Not Buying It
Due to late summer plans with in-laws this week, HAI will be brief. The market news of the week primarily revolved around a curiously large revision to labor market data, an abundance of dovish Fed speakers setting the table for a September rate cut, and the Fed Chairman himself, Jay Powell, paving a clear road to rate cuts at the annual Jackson Hole Symposium on Friday.
On Wednesday, the Bureau of Labor Statistics (BLS) had a little egg on their face when it released its preliminary benchmark revision to non-farm payrolls. The revision knocked 818,000 off total nonfarm jobs in the 12 months ended March 2024. In percentage terms, the headline revision was -0.5% of total nonfarm employment. For perspective, the BLS noted that “the annual benchmark revisions over the last 10 years have averaged plus or minus one tenth of one percent.” In other words, the revision was five times worse than what might normally be expected.
The original number of reported non-farm payrolls from last April to this March was a solid 3.007 million. That number translated to an average of 218,000 new payrolls per month and was strong enough to feed the narrative of a tight labor market. After the revision, however, new payrolls have been chopped to 2.109 million new jobs, or a rate of 150,000 per month, a 31% decline from the originally reported rate. It was the second biggest negative revision to jobs on record. Only 2009 was slightly worse with an 824,000 downward revision.
What does it mean? First, the labor market (and by extension the economy) is significantly weaker than previously reported. Second, along with an unemployment rate that’s jumped from 3.4% to 4.3% (Sahm rule recession indicator triggered), the massive negative revisions give Powell and other Fed officials all the ammunition they need to start slashing interest rates beginning in September.
This week, however, the newly released minutes of the July 30-31 FOMC meeting indicated that Fed officials were already targeting a September cut. According to the minutes, Fed officials were “strongly leaning toward an interest rate cut” at the September policy meeting, and “several of them would have even been willing to reduce borrowing costs immediately.” Furthermore, this week we saw U.S Federal Reserve Bank of Chicago President Austan Goolsbee, Federal Reserve Bank of Philadelphia President Patrick Harker, Boston Federal Reserve President Susan Collins, and President of the Federal Reserve Bank of Minneapolis Neel Kashkari all endorse the idea of a September rate cut.
On Friday, Powell essentially confirmed that message. A rate cutting cycle is about to get rolling. It almost certainly starts in September. Two years ago, at his keynote Jackson Hole speech, Jay Powell stunned markets by signaling that the Fed would accept a recession as an acceptable cost for lowering inflation. This year, on that same stage, Powell changed his tune dramatically.
As Nick Timiraos of the Wall Street Journal put it, “The Powell pivot is complete,” as Powell was “dovish across the board.” On Friday Powell said, “The cooling in labor market conditions is unmistakable,” and that, “We do not seek or welcome further cooling in labor market conditions.” In HAI’s view, Powell is now clearly putting greater emphasis on the labor market side of the Fed’s dual mandate. He added, “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” In other words, the cutting cycle is upon us, it starts next month, the exact timing and pace of cuts is yet to be determined.
As HAI has mentioned previously, however, the US has an acute fiscal problem threatening to blossom into a full-blown crisis—and soon. Debt/GDP is now 122% and rising. We are growing debt faster than the economy. With interest rates at current levels and debt/GDP this high, it will merely take insufficient growth (let alone an actual recession) to drive a debt doom-loop and a Western sovereign bond crisis.
Given a softer labor market than previously assumed and the fact that the Conference Board’s Leading Economic Index (LEI) is still falling amid it’s third-worst drawdown in 66 years, insufficient growth is a very real concern. Considering that the LEI has never been this weak with US Federal debt/GDP as high as it is right now, Powell is under tremendous pressure to deliver those stimulative rate cuts faster and in larger quantities than many might expect.
But HAI believes that the global economy has turned a corner toward a secular shift to elevated and persistent inflation. Given that structural backdrop, the imminent rate cutting cycle runs the risk of undoing recent progress toward cooling price pressures. So, while Powell and the Fed are taking something of a victory lap over inflation now, the celebration may be short lived.
Gold is financial insurance, and the cost of that financial insurance increases right along with increasing financial risks. As John Reade, market strategist for the World Gold Council, said this week, “When bad things happen, gold comes into its own.” So, the question that should concern the Fed and market participants is: why is the price of financial insurance at record highs and up 57% since 2022?
In a speech in June, Vladimir Putin offered one potential answer to that question. While HAI is no fan of Putin, it is often valuable to seek an outsider’s perspective. From his vantage point, Putin sees a West that is “destroying the system that they created themselves and that for many decades ensured their prosperity, allowed them to consume more than they earn, and attracted money from all over the world through debts and liabilities.” He continued, “Now it is becoming clear to all countries, companies, and sovereign wealth funds that their assets and reserves are far from safe, both legally and economically… There is already a growing distrust of the financial system based on Western reserve currencies. There has appeared a certain outflow of funds from securities and bonds of Western countries, as well as from some European banks, which were until fairly recently considered to be absolutely reliable to put capital in. Now gold is also being taken out from those banks. And this is the right thing to do.”
This week, in Jackson Hole, the monetary maestros of the West claimed victory over inflation and painted a picture of confidence, strength, and stability. Gold, however, is not buying it.
Weekly performance: The S&P 500 was up 1.45%. Gold was up with a 0.33% gain, silver added 3.37%. Platinum was up 0.38%, and palladium was off 0.12%. The HUI gold miners index was up 2.35%. The IFRA iShares US Infrastructure ETF was up 2.21%. Energy commodities were volatile and mixed on the week. WTI crude oil was off 0.94%, while natural gas was up 2.68%. The CRB Commodity Index was up 1.19%. Copper was up 1.39%. The Dow Jones US Specialty Real Estate Investment Trust Index was up 3.34%. The Vanguard Utilities ETF was up 1.30%. The dollar index was down 1.66% to close the week at 100.61. The yield on the 10-yr U.S. Treasury was down 9 bps to close at 3.80%.
Have a wonderful weekend!
Best Regards,
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
