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Nick is sad: I'm finding YIGAF increasingly a let down. In the sense that its too good; essentially I want it in a book form, so I can maximally grasp the full richness and interconnectedness of your thoughts. If Taleb can do it so can Mike Green!
As a slight aside: saw Nosferatu last weekend with the wife. A modern remake of the original 1922 version, but also arguably the 1979 one. These are some of the most theorized about films ever (in terms of how the films reveal a latent social-historical narrative related to the filmmaking's time period rather than the narrative's time period.
MWG Response: As we used to say in programming in the 1980s, “ASCII and ye shall receive!” The time has come to hijack YIGAF for roughly the next twelve weeks to finally “write the book.” I have agreed with a publisher to write “The Greatest Story Ever Sold, A Book of Unintended Consequences,” and I’d like your help. Since you’re paying for the privilege, I hope you live up to my expectations.
Starting with this week’s note, I will be writing rough drafts of the chapters and releasing them (out of order) in serial form on YIGAF. They will ONLY be distributed to paid subscribers. Remember that scholarships are available to all who ask.
Comments, feedback, criticism, and general criticisms of my physical appearance are welcome. I think you’ll enjoy these chapters, but the unfortunate byproduct is that YIGAF will spend LESS time on current economics at a time when those economics may be shifting rapidly. Part of this is by design — candidly the current economic environment is SO dependent on macroeconomic policy AND response to that policy, that the current state of affairs is increasingly irrelevant to forward performance.
The net benefit should outweigh the costs, particularly for me, but I will try to include some commentary on more traditional topics alongside the weekly chapters when I see events that appear critical to forward outlooks resolve. This week will obviously be about the rollout of Trump’s tariffs on Canada, Mexico, and China and there will be a very brief commentary on them before moving into the Chapter…
Without further ado…
The Main Event:
While I want to get right to the chapter, I owe my readers updates on a few topics. First, this week we got PCE prices and to say they were consistent with my forecasts is understatement. Should Powell stick to his “market-based pricing” focus, the all clear is definitely there to respond to a weakening of the economy even as Powell remains forced to humor his more hawkish governors in an attempt to maintain a united front.
Stripping out the imputed price metrics, including OER, and substituting market-based rents from the Cleveland Fed reinforces our tenuous pricing environment:
Can tariffs reverse this? Yes, of course. Tariffs may very well lead to higher prices in the short-term, especially if retaliation occurs, leading to actual shortages; but only the most asinine Fed would fail to “look through” any such pressure emerging from income destroying activities…. oh boy…
But for all the teeth gnashing, the early verdict from financial markets is roughly what I would have expected from Trump’s actions. Unless the tariffs manifest in actual job loss and selling from passive vehicles, the “Costanza market” remains in place and the odds are of higher, not lower equity prices. The Japanese Nikkei is a good example, with futures opening in free fall (/s) back to roughly late Wednesday levels… whatever shall we do?
The narrative will of course emerge that these tariffs won’t last long… that they are negotiating tactics… that they will lead to money printing EVENTUALLY… and those laments may eventually give way to “regulations being removed heralds a new era of productivity gain” (false)… or “animal spirits” or (eventually) “Alien technology is being transmitted directly into Elon’s brain and he’s advising Trump how to walk on water…” Pick your narrative. I just suspect we don’t fall as much as everyone seems to expect on these very meaningful tariffs until they impact the flows.
And with that, let’s dig in to the book:
Chapter 6: Price Discovery – “Why we trade”
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