I have been reading Samuel Rines for some time and must admit that he brings a fresh thinking to the economic thinking. In the following article he explains why ” Markets are not Lying” and this time is really different
The data does not seem to make sense. Manufacturing is back to growth, services are back to growth, and unemployment in the mid-teens. But it makes sense. While production is surging, employment is lagging. That is the great disconnect. This creates a few oddities. Most importantly, it creates a “cyclical upturn” without the typical “yield consequences”. It also creates difficult to interpret data. “Dr. Copper” – known to be one of the better predictors of economic upturns – is pointed to a further pick-up in activity. To that point, economic surprises have surged to dataset highs. With the Fed only caring about employment – and the labor market seriously lagging the cyclical upturn, “this time is different” with a return to growth placing little pressure on longer-term U.S. yields. In the end, the relationship between the data and yields (and broader markets) seems to be thoroughly nonsensical but makes perfect sense.  “Maybe the mind’s best trick of all was to lead its owner to a feeling of certainty about inherently uncertain things. Over”― Michael Lewis, The Undoing Project: A Friendship That Changed Our Minds “The data makes no sense.” “There is a disconnect between markets and the data.” Those seem to dominate the headlines currently, and they seem to be taken at face value. Nothing should ever be taken at face value. In fact, the data and yields make sense together when the data is fully parsed. Much of the frequently cited disconnect is the labor market. On the surface – that is true. Continuing claims are all over the map. While Florida appears to be in a downtrend, California has popped following the surge in COVID cases. Meanwhile, Texas never really brought many back to work. That is the choppiness of the labor market. And the labor market is the only thing the Fed is current interested in getting back to “normal”. This is where the disconnect lies.   Other pieces of data are furthering the head scratching “disconnect”. Complicating the interpretation of volatility in continuing claims (which will continue), the widely ISM Manufacturing Index surged to a level not seen in a couple years and the forward-looking new orders sub-index began to garner steam as well. With any reading above 50 indicating expansion, the index is indicating growth has returned, and new orders are signalling the expansion is here to stay for a while. But – even with production and orders pointing toward growth – employment remains well below 50. In other words, employment is contracting as production accelerates.  And it is not simply manufacturing either. The ISM Non-manufacturing (services) Index also rocketed off the COVID lows with new orders leading the charge. Employment (yes, there is a theme here) remained depressed and in contraction territory. Again, activity has begun to pick-up without a concomitant increase in the employment gauge. Employment tends to be far more volatile than the overall index, but the current 14 point spread is the widest differential between the headline index and the employment sub-index in history. That is extreme to say the least.  That is how you get this type of surge in economic surprises without much in the way of labor market improvement. Is the Citi US Economic Surprise Index broken? Is it lying? No. It is simply measuring the unbelievable surge in the all of the “other” data outside of the labor market.  And that is where the nonsensical data meets a sensical reaction. Normally, “Dr. Copper” and U.S. Treasury yields react in a similar manner to a cyclical upturn in the U.S. economy. Copper rises as demand increases for industrial/manufacturing purposes, and yields rise due to the relationship of a better economy meaning higher employment and increasing wages leading to inflation.Activity is increasing across both manufacturing and services, but it is not leading to a pronounced upturn in employment. Copper and yields are not lying. There is an acceleration in activity. It is difficult to argue otherwise, and it is likely to continue. So, it makes sense for markets to react to that data. COVID is a different beast than most recessions. The leisure and hospitality sector is taking an outsized beating. Workers in the sector are exposed to a vagaries of surges in the virus that can cause them to be unemployed, underemployed, or employed all in a single month. That keeps Fed policy hopelessly sanguine for the foreseeable future. Longer-term yields are not lying. Maybe then, there is no disconnect between “markets” and the “data”. It is simply a question of putting the data together in way that captures the peculiarities of the moment. A “cyclical upturn” without the typical “yield consequences”. This time is different. |