Job Market Meltdown? Live with Jeff Snider

Manufacturing and cyclical industries (construction, goods) show weakness first in a recession, followed by services as the lagging sector; the recent acceleration in nominal income decline and labor data confirms the realignment is becoming serious and transitioning toward services

“services are the lagging. That's really where the end the endgame comes from. You see the manufacturing cyclical industries like construction, they get weak first and then especially the goods economy...we're just now getting these the the confirmation in nominal incomes as well as labor market data that this this shifting and realigning has gotten to be not just a a prolonged process, but it's getting to where it's just now becoming serious.”

The yen carry trade unwinding, which began in late July and continued through October, signals Japanese investors' reassessment of US recession risk; they had been reaching for yield in US high-yield debt and collateralized loan obligations, which will not perform well in a recession

“Japanese in particular Japanese, not exclusive Japanese, but the Japanese in particular had a lot of macrosensitive investments. they were reaching for yield and collateralized loan obligations and other forms of high yield debt which are not going to perform very well in a US recession scenario. So when they were confronted in early August really late July throughout July with more and more stronger signals that the US recession risk was rising that's what triggered the carry trade unwind”

Markets are not accepting China's stimulus claims as credible; oil prices did not rise despite China stimulus announcements and known global oil demand problems, Chinese bond yields remain low and unchanged since stimulus began, and Chinese government refuses to provide concrete details, suggesting they lack a real plan

“oil is a huge one. Uh, you know, Reuters reported a couple days ago that the the borrowing plans by the central government are likely at the top end of people's range, economist range at like 10 trillion yuan over the next couple years. And oil prices were actually didn't move at all when everybody knows that oil, global oil markets have a huge China problem...the Chinese bond market...Chinese uh bond yields in in the in the country continue to be relatively low. In fact, they're they're ridiculously low. And they haven't changed since, you know, all the stimulus stuff started to come out either.”

China has structural problems going back 15 years involving high debt levels with no growth; these structural issues cannot be solved quickly, and the Chinese government cannot tolerate the short-run pain required for real reform, leaving them trapped in a box with no effective solution

“their problems go way beyond just short-term cyclical issues. We're talking about structural issues that go back 15 years. They have all of the debt and none of the growth, which is not a not an enviable position. And there really aren't that many ways to get out of it that don't involve a huge amount of shortrun pain that the Chinese government itself cannot tolerate.”

Consumer confidence is down primarily because of weakness in perceptions of the labor market, not because of weakness in consumer spending itself

“consumer confidence is down for that reason. It's not really about consumer spending with consumer confidence. It's about perceptions of the labor market.”

The labor market transition from demand destruction (recession) to recovery typically involves workers shifting from one industry to another slowly over time; what we're seeing instead is hiring freezes and people refusing to change jobs, which is not a productivity transition

“when you have any type of new innovation and technology and it does raise productivity, it usually does so over a long low long ramp up period to begin with, but at the end of the day, what that means is that yeah, we don't need we don't need as many workers in their current positions, but as that technology gets adopted, especially in broad fashion, that leads to jobs appearing in the new area. So people don't lose their job and go go go on unemployment or just just drop out of the labor force entirely. They shift from one industry to another industry. So you don't see the type of labor market slowdown...What we are seeing in the short run set aside that productivity and whether or not that's maybe a legitimate trend or not in the short run what we see is the opposite.”

The Fed will likely stick to 25 bp cuts (not another 50 bp cut) at least for the remainder of 2024 because of sensitivity to 'Fed regret' criticism and the psychology of monetary policy, where inflation expectations become self-fulfilling if the Fed appears panicked

“I don't think we're going to see 50 at least this year. I think we're stuck on with 25 because there is that degree of uncertainty and the Fed, whether they will ever admit it or not, are very sensitive to criticisms like we're seeing now where they made a huge mistake because they believe that psychology is a huge part of their policy toolkit. Um, if people start believing that the Fed made a inflationary mistake, it'll actually become inflation.”

Workers are refusing to quit their jobs according to JOLTS data, signaling they do not believe there are better opportunities elsewhere; this contradicts the productivity-driven job transition narrative and instead reflects recession expectations and fear of job loss

“from the Jolts report, American workers refuse to quit the jobs that they have. So if there is productivity, they would be migrating to other places. They they're saying, 'We don't want to go anywhere.' And the reason they don't want to go anywhere is because they know there's no place for them to go.”

Temp jobs have been severely cut throughout summer 2024, including in the latest report, which is a highly cyclical signal indicating businesses are not optimistic about productivity, topline revenue growth, or macroeconomic conditions; instead, they are cutting and controlling costs, a classic recession signal

“We see that industries are slowing down, especially cyclical industries like manufacturing and temp jobs. I mean, temp jobs have been obliterated over this over the summer, including the latest report. That's a highly cyclical signal that says businesses aren't optimistic about um productivity or anything else, the topline topline revenue growth and macroeconomic considerations. They are cutting and controlling costs, which is a classic recession signal.”

The labor market shows cyclical recession indicators including frozen hiring, falling temp jobs, and depressed quit rates, not long-run productivity transition; this includes the August revisions showing deterioration that September's outlier report obscured

“what you're seeing across the labor market are not signs of long run productivity leading to a prosperous future. You're seeing shortrun cyclical indications...suggests that the labor market has not just cooled off, it's gone way too far and we're into that at the very least the danger zone of cyclical recession type of downturn. Um, and it has all of the classic hallmarks that go along with it.”

Interest rates will eventually move much lower than current levels and stay there for a prolonged period, as signaled by swap spreads and longer-dated instruments, regardless of whether the economy experiences a severe crash or a mild recession followed by no recovery (like 2001-2003)

“swaps and swap spreads for example, they are adamant that that's where longer run interest rates are going. They're going much lower than where they are today and they're going to stay there...even if you're not really concerned about the economy crashing, even if you just think it's going to be a maybe a a a rerun of the early 2000s where we had a very mild recession in 2001, but then it was followed by two years of no recovery...That would get you very low interest rates.”

The speaker is 'very much bearish in the intermediate terms' until major structural problems are solved, but is 'very long-run optimistic' about human capability to solve problems and sees potential for a prosperous 1990s/early-2000s style future once current issues are resolved

“I am very much bearish in the intermediate terms until we solve the big problems that need to be solved and that's whole separate discussion there. But once that happens, I believe that we are setting ourselves up for a long run future that looks like for the rest of the world, the 1990s and the early part of the 2000s before it all went to hell.”

China's strategy is to throw around large stimulus numbers and hope markets will magically turn around sentiment without providing concrete details or policies, similar to Paul Krugman's term about being 'irresponsibly promising to be irresponsible'

“What they're really hoping to do is by throwing these huge numbers around, the markets will do their work for them. That somebody will be the the marketplace will be wowed by these huge numbers and the market will start to just magically turn around. The economy will just magically shift...the old Krugman term? incredibly promised to be irresponsible and just let the marketplace sort it out for you.”

Trump might pursue tax cuts and protectionist tariff policies rather than fiscal spending (transfer payments), representing a different fiscal approach than the current administration, though the actual economic impact is uncertain

“rather than fiscal spendings, which has been really the fiscal dominance approach of the current administration, Trump might say, 'Okay, we're going to do tax cuts and we're going to do um protectionist type of of policies and tariffs and things like that. So there there's there's just looking at it from very on the surface uh very broad terms there's a possibility you can make the case that what Trump would do in in terms of fiscal policies would be different than what we have now”

Treasury yields overshot on the downside relative to other fundamental markets and signals like Germany, suggesting the summer rally in rates was excessive and some retracement was natural

“the bond move, the the rally in interest rates up until September was pretty substantial. And in treasuries, it kind of overshot on the downside relative to other fundamental markets and signals like Germany, for example. Um, treasury rally got a little bit ahead of itself.”

Being long duration (long-term bonds) covers a wide range of negative scenarios including mild recession with no recovery (like 2001-2003), severe crash, and structurally low growth/inflation; the main risk is the 'bond vigilante' scenario of high deficits and inflation

“being long duration covers you for a whole bunch of those types of scenarios. And it obviously doesn't cover you for the opposite, which would be, you know, the bond vigilante scenario. there's too much debt. Um, higher inflation if that breaks out to the 1970s style, which I mean that's not happening, let's be honest.”

The Federal Reserve will continue cutting rates at its near-term meetings (November and December 2024) because the economic situation is more questionable than most people realize; the Fed will be sensitive to the 'Fed regret' criticism but will err on the side of caution given labor market weakness

“the Fed would not change its its it's it the answer where it's going is because the economic situation is at the very least more questionable than a lot of people are giving it really really paying attention to and appreciating...the market says there is no Fed regret and I think again most recent data we got from not just the payroll report but Joel bolts um on labor data there.”

Japanese three-month government bill yields continue to trade around zero basis points even though the Bank of Japan's overnight rate is at 25 basis points, indicating continued fragility in the yen carry trade and Japanese funding markets

“the Japanese three-month government bill yield which continues to be right around zero even though the Bank of Japan's overnight rate is at 25 basis points. So there there are a couple of things that are not, you know, they're not huge warning signs. They're not blaring sirens, but they're just like, okay, this shouldn't be happening.”

SOFR (Secured Overnight Financing Rate), particularly the one-month and three-month tenors, has remained locked into pricing further Fed rate cuts (November and December) regardless of macroeconomic data releases, signaling the market does not believe the Fed regrets its September 50 bp cut

“Term sofur rates plunged in anticipation of the 50 in September and then when Jay Powell had his press conference in the middle of September and said, you know what, we're the economy's really on solid footing...That was sort of was what what lit the fuse to this Fed regret narrative. Term sofur didn't budge. It continued to to price the next rate cut which is coming in November”

Repo fails have been rising since early August despite continued large Treasury bill issuance by the Treasury Department, breaking a two-year trend of declining repo fails; this signals emerging collateral scarcity and financial fragility despite expected stabilization from higher bill supplies

“repo fails, for example, have been rising again, which is a break in a two-year trend going all the way back to October 2022. Repo fails have been declining as the Treasury Department outside of a couple periods has been issuing more and more debt, more and more Treasury bills...There's lack there's not the same type of shortage and scarcity that leads to collateral problems which is another another warning sign because the Treasury Department is still issuing a ton of Treasury bills and yet we're seeing rising repo fails.”

The primary challenge is getting people to recognize that the economy is not currently booming and in need of serious structural reform, because without recognition of problems, solutions cannot be attempted

“The challenge before us is to actually realize that we are not in an economic boom that things are not good and are not turning around and therefore there needs to be some degree of urgency to actually look at the problem honestly...We got to we got to first put our fingers on it before we can think about even solving it. And most people don't even they're not it's not even on their radar.”

Four-week Treasury bill yields dropped by 11 basis points in a single day (late October 2024), likely due to expectations of a weak payroll report, which is an unusual move that signals underlying stress in short-term funding markets

“just yesterday, we saw the four-week Treasury bill drop by 11 basis points in yield, which is one of those things that, you know, goes off like, wait, that's that that doesn't happen. That shouldn't happen, especially for a Treasury bill. Um, and it's probably I mean most likely that was tied to perceptions that the payroll report today was going to be bad”

Most professional investors and economists say there is no recession and a soft landing is likely, while roughly 92% of the general public surveyed say they believe a recession is coming

“I mean, I don't I think if you asked most people in the, you know, commentary class and professional investors, they would say that there's recession. There's no recession. We're headed straight for a soft landing. That's what Jay Powell says. That's what every economist says. And then you ask about, you know, you ask 100 people on the street, about 92 of them would say, 'Yeah, we think we're headed for a recession.'”