State Of The States
In this issue of the peel:
Market Snapshot
Banana Bits
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Macro Monkey Says
We’re Gonna Need A Minute
Important decisions deserve scrutiny.
Whether it’s considering where to go to college, what to major in, or if you should get a keg of Busch or Natty this weekend, crucial calls like this can determine the fate of your life, society, and even that party you’re throwing.
That’s why it’s important to look this stuff over, even if the decision is something as trivial and insignificant as the direction of the U.S. economy.
Obviously, that’s no Busch vs. Natty debate, but I guess we can look this over too. Let’s get into it.
What Happened?
Yesterday, our economic overlords released the latest Fed Minutes from the Eccles Building in our beautifully gentrified capital city of Washington, D.C.
The purpose of the Fed Minutes is to dive deep into the sick, twisted minds of Federal Reserve officials—our economic overlords—and find out the reasoning behind monetary policy decisions.
As a reminder, the above image shows the path of interest rates since that damn virus showed up back in early 2020.
After a decade of ZIRP, a 3-year attempt to raise rates off the floor from 2016 to 2019, throwing them right back to zero, then launching the fastest rate hiking cycle in history, leading to a 50bp cut last month, interest rates have been volatile, to say the least.
Now, the question going forward centers on how much—if any—loosening of monetary policy is needed to maintain the Goldilocks zone our economy is in without retriggering the beast of inflation.
In September, that was an easy question for FOMC participants, the policy-setting arm of the Fed, to make. They knew they were cutting rates, but there was a big dispute over how much.
According to the Minutes, slightly less than half of the FOMC’s 19 members began the conversation looking for a 25bp cut due to concerns over the implied signal that the Fed would send to markets by starting with a “jumbo” rate cut.
But, in the end, only one FOMC member—Michelle Bowman, a Fed Governor—voted against the 50bp cut in favor of a 25bp cut.?
Given that activity in the housing market has been slower than using Excel with a mouse, unemployment’s slow rise since January 2023, weakness in manufacturing, and a few other restrictive factors, it was predetermined that a cut was coming in September.
The only decision to make was how much. Here, the question came down to “Which risk has a higher probability of causing near-term problems to the U.S. economy: inflation going higher again or the unemployment rate continuing to rise?”
Bowman thought her fellow overlords were getting too cocky on the battle against inflation, believing that retriggering rapid price growth was the bigger issue. By the end of the discussion, everyone else saw unemployment as the greater threat.
The other factor to consider was the signal a 50bp cut sends.?
Usually, the Fed only rips a 50bp “jumbo” cut if they think we’re heading into a recession, so there was concern over how markets would react if they thought the Fed thought that the U.S. was heading for a recession. You still with me?
Anyway, the Fed sought to diminish these fears in Fed Chair JPow’s post-meeting press conference, where he pinky-promised the decision was made because of how down bad inflation has become.
However, there are other ways to loosen policy besides just cutting rates.
The Fed’s balance sheet effectively serves as a liquidity management tool that helps implement interest rate policy and manage liquidity.
When the Fed buys assets, increasing its balance sheet, it’s adding liquidity primarily to Treasury and mortgage-backed securities markets, thus loosening policy and spurring activity in these asset classes.
Right now, the Fed is neither buying nor selling assets but letting existing assets mature without replacing them. This is called a “balance sheet runoff.”
When the Fed lets assets runoff, it’s neither increasing nor decreasing liquidity. The goal is to “normalize” the size of the Fed’s balance sheet in the aftermath of a plethora of quantitative easing in the wake of the GFC and pandemic.
If they wanted to, the Fed could ever-so-slightly loosen policy by stopping the runoff and buying assets to replace maturing securities.?
But, JPow and the FOMC gang (besides Michelle Bowman) think they can simultaneously cut rates and reduce the size of the balance sheet without f*cking things up to use the technical term. Fingers crossed, they’re right.
The Takeaway?
We really don’t learn much new information from the Fed minutes, but it does help us understand why the Fed makes its decisions.
Markets barely reacted to the release for exactly that reason.
Now, all eyes are on earnings szn beginning today, next week’s CPI print, the next PCE release on Halloween, the October jobs report, and how these could factor into the Fed’s next decision on November 7th.
Career Corner
Question
Hi mentors, I saw this interview question online and was wondering how you would go about answering it. "Which valuation method is the best?" Thank you!
Answer
Go through the pros and cons of each (briefly, or stick to the one most relevant) and then use that to explain why you think the pros of X make it the best in Y situation (or overall, depending on the exact interview prompt)
Head Mentor, WSO Academy
What's Ripe
Astera Labs (ALAB) 15.60%
Norwegian Cruise Line Holdings (NCLH) 10.91%
What's Rotten
Bayer AG (BAYRY) 6.89%
Alphabet (GOOG) 1.59%
Thought Banana
State Of The States
We know that Uncle Sam has a tough time managing his money.
This guy has nearly $36tn in debt and adds somewhere between $1-$2tn to that pile in any given year. In fact, he just added another $1.8tn at the end of fiscal year 2024.
But, his nieces and nephews—for the most part—are doing a helluva lot better. Let’s dive in.
What’s Happening?
While the federal government spends money like a recently divorced single dad having a mid-life crisis, states are much more responsible.
The vast majority of states run budget surpluses, meaning they collect more revenue than they spend on services, as I’m sure that’s a foreign concept to most Americans.
And in FY’2022, the number of states running a budget deficit hit a record low.
As we can see, the average state runs a budget surplus of 103.6%. Only 6 states—Connecticut, Hawaii, Illinois, Massachusetts, New Jersey, and New York—ran deficits throughout the 15-year period studied. Only two ran deficits in FY’2022.
Meanwhile, Utah is out here flexing a 136% budget surplus, the highest in the nation. Kentucky, Florida, Texas, New Mexico, and Montana follow closely behind, with Montana as the only state to never run a deficit through the 15-year period.
There are a few big factors at play. States with high GDPs, low but growing populations, and low pension liabilities tend to manage their finances better than Mr. Montgomery in The Simpsons.
Then, there are others. For example, California manages its finances worse than its average Instagram-flexing resident, running a $97.5bn surplus in 2022 but carrying a $275bn unfunded pension liability, both the largest in the nation.
Other factors that help states manage their budgets include:
The Takeaway?
Uncle Sam could learn a lot from these states.
If we want to help him out, legislatures at the state and federal levels consider ways to potentially change the way some social benefits are provided.?
For example, if states were responsible for their own public healthcare, we could save Uncle Sam $1.6tn in Medicaid/Medicare expenses in 2024, closing the deficit by nearly 90%.
Obviously, it wouldn’t be that easy, but the question of scale is crucial when it comes to social services.?
At the state level, there tends to be a higher degree of trust, while services could be tailored and made easier to understand without having to address all 340mn of us at once.
Like Nassim Taleb said, “With my family, I’m a communist. With my close friends, I’m a socialist. At the state level of politics, I’m a Democrat. At higher levels, I’m a Republican, and at the federal levels, I’m a Libertarian.”
Maybe it’s time to clear up Uncle Sam’s plate and let states and municipalities eat a little more.
The Big Question: What other steps could the U.S. take to ease the financial burden at the federal level?
Banana Brain Teaser
Previous
List S consists of the positive integers that are multiples of 9 and are less than 100. What is the median of the integers in S?
Answer: 54
Today
There are 5 sales agents in a certain real estate office. One month, Andy sold twice as many properties as Ellen, Bob sold 3 more than Ellen, Cary sold twice as many as Bob, and Dora sold as many as Bob and Ellen together. Who sold the most properties that month?
Send your guesses to [email protected]
?
Blessed are the young, for they shall inherit the national debt.
Herbert Hoover
How Would You Rate Today's Peel?
?? Meh
?? Rotten AF
Happy Investing,
David, Vyom, Ankit & Patrick
Entrepreneur | Executive Transition Coach | Customer Service Advocate | Mocktail Distributor | Martial Artist | Conflict Specialist | Author | Speaker
1 个月Great stuff thank you happy Thursday ??????