Less Is More

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.


6 thoughts on “Less Is More

  1. I’m not wholly convinced of the inevitability of Chinese dominance. No, China is not the USSR, but it could still turn out to be Japan. Countries can turn a blind eye to bad debt for a really long time but when the penny drops things can look very different, very quickly.

  2. There are certainly risks to China in their quest to dominate the world economically. Not the least of which is a need to build out a military that they would then be loath to use in a sweeping way if they truly achieve some measure of dominance.

    I do not believe central control is our strongest economic engine. Rarely has our democracy agreed on anything. Today with the battles over 1619, tax cuts and presidential lies. I think it is even less likely than a pipe dream that we both come together into some economic juggernaut.

    I think the best we can hope for is to stay out of the way of economic progress, by that I do not mean low taxation or not taking care of our people. I mean by not letting and trenched industries dictate the outcome, Wyoming lawsuits to promote coal, Texas looming ifight against lower cost solar and wind power, and utilities Nationwide rebelling at the thought of writing down uneconomic assets, do not give me encouragement. However is still possible the game is not lost. We are on the verge of lower-cost power Nationwide, lower cost electric vehicles Nationwide and lower cost heating and cooling.

  3. The history of USA is not written yet but the last two Republican Administrations scream out Empire in decline.
    Obama kept us in a holding pattern and Biden knows we can not keep it on hold any longer. I always liked rooting for the underdog and now it will quickly become us.
    Naval power will be the only thing holding China back due to their abysmal Naval history. Chinas’ National pride lacks naval pride and a leader who blunders there will lose the faith of the people. That may not last much longer.

  4. H, I agree with you completely. China is too lightly disregarded by the US. It is not just a country, it is a 5000 year old inevitability. You said: “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.” Too right!

    The trouble is no such leader exists. We will need someone smart, determined, and with a bedside manner that will attract everyone to him or her. Fagedaboutit. The problem is we can’t go after China with soldiers, navies or any of that crap. They have more trained soldiers, more other stuff than us and trying to overwhelm them would end like it did for both Napoleon and Hitler trying to take Moscow. Hell, we couldn’t subdue Viet Nam, North Korea (our first serious look at China) Iraq or Afghanistan, all recent failures. We sure as hell won’t subdue China. A good deal of their infrastructure is nearly new compared to ours. Ours is 60-100 years old and we just don’t like spending money on it. China is more self-sufficient than Japan ever was. Russia is in the hands of the mob so forget them. We have to take stock of our strengths like education and tech. Oh, shoot we just hate smart people here. Education may lead to dancing and thinking — can’t have that We do have football, though (although the wrong kind). Big whoop. And for us tech is turning into Facebook, Twitter, TikTok, Uber and AirBnB. Not the basis of national strength. And anyway we are starting to worry that these tech types may want to exercise some of their power. Too late to turn that around. Our formerly strong education system is mired in cultural gobbledygook. Our republic is becoming increasingly fragmented into fights over states rights and soon we will be just like the EU. Years ago we were warned by Tip O’Neil, who noted that all politics is local. He was right and it will be the rot that saps our real collective strength with grubby corrupt officials and an increasingly uncaring population that is willing to throw away its constitutional rights. We like it when there’s no one smart in charge of anything and each of us is equipped with our own personal “lackey buddie” to boss around. China is not doing everything right but we are doing almost nothing right except perhaps blowing ever bigger bubbles.

  5. This seems eerily close to thinking that pervaded in the 1960s, when Russia was growing at a 9% clip and fears were that it would surpass the US. Some will retort that China is not Russia, a different kind of authoritarian style of rule. Nevertheless, China’s demographics are horrific. And one should not count the innovative US citizens out of the game. Although with 34% of income coming from the government these days the capitalist / socialist distinction is not what it once was.

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