Global Macro Monitor

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We have crunched a lot of data from Friday’s nonfarm payrolls report (NFP) and have made some fascinating observations to share with our readers. 

This is the first post in a series in which we go deep into the data to bring you our insights on the condition of  the U.S. labor market. The later posts will get more granular into the employment subsectors (see last table below)

#1 – Total Private Nonfarm Payrolls

We prefer the private sector data, which excludes 22 million government jobs, of which 64 percent are local government payrolls; state governments make up 23 percent. The federal government (x/ military) is 13 percent of total government payrolls. 

Government workers are, in general, shielded from market forces, and the Bureau of Labor Statistics (BLS) does not publish government wage data, at least not in the NFP report. 

The above chart illustrates that private sector payrolls remain 7.4 million or 5.5 percent below their pre-COVID trend. Recall that from February 2020 to April 2020, the private sector lost 21 million jobs when the lights were turned off in most of the world’s economies as the COVID pandemic ravaged the globe.

Government payrolls lost 1 million jobs and didn’t bottom until December 2020, most of which were local government jobs.

Most Unrecovered NFPs Are In Three Sectors

The above data show that 81.5 percent of all unrecovered NFPs are in three sectors: Leisure & Hospitality (L&H); Government (of which, 73 percent are local govenment jobs), and  Education & Health Services (EHS). 

The L&H and EHS sectors alone make up 75 percent of all private sector unrecovered NFPs. 

Readers should make the distinction between the number of NFPs below trend and jobs lost during the initial labor market crash during 2020, which is the context of the data above. 

#2 – Nominal Average Hourly Earnings (AHE)

The chart below surely illustrates, at least to us, wage inflation, which make price increases sustainable, is undoubtedly not transitory.  It appears wage growth is actually accelerating. 

The December AHE is now $2.15 or 8.8 percent above its pre-COVID trend. 

We asked in a post last August,

What is the Fed thinking?

… It’s clear the labor supply curve has shifted left.

Isn’t that evident with 32.2 percent of the unrecovered jobs in the leisure and hospitality sector, yet no workers can be found? Moreover, 62.2 percent of unrecovered jobs are in three sectors: leisure and hospitality, government, and education and healthcare. None for no lack for demand.  – GMM, Aug 21

We warned that the Fed was repeating the same mistake of the mid-1970s, trying to monetize a supply shock with massive and ongoing stimulus.   

We were also early in our inflation call in or Feburary 9th post, Ready For 4 Percent CPI By Mid-Year?

We also posted that it wouldn’t surprise us to see inflation print at 5 percent in 2021, and we were beaten down like red headed stepchild. I can say that because of my reddish hair.. 

#3 Money Illusion

Money illusion is an economic theory positing that people have a tendency to view their wealth and income in nominal dollar terms rather than in real terms. In other words, it is assumed that people do not take into account the level of inflation in an economy, wrongly believing that a dollar is worth the same as it was the prior year.  – Investopedia

We hear a lot of money illusion these days, with the noise and praise that wages are rising rapidly. 

In some sectors, we are happy that wages are rising more than in others.  However, rising wages without a corresponding increase in productivity is the gas that fuels inflation.  This is evident in the following chart, which juxtaposes nominal against real AHE.   

Notice that nominal AHE have been up 37.7 percent since January 2011 versus the 8.8 percent increase in real AHE. 

We have deflated nominal AHE by the CPI index rebased to January 2011.  

#4 Real Average Hourly Earnings

Our real AHE chart is very enlightening.  

First, it illustrates how volatile real wages are compared to nominal. 

Second, the real AHE is only $.32 or 1.5% above its pre-COVID trend.

Finally, if the CPI monthly prints come in at an average of 0.4 percent (4.9 percent annualized) and real AHE stays flat for production and nonsupervisory, the real macro wage will be back to trend by this May.  Both components, nominal and CPI, won’t follow this trajectory, but we use the scenario for illustrious purposes to show how absurd money illusion is. 

If the CPI print on Wednesday comes in hotter than the 0.6 percent increase in December’s AHE, the real macro wage will decline.

Upshot

Most, or 82 percent of the unrecovered NFPs are in three sectors:  L&H,  Government, and EHS. 

Inflation hurts workers. 

Money illusion is rampant.

Wages increases without a corresponding increase in productivity or the inability of producers to pass on rising input costs, which pressures profit margins, is inflationary. 

The following table is an appetizer of our next post, which we hope will be published tomorrow depending on doctors’ orders. 

Notice a pattern, anyone?

Stay frosty, folks.

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The first published account of penguins comes from Antonio Pigafetta, who was aboard Ferdinand Magellan’s first circumnavigation of the globe in 1520. They spotted the animals near what was probably Punta Tombo in Argentina. (He called them “strange geese.”) – Mental Floss

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Who would have thunk it? The most dangerous women’s high school and college sport!

Much of the focus is on cheerleading’s physical toll. It is the most dangerous sport for female college athletes, accounting for 71% of serious injuries, disabilities and fatalities. – The Economist 

Approximately 66% of all catastrophic injuries in either high school or college female athletes occur due to cheerleading accidents. Cheerleading has resulted in one death per year, on average, from 1991 to 2015. – Very Well Fit

Source:  Varsity.com

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The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all information and consistent alpha generation is impossible.  – Investopedia

Carol K., who is slowly emerging from a coma, has taught me many things.  One major lesson is that investing is not about predicting the future but a process.  And if you get it wrong, don’t get angry but adapt to the new market conditions, get on your horse and get back to even and beyond.  

The last two days really feel like stocks are having an efficient markets moment. That is a more hawkish Fed is being priced and markets are now concerned about their lofty valuations. 

We have resurrected GMM’s S&P Key Levels table, which illustrate what we believe are the most signifcant short-term levels to monitor. 

Note the S&P500 bounced off its 50-day at 4672 today, now a big support level.  A key fibo at 4622, and 4495 (-4.28 percent), the December low, is the one level we are watching closely.  To the upside is 4818 and 4796.56, the all-time high and closing high, set just two trading sessions ago 

A Wiley E. Coyote Moment?

Will the current sell-off morph into a Wiley E. Coyote moment and drive stocks over a cliff allowing them to fall to fair value, which, for most, is much lower?  We seriously doubt it until the Fed begins to remove lots of the stimulus and tighten monetary conditions.  Remember ”three steps and a stumble?” 

We will qualify our postion with an “unless a Black Swan event emerges.”  Given all the hype, a crypto crash may not qualify as a Black Swan but certainly a Grey Rhino, which could do some major damage.   

We suspect it will take much more than three steps for the Fed to shatter glass.  

We have no idea where the market is headed tomorrow but shorts should beware.  There is just too much liquidity and wealth in the global economy.  Earnings for Q4 are going to come in very hot. Moreover, stocks seem the place to be with the new inflation regime and extremely low and negative real interest rates.   

It’s extremely difficult to submerge a beach ball and hold it underwater for any significant time.

To go lower on sustained basis, we suspect the Fed will have to drain a lot of liquidity and destroy mucho wealth before they are done. 

Asset Inflation And Price Inflation Are “Cousins”

Volcker recognized that when he was fighting inflation, he was actually fighting two kinds: asset inflation and price inflation. He called them “cousins,” and acknowledged that they had been created by the Fed. – Politico

The following illustrates the model I believe represents the current (and many years past) market environment.  Love that simplicity and parsamony.

As always, we reserve the right to be wrong. 

Stay frosty, folks. 

#CKStrong

DAWN BANCROFT, a 59-year-old gym owner from Pennsylvania, travelled to the national capital a year ago this week to hear Donald Trump speak, not to commit terrorism. Yet as she marched up Constitution Avenue, with the former president’s instruction to “fight like hell” ringing in her ears, Ms Bancroft apparently mislaid her moral compass.

Forcing a way through the mob outside the Capitol building, she and her friend Diana came to a shattered window and clambered through it. “We got inside, we did our part,” Ms Bancroft later explained in a video message to her children. “We were looking for Nancy to shoot her in the friggin’ brain. But we didn’t find her.”

After hearing the women plead guilty to a misdemeanour last September, Judge Emmet Sullivan wondered “how good people who never got into trouble with the law morphed into terrorists”. 

… Most made no effort to hide their identities. A Texan estate agent plugged her company while live-streaming the attack; an Ohioan kicked in a window of the Capitol wearing a jacket bearing the name and phone number of his decorating firm. The riot, as the biggest prosecutorial effort in American history has already made clear, was the logical expression of Mr Trump’s big lie, proudly carried out by 2,000 of his devoted supporters. To repudiate the violence, Republicans had no alternative but to repudiate the lie. Having failed to do so, they are instead normalising it. – The Economist

How Close Is The US To Civil War? Closer Than You Think

Wow!  The data say the U.S. no longer qualifies as a democracy.  Check out the video. 

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We have updated our tables of the IMF’s forecast and estimates of GDP growth rates for the G20 and the rest of the world for 2022 and 2021.  The post has always been a favorite for our readers.  The 2022 forecast ranks the world’s fastest to slowest growing economies in the ginormous table below. 

The data are from the October 2021 IMF’s World Economic Outlook so are a bit stale and do not reflect the new COVID variants but are close enough for government work and snapshot of the coming year. 

We have also added a chart of world GDP growth to illustrate how disruptive the COVID shock was.  Some advanced economies are now overheating from too much stimulus, including the U.S., and will need to adjust fiscal and/or monetary policy.  It’s is very difficult to forecast during the pandemic.  

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Excellent video and preview of 2022 from The Economist.  Worth your time.