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It’s The Job Losses, Not The Spending Cuts
Benchmark US yields were 4.80% or so on January 13. On Tuesday, following another lackluster read on
The other problem is the multiplier effect. DOGE cuts= perhaps 300k federal direct jobs+700k contractors. Then add the cutbacks to downstream providers and state and local cutbacks then add in the multiplier from all this. Now you are talking maybe 3,000,000 jobs and a significant drag on confidence and GDP. We will get low inflation perhaps but as my friend Dan used to say, “it will cost ya”!
I notice all the happy talk is melting away. Remember the Trump trade???
Maybe it’s already starting?? Check put DNUT today. What’s next? Not Cracker Barrel, I hope.
I know quite a few federal employees. Everyone I know and everyone they are talking to who hasn’t lost a job is cutting all discretionary spending fearing they could be next. Watch consumer spending in the coming months..
I don’t work for the government directly, but I’m in a tangential industry and I have cut spending to necessities only with only the smallest of indulgences given my means. I want as much cash cushion as I can get to weather whatever is coming. My friends in non-government industries are acting similarly. All of this uncertainty is going to have a persistent negative effect on sentiment and spending.
H-Man, this market seems to be looking for any reason to go lower while bonds are providing (the usual) safety net. If PCE is hot on Friday, bonds will start that march to 5% notwithstanding how ugly it may get with equities with a budget resolution seeming unlikely.
And I think it’s not just the job losses. It’s also throwing buckets of sand into the gears of the entire economy – the wasted time and money of delays, turnover, phone calls, meetings. But of course attorneys, consultants and lobbyists all remain firmly on the boil in this sort of environment, siphoning away even more resources from more productive uses. Something tells me February’s numbers ain’t gonna look too cheery.
You cannot control the outcome of adding force in one area of a highly complex system. You guess and hope.You remove (without much thought about who) 1 million people (maybe 20% of federal employees in the executive branch) and you really have no idea what will happen. I don’t think chaos theory even helps. This approach only appeals to stable geniuses, those who think they are smarter than everyone else and those who have enough wealth that they think they can escape to mars. Tulsi Gabbard is now in charge of US offensive cyber espionage. Think she’s up to the task? Think that might have an effect on markets if she’s not? The bench behind her doesn’t inspire much hope from a substitution.
This reminds me of a concept I learned back in B-School: the “Big Bath.”
When a new CEO takes over at a struggling company (or even a healthy company), they’ll often make the strategic decision to take the big bath: one really terrible quarter where they pull forward every expense they can and write off every under performing asset possible. Since it’s their first quarter on the job, it’s entirely justifiable, no one blames them for a one quarter horrendous loss, and they can blame their predecessor. As a bonus, all future quarters’ earnings will benefit from the reduction in realized expenses, making the new CEO look good.
Trump has something like that kind of leeway for the first few quarters. If the stock market crashes, inflation spirals, unemployment rips, consumer spending craters, he can just blame the Biden administration (I mean, he’ll do that anyway. He blamed Obama for anything that went wrong for 4 solid years. It’s just that it’ll be more plausible for his first 6-12 months in office). After any kind of initial economic malaise (or market sell off), he can claim credit for any rebound from the new lower baseline, asserting he has made America great again, regardless of whether (or how long) it takes to regain the lost ground.
Surely at least a few of the people around him are aware of the impact his new policies will have. Whether they’re brave enough to tell Trump to his face is an open question, but regardless, it seems like everyone around him is more than willing to take the damage to the economy in order to usher in the brave new world they have envisioned.
Blaming Biden isn’t going to work, because Trump will have bragged loudly and endlessly about precisely the actions that people will blame their misery on – tariffs, Medicaid/other cuts, layoffs, deportations. He will own the coming recession, lock stock and barrel.
Well here on Feb 27th close, the SPX YTD performance is RED. Who’d thought that would happen in America’s stock exceptionalism?