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“We have to trust that human civilization will eventually find answers to everything.”

- Cixin Liu, The Three-Body Problem

Friday Eclipsing Charts

The premise of the classic sci-fi trilogy (and now Netflix series) The Three-Body Problem is that aliens are coming to Earth to escape a home planet that’s become uninhabitable due to the chaotic gravitational push and pull of a three-star solar system. 

But the joke’s on them because our own three-body problem of the Earth, Moon and Sun remains unsolved.

Isaac Newton's 17th-century solution for the two-body problem remains the basis of our understanding of this corner of the universe — but Newton’s solution was only ever an approximation of how the Solar System actually works. 

Despite Newton's best guesses and all the advances we’ve had in the 300 hundred years since, we still can’t make exact predictions for the trajectory of the Solar System — the gravitational interactions of the Earth, Moon and Sun are too chaotic to model with the information we currently have.

We’ll have a little more information to work with after Monday, however, when three NASA WB-57 jet planes follow the path of the solar eclipse across North America, collecting data on the “mysterious region” of the Sun’s corona and its equally mysterious impact on Earth.

That should nudge us a little closer to a true understanding of the three-body problem of our Solar System, but probably not any closer to the three-body problem of markets: The interactions between the three bodies of stocks, bonds and the Fed are as mysterious as ever — perhaps more so as they’re currently not really doing what they’re supposed to be doing.

Equities, employment and the US economy are all defying the rules of financial gravity by remaining stubbornly elevated in defiance of the Fed’s restrictive monetary policy.

That’s not how it’s supposed to work and it has some FOMC members increasingly frustrated. This week, Dallas Fed President Logan said she sees “meaningful risks” in current inflation data, Cleveland Fed President Mester said the “bigger risk” is cutting rates too early and Chair Powell acknowledged that inflation is on a “bumpy path.”

That rising sense of uncertainty sent Treasury yields to a year-to-date high this week.

But equities are again finishing the week near all-time highs, which demonstrates the real lesson from the last couple of years of economic history: We don’t know nearly as much about inflation, growth and markets as we think we do.

And unlike Nasa, the Fed doesn’t have any jet airplanes to figure it out for us, so we’re just going to have to do the best we can with what we have.

What we have, of course, is charts.

So let’s see what they have to say.

More jobs — again:

The US job market continues to defy expectations. This morning’s excellent employment report suggests that job creation is reaccelerating — long after people expected it to be slumping. The surprising big picture is that the US economy has added 5.8 million jobs since February 2020.

Defying financial gravity:

This morning’s good news for the economy was taken as good news for risk assets, which is not necessarily what you’d expect. The above chart shows US equities decoupling from interest rate expectations, a phenomenon that Kathy Jones sums up nicely: “The Fed took away the punch bowl and Wall Street threw a party.” 

And, no, the party is not just about the mania for AI — the latest market rally has been surprisingly broad-based.

2024 has been one, long economic party:

Per the Citi Econ Surprise Index, US economic data has been coming in better than expected all-year.

It’s mostly a US party:

Europe is a conspicuous wallflower with EU growth forecasts stuck near zero.

Don’t go to grad school:

@EconBerger notes that this morning’s data shows the unemployment rate for people with advanced degrees is rising much faster than for those with just a bachelor’s. 

Maybe don’t get a bachelor’s, either:

The Wall Street Journal reported this week that Gen Z is becoming the “tool-belt generation.” Economist Bryan Caplan, author of The Case Against Education, would tell you that this is great news.

Doing something useful:

Even adjusted for population growth, there are now more construction jobs in the US than there were in the 1970s.

Artificial job creation:

The boom in AI is likely to create a decade-long boom in construction. The FT reported this week that Microsoft alone is opening a new data centre once every three days.

What will we do with the data?

Doomers will see danger in all things AI, but humans — like this one who just finished a run across the entire continent of Africa — are amazing, so I think we’ll do amazing things with it.

Give us enough supercomputers, multi-trillion parameter models and quantum technology and I trust we’ll be able to find answers to anything — even the three-body problem.

(But maybe not the market one.)

Have a great weekend, problem solvers.

― Byron Gilliam

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This week, Jesse Pollak creator of Base joins the show for a discussion on what the team have been building. As retail activity picks up on both Solana & Base, we thought why not just invite Jesse to the show to discuss the L2 end game, network scaling, base fee revenue & much more. Enjoy!

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