“He wanted everyone to think we would keep interest rates low to support the depreciation of the Dollar.”
- Paul Volcker
That’s how former Fed Chief and real-world inflation fighter, Paul Volcker, described his non-politicized relationship with then US Treasury Secretary, James Baker, after the Plaza Accord in 1985.
Paul Volcker died at the age of 92 yesterday. On devaluing the purchasing power of the American people (i.e. cutting rates and devaluing the US Dollar), Volcker often said “I had never made such a commitment.” (Volcker, pg 253)
For that, may your legacy of being apolitical and data driven rest in peace, Mr. Volcker.
Back to the Global Macro Grind…
I see Volcker’s monetary policy as a Strong Dollar, Strong America one where he drove inflation down from 12% to 3% by 1985. Average REAL GDP growth was well over +4% between 1983 and 1989. The Dollar was strong. Oil prices were very weak.
To be clear, that’s not the America that the Old Wall and all of its easy money cowbell fans want today. At any sign of economic weakness, the Street begs for an easy Fed, a weaker Dollar, and lower interest rates.
It is what it is. That’s a big reason why we have “Inequality” running at generational highs. Those of us LONG reflating assets get paid while The People pay for the rising cost of living and/or get fired when we have to pay them too much.
BREAKING: Morgan Stanley fires 1,500 people
That’s what they call the Santa Claus rally! And, btw, “great quarter” for Morgan Stanley (MS). But to have another one… and then another one… they need to do what the Fed can’t do – fire people, so that a smaller number of people can get paid.
Been there, done that, unfortunately.
That’s what happens when A) wage inflation #accelerates to #LateCycle highs and B) your revenues slow. It’s called margin compression. Only people who have never built and/or ran a company don’t quite fully get the cyclicality of that.
Longer-term, as you can see in today’s Chart of The Day (slide 40 in our Q4 Macro Themes deck):
A) Profits = black line
B) Labor = green line
And there are substantial cyclical and secular takeaways from this basic economic relationship:
- All the way back to pre-Volcker until the 2000 Cycle peak, Labor was always high and rising
- Since 2001’s mild recession, Labor got pounded to generational lows
- From the 2014 post WWII low, Labor has been LOW and slowly rising
Since Labor ALWAYS rises into (and perpetuates) the next red bar (i.e. recession),what could possibly go wrong from here?
Notwithstanding the fact that we have:
A) The largest amount of Corporate Credit in human history built on the back of the black line (i.e. TTM cash flows)
B) All-time highs in the US stock market (SP500) built on hopes of the black line re-accelerating from here (?)
We have a cyclical reality wrapped in a secular problem that I see very few strategists, economists, etc. discuss within the lens of either The Quads or The Cycle.
But, but, the super #LateCycle jobs report was “better than expected”…
That’s just great. But, mathematically speaking, that statement means absolutely nothing to me. The ROC (rate of change) does. Friday’s NFP (non-farm payroll) growth rate:
A) Had a Counter @Hedgeye TREND bounce to +1.47% year-over-year (from 1.42% in OCT)
B) And is still down, a lot, from both the 2018 cycle peak and even JAN 2019’s +1.91% growth rate
Put simply, the pace of people getting hired continues to slow, on a trending basis…
And the pace of people getting fired is about to accelerate as wages continue to. The NY Fed’s own survey can tell you what is already happening in lieu of that (consumer spending plans are slowing).
BREAKING: “NY Fed finds consumers' inflation expectations ticking up, but spending-growth expectations pulling back”
Look on the bright side though – it could be worse. The Chinese just reported a headline consumer price inflation (CPI) report that hit an 8-year high of +4.5% year-over-year. In two economic words that means: QUAD THREE.
We of course have #Quad3 economic stagflation being reported daily in the USA here in Q4 as well. As long as the Fed figures this out on a lag, no worries. The Street will beg for more cowbell and the cost of living will rise into further firings.
PE Powell is not Paul Volcker. He, like James Baker, was a successful lawyer. He knows where his post Government gig bread is going to be buttered. And it’s not where this son of a firefighter’s was. We, The People, just suck it up and pay the bills.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.70-1.85% (bearish)
SPX 3089-3165 (bullish)
RUT 1 (bearish)
REITS (VNQ) 91.54-93.98 (bullish)
Energy (XLE) 57.99-60.25 (bullish)
Shanghai Comp 2 (bearish)
DAX 127 (neutral)
VIX 11.60-17.19 (bullish)
USD 97.21-98.33 (neutral)
GBP/USD 1.29-1.32 (bullish)
Oil (WTI) 55.99-60.47 (bullish)
Nat Gas 2.18-2.50 (bearish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
