Less Is More

The Trump administration had Larry Kudlow and Steve Mnuchin. Joe Biden has Janet Yellen.

All Fed derision (and I met my quota Friday) aside, it’s probably comforting (or, at the least, convenient) to have Yellen at your disposal when you need to, say, contextualize a disappointing jobs report.

The market’s reaction to April payrolls was, in some respects, a classic “bad news is good news” trade, as the huge downside miss ostensibly helped allay fears that the Fed will soon be forced to start the taper discussion or otherwise acknowledge that if “substantial further progress” means anything, surely it’s what the US economy has been doing all year. Earlier this week, Yellen herself suggested higher rates might be needed at some point to prevent an overheat.

The problem was the size of the miss. The labor market gain for April was more than 400,000 shy of the most pessimistic estimate from more than five-dozen economists. That had the potential to spark a “bad news is just bad news” trade. By the time Yellen spoke at the White House briefing it was clear the market didn’t need any succor, but she’s an insurance policy of sorts. It’s not just that markets needed to parse the implications of the jobs miss for the Fed — traders also needed to consider whether the comparatively lackluster report might give the Biden administration more leverage in stimulus negotiations, and if so, what that entails for rates, equities and, coming full circle, monetary policy.

That was the backdrop for Yellen, whose Friday cameo was announced earlier this week. She weighed in on everything from the chip shortage to lumber prices to women’s role in the workforce. She also spoke to the contention that enhanced unemployment benefits might be exacerbating the labor shortage. She played down that notion. If that were the case, she said, it’s unlikely that the leisure and hospitality category would be adding as many jobs as it is, considering that’s where unemployment benefits and stimulus checks have the potential to offset entire income streams.

She took the opportunity to pitch Biden’s American Families Plan. “Today’s jobs report underscores the long-haul climb back to recovery,” she told the briefing. While Yellen said she’s “confident the US will have strong, prosperous economy this year and in 2022,” she asked what comes later, where later means in the next decade and beyond.

It wasn’t a throwaway question. And it wasn’t rhetorical. The truth is, America has no long-term plan. Not for the labor market, not for the economy more generally and certainly not for the environment. Other nations do — have plans, that is. But in many respects, their plans are irrelevant if the US is flying blind. It’s not just myriad societal inequities that the Biden administration is trying to address. This White House is trying to set a precedent and lay the groundwork for future administrations to build on so that the US doesn’t become an also-ran vis-à-vis Beijing.

I’m not cheerleading for any of the specifics in Biden’s proposals, I’m merely articulating the rationale for putting them forward in the first place. Truth be told, Biden’s plans are woefully inadequate, mostly because Americans no longer believe they can do anything particularly ambitious. Proposing to spend, say, $20 trillion to catapult the country into the future is like telling your therapist you plan to build a bridge to Mars — you’re dismissed out of hand with the gentle suggestion that you may be in the throes of some kind of “episode.”

Last month, Biden told the American public that Xi is “earnest” in his quest to make China the strongest nation on Earth and that Beijing is “counting on” America’s democracy to be too slow to respond. In case it’s not clear, I think the race is already lost. It’s not possible for America to keep pace with a burgeoning superpower operating under authoritarian, one-party rule. And China isn’t the USSR. The US can’t simply wait this one out. If Biden (and Yellen) are seen as too “radical” in terms of investing in various technology and infrastructure, then America may as well just wave the white flag now. It will take an enormous financial commitment, a serious bout of national soul searching and a leader much more ambitious than Biden for the US to be competitive.

In any case, Yellen’s pitch was as convincing as it could have been. And her familiar cadence has a lot of nostalgic value. She reminded markets not to mistake one month’s data for a trend, and said she doubts an inflationary cycle is in the cards. The recovery is on track, but it’s entirely reasonable to suspect the road will be “somewhat bumpy.” And so on. It doesn’t even matter if she’s right. It’s better than hearing Kudlow make predictions that have absolutely no hope of coming true or listening to Mnuchin’s nasal intoning.

Treasurys ended mixed after paring knee-jerk gains following the jobs miss. Yields were cheaper by 3bps out the curve. It was a fairly dramatic round trip. 10s fell to 1.464% at one juncture, before climbing back to 1.58%. “The drift back >1.50% speaks to investors’ unwillingness to completely price out the prospects for an extension of the recovery,” BMO’s Ian Lyngen said. “If the market didn’t care about economic reports before, April’s payrolls experience certainly didn’t help,” he added, noting that the big miss will likely engender “skepticism [around] the upcoming inflation update as well as retail sales.” Beats (or even in-line robust prints) “will be difficult to reconcile with the realities of an unexpected increase in the unemployment rate and ongoing labor slack even as pandemic restrictions are lifted throughout the US and the vaccination rate climbs,” Lyngen added.

The S&P ended the week solidly higher. Friday’s gains weren’t enough to save big-cap tech.

“Overall, the message from the [jobs] report is that the economy is still far from recovered,” TD wrote. “The data will likely reinforce the view of most Fed officials that progress has not been ‘substantial’ enough for them to start signaling tapering.”

That’s arguably bullish for equities and quite plausibly for bonds too. Indeed, it could be argued that “disappointing” data may drive an “everything rally” redux as long as the economy doesn’t exhibit signs of actually rolling over. You might even make the case that if the data cools off, pro-cyclical shares can still hold up given the read-through for fiscal stimulus — the cooler the data, the stronger the case for more.

Ultimately, it’s not likely that anyone will materially change their outlook for equities based on April’s NFP print. “Exposure of systematic investors has been gradually increasing, but is still in the ~35th%ile,” JPMorgan’s Marko Kolanovic said this week, noting that “hedge funds reduced effective equity beta over the past few weeks from ~75th to ~45th%ile.”

“Vol Control has been a buyer at a robust $22.7 billion over the past two weeks [but] the look ahead over the upcoming two-week period is de minimis at best,” Nomura’s Charlie McElligott remarked, noting that a daily unchanged S&P 500 “would only see ~$2 billion of buying, whereas daily 1% moves would instead tilt asymmetrically to selling.” On Nomura’s vol control model, overall equities allocation is just 53.4%ile. Gross exposure to global equities in the bank’s QIS CTA model is just 57.4%ile (since 2011).

Panning out a bit, investors poured another $18.3 billion into global stock funds last week, the latest data showed (figure below).

That takes the total in 2021 to $456 billion, $170 billion of which went to US shares.

I suppose the week ended on a satisfactory note if all you care about is stocks. On Friday, equities were more than fine to go with a literal “less is more” interpretation: Less now on the economic front means more stimulus, both fiscal and monetary.

Now go buy some Dogecoin.