Vision Quest

Warsh Trading Distributions

The Employment Report is the granddaddy of economic data. So when we get a very strong report and we still rally 19.5bps on the week, there has to be a reason. It wasn’t the noisy Retail Sales data or the mixed CPI data. I did say last week that people were too bearish the longer end of the curve. But I think part of the reason for the rally could also be something else I had mentioned about Warsh several times in prior issues, but that no one seems to be talking about. I wanted to discuss probability distributions with respect to Warsh, that affect both the front and long end of the curve.

But first the week in news:

· AI seems to be affecting all kind of second order industries, like real estate, trucking, etc, in addition to first order industries like software. I tend to think AI implementation is further out, but what do I know?

· Coinbase revenues were down 20% yoy and transaction revenue fell 37%. People seem to attribute this to the retail-apocalypse that happened, but those results were for Q4 and the second leg of the price drop hadn’t happened yet. I think it’s a function of there being NO use case for Bitcoin. I’ll write about this the next time I am out of town.

· Retail sales were weak, but this data can be very noisy. I would have thought retail would have been supported on the margin by forward anticipation of tax refunds. I’m going to attribute this weakness to maybe “noisy holiday seasonals” for now and keep an eye on retail going forward.

· The NY Fed says 90% of tariffs were borne by the US. The million-dollar question is, do we see the price hikes in the future, or have they just been permanently absorbed by the intermediaries?

· There was some chatter that the Birth-Death adjustment was large for January. That doesn’t explain the strong household survey, or the other strong aspects of the Report. I think payrolls may be downwardly revised (again) in future months, since I cannot imagine births of new firms > death of old firms in the current environment. Because one thing immigrants do is… start new businesses!

Vision Quest

I gave Warsh some attribute rankings a few posts ago. This week, I reinforced some things I already knew about myself:

· As an economic data predictor, I am a solid C… possibly a D. I went in thinking the skew was towards a weaker payroll and a higher unemployment rate. Yup. 0 for 2. The only thing I was right on was the increase in the labor force, which was the least important of the data. To be fair, because I already know I have no edge trying to predict economic data, I spend no time on it other than to wave a finger in the air. However, it didn’t matter because I still made money Wednesday being long delta (excluding unfavorable settles) and the rest of the week, because:

· As an evaluator of relative value and distributions on the curve, I am an A (or a solid B with an A+ for blind squirrel-ness). If you told me what the payroll results would be, that China urged banks to curb buying Treasuries and about Takaichi’s crushing victory (the weekly CA is as of Saturday night), I would have thought, “oof… that was unfortunate timing for my Steepener Fallacies post last week.” And that my friends, is why I hate consensus trades. If the Bond Vigilantes can’t get excited for that, then they are dead (for now). We steepened maybe a couple of bps on the Japan and China news, and then the curve just flattened like a mofo the rest of the week.