So … for the last few weeks in our X / Twitter Social Media stream, we have been waxing philosphic on our Macro-Economic thoughts. We have summarized many of those thoughts previously in our Member area; in posts free and open to all. But we thought it was about time for an entry here at our Main Site; which encapsulates all of those thoughts into one post.
Many of these thoughts we wrote before the “Ninja” (USD/JPY Currency Pair) unwind. But we stand by our thoughts; and in fact, with the recent partial unwind in Yen we feel these thoughts are even more relevant.
In recent months, there seemed to be an obsession by many in the main stream news media; with the Fed cutting the Federal Funds Rate. This obsession has spread to many market participants, and eventually? Surprising to myself, to the Interest Rate markets themselves.
While the market may eventually get what it seems to be demanding, we are at somewhat of a loss to understand this obsession. And we are not alone. We’ll give you a good follow on X / Twitter. Danny Dayan on X / Twitter has been pointing out some of the very things we have been mentioning to our members.
We ourselves simply do not see the need for the Fed to cut. In fact, we were somewhat encouraged by the Chairman’s statements in recent weeks; pushing back on this idea that we have seen a ‘massive slowdown’ in the Economy.
We have not seen a massive slowdown in the economy.
We have seen some softening. But ‘softening’ is a far cry from an actual slowdown.
GDP for the last 2 years remains elevated …
Real Gross Domestic Product
Naturally and quite obviously; you have to be careful at looking at any one individual metric; and especially one that is a lagging such as GDP. Everything looks great.
Until it doesn’t.
What we would offer … is that for the last two years we have been steadily rising, and are currently above 2018 levels. What exactly would cutting the rate achieve for the economy as a whole, with GDP elevated above 2017 and 2018 levels? Other than possibly increasing upward pressure on inflation?
We have seen some pain in the housing market?
But here we agree with the Fed Chairman. Taking a neutral, unbiased look at housing? We feel that housing needs to see some pain. In my particular area, buyers were buying houses, lifting past the offer … sight unseen.
We feel housing is a market, that needs to cool off. Higher rates are helping to do that. Do we really want to lower rates into an already warm housing market?
Median Sales Price of Houses Sold For the United States
And need we even begin to mention the the levels of any stock market index, even with the recent correction?
S&P 500 Index
Do these look like Indices reflecting a concern about future slowdowns? Because they certainly do not appear that way to us. So again we ask … why the obsession with cutting the rate?
Rates normalized in this range throughout the 1990’s, and the economy did more than fine …
Federal Funds Effective Rate
1991 to 2000
One of the big factors we have been paying attention to, is unemployment.
When the Federal Reserve was forced to hike rate from 1978 to 1983, you saw a massive rise in unemployment …
Unemployment Rate
1978 to 1988
But now? Unemployment is still at historically low levels, and nowhere near the pain that we saw in the 1970’s …
Unemployment Rate
Historical from 1949 to Present
Looking at the last 70 years, we are remarkably, historically subdued when it comes to the unemployment rate.
So we ask? Again … what is the obsession with cutting the rate? ZIRP led to many bad habits by market participants; and allowed many micro-distortions to creep into the economy. As we saw in the 1990’s, an economy can normalize with higher interest rates; and we would argue … that this is even somewhat healthy.
All of the above being said? Yes, we are seeing some softening. And just as we specified all of the above? NFP was released, showing that the US economy added 114K jobs in July 2024, well below a downwardly revised 179K in June and forecasts of 175K.
And risk markets began to unravel. Quickly.
Many tried to claim the speed of risk assets selling off, was due to the above weak NFP number. We almost immediately saw that this was not the case and was actually due to the Ninja (USD/JPY) Carry unwind. While my mind was sort of all over the place (had just woken up, it was 6:21 AM EST, was keeping an eye on volatility and our own positions, etc.), we did try to specify for newer traders in the following video entry …
You can find the video as below on YouTube, and is available in many other video venues (Patreon, etc). After this video? We continue to specify our thoughts as to the softening in data that we have seen …
Now … have we seen ‘softening’ in economic data?
Yes. Absolutely.
But this is softening. Not overt weakness. Yet.
We think this needs to happen (SOFTENING .. NOT WEAKNESS) if the Fed has been serious about battling Inflation. This is part and parcel of how its done.
Did people really expect the Fed to raise the rate as slowly as they did ( and yes it was FAR too slow if they were serious about inflation and I said so from the beginning that it was NOT transitory. I wanted +150 BPS ) and NOT to see eventual softening? Heck, we wouldn’t mind seeing some actual weakness that is specifically due to Interest Rates. That’s how you quell #inflation.
We’ve been watching the 5 Yr Yield, Personal Savings Rate, Commodity Indices and 1 Year Inflation Expectations ( And some manufacturing data on the side )
And we think the idea that 50 BPS is getting this much credence is just flat out insane. “Rates markets done lost their mind …“.
CME’s FOMC FedWatch Tool
August 10th, 2024
Sure … why not … let’s just destabilize the Ninja even farther by decreasing that rate differential ( /sarchasm)
What we would like to see is no rate cut. But we dont get what we like. We’d prefer to see weakness, and even some softening. It looks like a 25 BPS is all but baked in. Ok. Fine. But we’d prefer it to remain right where she’s at. We have MORE than enough room on U-3.
I have heard some are floating the concept of lowering rates to FIGHT inflation? That has to be one of the dumbest ideas I’ve heard heard in the long sad history of dumb ideas … and I think the number of Economists on Planet Earth that would agree with that concept … is exactly zero.
The only sticking point to the above and what we would LIKE to see? Is that the rate of change on ALL volatility metrics has been steadily increasing for years.
And here is another rock for you to look under you might enjoy, and is something we’ve been watching for years.
Check out not only the rate of change on volatility metrics? But also check out the upside deviation on risk markets during specific time periods. And then the steady speed, and the steady increase OF those increases in volatility. Then overlay that result across the previously mentioned ROC on Volatility metrics.
Yeah, that’s our postscript to all of the above. We have to be careful, because softening, with one (what we call) ‘kicker event’? And when they unravels come? They come faster and faster …
As always … our thoughts … not yours …
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