“A national crisis of immense proportion will occur around 2020”
- Neil Howe, The Fourth Turning (in 1991!)
Quants call it complexity, Soros would call it (social) reflexivity, Ray Dalio calls it The Truth.
The populace struggles to define it explicitly, but its early essence was captured in the American zeitgeist that percolated below the surface of Occupy Wall street.
They feel it in a decade of underemployment, stagnate real wage growth and massaged government inflation calculations. They feel it in the broken promises of “the great moderation” and broken bubbles in equities, tech, real estate, and central planning.
They feel it in protracted financial repression, negative real rates of return on savings and fixed income and in the volatility of their 401K. They feel it in multi-year monetary policy initiatives discretely designed to drive a wealth effect which perversely, only serves to drive a bigger delta between the 99% and 1%.
It’s expressed in lower lows in congressional approval, in the exodus of retail equity inflows, and the fragility of confidence about the future and the dismay in the declining prospects of upward social and economic mobility for their children.
It’s manifest in Trump’s ascendency and populism’s resurgence. In the glacial but real “Fourth Turning”
Democracy and Capitalism don’t promise equality but they should, holistically, breed humanism, equality of opportunity and strive towards an ideal of frictionless social mobility.
Back to the Global Macro Grind ….
I wrote the above back in 2016. Undiluted and unequivocally, the message rings more true now than then.
Implicitly, the slow build in that zeitgeist suggests a couple things.
- Either structural social-economic change is, in fact, glacial and we’ve finally arrived on the precipice of the next hinge in history. Or …
- The structural inequity is so endemic and entrenched that anything short of a catastrophic reset will be insufficient to catalyze wholesale change.
Q: "Will this moment be sustained to produce real change?”
A: “Probably not" … at least according to Ray Dalio
I’m not so sure.
Here, I’d highly encourage you to read my colleague Neil Howe’s book or, at least, the latest profile piece published in The New York Times.
Perhaps it takes another couple iterations through the Fourth Turning feedback loop before we breach a critical threshold, but we are already tangibly moving in the broad direction of policy realignment.
The Fed was compelled by the COVID shock towards closer fiscal-monetary coordination and a de-emphasis of Fed independence in the direction of a more supportive role of monetizing MMT style fiscal policy whereby any stimulus flows more directly to main street and not simply as liquidity for asset prices inflations and hoped for trickle down effects does not seem like a bridge too far from here.
I’m not making a normative call on whether that is “right” or not, but would simply note that we continue to baby step in that direction.
For all its benefits, monetary policy is inherently constrained in the scope of what it can accomplish and those structural constraints becomes more pronounced when it’s left to play Atlas to a DM world in secular deceleration and amidst increasingly reclusive fiscal policy post GFC.
Decades of lower highs and lower lows in rates and successively larger rounds of accommodation and intervention have served as an inequality engine that will invariably face a reckoning.
In the immediate-term, a sad irony is that the protests are likely to only further cement the current monetary policy lean and further foment agitation around cronyism and Wall Street socialism.
Indeed, nowhere is that juxtaposition more stark than current, adjacent headlines lauding ATH’s for stocks and lamenting depression-level unemployment.
This dovetails us nicely into the labor market discussion ahead of the lone fundamental release of consequence this morning.
Given the speed and scale of change in payrolls, the monthly NFP data remains the rearview report with weekly Jobless Claims continuing to offer the more insightful real-time read on developing conditions.
On that score:
- Initial Claims were +1.87M in the latest week, taking the cumulative 11-week total 42.65M. Inclusive of Pandemic related claims of +623K (recall, PUA claims are counted separately), total Initial Claims last week were 2.5M.
- Continuing Claims rose +649K sequentially to 21.49M, reversing the decline in the previous week and throwing some shade on the optimism around the trajectory in re-hiring.
- Total persons claiming benefits was approximately 35.89M (total claiming benefits as of May 16th + last two week of PUA + last two weeks of State Initial Claims). On a pre-virus employment/labor force base of ~153M, that represents an implied unemployment rate of 23%.
- Continuing Claims will remain the primary measure to monitor as it will continue to represent the closest, real-time proxy for the Unemployment Rate and the extent to which re-hiring is occurring alongside economic re-opening.
In short, the rate of change of the data continues to improve but that’s mostly hollow solace given the sheer scale of the absolute numbers.
That same characterization holds for the May NFP data as well. Job loss in May will be less than April and the official and whisper estimates have been improving but it remains difficult to somehow characterize 7.5M in employment loss (revised from 8.0M est) as fundamentally positive.
Regardless of what gets printed this morning, the broader contextual backdrop will remain largely unchanged:
- A labor market shock of the current magnitude will cultivate inherently unknowable derivative effects likely to inflict some measure of structural damage to the domestic labor and consumption economies.
- Despite rose-shaded protestations to the contrary and inclusive of any mechanical rebound in activity and employment associated with reopening and macro renormalization efforts, a full employment recovery will prove both precarious and painfully plodding.
- Some measure of consumer and capex retrenchment will characterize post COVID conditions….
- The April Income and Spending data offered a preview as spending collapsed and the savings rate spiked, both at multiples of anything observed historically. That unprecedented spending collapse occurred alongside receipt of stimulus checks and enhanced unemployment benefits
- As we highlighted last week …. We are coalescing around in income cliff timeline in 2H20 which will see delayed tax payments come due, PPP support expire, enhanced U.I. benefits expire and the expiration of auto loan, credit card loan and mortgage loan forbearance programs.
- In other words, April’s consumption collapse was inclusive of unprecedented and non-recurring Social Benefit payments. A discretionary spending cratering that occurred despite millions and millions of individuals not having to make auto, credit card or mortgage payments. What happens on the other side of that?
- Importantly, the scope of any structural damage will only take shape progressively given the potential for a temporal cascading of impacts.
- That is, while the initial shock was concentrated among those sectors and workers with direct front line exposure (younger-workers with less education in lower-wage service industries like Leisure/Hospitality and Retail Trade), the extent to which protracted demand destruction (and the roll-off of support measures) catalyzed metastasizing job loss up the income and white-collar hierarchy – with respect to both managerial positions in those front-line sectors themselves and in sectors immediately adjacent – would take time to become evident.
- To the extent those 2nd order labor effects do, in fact, materialize they should will only begin to manifest now and will be occurring alongside what should be fledgling improvement in the Continuing Claims data. A shift in the distribution of job loss will be important to monitor in this morning’s NFP data.
As always, you play and risk manage the game that’s in front of you, but as we’ve been compelled to gently remind investors in recent weeks:
Don’t confuse the light at the end of the tunnel with the end of the tunnel itself. The light from our nearest star, Alpha Centauri, may appear bright, but that ‘brightness’ is also 4.3 light years … or roughly 25 trillion miles away!
And the risk associated with getting from here to there is one few would willingly “look past”.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.58-0.89% (bearish)
UST 2yr Yield 0.12-0.22% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 9 (bullish)
Healthcare (XLV) 98.79-103.95 (bullish)
Tech (XLK) 94.76-100.09 (bullish)
Utilities (XLU) 55.06-62.79 (bullish)
Financials (XLF) 21.33-25.77 (bearish)
Industrials (XLI) 63.18-73.00 (neutral)
Shanghai Comp 2 (bearish)
Nikkei 205 (bullish)
VIX 25.08-33.70 (bearish)
USD 96.80-100.05 (bearish)
Oil (WTI) 30.66-38.67 (bearish)
Nat Gas 1.72-1.95 (bearish)
Gold 1 (bullish)
Copper 2.35-2.55 (bearish)
Best of luck out there today and have a safe weekend,
Christian B. Drake
Macro Analyst
