Aug 22, 2024
“The problem with R* is no one knows for sure where it is now but the Fed thought they had time to comfortably feel their way there, like getting out of a pitch black cave.
Now they hear a bear coming in that cave”
Last week’s TFTD (“Not Too Hot, Not Too Cold”) referenced Goldilocks to illustrate the tightrope US markets were walking: an economy slow enough to keep bond bulls happy, but not so slow as might spook equity bulls. This week, we continue the bear theme, courtesy of Ernie Tedeschi, and what might be taken as a public service announcement from the BLS, reminding both policymakers and the investing public of the dangers associated with “rear-view mirror driving”. The BLS benchmark revision is usually too wonky to attract press attention. But this is an election year, so naturally the BLS misplacing 818k jobs was an irresistible opportunity for conspiracy theorizing on the platform formerly called “Twitter”. It was suggested that the BLS had deliberately overestimated the number of jobs created during the Biden administration. As several commentators noted, there are problems with this theory, but it didn’t help that the BLS managed to fumble the data release (again!)
Having seen many benchmark revisions, we remind readers of Hanlon’s razor. However, that’s not to say there was nothing interesting in the release. The first observation is that the first benchmark revision is generally not the last, and usually the QCEW reading is subsequently revised up, and there is every chance that the establishment survey was correctly picking up on increased employment of illegal migrants who are not yet in the unemployment insurance system. But it would be remiss not to mention other arguments, including those that focus on the births/deaths model over-estimating new company formation. Some have even suggested that handing out free money in industrial quantities with limited oversight may have encouraged fraud (at the margin).
It is very hard to trust something you don’t understand, which is precisely the position the Fed now finds itself in. The good news is that the FOMC turns out to have done better in its efforts to weaken the labour market, as some FOMC members seem to have suspected. In these circumstances, the Fed might be forgiven for deciding that risk is best minimized by getting itself to neutral ASAP, as Bill Dudley suggested. But as the Trump campaign could tell you, sudden reversals of fortune happen surprisingly often.
The tragic events surrounding the death of Mike Lynch are probably the most striking example of a sudden reversal of fortune. What are the odds that Lynch and his co-defendant in the Autonomy fraud trial would die within a matter of days of their not-guilty verdicts? We think lower than the probability a boat called “The Bayesian” would be sunk off the coast of Sicily by a waterspout with a celebrating billionaire on board. Irony aside (and that’s a lot of irony!) we are struck by the confluence of two trends: 40 years ago, there were orders of magnitude fewer billionaires, and lower temperatures in the Med meant fewer waterspouts. Since then decades of asset price inflation and climate change have combined in one incredibly unlikely event. Brings to mind the Infinite Improbability Drive suggested in one of the Hitchhiker’s Guides to the Galaxy books.
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