“Bad Outcomes More Likely Than The Markets Would Like” – Peter Tchir Concerned At Over-Optimistic ‘Spin’ Everywhere
Untangling the Web
As I sit here to type this weekend’s T-Report, one thought keeps jumping out at me – “SPIN!!!”
It seems to be extremely difficult to understand anything right now as virtually every topic seems to be spun one way or the other. I’m not saying that there hasn’t always been spin (and always will be spin), but it just seems that it is incredibly difficult to tease out the “truth” or even the “facts” when putting a spin on things has become the standard way of communicating. It probably does not help that with people on vacation trying to enjoy the last days of summer, there are fewer people trying to get past the spin and uncover the elements of truth that can point us in the right direction. I cannot remember another time (except ahead of presidential elections) where I get such a different take from my Democrat/Republican contacts on virtually any topic, which means that we could see a lot of volatility because the spin out of D.C. must translate into some actual policies this fall.
I’m increasingly convinced that spin has taken over some narratives and even those doing the spinning no longer realize that they are spinning things, because the spin has become their reality. Hence, I believe that in the coming weeks, markets and companies will have to untangle the web we’ve created to figure out what is real and where things are headed.
Again, maybe it is just my perception that everything is subject to spin to suit an agenda, but a few things really jump out at me:
China, Russia, and Iran all see benefits to the U.S. leaving Afghanistan and some believe that this decision will improve stability in the region longer-term. It does not, however, improve the near-term security situation.
In this case, the big headline spins of “taking credit for jobs this year” or “laying blame for jobs this year”, don’t seem to resonate with any decision makers. What decision makers need to know and figure out is what is impacting jobs at a more detailed and policy level.
The delta variant clearly impacted jobs, but I’m not sure the impact was truly felt in August. Many point to zero jobs created in leisure and hospitality as a sign that COVID wreaked havoc on the jobs data.
Historically, August isn’t a great report for leisure and hospitality (August 2019 was 56k, 2018 was 7k, 2017 was 4k).
So, pointing to this single item as a sign that it was COVID related seems too simplistic at best.
In the coming month we will find out much more about how supplemental unemployment, various moratoriums, and lack of childcare have shaped the job market as those factors should be behind us.
For those who have been following the TReport, we have been highlighting minority unemployment data since late last year as a detail that the Fed is looking into. The bad news in this report was that some key minority unemployment rates went up, but that was largely due to a strong uptick in participation rate, offsetting some of that bad news. In any case, this is something the Fed will be watching and lends credence to the argument that they can be “lower for longer” because there is potential slack in the labor force.
We will get JOLTS on Wednesday and while job openings should be staggeringly large, we could see some decline.
A question I’m asking is will these job openings get filled before the jobs themselves disappear? What mismatches are causing these jobs to remain vacant? I am coming across more anecdotal evidence that “geographic” dislocation may be playing a role as there is a mismatch between where jobs are and where workers are and an equilibrium has not been reached.
I’m increasingly worried that more and more entry level jobs will be replaced by technology in the coming weeks and months. How long can simple jobs, like an order taker at a fast-food restaurant, go unfilled before the opportunity for cost savings (along with cheap financing) leads to incorporating more technology and eliminating these unfilled jobs? I think September and October will represent what the status quo is in the U.S. for the coming months, and we will have a much better picture of the job market and where it is headed.
For the first time in a year, I’m nervous about the trajectory and that nervousness has far less to do with COVID and more to do with my concern about a general slowing.
In any case, we should get a lot more data that helps us figure out what is really going on. •
I will refer back to Inflation – Yes, Hikes – No as that incorporates much of my take on inflation – that we should expect a 2% to 3% average over the next 18 to 24 months. I was going to avoid using the word “stagflation” since I don’t see it, but figure I should mention it as it is appearing all over my inbox and media streams. My main inflation themes remain intact, higher wages to attract workers, repatriation of production due to national security or ESG concerns, and the delinking of China.
While many people and institutions are doing the best they can, there are some things that I find staggering. Ivermectin is a case in point. On the one hand, it doesn’t seem obvious that it would help treat COVID, though maybe it is a placebo or COVID is so strange that it helps. On the other hand, I am completely certain that calling it a horse dewormer doesn’t help with the science. Yes, it is a horse dewormer, but it is also, in much different doses, used in humans. Apparently, it was so effective in treating River Blindness and Lymphatic Filariasis that the discoverers won the Nobel Prize in 2015. Again, I’m not sure why it would work on COVID, but I am certain the horse dewormer headlines have captured the attention of most and limited the amount of useful discourse. This is occurring as the narrative around vaccines is changing rapidly (from maybe a booster at some point in the future to almost an urgency for boosters). This shift in narrative is definitely affecting sentiment out there regarding vaccines. I remember that initially the CDC was not a big proponent of masks, then recommended masks and eventually advised people to double mask it on airplanes, etc. I believe that part of this “shift” was practical – there weren’t enough masks to go around in the early days, so they didn’t want to create greater shortages and panic. Admirable, and probably the right decision, but the “science” isn’t malleable, so how do we separate the science from what is practical? Also, how do people in charge, who may or may not have made mistakes, backtrack versus doubling down? Decisions on schools, reopening offices, and travel are all being made, and hopefully being made wisely based on the best data available. However,that is difficult when so many issues are presented with hyperbole and are more focused on being clickbait than informative.
Climate Change, Storms, and Infrastructure.
I do not see it as a paradox that one can believe in climate change, but also believe that not every storm (or the result of every storm) is directly tied to climate change or infrastructure issues. Academy published our monthly ESG Report where Mike Rodriguez examines the Intergovernmental Panel on Climate Change AR6 report. Climate change and battling climate change is a real issue. Envoy Kerry’s recent trip to China was disappointing on that front, as effectively China said that “we are going to do it our way”.
Given their still heavy reliance on coal fired plants, that is hardly reassuring. Though, living in a region with massive amounts spent on radar and weather forecasting, with results that wouldn’t let you keep a job as a trader for more than about an hour, it seems disingenuous to blame everything on climate change or use every failure to lament infrastructure (usually with the implication that your predecessor didn’t do enough about it). We are likely going to hear a lot about this in the coming weeks and months as D.C. focuses on infrastructure.
Threads to Pull
With all the spin, I think there are three threads to be pulled that will determine where the economy and markets are headed:
Last week, in One Chart, we highlighted President Biden’s approval rating. By all measures that has further deteriorated. This is incredibly important as it is likely to heavily influence policy in D.C. in the coming weeks. I find it difficult to believe that Republicans will be as open to bipartisan policies as they had been. I expect that some Democrats will want to push through an extremely aggressive agenda while they can use reconciliation relatively easily. Manchin seemed to come out somewhere in between last week. Whether it is political theater, negotiating ploys, or real philosophical differences remains to be seen, but we will get some real answers separating the spin from the reality in the coming weeks as progress towards policy must be made.
Let’s start with taxes. While likely tied to infrastructure, the fact that Treasury Secretary Yellen is a vocal proponent of global minimums on corporate taxes changes the landscape here. So far, markets seem unconcerned about a big shift in how companies are taxed and that may be wishful thinking. While not quite “fair share” per se, the regulatory front could be shifting making it more onerous to get things done. The next two months in D.C. will be critical and we will discover how much spin becomes policy and how much was just hot air.
I expect more decoupling from the rest of the world as China continues its recentralization. The G20 Summit at the end of October could be the culmination of China positioning themselves as “the” superpower. Virtually every global summit seems to end with China on one side and the U.S. on the other. That will not be different this time. What might be different, is how the rest of the world perceives the two sides. How China views itself will be crucial for anything to do with supply chains, inflation, the climate, and even geopolitical risks. While I can see the possibility of good outcomes on all these threads, I think we will be disappointed as we untangle the web and discover that the market/economy have too many good outcomes priced in and have not prepared for a potentially ugly truth.
I want to be bullish on the economy. I want to bet on a big, well-structured infrastructure bill, pushing rates higher, but also letting stocks soar to new highs as economic growth is the base case for years to come.
I’m concerned that not only has the spin been positioning us to be too optimistic, but my perception that some of the leading actors may not even differentiate between the spin and reality, makes bad outcomes (and a divisive D.C.) more likely than I, the economy, and markets, would like.
Since we are just pulling at these threads now that everyone is getting back to 100% staffing, there is room to be pleasantly surprised.
Tue, 09/07/2021 – 08:55