Linda
May 18, 2025 – Weekly comment
***********************************
This is a slightly paraphrased excerpt from the Michael Lewis book, The Undoing Project:
The researchers, Amos Tversky and Daniel Kahneman posed this storyline:
Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.
Which of the following is more likely?
1) Linda is a teacher in elementary school
2) Linda works in a bookstore and takes yoga classes
3) Linda is active in the feminist movement
4) Linda is a psychiatric social worker
5) Linda is a member of the League of Women voters
6) Linda is a bank teller
7) Linda is an insurance salesperson
8) Linda is a bank teller and is active in the feminist movement. (page 324)
Danny passed out the Linda vignette to students at U of British Columbia. In this first experiment, two different groups of students were given 4 of the 8 descriptions and asked to judge the odds that they were true. One of the groups had ‘Linda is a bank teller’ …and the other got ‘Linda is a bank teller and is active in the feminist movement.’ Those were the only 2 descriptions that mattered, though of course the students didn’t know that. The group given ‘Linda is a bank teller and is active in the feminist movement’ judged it more likely than the group assigned ‘Linda is a bank teller’
…’Linda is a bank teller and is active in the feminist movement’ could never be more probable than ‘Linda is a bank teller’. The former is just a special case; one description was entirely contained by the other.
Ultimately, they gave the subjects the same description of Linda and asked simply, “Which of the two alternatives is more probable?”
Linda is a bank teller
Linda is a bank teller and is active in the feminist movement.
Eighty-five percent still insisted that Linda was more likely to be a bank teller in the feminist movement than she was to be a bank teller. The Linda problem resembled a Venn diagram of two circles, but with one of the circles wholly contained by the other. But people didn’t see the circles.
***********************
On Friday the University of Michigan survey of expectations was released. The survey respondents judged that inflation one-year ahead is likely to be 7.3%, up from 6.5% a month ago, and that 5-10 year inflation will be 4.6% up from 4.4%. General Economic Expectations plunged to 46.5 from a projected 48.6, at the lowest level ever. Or at least since 2000.
The U of M survey highlights the hard-data, soft-data divide. There’s a more detailed analysis of results on ZeroHedge, which describes wide differences in the Michigan Survey based on political affiliations.
https://www.zerohedge.com/personal-finance/umich-sentiment-collapses-near-45-year-record-lows-democrats-inflation-dissonance
The Linda problem underscores a facet of human nature, which is a tendency to grasp a narrative and (sometimes irrationally) extend its effects. “I’m running with it!” The current news cycle is all tariffs, all the time. It’s little wonder that forward scenarios might be wildly imaginative and off the mark, leading to surprising survey results. (Does AI necessarily capture logic, or might large-language models perpetuate a fallacy?)
On the other hand, there are some undeniable reports of negative hard data:
SFGate:
CNBC and Reuters reported that Microsoft is laying off around 6,000 employees, or a bit under 3% of its humongous staff. The company’s WARN filing in Washington, where Microsoft is headquartered, included 1,985 workers. (Companies are generally required by the Worker Adjustment and Retraining Notification Act to file these documents in the event of mass layoffs.)
Moody’s overtly recognized the unsustainable path of US fiscal policy and took its credit rating down a notch Friday post-close.
The NY Fed’s Household Credit report notes:
Missed federal student loan payments that were not previously reported to credit bureaus between 2020Q2 and 2024Q4 are now appearing in credit reports. Consequently, 7.7% of aggregate student debt was reported 90+ days delinquent in 2025Q1 compared to less than 1% reported in 2024Q4.
Aggregate delinquency rates rose from the previous quarter, with 4.3 percent of outstanding debt in some stage of delinquency. [4.3% is above all levels since covid, but below everything from the GFC to 2019. 2016 to 2019 relatively stable around 4.5%]
There are many reports on Reddit of people with un-serviced student loan debt seeing their credit scores chopped by 100 to 200 points.
Regarding forward inflation, I used to think that estimates were highly correlated to the price of oil. But CLM5 closed at 62.49, pretty much the lowest level for front-month since 2022. As Luke Gromen notes, one ounce of gold buys 51 barrels of oil, up from just 15 bbls in summer of 2022.
Retail Sales last week were softer than expected. Walmart issued downbeat forward guidance given “uncertain times”. Target reports earnings before the open on Wednesday. Home Depot on Tuesday. Lowes on Wednesday.
**********************************
On the week the two-year yield rose 10.2 bps to 3.983% as Fed easing prospects are torched. Fives up 7.8 bps to 4.063%, tens up 6.8 bps to 4.439% and thirties up 6.6 bps to 4.897%. MOVE eased further to just 96.70, having surged post-Liberation day to 140.
On the SOFR strip, SFRH6 and M6 were hammered, with H6 down 16 to 9637.5 and M6 down 15.5 to 9651.5. May SOFR options settled Friday and the front SFRK5 (May 3m SOFR) settled 9567.5. So, even with the recent rise in yields following early April turbulence, SFRH6 is fully 70 bps lower in yield than SFRK5, which is essentially at the Fed Effective rate of 4.33%. Easing is still priced into forward rates, though much less dramatically so.
There was a somewhat odd trade on Friday: a new buyer of SFRM5 9725c for 0.25 (10k), and when those were no longer available at 0.25, he bought 15k M5 9725/9750c stupid for 0.5 (paid 0.25 for each). Obviously someone could have known about the upcoming Moody’s downgrade and wanted to cap upside risk. Surprising that calls over 150 bps otm with one month left would still be worth 0.25, especially when 9625c settled 0.5.
Economic news is light this week, but geopolitical events are fluid. 20y auction on Wednesday.
| 5/9/2025 | 5/16/2025 | chg | ||
| UST 2Y | 388.1 | 398.3 | 10.2 | |
| UST 5Y | 398.5 | 406.3 | 7.8 | |
| UST 10Y | 437.1 | 443.9 | 6.8 | |
| UST 30Y | 483.1 | 489.7 | 6.6 | |
| GERM 2Y | 178.5 | 185.5 | 7.0 | |
| GERM 10Y | 256.2 | 259.0 | 2.8 | |
| JPN 20Y | 234.4 | 237.3 | 2.9 | |
| CHINA 10Y | 163.5 | 168.2 | 4.7 | |
| SOFR M5/M6 | -92.5 | -82.0 | 10.5 | |
| SOFR M6/M7 | 2.5 | -4.5 | -7.0 | |
| SOFR M7/M8 | 21.0 | 19.0 | -2.0 | |
| EUR | 112.56 | 111.65 | -0.91 | |
| CRUDE (CLN5) | 60.58 | 61.97 | 1.39 | |
| SPX | 5659.91 | 5958.38 | 298.47 | 5.3% |
| VIX | 21.90 | 17.24 | -4.66 | |
| MOVE | 100.40 | 96.70 | -3.70 | |
