The Narrative Is The Fed Will Ease

Sheep Are Easily Led

Over the last quarter of 2023, the narrative was that the Federal Reserve after raising rates quickly to fight inflation, will ease. Three rate cuts are priced in for next year. The CME Fed Funds futures contract is the best predictor of what everyone expects will happen. Today was the release of the unemployment number. As any trader will tell you, it has been the Super Bowl of your trading month. Since I am not actively trading, I don’t know if that is still true.

Side story, the largest Eurodollar broker on the floor, DRBY, was having all kinds of trouble with his garage door. It wouldn’t open, and he was late to work. That cost him big money since he was missing the opens. Customers of his were pissed too. On Unemployment morning, he got in his car and the garage door wouldn’t open. He put the car in reverse, slammed his foot on the accelerator and blew through the garage door. He totally cracked up the back of his car and the garage was in shambles.

He made the open. It was cheaper to fix the garage door and car than it was to miss the open.

I don’t think the Fed will lower rates in the first six months of this year. I was pretty much on an island with that opinion, but if unemployment and other numbers continue to come in like today’s, the Fed is on hold. I could see one rate cut if inflation eases to their target of 2% but we are still a long way from that at 3.1%. I know that people think the Fed is politicized, but that is one place I am holding on to my idealism.

One thing the Fed has in its favor is I think oil prices will not spike this year. Since energy underpins a lot of inflation, that’s a win. However, salaries jumped 4.1%. Labor is the number one cost of production.

Labor policy in a large part of the United States creates incentives to find ways not to hire more labor. If you are headquartered in a state like NY, IL, Michigan, you will try to do more with less before you assume the cost of hiring one more employee.

If you follow the ChatGPT people or read articles like this, artificial intelligence is already shaping new business processes and we are able to do more with less. That doesn’t necessarily mean people lose their jobs. It means they can focus their energy on more productive tasks which contribute to revenue and return on equity.

The fly in the ointment is the largest point of job creation is government jobs which always seems to be the case in Democratic administrations. Healthcare, which is essentially government backed was second. Don’t look for Democrats to embrace large language models (LLM) or AI inside of government. Patronage>Efficiency for them.

The “soft landing” talk will fill the airwaves and newsprint over the next few months. But, a lot of people I follow on Twitter aren’t seeing a soft landing, nor are they seeing a hard landing. They see a slowdown which means a recession.

In the New Deal, Keynesian government spending gave a lot of juice to the economy from 1933-1935. Then, it fell backward. The US wasn’t doing so well from 1936-1940. The thing that provided a lot of jobs was the Lend-Lease Act and then the start of World War Two. Churchill loved Lend Lease, but for Roosevelt, it was a way to put people to work. Roosevelt was no angel. He was a very craven and cynical politician. His economic policy had nothing to do with actual economics. By the way, for history buffs or people who look at a chart, WW2 started in Europe on September 1, 1939, and for the US it was on December 7, 1941. That event still promulgates the “broken window theory of economics”.

Biden threw gasoline on the fires of inflation in March of 2021. We should be running out of that steam by now.

As my friend Jim Iuorio said today on Twitter, the headline numbers will be sold as “good” and Biden will crow about them. Underneath, they look not so hot.

Today's numbers were more bad then good..

1)The good was the net number of 216k and the 3.7 rate.

The bad

1)ANOTHER downward revision of the previous month.

2) Another number weighted heavily toward non-productive government /education/health care jobs.

3)The household survey showed a huge drop of 636k jobs.

4)Lastly, the responders of the establishment survey tied a ten year low of 49.4%. The last part is interesting as we are seeing a lethargic lack of responses to government surveys in many examples of economic surveys. This leaves the government to rely on nonsense estimating methods like the birth death model… Rates went down and stocks went up. On balance this is not good news. This will be portrayed as good news…

Another friend of mine, Rich Miller of Handelstats says the bottom is in for the short term in this market, so “Buy Mortimer Buy”.