Category Archives: Fundamental Analysis

A goodly part of the “strong” economy illusion derives from cherry-picking the hideously misleading numbers contained in the BLS establishment survey’s monthly “jobs” count.

As we noted in my previous piece, for instance, the index of hours worked in the high-pay, high-productivity goods-producing sector has actually contracted by 18% since peaking way back in 1978, but that has purportedly been more than off-set by a 128% rise in the hours index for the Leisure & Hospitality (L&H) sector, of which 75% is attributable to bars, restaurants and other food service operations.

Alas, however, what might be termed the “great jobs replacement” caper was not remotely a case of apples-to-apples. The typical part-time, near minimum wage “job” in the L&H sector pays the equivalent $24,400 per year or just 37% of the $66,000 annual equivalent for goods-producing jobs. So in terms of economic throw-weight, or the implied market value of output and income, we have been replacing prime labor force players with what amounts to third-stringers on waivers.

But in some cases, it may actually be even worse than that. To wit, neither the BLS employment data nor the GDP accounts are without systematic bias owing to the fact that they were designed and institutionalized mainly by Keynesian economists on the government payroll.

The problem, of course, is that when economic activity migrates from the informal and underground economy to the monetized economy it gets recorded as additional output, jobs and income in our Keynesian labor and GDP accounts. In many such cases, however, no new output or income is actually being generated; it’s just being newly recorded.

For instance, between 2014 and 2023 the number of US taxi and limo drivers more than doubled from 131,800 to 264,600. But we do not believe that activity and employment in this sector actually grew at the implied 8.1% per annum rate. What happened is that the explosion of Uber (NYSE:) and Lyft (NASDAQ:) services caused many traditional self-drivers to leave their cars in the garage, and to utilize for-hire drivers instead—even, perhaps, as they played video games on their iPhones in the back seat.

Nor is this illustration a trivial matter. The chart below, in fact, tracks a huge movement of un-measured household activity that has migrated into the monetized and BLS-counted economy since the peak of goods-producing employment back in 1978.

To wit, the employment rate (purple line) for the prime working-age female population (25-54 years) rose from 56.5% in Q1 1978 to 75.4% in Q2 2024. Accordingly, the work of nearly one-fifth of the prime age female population moved from the uncounted household economy into the monetized economy during that 46-year span. Self-evidently, however, that did not represent new output or jobs but merely the monetization of what was already there.

Moreover, in round job count numbers this migration from the household to the monetized economy was not inconsiderable. During that span the number of prime age women employees in the US rose from 23.5 million in Q1 1978 to 48.9 million in Q2 2024. But nearly half of that 25.3 million gain was due to the rise in the female employment ratio and therefore the counting of jobs that had previously not been recorded.

In the overall scale of the US economy, therefore, these 12.2 million female worker migrations accounted for nearly 20% of the total gain in US employment from 94.8 million in Q1 1978 to 161.2 million at present.

Needless to say, the tracking of this migration of output and jobs to the monetized economy was not simple and linear, such as homemakers becoming cooks in restaurants. In some cases, women historically employed in the household (or men for that matter, too) became doctors who, in turn, employed daycare workers to care for their own children and housekeepers to handle the cleaning and laundry.

Still, when you look at the three broad BLS employment categories which are closely related to household work that has become monetized, the migration of female workers from the household economy to the monetized economy is plainly apparent.

Thus, during the 46 years between 1978 and Q2 2024 total US employment grew by 1.16% per annum, which we use as a proxy for the rate of labor input growth in the overall economy. However, women employed in the three leading sectors that absorbed household work, the growth rates were far higher.

46 Year Gains:

• Women Employees in Health and Private Education (red line): +15.37 million workers and 3.13% per annum growth.
• Women Employees in Leisure & Hospitality: +6.08 million workers and 2.58% per annum growth.
• Women Employees in Other Services: +2.17 million workers and 2.54% per annum growth.

In short, the gain of women employees in these three labor market segments alone totaled 23.62 million over 1978 to 2024, thereby accounting for nearly 36% of the total gain in BLS reported employment during the last 46 years. Yet a very substantial portion of the former gain represented neither new economic growth nor new jobs.

Instead, it reflected the sweeping change in social mores during that period and in the role of women in economic life, as they moved into all segments of the paid labor force. At the same time, the household sector, in turn, became a major new employer of paid labor at restaurants, laundries, childcare centers, cleaning services, home health agencies, nursing homes etc. of what had previously been unmonetized household output and employment.

Employment Ratio of Women Aged 25 to 54 Years And Employees in Leisure & Hospitality, Health Care And Private Education and Other Services 

The implication is straight forward. The ballyhooed “incoming data” is not all it’s cracked-up to be. Indeed, bringing the analysis exactly to the current state of the US economy, one simple data set needs be noted. To wit, the contrast between the growth of Federal debt since Q4 2019 and nominal tells you all you need to know.

Change Between Q4 2019 and Q2 2024:

• Public Debt: +11.63 trillion.
• GDP: + $6.75 trillion.
• Debt Growth As % Of GDP Growth: 172%.

During the heyday of American prosperity between 1954 and 1970, the public debt grew by a scant 2.2% per annum at a time when nominal GDP was expanding by 6.5% per year. Accordingly, the public debt rose by only 16% of the gain in nominal GDP, the exact opposite of the past four years.

Change Between 1954 and 1970:

• Public Debt: +$110.1 billion.
• GDP: + 689.0 billion.
• Debt Growth as a % of GDP Growth: 16%

Nor did such tepid fiscal stimulus mean that real growth and living standards faltered. During the 1954-1970 period, real final sales grew by 3.75% per annum or by nearly double the 1.93% per annum gain since the pre-pandemic peak in Q2 2020.

Even more impressively, during the 1954-1970 heyday, real median family income growth far outpaced the last four years as shown below. During the former period, real median family income rose from $38,730 to $65,050 in 2023 dollars or by 3.29% per annum. By contrast, the $101,700 real median family income posted for 2019 clocked in lower at $100,800 in 2023.

Real Median Family Income, 1954 to 2024

The same story holds with respect to total public and private debt. Total debt rose from $558 billion in 1954 to $1.648 trillion in 1970. The resulting gain of $1.098 trillion was just slightly more than the $700 billion rise of GDP during the period.

By contrast, during the 4.5 years between Q4 2019 and Q2 2024 total public and private debt rose from $74.9 trillion to $99.8 trillion. The staggering gain of nearly $25 trillion far-outpaced the $6.8 trillion growth of nominal GDP during the period.

In short, there is nothing organic, natural, sustainable, or strong about the GDP numbers currently being posted—notwithstanding all the Biden-Harris boasting to the contrary. Actually, the US economic is being artificially bloated and levitated by cheap debt compliments of the Fed and other central banks around the world.

As we said at the onset, it has never been true that you can spend, borrow, and print your way to prosperity. And the tottering Biden-Harris Economy proves that truism in spades.

• US CPI data to guide Fed rate cut bets and the dollar
• RBNZ expected to cut interest rates by 50bps
• Wounded pound awaits monthly GDP numbers
• Canada jobs data and BoC business survey are also on tab

Dollar Rebounds on Safe Haven Flows and Upbeat Data

The staged a meaningful recovery this week aided by Fed Chair Powell’s remarks that the would likely stick with quarter-point rate cuts, adding that they are not “in a hurry,” as new data have bolstered their confidence in the economy. The currency extended its gains not only because of upbeat data but also due to safe haven flows after Iran launched missile attacks on Israel in retaliation for Israel’s operations against Tehran’s Hezbollah allies in Lebanon.

The better-than-expected and prompted market participants to scale back their rate cut bets, assigning only a 35% chance for a back-to-back 50bps reduction in November and around 67bps worth of reductions by the end of the year.

Fed Minutes and US CPIs on Next Week’s Agenda

Thus, barring any further escalation in the Middle East, dollar traders are likely to keep their gaze locked on the economic calendar. On Wednesday, the of the latest FOMC decision are due to be released. Nonetheless, given that the dot plot pointed to 50bps worth of rate reductions by the end of the year and that most policymakers who spoke after the decision, including Chair Powell, favored quarter-point reductions from here onwards, the minutes are unlikely to shake the markets.

Therefore, the spotlight is likely to fall on the US CPIs for September due out on Thursday. According to the preliminary S&P Global PMIs, prices charged by businesses rose at the fastest rate in six months, and although the ISM manufacturing survey revealed a slide, the non-manufacturing report corroborated the notion of accelerating price pressures.

This implies some upside risks to Thursday’s data, especially to the rate. The could still ease somewhat as the year-on-year change in slipped further into negative territory in September, despite the latest rebound in absolute prices.

Thus, should the data point to some stickiness in inflation, more investors may be convinced that the Fed will proceed as planned, cutting interest rates by 25bps at each of the November and December decisions. This could add more fuel to the dollar’s engines.

Will the RBNZ Cut Rates by 25 or 50 Basis Points?

Passing the ball to New Zealand, its own domestic dollar benefited last week from China’s decision to proceed with bold stimulus measures to revive economic activity. However, the latest wave of risk aversion and the recovery of the US dollar were reasons for a pullback.

Next week, on Wednesday, it will be the RBNZ’s turn to drive the . The last time RBNZ policymakers gathered was back on August 14, when they cut by 25bps and signaled that more are coming as is expected to remain near the mid-point of the Bank’s 1-3% target band.

The decision to cut rates came one year ahead of the Bank’s previous forecasts, with the new ones projecting the cash rate at 4.9% in the fourth quarter of 2024. However, investors took a more aggressive stance just after the decision, penciling in more than 30bps worth of cuts for the October decision.

Since then, data revealed that retail sales tumbled more than expected in Q2, and while the overall rate was better than expected, it still revealed contraction. The was revised down to indicate a modest 0.1% expansion after the economy suffered a recession in the second half of 2023.

Now, investors are convinced that the Bank will cut interest rates by 50bps next week, and by another 50 in November. This means that the risks for the kiwi may be tilted to the upside because if officials do proceed with a double cut and signal more aggressive easing, this will just confirm market expectations, and thereby, the kiwi is unlikely to depreciate much.

On the other hand, if they cut by only 25bps just solely in order to wait for more data and/or because they will not have updated economic projections to work with at this meeting, the kiwi is likely to recharge and resume its prevailing uptrend.

Will the UK Data Provide a Helping Hand to the Pound?

Among the major currencies, the has been the best performer year-to-date and by a large margin. However, it suffered a big blow this week after BoE Governor Andrew Bailey said in an interview with the Guardian that they could turn “a bit more activist” on cuts if data continues to suggest progress in . The market is now nearly fully convinced that a quarter-point cut will be delivered in November, assigning a 65% probability for another one in December.

The next test for the pound could come in the form of the for August, due out on Friday, which will be accompanied by the and production rates, as well as the for the month. A disappointing set of numbers could add credence to Bailey’s remarks and prompt traders to push sterling lower.

Elsewhere, the from the latest RBA decision are scheduled to be released on Tuesday, while on Friday, with traders assigning a 30% chance for a bigger 50bps cut by the on October 23, the for September and the will attract special attention.

• Discussions about the size of the November Fed rate cut continue
• Mixed labour market data up to now with ADP surprising on the upside
• Friday’s data matters the most; non-farm payrolls seen rising by 140k
• Geopolitics boost demand for dollar, data could reverse this trend

With the market trying to figure out the next development in the Middle East and the likely market impact, the about the size of the November Fed rate cut continues. On Monday, Chairman Powell poured cold water on expectations by suggesting that the Fed would likely stick with 25bps rate cuts moving forward, with a total of 50bps of easing to be announced in the two remaining gatherings for 2024.

The Fed doves are not yet ready to accept defeat with the market still pricing in a sizeable 36% probability for a 50bps move in early November. However, with the economy progressing well, the housing market showing signs of life, and inflation remaining comfortably north of 3%, the bears face an enormous task to gather enough votes at the next FOMC meeting to achieve a second consecutive 50bps rate cut.

Having said that, since Powell’s Jackson Hole speech in late August, the labor market has become a crucial factor in the Fed’s decision-making process. This is not odd since the Fed operates with a dual mandate of price stability and full employment, contrary to the ECB’s single target of price stability. As such, the incoming labor market data, primarily Friday’s non-farm payrolls figure, could put the option of another aggressive rate cut back on the table.

Mixed US Labor Market Data Up To Now

Despite the positive job opening figure, both the and PMI manufacturing surveys remain comfortably below the 50 threshold. Additionally, their respective employment subcomponents have resumed their recent downward trend, thus bringing some smiles to the doves’ faces.

However, these smiles have probably disappeared following yesterday’s employment report. It managed to produce a small upside surprise by posting a 143k increase, above the market forecasts for an 120k jump, with the August number also getting a small upwards revision. However, both the Fed doves and market participants should be cautious as the ADP employment figure tends to be a very weak predictor of the non-farm payrolls print.

Key Data Today, But the Focus Is on Friday’s Calendar

Today’s monthly Challenger job cuts, the and, predominantly, the ISM and PMI services surveys should serve as the best appetizer for Friday’s data. Another set of weak prints today will add to the current theme of a labour market weakness, and possibly force economists to lower their forecasts for tomorrow’s data.

Economists are currently looking for a 140k increase in the non-farm payrolls figure with both the unemployment rate and the average hourly earnings growth seen stable at 4.2% and 3.8% respectively. Confirmation of these expectations or an upside surprise, particularly in non-farm payrolls, would temporarily pause the discussion for a 50bps rate cut on November 7, with the doves hoping that the next set of labour market data in early November is more favourable to their case.

However, a sub-100k print tomorrow, a downward revision to August’s non-farm payrolls figure and an abrupt increase in the unemployment rate could support arguments for a 50bps rate cut in November, with the doves quickly appearing on the newswires to support such a move.

Dollar Could Underperform Upon a Weak Set of Data

The geopolitics-induced risk-off reaction has boosted the with the pair dropping towards the 1.1020 region and recovering abruptly. Assuming that there is no further escalation in the Middle East, weak labour market data on Friday will keep the discussion alive for another 50bps rate cut in November, and thus potentially reverse the current dollar/yen upleg. The 142.49 level is probably the plausible target for the dollar bears.

On the flip side, an upside surprise in the non-farm payrolls figure and a likely acceleration in the hourly earnings could help the dollar maintain its recent gains. A break above the busy 146.65-147.71 area could open the door for a more protracted rally in dollar/yen.

• Iran fires missiles at Israel in retaliation move
• Dollar, yen and gold attract safe-haven flows
• Oil rebounds on supply concerns
• Wall Street pulls back ahead of key US data

Dollar Turns Into Safe Have as Iran Attacks Israel

After Powell’s boost on Monday, the extended its gains against most of its peers on Tuesday, with the only currency resisting the dollar’s strength being the .

Having said that though, the catalyst wasn’t receding bets about a back-to-back double rate cut by the Fed, but Iran’s missile attacks on Israel in retaliation for Israel’s operations against Tehran’s Hezbollah allies in Lebanon. The dollar turned into a safe haven, benefiting from risk aversion, and this is evident by the fact that Treasury yields, which usually move in tandem with the dollar, pulled back.

What is also supporting the case of haven flows into the dollar is that yesterday’s US data was not that encouraging. The ISM PMI held steady into contractionary territory in September, with both the prices and employment subindices further declining, allowing investors to continue assigning a decent 40% probability of a back-to-back 50bps rate cut by the Fed at the November gathering.

The next tests for investors’ rate cut bets may be the ISM non-manufacturing PMI on Thursday, and Friday’s nonfarm payrolls.

Nonetheless, with Israel and the US pledging to retaliate against Iran, fears of a larger conflict may keep the greenback and other safe havens, like the yen, supported for now.

Gold Prepares for New Records, Oil Rebounds Strongly

The safe haven of choice during the Middle East saga seems to have been , with the precious metal rebounding more than 1% yesterday, notwithstanding the dollar gains. Should market participants remain concerned about a bigger war, gold is likely to continue marching north and conquer new uncharted territory. Even if geopolitical tensions ease at some point, the yellow metal may be destined to extend its rally as most major central banks around the world are expected to continue lowering interest rates.

Yesterday’s attacks had the biggest impact on oil, with prices rebounding more than 8% from yesterday’s lows on worries that further escalation in the Middle East could disrupt output from the region. Lately, oil markets were mostly concerned about the weakening global economic outlook, but the latest geopolitical developments and China’s willingness to revive economic activity may allow the rebound to continue for a while longer.

Wall Street Pulls Back, Euro Slips on ECB Cut Bets

All three of Wall Street’s main indices felt the heat of the missile attack, with the losing the most ground. However, the broader uptrends are not threatened yet. Even if the retreat continues for a while longer, investors may be tempted to buy again on new evidence that the US economy remains in good shape.

With the Fed placing extra emphasis on the labor market lately, a decent jobs report on Friday may revive appetite, even if the data translates into less aggressive rate reductions moving forward.

Elsewhere, the tumbled after Eurozone inflation dropped below 2% for the first time since 2021 and after ECB President Lagarde said before parliament that the latest developments strengthen their confidence about inflation returning to their target soon and that this should be reflected in the upcoming policy decision. This prompted traders to fully price in 25bps worth of rate cuts at each of the October and December gatherings.

We are currently in the “everything market.” It doesn’t matter what you have probably invested in; it is currently increasing in value. However, it isn’t likely for the reasons you think. A recent Marketwatch interview with the always bullish Jim Paulson got his reasoning for the rally.

“It is this cocktail of ‘full support’ at the front end of a bull market which commonly has created an ‘Everything Market’ during the early part of a new bull. That is, for a period, almost everything simultaneously rises – value, growth, small, large, defensive, and cyclical stocks – and usually by a lot.

Short rates are falling, bond yields have declined, money growth is rising, fiscal stimulus has again expanded, and disinflation is still evident; and because of this new and overwhelming support, expectations for a soft landing should grow while both consumer and business confidence improves.” – Jim Paulson

But that isn’t the reason.

On the other side of the bull/bear argument are “gold bugs” enjoying soaring gold prices because “debts and deficits” are finally eroding the U.S. economy. As Michael Hartnet of BofA recently stated:

“Long-run returns in commodities are rising after the worst decade since the 1930s, led by gold, which is a hedge against the 3Ds: debt, deficit, debasement.”

The evidence doesn’t support that view. Historically, when deficits as a percentage of increase, gold does very well as concerns about U.S. economic health increase (as per Michael Hartnett of BofA.)

However, gold performs poorly as economic growth resumes and the deficit declines. Such is logical, except that since 2020, gold has soared in price even as economic health remains robust and the deficit as a percentage of GDP continues to decline.

While stocks and have risen this year, , commodities, , and have also enjoyed gains.

In other words, whatever your “thesis” is for whatever asset you own, the price action currently supports that thesis. That does not mean your thesis is correct.

In an “everything rally,” rising asset prices cover investing mistakes.

Therefore, this analysis should elicit two important questions: 1) what drives the “everything rally,” and 2) when will it end?

Whatever Your Thesis Is – It’s Probably Wrong

When it comes to what is driving the “everything rally,” everyone has their thesis. The “stock jockeys” suggest that easier monetary accommodation by the Fed and improving earnings are the key drivers for equities.

As noted above, the “gold bugs” are seduced by burgeoning government spending and expectations of a decline to loft gold prices higher. Every asset class has its “reason” for going higher, but the real reason may be much simpler. This post will focus on stocks and gold as they garner the most headlines and have the most fervent of “true believers.”

In every market and asset class, the price is determined by supply and demand. If there are more buyers than sellers, then prices rise, and vice-versa. While economic, geopolitical, or financial data points may temporarily affect and shift the balance between those wanting to buy or sell, in the end, the price is solely determined by asset flows.

Notably, the amount of money flowing into assets has been remarkable since 2014. Despite many “concerns,” 2024 is on track to be the second-strongest year of monetary inflows since 2021. That statistic is amazing when considering the government was flooding the system with trillions in monetary and fiscal stimulus then versus contracting it currently.

Unsurprisingly, as asset prices increase during the “everything market,” more money is pulled into those assets, forcing prices to rise as demand outstrips supply. , for “every buyer, there is a seller at a specific price.” That “demand” for stocks, gold, real estate, cryptocurrencies, etc., comes from many sources.