Expensive Observations

This week’s earliest market commentary revolved around the profound observation that Kevin McCarthy’s surprising decision to put the interests of American voters ahead of his own career puts a November Fed hike back on the table.

The logic is straightforward. The Fed is avowedly data dependent. The data that matters most are government reports on the labor market and inflation. Those reports would be suspended in a shutdown. A November rate hike wasn’t a sure bet in the first place. The odds of a data-dependent Fed pulling the trigger on a rate hike that wasn’t guaranteed when there’s no data (and when the reason for the absence of data is a macro event with the potential to leave millions of people without a paycheck) were very, very low. But, there was no shutdown. So the data releases aren’t suspended, and the negative macro event didn’t occur. Therefore, the odds of a November Fed hike are higher than they would’ve been if McCarthy capitulated to his far-right flank.

Believe it or not, that’s the kind of incisive, sharp-witted analysis banks pay $500,000 a year for (if you’ve been doing it long enough), and the buy-side pays millions to read. “If this, not that. Not this, so… that?”

Meanwhile, we pay registered nurses $75,000, elementary school teachers $60,000, social workers $45,000 and the millions of people who go to work at animal shelters around the country every day less than we pay fast food workers and janitors. If you’re inclined to scoff, I’d say two things. First, the joke’s on you because… well, do you make half a million dollars to say nothing? Second, next time you go to the emergency room, remember that the person who’s about to stick a needle in your arm is underpaid and probably irritated about it.

Anyway, if you buy the dot plot “threat” of another Fed hike in 2023 and you pushed your bets on that hike to the December meeting in light of a likely government shutdown, you might be reconsidering on Monday. Maybe it’ll be November after all. (Now where’s my $500,000, my health benefits, my stock options and, most importantly, my Hermès tie?)

Crucially — and I trust the Hermès tie crowd mentioned this Monday while earning their Ferragamos — there will be another shutdown fight at some point. This isn’t resolved. As expounded in “Dysfunction, Division and Dystopia” (the kind of piece you write when you are worth the money), nothing is ever solved inside the Beltway. And not just because gridlock is the defining feature of politics in America’s fractious, teetering democracy. Here’s the key point (from the linked article):

McCarthy’s rebels are agents of chaos for whom disarray is an end in itself to the extent it keeps America in a state of perpetual, angry churn. There can be no resolutions (continuing or otherwise), let alone solutions. The day problems get solved is the day the rebels have no cause. What happens to grievance politics when the grievances die away? It dies too, along with the political careers of those who have nothing else to offer.

This isn’t entirely new in American politics, but the not-so-veiled allusions to anarchy emanating from one faction of the Republican party are a testament to the notion that the virulent strand of faux libertarian nationalism — “bumper sticker jingoism” and “Podunk populism,” as I’ve variously called it — espoused by the nation’s last (and perhaps next) president threatens to turn gridlock into outright, domestic chaos.

If you had to make a list of things you don’t want to see in the issuer of the world’s reserve currency, “outright, domestic chaos” would surely have a claim on the top spot.

And yes, for the hapless Russophiles among you, “capricious weaponization of the reserve currency” would be high on the list too. But not as high as internal dissolution.

Maybe that’s a question someone should be asking at the next Politburo meeting: “Comrade Xi — and with all due respect — I gotta ask, What happens to the value of our US Treasurys and agencies in the event we succeed in destabilizing America completely or beat them in a war?”