Equities and bonds meandered rudderless into the weekend following a spate of inconclusive data out of the US economy.
If it’s macro clarity you seek, you’re out of luck. Notwithstanding the (plausible) notion that the US labor market has for all intents and purposes normalized, we’re still flying blind in many respects.
The “Abandon all hope, ye who forecast here” regime ushered in by the pandemic and perpetuated by the war in Ukraine, lives on, if not as acutely in the inflation numbers and job openings, then simply in the long wait on a recession that may or may not ever arrive.
Consider the length of the three-month/10-year inversion:
That’s 15 months. Far be it from me to question Cam Harvey’s Delphic oracle, but… well, what the hell Pythia?! Or, “Dude where’s my recession?” as a hapless Paul Krugman put it Friday, in a characteristically cringeworthy appeal to yesteryear’s plebeian farce.
“[It’s] been inverted 15 months,” BofA’s Michael Hartnett remarked, in passing. “If it’s still inverted by July, the duration of inversion would be the longest since the run-up to the October 1929 Great Depression crash.”
I’m not sure that’s an especially useful analog. We’re not going to have another Great Depression, but if we did, there’d be a silver lining: Whatever’s left of the inflation impulse would be summarily extinguished and replaced by outright, across-the-board deflation.
If your barber gouged you for $50 in 2022 and 2023, you could skewer the poor bastard in a depression scenario, when haircuts would be so low on the list of people’s priorities that you could barter a can of tuna for a drop fade.
Anyway, it’s also rare for ISM manufacturing to be mired in a prolonged contraction when payrolls are buoyant. BofA’s Hartnett editorialized around that disparity as well in his latest.
Friday’s robust NFP headline (which came with any number of caveats) only made the disconnect illustrated above more glaring.
Of course, the US economy doesn’t live and die by factory work, although the middle-class did (live by factory work and then die for lack of it). But 14 months is a very long ISM manufacturing contraction. In fact, as Hartnett noted, if the factory malaise persists through April, that’d be the longest contraction in more than two decades, and before that since the early 1980s.
Do note: ISM services downshifted in this week’s release, and the employment component index plummeted. So, it’s not just the factories, although it’s important to mention that the underlying activity index in the ISM services report actually improved last month from November.
Coming full circle, both stocks and bonds were pretty clearly unclear about the read-through of a US jobs report which found the BLS juxtaposing a 216,000 headline increase with the single-largest decline on the household survey since April of 2020.
One reader wondered aloud, in the comments here, about the response rate. Another asked the same in an e-mail. BMO’s Ian Lyngen offered some levity in that regard.
“As the market continues to fret over the divergence between the establishment and household surveys, to say nothing of the weakest ISM employment component since July 2020, we cannot help but return to one of life’s persistent questions: Who on Earth is picking up the phone to speak to the BLS when they call?” Lyngen asked, on Friday afternoon. “Caller ID is ubiquitous, meaning that someone has to look at ‘Caller Unknown’ or ‘BLS’ or ‘From the government; here to help’ flashing across the screen and decide, ‘Sure, let’s give that a go.'”
Hilarious. From multiple angles. As long as people aren’t jumping out of buildings anyway. Which brings to mind the destroyed buildings in Ukraine and Israel and Gaza, lives and lives and lives lost, and the hilarity disappears, and the sense of surreal–and real–lunacy emerges.
I was burdened with that survey 15 years ago or so. I was curious about what they asked and such so I accepted a six month series of weekly interviews. It became annoying because they would not allow you to simply announce “no difference whatsoever from last week.” Nope, you had to answer every damn question.
I was a good citizen almost to the end, but I sure can sympathize with what Dr. Lucky’s wife encountered years before that.
The broader theme here is, I think: why is this economic cycle acting so differently from past cycles? Based on indicators that have proven reliable, some say dang near infallible, over the past seventy years, the US “should” have entered recession last year or, using the longest of historical lags, be entering one “now-ish”.
Unemployment should be jumping, earnings tanking, rates plunging in the bearish sort of way, and we should be happily bottomfishing quality names at low-teens P/E while clucking happily at our sagely accumulated piles of cash.
Instead, there is a $6TR pile of cash but finding names is – well, it’s never impossible, and I’m finding some good names even now, but the yield from the searches is thin. Very thin. Not the thinnest – that was most recently in 2021 – but not far off. Although, it seems to be getting better, actively.
Possibilities:
A. It is totally different this time. A hundred-year biological event followed by a hundred-year fiscal and monetary response make this time a true exception. Remove 8MM workers, add $8TR stimulus, cut rates 8 x 25 bp from mid 2019 to mid 2020, gift 800bp of inflation-enabled margin, and you can avoid all the unemployment, demand destruction, and financial crisis of a recession. Maybe you just get the mild earnings weakness, vibecession, and punky S&P 493 that we’ve had. “You want a recession? – you just had it, sucker.”
B. It is not different, but just stretched and distorted and lagged so much that, for investors without the benefit of hindsight, we can’t see how. Inversions warn but the recession doesn’t start until the rate cuts start, employment is a lagging indicator, oil and other canaries are squawking, receding inflation will take margins with it and show who’s sans bathing suit, and all the other things that frustrated analysts and strategists said last year and some are saying this year as well. “It’s coming! Just wait. And wait.”
C. Something else. No idea what.
So what do you do if you don’t have strong conviction in A, B, or C?
One choice is to surf the flow and position waves so cogently chronicled by McElligot etc. Few investors can do that – by mandate if nothing else.
Another choice is to dig deep and sift broadly for undervalued and underowned names with coming catalysts. The theory being, finding pearls is always profitable, whether the tide is in or out.
Other choices include throwing yourself on the mercy of the indicies and trusting that they do tend to go up more than they go down, locking in yields about 200-300 bp above inflation targets and hoping those targets are met, and so on.
The thing is that most professional investors don’t have the choice. They live in a quadrant, a style box, a discipline, and are not invited to stray. I remember in 2007 running a RUO-benchmarked product, meeting with consultants, and explaining that the benchmark was going to tank, to be told our job was to beat the benchmark and what the benchmark did was not our concern. Madness, we thought, and indeed it was. But we delivered triple-digit returns in 2009, so we got to Play Again.
Even if you theoretically have the freedom to be style agnostic, well, that’s not easy to get right either. You can be a star in 2022 and a schlemiel in 2023, averaging out to – well, probably about how you’d have done without all the leaping around.
At the end of the day, if you can make money in the good years and hold on to most of it in the bad years – where good and bad are referring to your particular investment discipline – you have a chance of doing well over time.
C. Something else.
I nominate the gig economy. I do not think official stats come close to capturing its depth and breadth.
That is an interesting idea. From my experience I see more than one sector in the gig economy. A friend calls on Sat PM and says he needs a Tenor Sax for a gig at a local bar. You grab your horn go down to the place and jam with your pals for a few hours and pick up $50 cash. You don’t report it. Sector two is mail-box money. I picked up a grand last year writing reviews for an academic journal, a minor gig. However, the contractor is a global company and I will report this so it’ll be in the stats. Sector three is essentially populated by temps doing term work. For most of my academic career I did consulting, expert witness work, and other related activities. Not only did that show up on my taxes, but I had to file annual reports with the state for the amount of that kind of work I did. That definitely found its way into a couple databases. I’m sure some gig work gets missed, but I’m not sure it’s a largish portion.
excellent effort, John L.
…I lean B, referring to this period of our lives as “The Great / Epic Distortion,” with the longest dust settling process ever, … and for American democracy’s stake may it persist for another 10 months…GLTA…
Yes JL – when you are in that world you can only play the cards you are dealt rather than whine you weren’t dealt a better one. “Stay in your box!”
Now, why is passive a bad option?
Passive is boring. Work should be interesting.
If I were to choose a niche again, it would probably be quant. I have the math background for it. Unfortunately the interview was 8 am EST and at 5 am PST student me could barely form words, much less solve partial differential equations. But fundamental stockpiling is pretty fun too. There’s a lot of interesting economic, psychology, and human factors.
autocorrect – stockpicking
This week I had my first ever JOLTS experience! I usually don’t answer an unidentified caller but they called quickly a second time so I answered for sh—ts and giggles. It was the BLS! My wife and I are a two person, home based LLC. She does the back office and I do 1099 consulting. My last job was March 2023 and I have been happily semi-retired waiting for the next call since without taking unemployment. All this was explained. The caller had to check with the supervisor to see if I fit in one of the survey boxes. Even though I didn’t, I was still emailed the 2 page “jobs opening and turnover” survey for a souvenir! Needless to say, we don’t have any openings or turnover and I didn’t complete the survey but at least answered the phone!
I was answering phone surveys for the U Mich Cons Confid survey last year. It was interesting.
I am so jealous. I got to do JD Powell auto surveys for three years. They were the most sophisticated surveys I’ve ever seen, along with the one’s from the so-called Harvard Ethics Project. The latter ones were amazing. Both of these groups were not averse to tying one up for an hour at a time, several times a year. I loved those things.