Liquidity Is Abysmal, Risk of Rapid Decline Is Too High to Take Risks
With economic uncertainty at a high heading into a crucial FOMC meeting, investors should be wary of risk.
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The market continued to flip flop around last week, often erratically. I remain concerned that liquidity is abysmal, though maybe that will improve as we enter September?
There is a lot of uncertainty around economic data right now, just as it is crucial heading into a FOMC meeting.
Inflation
We are done arguing that inflation is coming down or that the spike in the first quarter was a statistical anomaly. We continue to stick to our simple “COVID bump” model where goods had a sharp spike that has largely declined already, and that services took longer to ramp up to “peak” inflation, but is also coming down.
The real question now (since so many seem to finally have given up on inflation resurgence fears), is: What is the floor on inflation? We have argued that “geopolitical inflation” will provide a floor on how low inflation can go; that the process of “securing” supply chains in a variety of forms will be inflationary; that the geopolitical risks to commodities will provide a floor to inflation. I’m starting to question those assumptions as, so far, the efforts to reshore, reindustrialize and expand both traditional and nontraditional energy sources have been slower than I’ve expected.
While I’m not there yet, for the first time, I’m starting to think the 2.5% crowd (which I’ve been in) might be too high and we could see further reductions in inflation as more products become deflationary.
The Consumer
The consumer will have a great say in the inflation story, but it is incredibly difficult to figure out where the consumer stands.
For every good data point on the consumer, I’m pretty sure we can come up with a weak data point. The data has been mixed. The consumer credit side of things seems weakest. The current spending seems strongest. I’m still leaning toward a slowdown in consumer spending, largely based on the view that recent sales pulled forward demand and that caused the strong spending so far this summer, which will slow as we enter the autumn.
Jobs
What to do with Friday’s NFP?
One of the favorite activities of the T-Report (and hopefully a useful one) is examining the data for consistency. Are headline numbers consistent with the internal details? What things (like birth/death) seem off? Are we seeing consistencies between a variety of metrics, all purporting to measure the same thing? Like JOLTS, AFP, the Household and Establishment survey, let alone the “employment components” of various other surveys?
The market is going to have to digest the preponderance of evidence on jobs this week! Will the market still react to the headline NFP data on Friday? Sure (and I will be on Yahoo! Finance with a longtime friend and excellent economist to give our instant reaction), but for how long? Not only has the bias been toward downward revisions on a monthly basis, but the annual revisions were quite high. The estimates (on Bloomberg) rand from a high of 208,000 to a low 100,000 (though ignoring two “outliers,” the low is 125,000). The average is 162,000, with a median of 165,000. But how do we react to a number when the “doubters” (I won’t call us conspiracy theorists) turned out to have a valid case? My order of importance on jobs this month will be:
- Unemployment rate: While this number is fraught with so many issues, it will likely be the biggest driver. If it improves, does that take the Fed off the table, and maybe reduce the flood of “Sahm rule” hot takes? If it gets worse, but only due to an increase in labor participation, is it that bad? Not my favorite metric by any stretch of the imagination, but probably the most important.
- JOLTS quit and hires rate: To some extent I view this as “crowd sourcing” the labor market. People have a good sense of how easy it is to find a job. How likely their company is to let them go, long before the company lets them go. So, given all of the uncertainty, I will overweight the importance of this data in my analysis on jobs.
- ADP: I often wonder, given their dominance in the payroll business, why their data isn’t the “gold standard” but it just isn’t (or hasn’t been). The fact that they didn’t publish for a period of time while changing their methodology isn’t particularly helpful either. But, I, for one, will spend more time than usual on ADP and suspect that the market will react more than usual as well (jobs are clearly the main Fed concern and with the big revisions to NFP so recent, more people will look to this data than usual).
Understanding the current state of the economy is difficult enough with the data we have, let alone when we really start to question the accuracy and timeliness of the data.
Given all the uncertainties, I’m still in the “bumpy” landing. Not a hard landing, but an economy where the data, over time, shows that both the job market and the consumer are slowing. Not necessarily to recessions levels, but to levels that make current valuations questionable.
I think the market has priced in too much from the Fed, so I'm looking for yields to drift higher and weigh on stocks.
The AI story is overdone (again) and we should look for more pullbacks, dragging the broader indices down.
I do like some of the lagging sectors (small caps, banks, real estate, value, etc.) but I think that right now, unless I see signs of improved liquidity, the risk of a rapid decline is too high to be overly comfortable taking a lot of risk (so I’m overweight cash versus longer duration bond products and equities).
At the time of publication, Tchir had no positions in any securities mentioned.
