Inflation & Interest Rates: share your data sources, models, and assumptions

[ChpBstrd]

The often-bearish WolfStreet blog makes the case that the purported drop in consumer spending in the January PCE report is due to seasonal adjustment error and is inconsistent with other data sources. The input of this error would explain why the GDPnow tool threw a negative number.

Huge seasonal adjustments try to iron out the differences between December and January, by reducing December’s spending figures and increasing January’s spending figures. And since these adjustment factors are so huge, if they’re even slightly off and the error gets multiplied when it’s translated into an annual rate, the month-to-month change of that annual rate would be off by enough (see today’s -0.2%) to send the financial media into a tizzy.

Retail sales are also released as actual retail sales, not seasonally adjusted, and not annual rate, and they looked OK in January, down by less month-to-month than in most Januarys, and up by 4.8% year-over-year.

If WolfStreet is right, then we may be at a buy-the-dip moment, with the S&P500 down -4.8% and QQQ down -8.7% amid pervasive negative sentiment.

The seasonal adjustment error explanation also helps us understand how January CPI came in hot, but PCE supposedly came in tame. Maybe PCE was over-adjusted downward? PCE may be due for an upward revision, which is good for growth but makes rate cuts less likely.

I wouldn't be surprised, with all the disruption in government employment and expectations of continued employment, that there might be errors.  However, at the same time I'm also thinking buying a dip because typically reputable number might be erroneous seems inconsistent.

My interpretation of Richter's argument was that usually there's a ton of spending in December that reduces down to very low levels in January, and so they set up the seasonal adjustment based on this average drop off. But this particular Dec-Jan, spending was more flat across the two months than usual. Thus the adjustment was an overcompensation.

December is by far the best month of the year for spending on goods due to the holiday binge. Then in January, spending on goods, as per retail sales, plunges by 15% to 22% from December (range of the past 20 years).

This January, retail sales plunged by 16.5% from December. There were only two Januarys with smaller plunges: in 2023 (-14.8%) and in 2021 (-15.4%). The rest of the Januarys experienced bigger plunges.

That said, we could put a positive or negative spin on this year's relatively strong January spending. Either we're enjoying the fruits of full employment and real wage growth OR some consumers are pulling ahead purchases in anticipation of tariffs. I suspect both are true.

[ChpBstrd]

Now that tariffs are a reality, it's worth asking what the effects will be. The data source and model I'm sharing today comes from Yale University's "the budget lab".
https://budgetlab.yale.edu/research/fiscal-economic-and-distributional-effects-20-tariffs-china-and-25-tariffs-canada-and-mexico

Their economic model assumed:

• 20% total tariffs on China.
• 25% total tariffs on Mexico.
• 25% total tariffs on Canada.

These are all a reality right now, on March 5, 2025. The outcomes they forecast include:

• The policy is the equivalent of a 7 percentage point hike in the US effective tariff rate, raising it to the highest since 1943.
• The price level rises by 1.0-1.2%, the equivalent of an average per household consumer loss of $1,600–2,000 in 2024$.
• Real GDP growth is 0.6 lower in 2025. In the long-run, the US economy is persistently 0.3-0.4% smaller, the equivalent of $80-110 billion annually in 2024$.
• The tariffs to date raise $1.4-1.5 trillion over 2026-35 conventionally-scored, and $300-360 billion less if dynamic revenue effects are taken into account.
• Tariffs are regressive taxes. Losses for households at the bottom of the income distribution would range between $900–1,100.
• Electronics and clothing are disproportionately affected. Motor vehicles and food see above-average price increases as well.

So let's apply these to the IMF's 2025 forecast of +2.7% real GDP growth in the U.S. If we lop off The Budget Lab's -0.6% impact assessment, we still have +2.1% real GDP growth. Thus, a recession seems unlikely, unless something is very wrong with either or both estimates. 

Corporate earnings could rise significantly in an environment of 2.1% real GDP growth. Even if the S&P500 only squeaks out, say, a 5% earnings gain, that still multiplies by the PE ratio.

So in itself, these specific tariffs are survivable. However the lower long-term growth and the risk of a reverse-stimulus multiplier effect of these regressive taxes and firings might call into question the wisdom of paying a PE of 29 for the S&P500 when there are markets around the world selling for half that valuation. There are also the perennial concerns about a housing bubble, a crypto bubble, a tech stock bubble, rising deficits, and the expansion of unregulated shadow banking, that are starting to look a bit like a row of dominoes.

So my take home message is that we're in a risky environment that justifies staying hedged, but with plenty of hopeful reasons to stay invested in equities despite the tariffs. I doubt it will be another +20% year or anything, but that's fine. It just means my collar hedges will probably be free.

[MustacheAndaHalf]

The February jobs report had no dramatic surprises, although it also does not reflect Federal layoffs (expected in the March jobs report).


"Total nonfarm payroll employment rose by 151,000 in February, and the unemployment rate changed
little at 4.1 percent, the U.S. Bureau of Labor Statistics reported today."
https://www.bls.gov/news.release/empsit.nr0.htm

"Nonfarm payrolls increased by a seasonally adjusted 151,000 on the month, better than the downwardly revised 125,000 in January but less than the 170,000 consensus forecast."
https://www.cnbc.com/2025/03/07/jobs-report-february-2025.html

"US Jobs Report Shows Evidence Labor Market Is Softening"
https://www.bloomberg.com/news/articles/2025-03-07/us-hiring-rises-at-solid-pace-unemployment-unexpectedly-higher

[ChpBstrd]

February inflation numbers came in nice and cool:

CPI:              +0.2% MoM, +2.8% YoY
Core CPI:      +0.2% MoM, +3.1% YoY

Stocks will boom today, as this report rekindles hopes for rate cuts later this year. Annualized Core CPI, for example, finally broke through the 3.2% annual barrier where it's been stuck since June.


Annualized CPI broke a 4-month trend of rising inflation:


Even more impressive, these good numbers occurred despite supplemental 10% tariffs on all Chinese goods, enacted February 4th. Perhaps those price increases have not yet had a chance to appear on retail shelves? I will be interested to see next week's January Inventories report, to see if businesses are focusing on selling down their inventories due to recession fears, or if the tariffs are mostly being absorbed by reduced margins along this supply chain. If the latter, then businesses may be adopting a lower-margin, higher-volume strategy to deal with the economic friction. Still, I wonder how much lower margins can go, since importers were already running this strategy. Wal-Mart for example has a profit margin of 2.85%. They certainly don't have to absorb the entire 10% tariff, but they also don't have room to absorb any of the tariff!

In any case, the stagflation hypothesis took a gut punch. These data could be interpreted as supporting the normal-disinflationary-recession hypothesis OR the falling-inflation-falling-rates economic growth hypothesis.

[dividendman]

February inflation numbers came in nice and cool:

CPI:              +0.2% MoM, +2.8% YoY
Core CPI:      +0.2% MoM, +3.1% YoY

Stocks will boom today, as this report rekindles hopes for rate cuts later this year. Annualized Core CPI, for example, finally broke through the 3.2% annual barrier where it's been stuck since June.


Annualized CPI broke a 4-month trend of rising inflation:


Even more impressive, these good numbers occurred despite supplemental 10% tariffs on all Chinese goods, enacted February 4th. Perhaps those price increases have not yet had a chance to appear on retail shelves? I will be interested to see next week's January Inventories report, to see if businesses are focusing on selling down their inventories due to recession fears, or if the tariffs are mostly being absorbed by reduced margins along this supply chain. If the latter, then businesses may be adopting a lower-margin, higher-volume strategy to deal with the economic friction. Still, I wonder how much lower margins can go, since importers were already running this strategy. Wal-Mart for example has a profit margin of 2.85%. They certainly don't have to absorb the entire 10% tariff, but they also don't have room to absorb any of the tariff!

In any case, the stagflation hypothesis took a gut punch. These data could be interpreted as supporting the normal-disinflationary-recession hypothesis OR the falling-inflation-falling-rates economic growth hypothesis.

I don't see a "boom" in the stock market today. I think any lowering of interest rates (with is clearly TBD since tariffs haven't come yet and will be inflationary) is nothing in comparison to the impacts of the dithering non-sensical tariff policy coming out of this administration.

[ChpBstrd]

As I've noted, the key question is whether price increases from tariffs that appear in the inflation data are interpreted by the Fed as simply inflation requiring a policy response or as a one-time factor that can be discounted out.

JPow's March 7 speech offered only the scantest clues about the Fed's attitude toward tariff-drive price increases. These include:

Wages are growing faster than inflation, and at a more sustainable pace than earlier in the pandemic recovery. With wage growth moderating and labor supply and demand having moved into better balance, the labor market is not a significant source of inflationary pressure.

This statement strikes me as bold. If wages, a major cost input in a services-driven economy like the US's, are growing at a rate faster than inflation, it would seem like the requirement to pay higher wages would eventually translate into prices. Wages should be considered "a significant source of inflationary pressure" for as long as they are much higher than inflation. Real hourly wages were +1.22% in 4Q2024. This is within the range of normal, but wouldn't, say +0.75% offer less inflationary pressure?

Further, recent surveys of households and businesses point to heightened uncertainty about the economic outlook. It remains to be seen how these developments might affect future spending and investment. Sentiment readings have not been a good predictor of consumption growth in recent years.

We pay close attention to a broad range of measures of inflation expectations, and some near-term measures have recently moved up. We see this in both market- and survey-based measures, and survey respondents, both consumers and businesses, are mentioning tariffs as a driving factor. Beyond the next year or so, however, most measures of longer-term expectations remain stable and consistent with our 2 percent inflation goal.

So the Fed is largely ignoring consumer sentiment and business purchasing/conditions surveys, and looking to see what the bond market is doing. Fair enough. Poor consumer sentiment and slightly higher inflation expectations due to tariffs may be a reason for people to pull ahead durables purchases, not avoid them. And what other technique do most Americans have for dealing with anxiety than purchasing things? Sometimes sentiment is cyclical and other times it is anti-cyclical.

The bigger problem is Powell's sentiment that "most measures" point to stable expectations consistent with the 2% target. Did JPow not notice that the 5-year inflation breakeven implied by TIPS versus nominal treasuries has risen from 1.86% on September 6 to 2.52% on the day he was speaking? Markets are giving up on the Fed's ability to hit its 2% target and JPow really said what he said?

the new Administration is in the process of implementing significant policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. It is the net effect of these policy changes that will matter for the economy and for the path of monetary policy. While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their likely effects remains high. As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves. We do not need to be in a hurry, and are well positioned to wait for greater clarity.

I'm interested in your takes on this somewhat cryptic statement.

To me, it means policy changes are contributing significant "noise" that will obstruct the inflation "signal" and force the Fed to take a less nimble, longer-term view. JPow seems to imply that because uncertainty remains high and because there are so many parts moving at once, it will be impossible to separate the impact of tariffs for example, with a CPI-excluding-imports, or with a PCE that has consumers' share of tariff payments manually subtracted. "Not in a hurry" and "positioned to wait for greater clarity" mean we are at a plateau in interest rates that could last a year or longer.

Certainly rate cuts could happen later this year if inflation continues to fall despite the tariffs. But in that scenario, we'd be wondering how much the tariffs are masking a disinflationary/deflationary trend and recession risk arising from a too-restrictive monetary policy. All eyes will be on unemployment for that answer.

I don't think the policy changes impair the Fed from reacting more quickly to an economic emergency, such as a rapid increase in unemployment, a new pandemic, or a default-driven financial crisis. However, JPow is saying the Fed will be delayed in reacting to changes in inflation. So the Fed can quickly respond to economic decline but cannot quickly respond to inflation.

Thus we are back in 2021, when unprecedented supply chain disruptions served as a reason for the Fed to delay rate hikes until 2022. Tariffs may increase prices this year, but the Fed seems to be signalling they'll initially consider these price increases to be transitory and wait as long as they can for more data.

The question is: Could prices rise sharply this summer, as they did in 2021, and the first rate hikes come the following Spring (i.e. March 2026)? Fedwatch is utterly discounting this possibility, but just think how obvious it would seem in hindsight!

Plot twist: Trump gets to replace JPow with a lackey in May 2026. So there will be subtle pressure for the Fed to wait a little longer to get in alignment with the new leadership before committing to rate hikes. The outlook for inflation in 2026 gets much worse when we consider how dovish and politically servile this new Fed chair is likely to be.

[ChpBstrd]

I'm calling this the bottom of the current stock correction.

1) CPI numbers came in favorable at 0.2%.
2) PPI came in at 0%
3) Initial claims are in their 2nd week of decline - the brief upward trend peaking on Feb 22 was a false alarm.
4) Continuing claims also fell, and we're back in line with the trend since last fall. These are still historically low levels.
5) As discussed earlier and on WolfStreet, the scary January PCE report that accelerated this cycle of fear was probably due to over-correction in seasonal adjustments, and is not in alignment with other data sources. People pulled ahead purchases, causing this December-January cycle to not resemble other years' cycles.
6) Putting all these factors together, the odds of rate cuts are increasing. This interpretation is starting to be supported by federal funds rates futures markets, which now see a 3.5%-3.75% FFR as the most likely outcome in December. That's 75bp in forecasted cuts.
7) With stock market corrections, bigger drops are much rarer than smaller drops. A 10% or worse correction as we've just experienced occurred in 63% of years between 1928 and 2021. However a 20% or worse correction/bear market occurred in only 26% of years. So just by statistical probability, the market is MUCH more likely to recover than it is to go down another 10%.

8) The tariffs everyone is afraid of are estimated to impact GDP -0.6%. So GDP growth is likely to land between +1% and +2% in the worst case scenario where they are immediately enacted in full and not revised/repealed. That would make 2025 a typical year for the US economy, and we know how stocks do in typical years.
9) The pending end of QT will allow money supply to rise faster.
10) The coming Republican tax cut bill seems likely to ignite some animal spirits in the short term, though I do not expect any long-term economic boost from it.

So I've moved some spare change back into stocks. I'm also letting some covered calls on IWM expire, and won't be rolling them. I didn't have much to move from cash to risky assets, maybe $15k in all, but I think it's the right thing to do because most of the macro metrics are good.

I was tempted to drop my collar hedges on my main QQQ and IWM positions, because they are sitting on thousands of dollars in gains, and the puts are pumped up by volatility that is due to melt away. But I'll reluctantly stick to my IPS for now, and not exit unless we get a -20% correction. For my options expiring in June, it seems increasingly likely the market price will end up beneath my short call strike price anyway, so why spend a few hundred dollars buying them back?

Reasons I might be wrong include rising delinquencies, under-estimation of the macro impacts of tariffs and government spending cuts, consumer spending reductions due to sentiment, the risk of a bond market revolt if the coming tax cut bill is too aggressive, and stock market overvaluation. I'm betting these risks won't amount to a recession. Feels like I've seen much worse macro environments, and this is no 2008, 2020, or 2022. 

[EscapeVelocity2020]

I always enjoy your analysis of the numbers @ChpBstrd but I'm getting the impression that market sentiment is still very negative.  Getting one day of 'bargain hunter' gains probably won't reassure main street that tariff and Ukraine whiplash risk is still high.  Incidentally, I was overseas last week, and I can't emphasize enough just how pissed off the rest of the world seems to be at Trump right now, once you get out of the US bubble.  There are some high hurdles to clear for the S&P to get back to 6000, unless there is real, unexpected stimulus from either the Fed, Congress, or an AI/energy/tech narrative.  I suspect that foreign capital inflows (such as this) had helped US equities hit nosebleed highs earlies and some of that enthusiasm has since waned.  If there is one thing I can applaud Trump's team on, it is that they finally seem to be weakening the USD.

[Financial.Velociraptor]

I always enjoy your analysis of the numbers @ChpBstrd but I'm getting the impression that market sentiment is still very negative.  Getting one day of 'bargain hunter' gains probably won't reassure main street that tariff and Ukraine whiplash risk is still high.  Incidentally, I was overseas last week, and I can't emphasize enough just how pissed off the rest of the world seems to be at Trump right now, once you get out of the US bubble.  There are some high hurdles to clear for the S&P to get back to 6000, unless there is real, unexpected stimulus from either the Fed, Congress, or an AI/energy/tech narrative.  I suspect that foreign capital inflows (such as this) had helped US equities hit nosebleed highs earlies and some of that enthusiasm has since waned.  If there is one thing I can applaud Trump's team on, it is that they finally seem to be weakening the USD.

Thanks for this color on the analysis EV2020!  I'm mostly limited to getting the feel of Europe via the BBC, but they continue to treat the US with some serious kid gloves.  It helps to know what the man on the street thinks.  And since you probably left the country to spend time with some of the world's most conservative people (oilfield peeps) your estimate is probably more favorable than reality.  I think it should be pretty clear to any American that is paying attention though that when the Canadians give up American Booze and Europeans set entire Tesla dealerships and their inventory on fire, that we are less than loved right now.

[FIPurpose]

I'm currently working abroad in South America. When I pass US consulates, the lines are no longer wrapped around the buildings like they were before the election. Travel to the US is way down. I suspect especially states like Florida will see some of the biggest losses from loss of snowbirds deciding to go elsewhere for their warm weather/ entertainment.

I heard from some Canadians today that they were foregoing visiting family in the US to avoid contributing to US markets. That kind of sentiment stretched across millions of people? Yeah, I think the US is in for some major losses and people who said that investing in the US alone was good enough will see a couple down years where international funds come out ahead.

[ChpBstrd]

I always enjoy your analysis of the numbers @ChpBstrd but I'm getting the impression that market sentiment is still very negative.  Getting one day of 'bargain hunter' gains probably won't reassure main street that tariff and Ukraine whiplash risk is still high.  Incidentally, I was overseas last week, and I can't emphasize enough just how pissed off the rest of the world seems to be at Trump right now, once you get out of the US bubble.  There are some high hurdles to clear for the S&P to get back to 6000, unless there is real, unexpected stimulus from either the Fed, Congress, or an AI/energy/tech narrative.  I suspect that foreign capital inflows (such as this) had helped US equities hit nosebleed highs earlies and some of that enthusiasm has since waned.  If there is one thing I can applaud Trump's team on, it is that they finally seem to be weakening the USD.

Thanks for this color on the analysis EV2020!  I'm mostly limited to getting the feel of Europe via the BBC, but they continue to treat the US with some serious kid gloves.  It helps to know what the man on the street thinks.  And since you probably left the country to spend time with some of the world's most conservative people (oilfield peeps) your estimate is probably more favorable than reality.  I think it should be pretty clear to any American that is paying attention though that when the Canadians give up American Booze and Europeans set entire Tesla dealerships and their inventory on fire, that we are less than loved right now.

It's fair to ask whether foreign sentiment will translate into a decline in US exports, which comprise about 11% of GDP. Will there be boycotts that drop exports by 10%? Such a reduction might knock almost 1% off of GDP. But could it happen?

The US's main goods exports include things like petroleum products, agricultural commodities, aircraft, industrial equipment, vehicles, and other manufactured products. Services exports include business services, financial services, intellectual property, travel, and telecom. Overall, I think a relatively small portion of these goods and services are consumer-facing, like cars and financial services. So foreign consumers, no matter how mad they are, have relatively little leverage to boycott US goods, and I don't see foreign businesses like airlines, oil companies, banks, or the users of agricultural commodities as being able to take a stand against US airliners, petroleum, or soybeans.

So even after considering changes in consumer behavior due to anger, rather than tariffs, I think we're back to the -0.6% GDP impact number that the Yale Budget Lab calculated based on pricing alone.

Also, these same Europeans who are supposedly irritated by the U.S's right wing shift have put the very Trumpy French National Rally and the German Alternative for Germany parties in 2nd place positions. Right-wing coalitions govern Italy, Finland, Slovakia, Czech Republic, Croatia, and Hungary. It's certainly true that populist nationalism is always self-centered, but a large voting bloc in Europe is in political alignment with Trump. So it's hard for me to envision an anti-Trump consensus that could result in an effective boycott there.

Not to mention, the U.S. social media companies, which are in alignment with the administration, control many foreign individuals' information sources, so any boycott talk could simply be demoted in Europe, Canada, Asia, Latin America, or elsewhere. 

[EscapeVelocity2020]

I was thinking more along the lines of direct foreign investment in the US equities and bond markets.  In the link from my previous post -

Net foreign acquisitions of long-term securities, short-term US securities, and banking flows totaled a net TIC inflow of $87.1 billion in December 2024. This included $162.5 billion in net inflows from foreign private investors, while foreign official institutions saw $75.3 billion in outflows. Foreign investors increased their holdings of long-term US securities by $79.6 billion, with private foreign investors accounting for $130.5 billion in net purchases. Conversely, foreign official institutions reduced their holdings, selling $50.9 billion worth of US securities.

My international oil company places a high value on the US being a stable and predictable place to invest long term.  Investments are always competing for dollars, so throwing steel and aluminum tariffs around as well as pulling stunts like Trump axes Chevron's Venezuela oil license, results in additional risks and burden to investing billions in the Gulf of America.  Sure, the long term goal of reshoring manufacturing is laudable, but it will drive away foreign investment in the short to medium term.

[ChpBstrd]

I was thinking more along the lines of direct foreign investment in the US equities and bond markets.  In the link from my previous post -

Net foreign acquisitions of long-term securities, short-term US securities, and banking flows totaled a net TIC inflow of $87.1 billion in December 2024. This included $162.5 billion in net inflows from foreign private investors, while foreign official institutions saw $75.3 billion in outflows. Foreign investors increased their holdings of long-term US securities by $79.6 billion, with private foreign investors accounting for $130.5 billion in net purchases. Conversely, foreign official institutions reduced their holdings, selling $50.9 billion worth of US securities.

My international oil company places a high value on the US being a stable and predictable place to invest long term.  Investments are always competing for dollars, so throwing steel and aluminum tariffs around as well as pulling stunts like Trump axes Chevron's Venezuela oil license, results in additional risks and burden to investing billions in the Gulf of America.  Sure, the long term goal of reshoring manufacturing is laudable, but it will drive away foreign investment in the short to medium term.

I can agree that part of the reason people are willing to pay 30x earnings for U.S. stock indices or to lock up money for ten years at a yield of only 4.3% is because there is an expectation of stability compared to many other markets in the world (i.e. versus China, Latin America, SE Asia).

An even bigger factor is the expectation that the U.S. will grow faster than Europe, Japan, Africa, etc. because of structural reasons (consumerist culture, lack of social spending, pro-business policy, demographics, education).

Yet, a factor even bigger than these two factors is the U.S. trade deficit. The USD is the world's reserve currency, meaning there is constant demand for it from countries that would like to engage in international trade. Much of the growth in other countries must be financed in USD, because how else does one buy the petroleum, steel, equipment, etc. to build that growth? The world runs a trade deficit with the U.S. that amounts to about $70 billion most months because the world is desperate to obtain USDs. The U.S. government essentially prints these dollars and exports debt instruments in exchange for the hard work of foreigners. This inequality is sustained because the U.S. has a very large economy, very free financial controls, and high stability.

Yet the assumptions behind all 3 reasons are crumbling. U.S. stability is now questionable, as the country heads toward permanent one-party-state status and as the constitution and laws are increasingly ignored by the ruling party. It's a lot harder to answer the question nowadays of "Which country will be first to have a coup leading to dictatorship? The U.S. or Brazil?"

The structural reasons for growth can similarly be questioned. Is it an environment of fair competition if media companies like Meta must kiss the emperor's ring, or if the president is doing sponsored commercials for car companies on the White House driveway? If public primary education is defunded, will the U.S's technical capabilities start to decline in about 10 years? Can consumerism continue if the middle class continues declining? Will demographics support GDP growth if the US actually manages to reduce immigration?

Finally, we get to the effects of tariffs. Tariffs create deadweight losses that reduce trade. I.e. Somebody in another country who would have bought a U.S. export will change their mind when the price increases due to tariffs, and somebody in the U.S. who would have bought an import will similarly change their mind in reaction to price increases. If international trade with the U.S. decreases, the pipeline of USD's to the rest of the world will decrease. That might mean the rest of the world would have to reduce their trade in USD-denominated markets, and/or it might put upward pressure on the value of USDs due to scarcity.

As trading in USDs gets more and more cumbersome, it opens the door for BRICS Pay or Euro-denominated markets to take market share. Such a development would make USD denominated investments less attractive, as it would create the risk for a massive USD devaluation someday in the future. So even if the USD currency moves upward, from a shortage of the currency in international markets, USD-earning investments might look less attractive. The USD will likely remain relatively stable in the short term. But over a longer term, the rationale for US exceptionalism is a lot murkier.

Bond yields are swinging back and forth from the uncertainty of whether policies will lead to a dis-inflationary recession or stagflation. The USD may also swing around as immediate shortages driving up the value confront longer-term investment pessimism driving down the value.

[ChpBstrd]

The Fed's March Dot Plot seems to be a disaster. Yet markets seem to be shrugging it off.

Year-End 2025 Numbers, with comparisons to December SEP

Real GDP: +1.7%, down from +2.1%
Unemployment: 4.4%, up from 4.3%
PCE: +2.7%, up from +2.5%
Core PCE: +2.8%, up from +2.5%
Federal Funds Rate, average: 3.9%, same as December

So basically the Fed's survey participants are saying things have changed in the past 3 months so that significantly reduced economic growth and simultaneously rising inflation are more likely. But they still foresee 50bp in rate cuts this year, despite the higher inflation, suggesting that the consensus plan for now is to cut rates in the face of stubborn inflation. This supports the hypothesis that the actual inflation target is more like 3%. It also implies that the FOMC has no plans to pre-emptively cover the administration for the inflationary impacts of tariffs.

It's also interesting to see the Fed's -0.4% reduction in GDP estimates alongside the Yale Budget Lab's -0.6% estimated reduction in GDP if the announced tariff plans end up being fully and immediately implemented. One has to wonder if the Feds agree with the Budget Lab's estimate, and have discounted it by the probability of the full set of tariffs actually happening in the next month. So far this year, Trump has folded on his signature agenda policy each time the consequences (or perhaps lobbyists' bribes) have been brought to his attention. If we ease into these tariffs over the course of a year, instead of doing them on that "day one" we were once told about, then the impact on GDP will be spread out over a longer timeframe and the Fed's estimate is as good as any.

Switching to JPow's press conference, I noticed the following things:

• QT for treasuries drops from $25B to $5B in April. The amount of mortgage backed securities being redeemed remains unchanged. Watch for a small, positive inflationary impact from the faster increase in money supply a couple months from now. JPow has no plans to taper the reduction in MBS.
• How much inflation came from tariffs? "Some of it, a good part of it." Powell says. He notes that it's challenging to separate the impact of "tariff inflation" from "non-tariff inflation" but that they will be working on ways to separate the factors. The good news: They are not delusional about the inflationary impact and are trying to study the problem to avoid being in position where they don't know whether the source of inflation is "transitory" or not. The bad news: they might be working bottom-up within the existing calculation paradigm, instead of giving us a much simpler top-down number based on PCE subtracting the amounts of tariffs collected. In a subsequent question, JPow refused to explain how they might separate the two types of inflation, other than by looking at non-tariffed sectors like services. Also, JPow daringly used the word "transitory", which implies a dovish bias toward ignoring too-high inflation if tariffs can be justified as an excuse.
• The FOMC believes slower growth will "offset" inflationary pressures. This is why they did not change their interest rate projection despite the higher inflation estimate, or why the inflation estimate did not rise further to fully account for tariffs. This implies they are thinking in terms of the Phillips Curve. The Phillips Curve fell out of favor after the low-growth and high-inflation 1970s proved that you can actually have the worst of both worlds. It's not that they should be using a different paradigm that has not been contradicted; they've all been contradicted! It's simply notable that the Fed seems to be discounting the risk of stagflation, even as their own GDP, unemployment, and inflation estimates are converging toward that outcome. Perhaps the attitude is something like "We'll probably get a disinflationary recession from these tariffs, so we want to get rates lower, but if that doesn't happen, any tariff-driven inflation will be transitory anyway, so we won't be wrong-footed by staying the course on rate cuts no matter how it goes." That view could be challenged if we start seeing rising inflation and/or rising unemployment this summer.

In other relevant news, the Cleveland Fed's inflation nowcasting service is predicting 0% CPI and PCE inflation in March, and about 0.25% on each core measure.

[ChpBstrd]

A CNBC survey of 20 CFO’s found that 60% of them expect a recession to start in the 2nd half of this year. Another 15% expect a recession in 2026. 95% said Trump’s tariff policies are making it difficult to make business decisions.

I’ve generally dismissed doom-level consumer sentiment because (a) consumer surveys have a poor track record, and (b) what are anxious consumers going to do? Buy more stuff!

However, CFO’s are harder for me to dismiss. Unless there’s something askew with the small sample, these executives probably voted for Trump, so there shouldn’t be a bias.

Call it a conspiracy theory if you want, but here’s a thought: It could be that the Trump administration knows that, by the odds alone, there will be a recession sometime within the next 4 years. Voters’ sentiment may recover if the recession happens in year one, or at worst, year two. This is what happened after George W. Bush oversaw recession from 2000-2002, only to win reelection in 2004. If the recession happens in years 3 or 4, though, voters will remember and it will affect the election. So why not throw on all the tariffs in 2025? A mild recession will occur, and voters will be over it by 2028.

[reeshau]

Yes, if enough people of influence believe a thing, they can Manifest that thing.  If most companies become cautious, scale back their investment plans and inventory levels, and lay off 5% of their employees to secure their bonuses, then the recession ball gets rolling.

That's how I view technical analysis, mainly.  There are tons of things to measure, and we pattern-seeking humans find a correlation once in a while.  If enough of us find a supposed pattern that we believe predicts something, then react to it, then voila!  Something happened because of the pattern.  I view it mainly as a measure of market psychology, as a kind or rorschach test of how people are feeling, anyway.

I think of your conspiracy theory in a similar way.  Trump is as Trump does.  Could some Republican strategist be thinking in the way you lay out, to make lemonade out of lemons?  Probably.  But the causality is backwards.  Trump changes his mind multiple times a day, so the plotting Republicans are riding the lightning, and trying to make the best of it.  Then they rationalize a story of how brilliant it all is.

[ChpBstrd]

February PCE numbers failed to impress:

PCE:               +0.3%, +2.5% annualized
Core PCE:       +0.4%, +2.8% annualized (above forecasts of +0.3% and +2.7%)

Other Personal Income and Outlays numbers suggest overheating economic growth, and possible distortions due to the pulling-ahead of purchases before tariffs.

Personal Income rose +0.8% in February, and Disposable Personal Income rose +0.9% (again, these are monthly numbers). Some of those income gains went into the Personal Savings Rate increase to 4.6%, compared to 4.3% in January and 3.3% in December. To summarize, we earned a lot more, spent a lot more, and paid higher prices. The rapid earnings increases are troubling considering how Labor Force Participation fell in February. Wage-price spiral? Early stagflation?

These February numbers might reflect some of the impact from tariffs that were applied to Chinese goods, the impact of the - what was it? - 2 days of tariffs on Mexico and Canada, and the impact of retailers raising prices ahead of expected tariffs to cover the cost of their next round of inventory.

In other news, GDPNow is currently forecasting -2.8% GDP growth, and a University of Michigan survey of consumers' inflation expectations revealed a sharp uptick in long-run inflation expectations, to 4.1%. From the U of M survey:

As of March 2025, long-run expectations have climbed sharply for three consecutive months and are now comparable to the peak readings from the post-pandemic inflationary episode.

The contrast between this hot February PCE report and the cool February CPI report might boil down to consumers pulling ahead purchases of the items that saw the biggest price increases, perhaps in fear of even further price increases. I'm also concerned that PCE might have been much higher had "final expenditures of nonprofit institutions" not declined by a whopping -15.8% - perhaps as they pulled back in anticipation of government cutting grants?

Also...

Consumer sentiment tanked 12% this month, the University of Michigan said in its latest survey released Friday. That was a slightly steeper decline than the one reported in a preliminary reading earlier this month. Respondents blamed Trump’s erratic trade war for their jitters, the survey said.
...
The Michigan survey’s “expectations” index, which captures respondents’ outlook for the economy, plummeted 18% “and has now lost more than 30% since November 2024,” according to a release. And this time, it wasn’t just Democrats and Independents feeling dour; Republicans also grew gloomier, “expressing worsening expectations since February for their personal finances, business conditions, unemployment, and inflation.”

The PCE report pushed any possible rate cuts into next year, according to Fedwatch, which shows the most likely December 2025 rate is a full quarter point lower than it was yesterday.

Yet I still think recession calls are a bit premature. If the US economy managed to grow through the rising rates and failing banks of 2022-2024, and if the Yale Budget lab is only thinking full tariff implementation would knock -0.6% off GDP growth, then the economy will probably muddle through. Besides, yesterday's initial claims and continuing claims showed no signs of deterioration. Nor do durable goods orders or Q4 residential investment.

Risks to my assessment include a possible misunderstanding of the multiplier effect of government job and spending cuts, a consumer-sentiment led panic, or a tariff-driven stagflationary cycle where the US does to itself what OPEC did to the US in the early 70's.

Yet, it seems like the stock market is serving as a check valve on Trump's ambitions to rapidly roll out tariffs, at least for now. Each time he talks tariffs, the market goes down further and sentiment gets worse, forcing a delay or bargain. In term 1, a stock correction seems to have led to a trade deal with Mexico and Canada, and only targeted tariffs on China. In term 2, Trump has so far dialed back his "day one" priorities a whole quarter, and is not acting like the lame duck president he is, with full party control over all branches of government plus most media. Will he gradually implement his agenda, to avoid shocking markets all at once, or does the narcissist need us to admire him for keeping the economy growing? Markets have lost patience with hopeful narratives.

[eusebn2]

Now that tariffs are a reality, it's worth asking what the effects will be. The data source and model I'm sharing today comes from Yale University's "the budget lab".
https://budgetlab.yale.edu/research/fiscal-economic-and-distributional-effects-20-tariffs-china-and-25-tariffs-canada-and-mexico

Their economic model assumed:

• 20% total tariffs on China.
• 25% total tariffs on Mexico.
• 25% total tariffs on Canada.

These are all a reality right now, on March 5, 2025. The outcomes they forecast include:

• The policy is the equivalent of a 7 percentage point hike in the US effective tariff rate, raising it to the highest since 1943.
• The price level rises by 1.0-1.2%, the equivalent of an average per household consumer loss of $1,600–2,000 in 2024$.
• Real GDP growth is 0.6 lower in 2025. In the long-run, the US economy is persistently 0.3-0.4% smaller, the equivalent of $80-110 billion annually in 2024$.
• The tariffs to date raise $1.4-1.5 trillion over 2026-35 conventionally-scored, and $300-360 billion less if dynamic revenue effects are taken into account.
• Tariffs are regressive taxes. Losses for households at the bottom of the income distribution would range between $900–1,100.
• Electronics and clothing are disproportionately affected. Motor vehicles and food see above-average price increases as well.

So let's apply these to the IMF's 2025 forecast of +2.7% real GDP growth in the U.S. If we lop off The Budget Lab's -0.6% impact assessment, we still have +2.1% real GDP growth. Thus, a recession seems unlikely, unless something is very wrong with either or both estimates. 

Corporate earnings could rise significantly in an environment of 2.1% real GDP growth. Even if the S&P500 only squeaks out, say, a 5% earnings gain, that still multiplies by the PE ratio.

So in itself, these specific tariffs are survivable. However the lower long-term growth and the risk of a reverse-stimulus multiplier effect of these regressive taxes and firings might call into question the wisdom of paying a PE of 29 for the S&P500 when there are markets around the world selling for half that valuation. There are also the perennial concerns about a housing bubble, a crypto bubble, a tech stock bubble, rising deficits, and the expansion of unregulated shadow banking, that are starting to look a bit like a row of dominoes.

So my take home message is that we're in a risky environment that justifies staying hedged, but with plenty of hopeful reasons to stay invested in equities despite the tariffs. I doubt it will be another +20% year or anything, but that's fine. It just means my collar hedges will probably be free.

Amazing post. I was wondering if the models includied the tariffs imposed on american companies?

My current predictions:

I think April will be the most important month to see how the tariffs impact inflation. The data and numbers is usually lagging a month behind. I think America could see a short recession, as companies navigate the tariffs, find new suppliers, Etc.

Short Term pain for long term gain.

[ChpBstrd]

https://finance.yahoo.com/news/another-us-debt-downgrade-could-be-coming-200236197.html

The latest Moody’s analysis suggests that it, too, may lower the US rating at some point in 2025. Moody’s cites the unchecked rise of federal debt as a percentage of GDP, along with ballooning interest costs due to higher borrowing rates. That gloomy debt trajectory will likely worsen as Congress passes a set of tax cuts and tax-cut extensions later this year, one of Trump’s top economic priorities.

Honestly, AA+ seems a bit rich. So maybe S&P and Fitch knock off the "+" too.

[ChpBstrd]

Massive market shifts are occurring in response to larger-than-anyone-anticipated tariffs.

Crude oil is down 7% just today.

The Federal Funds Rate futures market as measured by Fedwatch has, in one week, shifted it's expectations for December federal funds rate down by 50 basis points, or two rate cuts.

The 10 year treasury yield has fallen from 4.36% just last week, to 4% today.

JP Morgan raised its estimated risk of a recession starting this year from 40% just days ago, to 60% now.

Continuing claims for unemployment benefits rose and broke through the upper limit from the last several months, suggesting a falling surplus of jobs.

And of course, some stock indices are now in a bear market.

Suddenly, markets are bracing for recession.

A key question is whether the broader tariffs will actually deliver a recession, despite the Yale Budget Lab's assessment of a mere -0.6% hit to GDP, or if they will be rescinded after a few months or a year as a negotiating tactic. Joeri on the Money & Macro channel again comes through with an explanation based on what has been written and said about the MAGA economic philosophy. He forecasts that the tariffs will be reduced for some "green" vassal state countries in a "Mar a Lago accord" that will rival Bretton Woods and Reagan's Plaza Accord.

I predict that the US will end up with both continued de-industrialization and a weaker dollar - with a possible loss of reserve currency status. I think there are insufficient incentives for countries like Britain or Australia to agree to lock their currencies with the USD, instead of seeking free trade deals and economic autonomy. Even if they lost a single digit percentage of their GDP, that would be less bad than being unable to respond to economic crises. A weaker dollar and higher trade barriers might bring some marginal manufacturing to the U.S. but even if tariffs were 100%, it's still cheaper to make most things in Asia, India, or Latin America. It would take a whole generation to again develop the know-how to make things in the now-high-tech, robot-driven manufacturing world (that because of tech and robots, doesn't need to employ as many people).

In the interim 15-20 years, my base case is that the US gets sidelined from the world's economic activity and actually loses some manufacturing capacity, while inflation and dollar devaluation reduce living standards. Also in the interim, such a massive economic shift will move asset prices in such as way as to precipitate an economic crisis in our derivative-leveraged, financialized economy. Maybe it will be real estate, currencies, MBS, bonds, commodities, swaps, IDK. But as multiple tides go out, someone will be shown to be swimming naked, and over-leveraged against a rapid price change. And as we know from 2008, it's all tied together.

In the short term, inflation reports could start reflecting a sudden increase in prices as soon as next week (next CPI report is April 10), but the April CPI report is probably what is prompting people to sell now rather than hold through the data report (April CPI will be reported on May 13th).

Despite the FFR futures market's outlook, JPow has simply stated that the Fed will sit tight for a while, and wait for data. Honestly, I can't blame them. The US economy will be simultaneously hit with both inflation and a collapse in aggregate demand. What's the right policy when the government itself is working against both sides of the Fed's dual mandate? For our purposes, that probably means the FOMC does not intend to do any more rate cuts until late this year, at the earliest, and maybe not until March 2026. That estimate factoring in a few months of data plus a few months of warning. It's another standoff between the futures market and the FOMC, like we saw in 2024. But for our purposes, it means the Fed is not riding to the rescue with rate cuts any time soon, because the data will be bonkers. JPow's use of the word "transitory" in the last press conference was an eerie reminder of the timeframe involved when the Fed is facing conflicting narratives driven by one-time events, like when they spent 2021 thinking inflation was transitory.

[Telecaster]

I predict that the US will end up with both continued de-industrialization and a weaker dollar - with a possible loss of reserve currency status. I think there are insufficient incentives for countries like Britain or Australia to agree to lock their currencies with the USD, instead of seeking free trade deals and economic autonomy. Even if they lost a single digit percentage of their GDP, that would be less bad than being unable to respond to economic crises. A weaker dollar and higher trade barriers might bring some marginal manufacturing to the U.S. but even if tariffs were 100%, it's still cheaper to make most things in Asia, India, or Latin America. It would take a whole generation to again develop the know-how to make things in the now-high-tech, robot-driven manufacturing world (that because of tech and robots, doesn't need to employ as many people).

I agree with all of that with one slight quibble:  Tariffs tend to strengthen a currency not weaken it.  Fewer imports reduces the supply of dollars to the foreign exchange market, which should drive the value of the dollar up.  A stronger dollar, in turn makes imports cheaper.    For this reason, economists agree that trying to "correct" a trade imbalance by using tariffs is a fucking stupid thing to do.   

Note:  The dollar is currently down, so the conventional wisdom could be wrong in this instance.   But what I think is happening is that foreign produces anticipate lower need for dollars and are selling, but that will likely stabilize in the future.

That's assuming there is some coherent policy with tariffs, which there isn't so far.   

[ChpBstrd]

I predict that the US will end up with both continued de-industrialization and a weaker dollar - with a possible loss of reserve currency status. I think there are insufficient incentives for countries like Britain or Australia to agree to lock their currencies with the USD, instead of seeking free trade deals and economic autonomy. Even if they lost a single digit percentage of their GDP, that would be less bad than being unable to respond to economic crises. A weaker dollar and higher trade barriers might bring some marginal manufacturing to the U.S. but even if tariffs were 100%, it's still cheaper to make most things in Asia, India, or Latin America. It would take a whole generation to again develop the know-how to make things in the now-high-tech, robot-driven manufacturing world (that because of tech and robots, doesn't need to employ as many people).

I agree with all of that with one slight quibble:  Tariffs tend to strengthen a currency not weaken it.  Fewer imports reduces the supply of dollars to the foreign exchange market, which should drive the value of the dollar up.  A stronger dollar, in turn makes imports cheaper.    For this reason, economists agree that trying to "correct" a trade imbalance by using tariffs is a fucking stupid thing to do.   

Note:  The dollar is currently down, so the conventional wisdom could be wrong in this instance.   But what I think is happening is that foreign produces anticipate lower need for dollars and are selling, but that will likely stabilize in the future.

That's assuming there is some coherent policy with tariffs, which there isn't so far.   

Yea, it's really hard to anticipate currency moves, because there are always competing reasons for a currency to go up or down. A decision to be bullish or bearish boils down to deciding that some factors will be more important than some other factors within a given timeframe.

Dollar-Bearish Factors:

• Loss of confidence could result in expansion of non-USD commodities markets in the long term
• Government policy is to weaken the USD to make terms of trade more favorable
• Fed is not likely to address tariff-driven inflation with rate hikes any time soon, and may actually cut rates, so negative real yields could be ahead
• Improving conditions in the Eurozone, Japan, and China could shift investment away from US treasuries
• BRICS Pay could take market share
• The US Dollar Index ended the first Trump presidency lower than when it started
• The upcoming budget/tax bill will require massive money printing to support a bigger federal deficit

Dollar-Bullish Factors:

• If the trade deficit falls, that could reduce the supply of USD for international markets, thereby requiring traders to scramble or commit forex trades for USD, pushing up the relative value of USD.
• Trump seems likely to create a crisis somewhere, which could lead investors back into safe-haven US treasuries
• Net-exporting economies are likely to suffer worse recessions than the US as a result of tariffs
• Broad money supply could decline, or fail to grow fast enough to keep up with the world economy, if banks reduce the availability of credit
• As asset price correction could raise the value of the USD by lowering the value of everything else

[vand]

CME FedWatch tool is saying that a Rate Cut in May is coming into play here, perhaps unsurprisingly, and pricing 100bps of cuts by Dec

https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

[reeshau]

I think the traders are reacting with their emotions.  It could be true, unless inflation does come in hot, and then the Fed has to act against it.

[ChpBstrd]

CME FedWatch tool is saying that a Rate Cut in May is coming into play here, perhaps unsurprisingly, and pricing 100bps of cuts by Dec

https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

The FFR futures market has consistently predicted what the Fed should do. I don't see JPow bailing Trump out of policies that come and go on a weekly basis.

[ChpBstrd]

March CPI Numbers:
CPI:               +0.1%      +2.4% YoY
Core CPI:       +0.1%      +2.8% YoY

March PPI:
PPI:               -0.4%        +2.7% YoY
PPI-goods:     -0.9%
PPI-services:  -0.2%

How can this be? Weren't additional tariffs in place, particularly on China, for much of March? It wasn't "liberation day" yet but you'd think the existing tariffs and the increasing expectation of tariffs would have raised prices, particularly for goods. 

My hypothesis is that rising tariff expectations actually lowered prices in the short term, by persuading exporters to empty their inventories into the U.S. at low prices, because that would yield a better profit and lower risk than holding that inventory until after tariffs are enacted. It would be a continuation of the trend seen in the post-election balance of trade for goods, where a surge of things are being shipped into the U.S. since November.

Perhaps this strategy makes sense for exporters because they will have significant overcapacity if tariffs destroy demand in the U.S. so they're running production and shipping at full speed with a plan to dramatically reduce output later. For wholesale buyers in the U.S. it makes sense to pull ahead purchasing and pay the costs of warehousing inventory. If they avoid another XX% in tariffs, that's XX% in additional margin when prices rise to reflect tariffs.

Also, there's a prisoner's dilemma situation. Retailers like WalMart, Amazon, and Target must anticipate their competitors pulling ahead purchases so that they can keep their prices lower for longer and grab market share and the majority of profits. None of them want to be in a position of raising prices first, while their competitors are still liquidating their inventory bought at pre-tariff prices. The first retailer to raise prices loses most of their sales! So hold out as long as possible!

The most recent number we have for the balance of trade in goods is, unfortunately, only February, but that month's balance of trade in goods involved a 41% larger deficit than November. If this hypothesis is true, we should expect to see a rapid increase in Total Business Inventories for February, which will be reported on Wednesday March 16.

There may also be bumpy earnings for companies using LIFO (last in, first out) accounting, such as WalMart, Home Depot, Macy's, Costco, and Kroger if prices do not rise at the same time as tariff costs rise. You can bet their accountants will be busy filling the footnotes with calculations of how much earnings would have been under FIFO or weighted-average methods.  Companies using FIFO (first in, first out) will continue to sell - on paper - the pre-tariff inventory they accumulated, and so their earnings will look better to the untrained eye in the short term. But then in the long term the LIFO companies will pull ahead - on paper.

[FIPurpose]

My understanding is that tariffs have not been actually charged yet. The have excluded any product that was mid-delivery when the tariffs were enacted. I would expect at least a 2 week delay just to see the first products that will start being taxed hitting US shores. That's not even considering how companies would be changing their pricing on the products.

I don't think you'd start to see the beginning of the real effects of tariffs until the start of April.

[EscapeVelocity2020]

The market pretty much ignored that backward looking good news.  Without tariffs, we'd have had a nice bump and enthusiasm about rate cuts, but the unknowns about tariffs made that data just about worthless.  And the Fed is repeatedly indicating that they are on ice until more data and a trend takes shape.  There is more concern now about the slowing rate of growth.  Further tariff reprieve could stave off a recession, but a slowdown amidst all the chaos seems almost certain.  Not to mention the crumbling consumer confidence and high inflation expectations...

Trump keeps calling back to his first term tariffs, but oil and gas was able to work through those the steel tariffs and stable oil and gas prices.  This time around, everything keeps changing on a number of fronts (who to talk to, what regulations are changing, will oil prices keep plunging?)...  so instead, oil companies are trimming their workforce, slow rolling projects, and waiting for stability.  The last time things were this bad was 2015...

[reeshau]

My understanding is that tariffs have not been actually charged yet. The have excluded any product that was mid-delivery when the tariffs were enacted. I would expect at least a 2 week delay just to see the first products that will start being taxed hitting US shores. That's not even considering how companies would be changing their pricing on the products.

I don't think you'd start to see the beginning of the real effects of tariffs until the start of April.

Yes, if you were en route with your customs paperwork filed, you were not charged the new tariffs.  That's quite some time for sea shipments, even if the ports are handling without delay.

[ChpBstrd]

Without tariffs, we'd have had a nice bump and enthusiasm about rate cuts, but the unknowns about tariffs made that data just about worthless.  And the Fed is repeatedly indicating that they are on ice until more data and a trend takes shape.  There is more concern now about the slowing rate of growth.  Further tariff reprieve could stave off a recession, but a slowdown amidst all the chaos seems almost certain.  Not to mention the crumbling consumer confidence and high inflation expectations...

To me, the setup looks like this. Each subsequent step in the process becomes less likely than the former, but none of these are issues we haven't seen in the past 18 years:

1) The FOMC ignores a rapid run-up in prices this summer, driven by the tariffs on China, attributing the changes to "transitory" taxation policy changes. Inflation exceeds 5% with no hope of a rate hike any time soon.
2) Demand destruction leads to layoffs starting in the 3rd quarter. The FOMC is unable to cut rates to save the economy from a multi-year recession.
3) A massive tax cut bill is passed, on the justification of tariff revenues and stimulus. Federal deficits are projected to rise to the moon. Stocks rise for a week or two in response.
4) The economy faces stagflation amid a paralyzed Federal Reserve. Thus Treasury is ordered to start cutting helicopter money checks to households, supposedly paid from the tariffs which previously justified the tax cuts.
5) The bond market goes on strike as the cycle of foreign demand driven by export revenues is broken ...and this is how you get 7% yields on the 10-year treasury, and 9-10% mortgages, by next April.
6) The housing market melts down again. Defaults rise at the same time as interest rate increases hit bank/investor liquidity. But this time MBS and banks cannot be bailed out by the government because of failed treasury auctions and elastic yields.
7) Fannie and Freddy are liquidated. 15 and 30 year mortgages, and 1-2% spreads of mortgage rates over treasuries both become history. The private market eventually steps up with 5 year ARMs but for a year or two, housing is illiquid and mortgages impossible to get. Real fire sales for cash inspire more people to sell stocks, deepening the rout.

If you think we only get to level 2, it makes sense to have cash to take advantage of the dip. If you think we'll hit level 5, long-term short options plays or bearish ETFs might make sense. If we get to 7, you need to have liquidated everything including any real estate and gone all in on LEAPS puts.

[ChpBstrd]

The S&P500 is down -9.2% and the Nasdaq is down -14.2% YTD. However, US FIRE'ees might have lost even more purchasing power than that due to the plummeting US dollar.

The US dollar index has lost -7.72% YTD, so add that to your overall decrease in worldwide purchasing ability! In particular, the USD has lost -8.87% to the Euro, and -8.96% to the Yen. All together, I wish I'd sold stock and purchased my European vacation in January instead of procrastinating.

[ChpBstrd]

Non-voting members seem to be used to communicate the sentiment and thought process of the FOMC, whereas voting members have to worry about accusations that they are giving tips about their future votes, and thus have less freedom to speak.

Thus Federal Reserve Bank of Minneapolis President Neel Kashkari made the following comments last week on CBS's Face the Nation:

“I think investors in the US and around the world are trying to determine what is the new normal in America” and the Fed has “zero ability to affect that destination,” Kashkari told CBS.

“All we can do is keep inflation expectations anchored and manage some of the ups and downs on that journey,” he said.

The interesting part of this quote, and recent comments by other Fed officials is the emphasis on the inflation side of the dual mandate. It is as if they are saying, "Trump, if you're going to break our maximum employment objective, we've not going to bail that out. We'll just focus on controlling inflation until you're done screwing around. You now own the full employment mandate." That means no pre-emptive rate cuts to offset the job losses tariffs will produce.

This is a shot across the bow for markets, and a clear contradiction of the Federal Fund Rates futures market, which anticipates no less than 100bp of cuts before the end of this year!

Meanwhile, Trump continues to apply political pressure for rate cuts, with relentless press comments and social media posts. This pressure has backfired so far, leading Fed officials to build a "wall of credibility" around JPow and to double-down on data-dependency, and a singular focus on inflation.

“I intend to keep my eye squarely focused on the outlook for inflation,” Jeffrey Schmid, the Federal Reserve Bank of Kansas City president, said on April 10.
“While in theory, tariffs may have only temporary effects on inflation (although persistent effects on the level of prices) I would be hesitant to take too much solace from theory in this environment.”

This is Trump's payback for ignoring the warnings from the economics profession.

Where does this leave us? First, Trump will obviously blame the Fed if there is a recession. Second, the Fed could be poised to raise rates - not cut them - amid high tariffs, mirroring the demand-destructive actions of the early Great Depression and the 1970s recessions. We shouldn't expect them to behave any differently, given their lack of control over fiscal policy. 

[EscapeVelocity2020]

Definitely a standoff between Trump and the Fed, no two ways about it.  Unlike every other part of government, the Fed is maintaining its independence.  Thankfully there is nothing Trump has found that allows him to fire Powell, or else he would have by now.  I'm pretty sure this standoff continues, with Trump's love for tariffs flourishing, inflation expectations rising, and rate cuts not really fixing the root cause of rising unemployment or rising inflation...  It's particularly bad for Trump, since the data was all pointing toward falling inflation, low unemployment, and two rate cuts coming in to Liberation Day.

Although I appreciate trying to put steps together as to where this could go from here, I think it is still too unpredictable.  I went in to Liberation Day conservatively allocated and am paralyzed by uncertainty to make any grand portfolio moves.  I'd like to get cash to work, but both bonds and stocks could falter at the drop of a tweet.

[ChpBstrd]

I went in to Liberation Day conservatively allocated and am paralyzed by uncertainty to make any grand portfolio moves.  I'd like to get cash to work, but both bonds and stocks could falter at the drop of a tweet.

Congratulations on the positioning, but now you have the problem of buying back in.

This is the kind of market that makes investors like me want investments that return money in a shorter amount of time, like short-duration bonds instead of long-duration, high-dividend stocks and preferreds, value over growth, natural resources over tech, and short-term trades. That's why funds like PGF (yield=6%) only fell -4.7% YTD while the S&P500 fell -8.5%. HYG (junk bonds) is only down -1.59% YTD! The future seems too uncertain to bet on distant-future cash flows, and thoughts circulate about locking in income today.

But of course, if you follow that instinct, you'll sell the S&P500 low to buy assets that didn't fall as much. That's buying high and selling low, isn't it? And in the (near 100% probability) event of a rebound, it will be the distant-cash-flow investments that go up the most.

So there's an optimization question for anyone going through a correction with dry powder to deploy: When is the ideal time to buy risky, distant cash flows? When the market is down 10%? 20%? 25%? We have to keep in mind that small corrections are a lot more likely than big bear markets like 2000-2003 or 2007-2009. In fact, small corrections of 10% occur about every two years, while a GFC-scale event might happen once in a lifetime. So the longer you hold out, the more probable it becomes that you'll be left behind by the recovery.

I suggest getting in incrementally. Take the win now by deploying 50% of dry powder. Throw in another 25% if we drop another 5%. Throw in the last 25% if we drop a total of 10% from here. In the meantime, hold some 1-3 year duration corporate bonds and make about 5% in the meantime.

[EscapeVelocity2020]

I fully understand that I'm playing long odds by remaining risk-off.  Problem is, I'd much rather miss a 10% gain then have a 10% loss.  I at least want to get through this earnings season before I'm comfortable starting a DCA back in.  Meanwhile, I still have plenty of exposure to the market, but I'm also making a nice yield in MMs.

I do like short, tactical investments which help hedge my losses, so I'll buy puts on what I think are wildly over priced companies near their earnings (cough cough TSLA next week).  I'm just biding my time this week to get in cheap, but I think it falls below 235...

[EscapeVelocity2020]

woohoo, those TSLA puts are deep in the money today!  And earnings haven't even hit yet.  Too bad it's not offsetting my other investments, but it is something...

[ChpBstrd]

March durable goods orders broke the trend!

But why March? Perhaps just like the stock market snapped out of its collective denial about tariffs in March, so did purchasing managers.

I'd have suggested pre-ordering durable goods in December and January, given the risk of "day one" tariffs, and perhaps I'd have been laughed out of the room by the optimists when those tariffs were postponed again and again. But the optimists somehow lost their optimism in March and realized that growth-killing tariffs could be imminent.

Initial Claims and Continuing Claims were reported today. Both stayed rangebound, and do not yet incorporate tens of thousands of fired federal workers who are generally still receiving income from the government.

I'm keeping a close eye on the Chicago Fed National Financial Conditions Index. The NFCI is a short-term predictor of recessions caused by a drying-up of liquidity due to financial stresses on banks and other financial institutions. It has taken a sharp upward turn since late January. We're nowhere near the zero line, which represents a recession warning, but we're definitely on an abrupt upward trajectory that could potentially cross that line within 6-9 months if the turbulence continues.


The Atlanta Fed's GDPNow released this week's estimate of GDP growth at -2.5%, even worse than last week's -2.2%.

But here's the interesting part: It appears they are now issuing an "alternative model forecast" which "adjusts" for the net import/export of gold. As you've seen in the news, there is a surge of gold demand in the U.S. resulting in a sudden increase in imports, from a few billion dollars to tens of billions of dollars per month. GDP tries to get at only the "domestic" side of production, so imports are subtracted. But if they subtract this amount of gold imports, the GDPNow forecast spits out a nonsensical number, such as -2.5% GDP growth in a time of low unemployment, strong demand, and solid corporate earnings.

The simpler explanation is that a surge in gold imports affected the GDPNow math as Americans realigned their portfolios to brace for chaos, selling stocks for dollars and dollars for foreign gold. So the Atlanta Fed helpfully backed out gold imports, and came to the following alternative forecast, which seems more reasonable:

The alternative model forecast, which adjusts for imports and exports of gold as described here, is -0.4 percent. After recent releases from the US Census Bureau and the National Association of Realtors, both the standard model’s and the alternative model’s nowcasts of first-quarter real gross private domestic investment growth decreased from 8.9 percent to 7.1 percent.

Unlike paper financial instruments which are traded across borders without affecting GDP, gold counts toward the GDP math as a good to be imported or exported. As one policy analyst at the Atlanta Fed noted:

...much of the widening of the trade deficit in January was due to an increase in nonmonetary gold imports from $13.2 billion in December to $32.6 billion in January. This accounted for nearly 60 percent of the widening of the goods trade deficit.

It's wild times when the Federal government starts publishing an alternative GDP forecast to negate the impact of capital flight from the country's investments and currency.

[Financial.Velociraptor]

Interesting observation @ChpBstrd

I'm now wondering how Crypto factors into GDP.  Is it considered a domestically produced "product" when a domestic miner is awarded 12.5 BTC?   

[EscapeVelocity2020]

I applaud you for keeping this thread going, but we are in uncharted economic waters, so I'm not sure what analysis will catch the spike in inflation or unemployment in time to adjust AA.  I think that the Fed will continue to supply liquidity and use tools to stop the worst immediate issues, but they have little control over the timing and size of tariff impacts.  I feel like we are on the Titanic and at some point it will be too late to make meaningful adjustments, but I have no idea how to judge where we currently are in that situation and how much successful deals will help at this point...

As for market, I feel like everyone else knows something before I do (this rally certainly feels like we're about to get a positive tariff development 'Truth' soon)...  so again, impossible to feel like I have any sort of analysis or information edge when tweets move the market 5% either way. 

[ChpBstrd]

Interesting observation @ChpBstrd

I'm now wondering how Crypto factors into GDP.  Is it considered a domestically produced "product" when a domestic miner is awarded 12.5 BTC?

Well, it's not a commodity that can be accounted for at a port of entry so I don't think it counts. Guess that makes it a security!

April 30 is going to be an "interesting" day, and I might dial back my speculation shortly before then. It will be interesting because the GDP report will reflect the same issue with gold that forced the Atlanta Fed to offer an alternative nowcast.

The main GDPNow estimate uses the same method of calculaton as the official GDP metric, so the GDP metric could also be a nonsensically low number. Even if the government surprises us with an "alternative" GDP number or footnotes, I suspect the crazy low GDP number will throw off unprepared market participants / bots and result in a brief selloff. It might be taken like the announcement of the start of a severe recession.

It will also throw off PCE/Core PCE, which are released the same day, alongside other GDP/Personal Income and Outlays metrics I watch like the PSR. For the unprepared, it'll look like chaos, and many, many participants in this market are receptive to recession news. So...
     1) Don't panic-sell if something happens Wednesday
     2) Pre-position now if you need to avoid or exploit a high probability of mid-week volatility.

The wide gap between the consensus GDP and GDPNow largely reflects this issue.

I applaud you for keeping this thread going, but we are in uncharted economic waters, so I'm not sure what analysis will catch the spike in inflation or unemployment in time to adjust AA.  ...
As for market, I feel like everyone else knows something before I do (this rally certainly feels like we're about to get a positive tariff development 'Truth' soon)...  so again, impossible to feel like I have any sort of analysis or information edge when tweets move the market 5% either way. 

I think we're definitely trying to learn how to predict things on a 6-12 month timeframe, rather than next week's Truth tweet. In the long run, market prices will revert to economic realities. The data, the experts, and policies all make it possible to see some kinds of trouble coming, or to realize when growth will continue despite the ever-present doom news.

In terms of reacting in time, I already have. I've been option hedged since last July, when 

[EscapeVelocity2020]

@ChpBstrd I'm not sure how I could use collars / options for my 401k funds.  I also don't think it's practical to hedge all of my portfolio, but I'd consider it if yields were comparable to money market yields.  At some point you have to exit your hedges though, so there's still some market timing involved.

[ChpBstrd]

@ChpBstrd I'm not sure how I could use collars / options for my 401k funds.  I also don't think it's practical to hedge all of my portfolio, but I'd consider it if yields were comparable to money market yields.  At some point you have to exit your hedges though, so there's still some market timing involved.

Yea, not much you can do about the 401k other than quit your job and roll it into your own brokerage IRA. Then you can do hedging. I guess could also hedge your overall portfolio by buying puts in your brokerage accounts to offset losses in your 401k, essentially shifting money across the accounts as markets go up or down, but you won't be able to sell covered calls this way.

And no, actually I never have to exit my hedges. It's a permanent AA for me. I can keep rolling the options positions forward forever, or as long as markets continue to exist. As each set of short calls / long puts near expiration, I simply trade out of them and into short calls / long puts that are over a year out. I can do this with combo orders and not go unhedged for even an instant.

[EscapeVelocity2020]

I'll have to read your other posts about your portfolio and plans, but I have no intention to stay hedged forever.  I do buy puts from time to time to offset losses when I get nervous, but I still remain optimistic that the overall trajectory is up and to the right.  I'm also in a high tax bracket, so I can't really sell significant positions efficiently right now (for example, if shares were called away).

[MustacheAndaHalf]

...
And no, actually I never have to exit my hedges. It's a permanent AA for me. I can keep rolling the options positions forward forever, or as long as markets continue to exist. As each set of short calls / long puts near expiration, I simply trade out of them and into short calls / long puts that are over a year out. I can do this with combo orders and not go unhedged for even an instant.

Correct me if I'm wrong, but you wait for puts to expire.  So if the puts expire worthless, you use money from your portfolio to buy new put options.  If the puts expire in the money, the cash goes to buying new puts, and leftover cash goes into your portfolio.  Is that right?

[ChpBstrd]

...
And no, actually I never have to exit my hedges. It's a permanent AA for me. I can keep rolling the options positions forward forever, or as long as markets continue to exist. As each set of short calls / long puts near expiration, I simply trade out of them and into short calls / long puts that are over a year out. I can do this with combo orders and not go unhedged for even an instant.

Correct me if I'm wrong, but you wait for puts to expire.  So if the puts expire worthless, you use money from your portfolio to buy new put options.  If the puts expire in the money, the cash goes to buying new puts, and leftover cash goes into your portfolio.  Is that right?

With a “zero cost collar” you receive cash from the sale of a call and then deploy almost exactly the same amount of cash to buy a put. Thus, on day zero, the number of shares, the account’s cash position, and the account’s value is unchanged.

When the time comes to roll, maybe months or over a year later, the usual/expected outcome is that the price of the stock is below the short call’s strike price, but above the long put’s price. In that scenario, both options have probably lost a lot of their value to time decay. Because you have +1 put and -1 call, the time decay works against you on the put and in your favor on the call. This means time decay is almost a wash on a net basis. On expiration day in this scenario, both options decay to zero, which is what you paid for them on net. So you paid zero for the pair and they ended up being worth zero. Your insurance was thus free.

In the scenario where stocks zoom up higher than your call’s strike price, your long put will decay to near zero, while the short call becomes a growing liability in your account. The negative value of the short call drags down your account’s value but is offset by the appreciation of the stock. E.g. you can’t have lost money on the short call unless your stock also appreciated a lot - perhaps because the stock became overvalued.

At this point in the stocks-zoomed-up scenario, you don’t have to wait until expiration and have your shares called away. If you did so, then perhaps your 100 shares would be assigned away at the call’s strike price and you’d only receive enough cash to buy 97 shares at the new, inflated price. That’s no bueno because you’d not have enough shares to sell a call against unless you deposited more cash (Options are generally in 100 share increments). Instead, you’d just buy back your ITM short call and pay for doing that by simultaneously selling a further-out call at a higher strike price. This way you’ve traded up to a higher strike price and bought more time. At the right strike prices and with enough time, you can bail out the short call and simultaneously buy a new put to replace the old one. If this sounds far-fetched, imagine yourself in this scenario and check the prices for such a roll. You can always find some pairing of strike prices and expiration dates to make this work.

My philosophy is that years of massive stock appreciation like this would likely be followed by a reversion to the mean. I.e. the market can’t keep going up >20% forever, so if you find your short call underwater, just buy more time (in terms of years) and it’ll sort out so that you don’t have to sell your shares lower than the market price. Play on a 5-10 year strategic timeframe, not a month to month timeframe.

The scenario where stocks fall below your long put’s strike price is relatively simpler. Your long put appreciates to offset some of your stock losses. Your short call liability falls to near zero. The combined effect results in a net profit on the options whether you close them out or roll up (in strike prices) and out (in expiration dates). Do what you wish with the profits. I would consider spending some of the options windfall on either buying more shares or paying a net debit for your next collar so that your upside potential is higher (by buying a put at a higher strike and selling a call at a higher strike than what is available at zero net cost). The philosophy here is that stocks usually rebound strongly after bear markets so you want to set yourself up to capture more upside. Imagine getting an insurance check on the way down, and parlaying that money into the bull market that follows. If you can pull that off just once you’ve generated alpha with a less volatile portfolio, using insurance you paid nothing for!

In any event, I’ve decided it’s optimal NOT to let one’s options expire, and to instead always roll up and out 3-6 months before expiration. Options that are out of the money become less sensitive as they approach expiration, (delta decreases) so the functionality of your insurance policy can get weak in the last few weeks of the options’ lifespan.

In the end, all we are doing is managing delta, theta, and vega. That’s the 2nd level way to think of hedging, rather than imagining expiration day outcomes. You never actually have to take assignment or let anything expire; you are simply managing a few statistics and time itself. In fact, you could intentionally just roll ITM covered calls forever if you wanted a particular profile. Such a position would have very low volatility and would earn much of its gains from time decay more so than stock price appreciation. That profile might appeal to someone who thinks shares are overpriced and will likely have relatively low long term returns.

[EscapeVelocity2020]

I'm not sure I fully understand this part

At this point in the stocks-zoomed-up scenario, you don’t have to wait until expiration and have your shares called away. If you did so, then perhaps your 100 shares would be assigned away at the call’s strike price and you’d only receive enough cash to buy 97 shares at the new, inflated price. That’s no bueno because you’d not have enough shares to sell a call against unless you deposited more cash (Options are generally in 100 share increments). Instead, you’d just buy back your ITM short call and pay for doing that by simultaneously selling a further-out call at a higher strike price. This way you’ve traded up to a higher strike price and bought more time. At the right strike prices and with enough time, you can bail out the short call and simultaneously buy a new put to replace the old one. If this sounds far-fetched, imagine yourself in this scenario and check the prices for such a roll. You can always find some pairing of strike prices and expiration dates to make this work.

Don't you also have to roll the put side up to match the duration and continue to limit losses to 20% (of the current price)?  You also have a timing decision to make as to how much above call appreciation you are willing to take before buying back the call.  I think this could eventually become untenable as you get less and less OTM upside for the price.  This becomes the situation where you were better off without the collar.

[MustacheAndaHalf]

Oh, collaring your stock performance on the high and low end.

If I want to sell a call +20% above the S&P price (SPY $550, call at $660), the same priced put is about -31% below the current price for options expiring March 31 2026.  Aiming for put protection after a -5% drop, at $525, needs to be funded with a call that kicks in after +7% gain, at $590 (also March 31 2026).  Seems like a bad deal, for the moment, for the date I picked.

If I aim for July 18 2025, just under 3 months away, the collar balances out at -10% and +6% ($495 long put for a $585 short call).

It's good news that you already established your collar earlier, not under these volatile conditions.

[ChpBstrd]

I'm not sure I fully understand this part

At this point in the stocks-zoomed-up scenario, you don’t have to wait until expiration and have your shares called away. If you did so, then perhaps your 100 shares would be assigned away at the call’s strike price and you’d only receive enough cash to buy 97 shares at the new, inflated price. That’s no bueno because you’d not have enough shares to sell a call against unless you deposited more cash (Options are generally in 100 share increments). Instead, you’d just buy back your ITM short call and pay for doing that by simultaneously selling a further-out call at a higher strike price. This way you’ve traded up to a higher strike price and bought more time. At the right strike prices and with enough time, you can bail out the short call and simultaneously buy a new put to replace the old one. If this sounds far-fetched, imagine yourself in this scenario and check the prices for such a roll. You can always find some pairing of strike prices and expiration dates to make this work.

Don't you also have to roll the put side up to match the duration and continue to limit losses to 20% (of the current price)?  You also have a timing decision to make as to how much above call appreciation you are willing to take before buying back the call.  I think this could eventually become untenable as you get less and less OTM upside for the price.  This becomes the situation where you were better off without the collar.

An illustration might be more helpful. You buy 100 shares for $100 each, buy a one-year put at the 80 strike for $5 per share ($-500), and sell a one-year call at the 125 strike for $5 per share ($+500).

Nine months later, the shares have unexpectedly zoomed up and are selling for $130. The two options have three months remaining. The put option at the 80 strike is hopelessly out of the money and has lost all but $1 per share of its value. The short call is now in the money because the share price ($130) is above its strike price ($125). The short call has an intrinsic value of $5 plus time value of $3, for a total of $8 (Note that its time value has declined from $5 to $3, even as intrinsic value suddenly appeared. This is because 9 months passed.). 

Adding up the accounts, you made $+30/share on the stock, lost $-4/share on the long put, and lost $-3/share on the short call. If the stock price stays the same, you will be required in 3 months to sell your 100 shares for the calls' strike price of $125, which is less than the current price of $130.

So you made money, but not as much as if you'd not been collared. If you want to start over with a new collar, you will only be able to buy (125/130=) 96 shares. But you need 100 to sell a covered collar and not borrow margin.

Instead, you simply start a new collar by making the following trades:

Close existing positions:

• Sell the 3 month put you own at the 80 strike for $+1/share.
  Buy back the 3 month call you OWE at the 125 strike for $-8/share.

And enter the new collar:

• Buy a 1 year put at the 110 strike for $-5/share
• Sell a 1 year call at the 145 strike for $+12/share*

*You'll notice I cheated here! My original collar had (125-100=) $25 upside, and here I'm only offering (145-130=) $15 upside. That's 25% upside versus 11.5% upside! I'm good with making this compromise because (1) I want to maintain 100 shares to be able to continue collaring, (2) I need to collect more premium to offset the cost of exiting my earlier collar without adding cash to my account, and (3) because the stock market just went up 30% and is less likely to do that next year because valuations are probably stretched. If stocks only go up 10% the following year, for example, both of my options will expire worthless and my 19-month outcome will be the same as if I'd just held the stock because I paid nothing on net for the options, gained or lost nothing from the options, and maintained the same number of shares the whole time.

Yes, it is possible the market gains yet another 30% the next year, and it is true that such a market would leave any hedged portfolio further and further behind. But we're also comparing an 100% stock portfolio to a portfolio with half the volatility and with firm bumpers preventing losses beyond a certain amount.

By rolling this way, I would spread the cost of an unexpected price increase into the next collar period (i.e. the next year).

Even if there was a string of 3 or 4 blockbuster years in a row, there'd still be nothing stopping you from rolling further and further down on the short call, until you were basically borrowing money from the options market and ratcheting up your more modest gains each cycle.

Oh, collaring your stock performance on the high and low end.

If I want to sell a call +20% above the S&P price (SPY $550, call at $660), the same priced put is about -31% below the current price for options expiring March 31 2026.  Aiming for put protection after a -5% drop, at $525, needs to be funded with a call that kicks in after +7% gain, at $590 (also March 31 2026).  Seems like a bad deal, for the moment, for the date I picked.

If I aim for July 18 2025, just under 3 months away, the collar balances out at -10% and +6% ($495 long put for a $585 short call).

It's good news that you already established your collar earlier, not under these volatile conditions.

I've observed something similar. High volatility/fear inflates the value of the puts we'd like to buy more than it inflates the value of the calls we'd like to sell. In normal or low-volatility conditions, a call with a strike 20% higher than the current price is worth more than a put with a strike 20% lower than current price because historically stocks have had an upward bias. That pricing flips in a panic - for shorter duration options. Thus the VIX or CNN fear/greed index are good signals for when it is a good time to trade a collar. Similarly, you get a profit boost if you exit your collar during a panic after having bought it during calm times.

That said, even in volatile times, the normal pattern still emerges when you go out a year or two. And longer periods of time is how long we should be hedging! There are probably unexplored calendar spread arbitrages buried in these observations.