to 3.9% (rounded). The good news is wage gains of 0.2% m/m are lower than what the market expected, supporting US Treasury Secretary Janet Yellen’s statement that the fundamentals are: inflation expectations - they’re well under control, and the labour market - strong but not a significant source of inflationary pressure.
The robust inflation data in the first 3 months of the year came mainly from housing rents (signs they have already eased) and financial services. Looking at the NY Fed’s Multivariate Core Trend of PCE Inflation model, which looks at 17 core sectors of the PCE price index to assess the extent of inflation persistence and its broadness, the PCE inflation is stabilizing and not taking off (chart below).
Yet, Morgan Stanley analysts noted that 10-year government bond yields have been more sensitive to inflation surprises since the beginning of 2024.
Positive news on growth came as the Euro Area expanded 0.3% (q/q) from -0.1% in Q4. Core inflation in April was 2.7% y/y (dropping 0.2% from March) helped by the decline in services inflation. Rate cuts can begin as soon as June, the ECB indicated.
Delay in Fed rate cuts and therefore dollar strength continue to reverberate in the rest of the world, with Asia feeling the pinch. The Japanese authority reported spending $60 billion to drive the Yen from 160 to 153 to the dollar this week. Korea and China reacted by letting their currencies weaken, and other emerging markets became more cautious in cutting rates further. Higher US yields also mean tighter financial conditions in other markets.
This coming week, we will monitor the Bank of England rate decision on Thursday, China’s April exports on Thursday and April M2 growth, the US Senior Loan Officer Survey on Monday and the March consumer credit on Tuesday.
Economy and Investments (Links):
US Stocks Rally as Cooling Labour Market Boosts Rate Cut Hopes (FT or via Archive)
Full Recap of Warren Buffett’s Comments at the Berkshire Hathaway Annual Meeting: ‘I hope I come next year’ (CNBC) - 3 highlights below -
Fed Chair Jerome Powell Projects Optimism, But Inflation Data Are in the Driver’s Seat (WSJ or via Archive)
Powell cited a list of reasons to think high interest rates were indeed cooling demand, including a slowdown in hiring and a decline in the share of workers quitting their jobs.
And he said he continued to expect inflation to decline, partly because of the lagged behind effects of a slowdown in housing rents that have yet to feed through to official inflation measures.
“To get a sustained inflation, there has to be something generating that, and right now, there’s not an obvious area that is overheated and that is generating the likelihood of prices and wages going up,” said Eric Rosengren, former president of the Boston Fed.
~ WSJ
Finance/Wealth (Link):
The Algebra of Wealth (Scott Galloway, summarized by Four Minute Book — Video Edition)
Wealth = Focus + (Stoicism * Time * Diversification)
In other words, Galloway suggests building wealth is money generated + investing choices * discipline * the compounding effect of time.
Wellness/Idea (Link)
Currencies (On Motivating Different People) (Ed Batista)
Herzberg indicates that the most significant intrinsic motivators are "[a sense of] achievement, recognition for achievement, the work itself, responsibility, and growth or advancement," while the most significant extrinsic motivators are "company policy and administration, supervision, interpersonal relationships, working conditions, salary, status, and security." [8] Some of Cohen and Bradford's currencies fall readily into one category or the other, but in many cases the distinction is unclear or may be highly contextual.
~ Ed Batista
Based on Cohen and Bradford’s book Influence Without Authority, the most useful concept related to motivation is what they refer to as currencies: "resources that can be exchanged [as] the basis for acquiring influence."
These 4 “currencies” resonate with me the most, but check out the excellent list:
Inspiration-Related
Vision: A compelling view of the company's future and a description of how someone could contribute to its accomplishment.
Task-Related
Challenge: Opportunities to pursue difficult goals and develop enhanced skills and capabilities.
Position-Related
Recognition: Public or private acknowledgement of effort, accomplishments or abilities.
Relationship-Related
Understanding: Opportunities to voice concerns and feel heard.
Personal
Gratitude: Expressions of appreciation in the form of thanks, deference, or a recognition of indebtedness.
One Chart You Should Not Miss: Who Owns the US Federal Debt
The US Federal Debt has been projected to rise at an alarming rate from 97.3% of GDP in 2023 to 171.7% of GDP in 2054 - that is - if the Fed cuts rates by a lot and discretionary spending like defence continues to fall.
From the FT article, Who’ll buy all the Treasuries? You’ll buy all the Treasuries (FT or via Archive), the Fed and foreign central banks no longer bought half of the net supply of Treasuries, turning to US households to take up the baton.
One Term To Know: Goldilocks Economy
A Goldilocks economy, a term developed in the mid-1990s, is one where it is neither accelerating nor decelerating too fast, supporting asset prices to rise. It usually reflects a good balance between growth, employment, and inflation, where things are “just right”.
This reflects the periods of the mid to late 1990s, between 2004 and 2005, and 2017 in the US.
HSBC Chief Strategist recently explained his rationale for “Goldilocks -y”: company margins (outside of tech) are now higher than the peak (2018-2019) reached before the Pandemic, and higher bond yields are driven by higher nominal growth.
[🌻New] One Thing I Learn About AI:
If you have not seen LinkedIn founder Reid Hoffman interviewing an AI version of himself, I would recommend you do so.
Hoffman concluded that he could become more human and communicate better after watching and interacting with an AI Avator of himself. Keep asking: “What might we be able to make?”
Creepy, amazing, fear, mind-boggling, and praise are the range of reactions from the audience. AI is evolving at such a fast pace that it makes sense for us to get very engaged about its uses and risks.
Please do not hesitate to get in touch if you have any questions!
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