Nicholas Glinsman | December 3rd, 2021
· The wisdom of forecasters
· The nonfarm payroll and unemployment report was very much a tale of two conflicting reports – why?
· Inflation is both an economic and political problem now
· What Jerome Powell couldn’t say in his speech, and doesn’t know
· Shutdown risk had the can kicked down the road
· US and Russia
Keeping it short today, given market price action
The wisdom of forecasters
A few interesting snippets from a new book entitled Applied Wisdom: 700 Witticisms to Save Your Ass(ets) by Alexander Ineichen, a Swiss financial analyst. Ineichen says that markets are governed by Gump’s Law, (derived from a line in the movie Forrest Gump), which states that life is a box of chocolates because you don’t know what you’re going to get. When you next encounter someone who confidently predicts the course of the pandemic, some of the following responses might be apposite:
“Forecasting is not a respectable human activity, and not worthwhile beyond the shortest of periods.” – Peter Drucker
“The herd instinct among forecasters makes sheep look like independent thinkers.” – Edgar Fielder
“Anyone who causes harm by forecasting should be treated as either a fool or a liar. Some forecasters cause more damage to society than criminals.” – Nassim Nicholas Taleb
“Many of us smile at old-fashioned fortune-tellers. But when the soothsayers work with computer algorithms rather than tarot cards, we take their predictions seriously and are prepared to pay for them.” – Gerd Gigerenzer
The nonfarm payroll and unemployment report was very much a tale of two conflicting reports – why?
So, we had weaker than expected payroll, yet stronger than expected unemployment, which occurred with an increase in the participation rate. So, what happened to give us such conflicting numbers?
Change in Nonfarm Payrolls 210,000
Unemployment rate 4.2%
Labor Force Participation Rate 61.8% (up 0.1% from the previous month)
Well, after some checking, an old colleague found the answer – seasonal adjustments. Have a look:
Hence, the weaker than expected payroll number. Hence the contradiction between payroll and the unemployment rate falling to 4.2% from 4.5% and despite the uptick in the labour participation rate.
So, this was not a set of weak data by any means. Furthermore, the Fed’s own forecast for unemployment in H2 next year is 3.8% – we are almost there now!
Inflation is both an economic and political problem now
And that is why BofA Chief Investment Strategist and fellow expat Brit, Michael Hartnett, looks at the Biggest Picture and thinks withUS inflation up from 1.4% to 6.2% and Biden approval rating down from 56% to 42% YTD means now inflation is an economic and political problem. As a result, Fed set to be very hawkish next 6 months.
With “rates shock” clearly seen in EM, US$, long-duration stocks (ARKK, CLOU, TAN, XBI), vol (MOVE, VIX), the next leg of tighter financial conditions will impact crypto (XBT <$53k), credit (HYG <$82, LQD <$125), consumer (XLC<$70), leverage (REM<$32).
As you can see from the above, Hartnett is bearish markets into next year with “rates shock” in ’22 to follow “inflation shock” of ’21. Fed likely ends QE & hikes Q1 and tighter financial conditions + EPS slowdown = low, negative, volatile asset returns in ’22; credit spreads to determine absolute returns, yield curve (potential inversion H2) to determine relative returns.
What Jerome Powell couldn’t say in his speech, and doesn’t know
According to an article of the above headline, the following is the subject in hand:
Shutdown risk had the can kicked down the road
The federal government will be funded to February 18, which means there are likely 3 big bills to tackle by year-end:
1) debt ceiling;
2) NDAA/China; and
With regard to the debt ceiling, Democrats can use FY22 budget vehicle to pass TWO bills at separate times:1) debt ceiling hike ($ amount & not a suspension to a date); and 2) $1.75T reconciliation bill around same time. The debt hike via reconciliation may only take a few days and is currently the default option (excuse the pun…). The other option is McConnell blinks again. However, there is some new nuance here: GOP votes against debt hike BUT doesn’t filibuster (so 50 votes) and you can suspend it to a date certain (ie, not a $dollar amount raise, but to a date pegged in the future)
As for the NDAA/China Bills. Well,this is a hodgepodge of bills with the NDAA the annual Pentagon policy bill that has passed every year since 1961. It is now the likely vehicle for tough China-related amendments/legislation. The Senate is due to finish this up soon.
Finally, BBB. The House passed it last week. The goal remains before the year end for enactment into law, though this could easily extend into Q1 2022. As discussed multiple times, the bill is largely composed of 4 big sections:
1) health care;
There will clearly be some tweaks in the Senate on Child Tax Credit, immigration, SALT, Medicare expansion, paid family leave, methane fee & others such issues. Conventional wisdom has passage being a question of when, not if.
US and Russia
We assume there is going to be a Putin-Biden “summit” call soon.
Here’s where things stand – The U.S. signals we would escalate sanctions if Russia crosses our red line re: Ukraine. And Russia is talking about kinetic action against U.S. satellites (threat to use ASATs to shoot down our GPS satellites). Effectively, that means the U.S. is not willing to go to war over Ukraine, but Putin is…or is at least taking the risk of escalation that could actually lead to war.
The purpose of the “summit” is likely to be about negotiating Putin’s demand that the US stop building up Ukraine’s military…or as Putin has declared his red line, building up NATO’s infrastructure inside Ukraine.
It might not be the right thing by the judgement of history, but we think the U.S. would probably agree to some form of what Putin is demanding, given that there is no sincere affection for Ukraine from this Administration anyway and Biden wouldn’t risk actual war. If it isn’t about China, it is potentially on the table.
This Administration is much more realpolitik than many might think. And very risk averse.