Diary Week 39: An Iceberg Looks Great (On The Surface)

First the good news- You will not have to listen to me pontificate for the next week as I am on 1 week "Mandatory Time Off" with no access to email or systems.

Now the bad news

It is time to stop focusing on the headline NFP number as a sign of the health of the Job market This applies in particular to the Fed who are using it as an "excuse" to hold the line on monetary policy for fear of making the same mistake twice in a row on inflation.

The Algos and A.I. With the immediate reaction in the markets showed why we should remember that the "A" in AI stands for artificial.

Yes, yesterday "suggested" that 206k jobs were created.

Here's a few problems with this (Yet again) when we look below the surface

• NFP higher at 206k but sharp 2 month revision lower of -111k. In fact 4 of the prior 5 payroll numbers this year have been revised lower by on average 64k with the one upward revision being 7k in March. (7 numbers in 2023 were also revised lower)
• The 3 month NFP average is now 177k compared to prior 3 months 267k
• Unemployment rose to 4.1%. The Fed had end of year projection of 4%. When that was hit they raised it to 4.1%. Now that is hit and it is still only June. The Employment rate is the 2nd part of their dual mandate not the selectively chosen NFP number- which by the way simply calculates Jobs, not people employed. So when you are "tapped out" and take a 2nd or 3rd part-time job in say hospitality (Bar tending/ waiting tables etc) this number makes that look like a positive development.
• The household survey covers people employed and that calculates that 162k jobs were lost last month taking total unemployment to a new cycle high of 6.811 mm.
• The total number of unemployed is now up 814k in last 12-months
• Job creation is now essentially in 3 areas - Government, healthcare and hospitality.
• In last 50 years when unemployment has risen .5 from a structural low (3.9% in Feb from low of 3.4%) it has always been higher 6-months later (Aug)-by on average 1%. The smallest rise has been 0.4% which would take us to 4.3% before the Sept meeting. No way The Fed is not moving if that is the case
• Nearly ¾ of jobs added last month came from Govt. Private payrolls missed to the downside and were revised down. There has not been one upward revision in private payrolls this year and 8 months last year were revised down
• Most jobs being created are part-time
• Unemployment of people 25 years and older rose by 1/10th and 3/10th for those with associate/college degrees.
• The number of people unemployed 27 weeks or more hit new trend high
• AHE had the smallest rise since the summer of 2021 and long-term unemployment rose sharply- up 166k to 1.5 million (now 22.2% of total). (Thank you Andrew Grosso)
• JOLTS are collapsing (notwithstanding a small bounce last month- May)
• Initial claims and continuing claims (high of the cycle) are also rising

As with the iceberg it is what is beneath the surface that is the true story and it is not a pretty one. The only thing above the surface is the increasingly discredited headline NFP first print

At the same time let us not forget that real GDP was just 1.4% in Q1 taking nominal GDP below the upper fed Funds rate with the Atlanta fed GDP now forecast now down to 1.5% for Q2 falling in line with a number of other regional Fed forecasts as well as some private ones. On 14th May this year that Atlanta Fed Q2 forecast had been 4.2%

The Fed is haemorrhaging money (Lost $114 billion last year and has unrealised losses in the region of $1 trillion on its books) due to a portfolio that is earning around 2% while they pay 5.4% on reserves.

Regional bank balance sheets and others have the same problem.

This includes the Treasury who funded so much new debt at short-term rates and now has debt servicing as the 3rd largest budget cost at about 13%

Funding costs above the rate of economic growth are prohibitive for refinancing mortgages, small business, new business loans etc. etc.

The Fed lost yesterdays battle (the fight against inflation in 2020-2021) but today is still fighting yesterday's battle when it is clear it is no longer (by far) the greatest evil. This increases the danger that they "lose the war"

The greatest evil now is not inflation but monetary policy driven by a fear of making the same mistake again. Jay Powell admires possibly the greatest Central banker of all-time, Paul Volcker, who clearly did not operate out of fear. He did what needed to be done.

Everybody remembers that, in terms of the speed and magnitude of rate hikes into May 1981, and the peak of 20%- but few articulate that when the balance shifted he was also very quick to do the right thing and by December 1981 the Fed Funds rate collapsed to 8%

It is time for this Fed to do the right thing ( this week there are signs that the market is starting to see this) and recognise that under their dual mandate they have to start easing. They should be doing this in July but will not ...but who knows, by the time we reach September we might have them in a place similar to Jan 2001 and making a first cut of 50 bp's

We can hope, but hope is not a good investment method. As each day passes I become more and more convinced that we are in the throes of yet another Fed policy mistake borne of the prior policy mistake.

That's it for now. You will not have to listen to any of my rantings for another week

stay safe

Best

FITZ