Under promise, over deliver

Happy Friday!

No weekly due to the holiday, but I wrote a primer on the debt ceiling a few months ago in anticipation of this clown show underway. Happy to send it your way if you so desire.

Of all the dumb stuff at the intersection of politics and finance, the debt ceiling rises to the top (pun intended). The utter stupidity of this situation cannot be overstated.

Moving on…

Follow the money

Inflation is a currency phenomenon. It’s too many dollars chasing too few goods. That’s why I found this chart from DoubleLine to be so interesting. It shows that M2, a measure of the money supply, leads the inflation rate. 

Look at the blue line in 2020. That’s when the Fed decided to jack up the money supply by over 40% in two years so that Americans could cash in their stimmy checks at Louis Vuitton and make Arnault even richer. 

Increase the supply while keeping demand relatively fixed, and the value of dollars falls. There’s no better way to visualize this concept than via this chart from First Trust:

If M2 grew faster than its long-term average for two years, then the only way to normalize it is to have a period where M2 grows slower than its long-term average. The DoubleLine chart above shows that M2 is now growing at the slowest rate in four decades, which is good!

But we’ll see how long the government stays on track. Money supply growth also tends to be highly correlated to popularity, so I’m skeptical that politicians will remain disciplined.

Speaking of correlation

Few things fire me up more than misusing data and statistics, and since most pundits and politicians misuse data and statistics, I’m fired up most of the time. But there are instances when causality gets confused with correlation, and it’s ok. 

That’s how I feel about the Fed’s “progress” so far. There’s an old saying that raising interest rates is a blunt instrument, and for the most part, I agree. Aside from housing, I’m not sure how higher interest rates have done much to temper inflation. For example, how have they moderated input costs like global shipping rates?

To be clear, I’m not implying that higher rates have zero effect. They do. Last year, the value of the dollar relative to pretty much every other currency surged higher because the Fed panicked. Since most commodities are priced in USD for global trade, it’s more expensive for foreign entities to buy stuff. So, demand probably got hit, but how much is hard to estimate.

But that doesn’t change the fact that the Fed suffers from the law of the instrument. They only have a hammer, and problems like disrupted supply chains, wars, and Taylor Swift concert tickets aren’t nails. They can’t be solved just by hiking interest rates.

There’s even a case to be made that raising rates is causing more inflation. Here’s a great post by Barry Ritholtz this week that argues just that. 

Back to my point, Econ 101 teaches that we are all self-interested, and not one person at the Fed is immune to this basic desire. They want to feel like they’re doing a good job and crave just as much social validation as anyone else would seek after screwing up so badly. Perception is reality, so if they want to think their hammer is surgically fixing inflationary pressures, then so be it. They call the shots.

In fact, I fully support the FOMC’s decision to move their meetings to whatever alternate universe they’re in right now. Keep thinking you’re doing a good job, pat each other on the back, and use this correlation (not causality) to justify a pause. 


Before selling my soul to Wall Street, I was a management consultant for nearly a decade. It was a glorious time, and I learned many skills I have carried with me since. The most valuable is knowing how and when to Under Promise and Over Deliver. It’s the “Semper Fi” of that industry. 

Because the only “management” in management consulting is managing client expectations. Win the business quickly by promising painkillers, and then twelve minutes after the Master Service Agreement (MSA) is signed, reset client expectations by following these steps:

  1. Make the client think their problems are 5x worse than initially expected. Blame the misread on the lack of data and information access before the MSA and NDA were signed.
  2. Do virtually no work on the first phase of the project. Ask for a bunch of data that you know won’t help, and then drown the client in cool PowerPoint decks with lots of tables and charts.
  3. Near the end of the project timeline, point to these decks as progress and a reason to sign on for another phase of work.

This formula is as consistent as gravity in consulting because of the underlying incentive in the industry. Consultants don’t get promoted for fixing problems or paid bonuses for efficiency. It’s a world fueled on billable hours, and there’s good money to be made at prolonging problems. 

So, if you can manage client expectations to keep the billable hours up, while also not upsetting them to the point where they start asking questions and demanding to see evidence of progress, then you’re going to make partner in no time.

Given that so many consultants transition over to Wall Street and corporate America, I’m not at all surprised to see what’s transpired heading into this earning season. As in, sentiment has become very pessimistic.

It’s the same game but in a different venue. During 4Q2022, analysts cut estimates by 6.5%, while over the last five years, the average cut has been 2.5%. Talk down expectations for investors so that companies can beat them when they report. 

That’s why over 70% of companies reporting so far have beaten. Given the economy’s direction, I’d wager we see a lot more UPOD going forward.

Out of the market

There’s an old saying that goes something like, “Wall Street is the only place where a sale is announced and everyone runs out of the store screaming.” Here’s some evidence of just that.

Goldman Sachs estimates retail investors have sold all of the S&P 500 stocks accumulated during 2019-2021. This is unfortunate because the early innings of a recovery are essential, and it looks like a lot of people are going to miss out. 

Enjoy the weekend…