Hillbillies
Are you a "Satisfied Man" or are you "Chasin' Money No More"?
Lately, I have been coming across a lot of ‘hillbillies’. The first one that comes to mind is J.D. Vance, author of “Hillbilly Elegy” and now the Vice-Presidential candidate for the G.O.P. He has certainly come out of the gates with a lot to say. He has laid out what his economic agenda would look like, not that it entirely matters because the VP agenda doesn’t really get any airtime in an actual White House, regardless of who the President or VP are. However, it has led to a lot of videos and tweets on X. While his policies are quite different to the current administration, like theirs, I think they also sound quite inflationary. Especially when he speaks about wages.
Netflix is picking up on his recent newsworthiness as the algorithms keep prompting me to watch the movie. I doubt I will. I read the book. I thought the book was very good. Not sure I need to watch the movie as well. However, the algo sees something in what I, or others like me, are watching prompting me to watch.
Then today, I was at Pierogi Fest in Whiting, IN. Even though I spent many a summer there with my grandmother, whose husband had worked at Standard Oil, I never went to Pierogi Fest. It is in its 30th year, so I would have been coming out of college, and she would have been gone.
The band we saw was called ‘The Hillbilly Thomists’, a bunch of Dominican priests who play bluegrass music. It was Catholic Day after all. Catholics were out in force, and you can imagine the Paris Games opening ceremony was part of the discussion. Their music was really good, especially the song “Bourbon, Bluegrass and the Bible”. I encourage you to have a listen on Spotify. You just may like it.
There was quite the crowd there, all very blue collar, many wearing patriotic apparel, quite a few likely to influence an election or two (unless they are from Illinois where we don’t seem to have competitive elections anymore). Inflation was a concern, as the costs of everything from pierogis to paczki to kielbasa were noticeably high. You could hear the ‘how many hours do I have to work to buy this’ type of conversations.
This was interesting to me because the market is solidly pricing in a soft landing, a Trump victory and a Fed cut. It is not entirely clear that there is consistency in this viewpoint. In my Macro Matters podcast this week for the CFA Society (check it out on any podcast app), we talked about the ‘Trump Trade,’ so I won’t cover it here. Go have a listen here.
There was a debate in the markets this week about the GDP data. I wrote about that debate on LinkedIn:
Chart of the Day - you're both wrong
Had a busy day catching up on a number of things after a fun day at the NV5 Invitational Pro-Am on Wed. Great golf with good friends & 2 great pros (good luck this wk JP & KK)
While I didn't pay close attention to the mkts during the day, I took some time in the evening to scroll thru FinTwit to se what the discussion was all about. The GDP data seemed to be the topic
It seemed there were 2 camps. One camp was critical of everyone calling for a recession because with quarterly nominal GDP at 5.2%, we seem to be far from a recession
The other camp was critical of those calling for rate cuts because with real GDP at 2.8% & the price index at 2.3% (both numbers rounded which is why they don't add to 5.2%), how can the Fed cut rates
So no recession but then no rate cuts? Or no recession but rate cuts? Or rate cuts but still a recession? It seems like this has been the discussion since January as I laid it out then the 3 possible scenarios
The 1st thing I want to say is that this GDP will still be further revised. That is my frustration with a focus on GDP - the number today will change in a month. Why get too caught up even if it is 'hard data'
This makes it challenging from a data analytics perspective because the time series we look at are the final revisions & not the initial estimates. However, let's look at it anyway to see if there are patterns
1st, to the camp that says with a 5.2% nominal GDP, the recessionistas are clearly wrong. I have put these lines on the chart and also drawn in the NBER recessions
We can see that 6 months before the Covid recession & the Great Fincl crisis nominal GDP was above 5.2%. It 2000, it was higher 9 mo earlier. In 1990 it was above 5.2% 3 mo earlier
So this number does not rule out a recession by the end of the year at all. Yes, there are more times without a recession than with at this level, but that is true in general. I don't think yesterday's number, which will get revised, rules out any recession
What about rate cuts? Can the Fed cut rates with GDP price index around 2.3%? I have also drawn on here the Fed Funds rate for perspective
The Fed cut rates with GDP price at or above 2.3% in 1990, 2000, 2008. Price was lower before they cut around Covid, but it is clear that a price level at 2.3% for GDP does not preclude the Fed from cutting rates
Sure, we can argue that we are coming off extremely high inflation we haven't seen since the 70s. Perhaps they need to see it sustainably lower. However, yesterday's number doesn't say the Fed can't cut rates. Also, this number will be revised
So, while all of the narrative yesterday was about the important conclusions from the GDP, I frankly don't think there are any. I don't see how bulls or bears can or should change their mind because of it. I think those arguing on FinTwit are both wrong
This is also why I don't really care for the GDP data to begin with
As you many know, I prefer to look at other data to tell me the direction of the economy. We will get ISM in the coming week, but there were a few other bits that came out that I thought was worth noting. The first batch are the regional Fed surveys. These can give us a bit of an early look into ISM. We can see that it was a bit mixed, with a nice bounce in Philly but sharp falls in Richmond and Kansas City. Overall, though, the trend is lower for all of them except Chicago, which has held up better than other regions the past couple years. This doesn’t give me a particular reason to think we will see a bounce in ISM this month.
The next set of data was the S&P PMI, both manufacturing and services, which give us the composite. I am not as huge a fan of this data as others are but many think it does a better job of reflecting corporate performance than the ISM because it excludes the government. However, the government is about 30% of the economy so we are missing a big part. In addition, the time series only goes back to 2021 so it isn’t clear how it has performed through time. That said, others do follow it and the move higher throughout last year and into this year was consistent with better-than-expected profits and higher stock prices. The composite was once again better-than-expected, so perhaps this provides an offset to the regional Fed surveys.
I have a greater affinity for the housing market as an indicator for the overall economy. This past week we got data on both existing home sales and new home sales. Both were worse than expected. The new home sales also saw the prior month revised lower from -11.8% to -14.9%. While it looks like it bounced sharply, the number was still negative. This fits with the narrative that the consumer is somewhat tapped out right now as credit card delinquencies are also rising.
This weakness in housing comes as the mortgage rate has fallen 100 basis points from 8.1% to 7.1%. We have seen refi activity tick up as those who bought in the last year have moved to lower their rate. As the mortgage rate has moved lower, though, the job market is getting worse. I have shown this before, but a simple index of mortgage rates * unemployment rate does a good job (when inverted) of tracking the NAHB real estate market index. Both are looking poor right now. Both suggest headwinds ahead.
Speaking of the labor market, we will get the non-farm payroll number in the coming week. I wrote about the job market on LinkedIn this week and the post was picked up by the LinkedIn team. It had more engagement than any other post this year. It would seem that many people are worried about the labor market now:
Chart of the Day - job market
I had the opportunity for my periodic trip into the city yesterday to meet with quite a few people. I enjoy these days, as rushed as they can be at times, because it gives me a good chance to hear many perspectives
Of course, when it comes to markets, everyone is focused on earnings right now. This week and next are the two busiest weeks of earnings for the quarter
Can Mega Tech continue to impress? Will small caps turn the corner on earnings, giving more legs to the recent outperformance? What will consumer discretionary companies tell us about the economy?
One problem is that the current bias seems to be that earnings are assumed to impress. Not as much focused on the possibility to disappoint. To me there are questions on this front too:
What will CRWD say on its call about the IT outtage? Airlines must have negative feedback too. Can Boeing finally get out of its own way? Is TSLA's core business struggling which is why the narrative has shifted to AI?
Beneath the surface, I think there might be another issue that we are not focusing on with all of the major political headlines and company specific news - the job market
I have talked about the weakness beneath the surface for some time - tech firms were fast to layoff thousands, fincl services followed suit & haven't been hiring at the same pace, consultants are still not hiring. Basically, the white collar labor market is not particularly strong now
We are starting to see that in the data. After historically strong labor markets since Covid, there are signs of weakness that we might want to take notice of, as the forecast troubles ahead as we look into Q4
I have mentioned the Sahm Rule before - when the 3 month mov avg of unemployment moves 0.5% above the lows. We are close (0.43) & will be there in 2 months unless the rate starts falling
However, that is not the only data. While jobless claims has been struggling with some seasonality issues, such that we aren't getting a clear picture, quietly the continuing jobless claims are getting a lot worse
You can see in the chart today that this is slow moving data. When it is on a trend, it moves for a long time. When the trend finally changes, it will continue in the opposite direction for some time as well
The trend has changed. Unemployment rate is higher, continuing claims are higher, & initial claims are finally catching up after some statistical noise. Not to mention that the revisions to the non-farms data have been consistently negative for over a year
The labor market is just not that strong. We see that whenever this data turns and heads higher, a recession inevitably happens. "Sure", you say, "this is the same thing you said about the yield curve. Maybe that old school approach doesn't work in an AI world"
Companies like to grow & when in aggregate they are firing it is a sign that profits just aren't that strong & profits drives stocks
I will leave it there so this doesn’t get too long. Next week is another big week of data and earnings. It is another big week to see if this rotation out of what has worked and into that which has lagged will continue. We appear to be at an inflection point. Will the bulls step in and hold the key levels now, or is this correction going to turn into something more. Will investors look buy the dip, or as the Hillbilly Thomists sing:
Everybody's interested in paradise
Till they find out it doesn't always feel nice
And I ain't gonna spend my time chasing money no more
Stay Vigilant
