The excesses of the Fed have ended an era of halfway rational economic analysis and made impossible a critical identification of fiscal and monetary aberrations caused by policymakers. The stimulus-mania has disguised everything. Sadly, though, economic conditions in totality do not become more stable but more fragile. Of course, we cannot know how far the wave of unprecedented intervention will carry us, but crash onto a rocky shore it will at one point.
Hence unsurprisingly, Friday’s payroll numbers surprised on the up. The US economy added a better-than-expected 850k jobs in June. Americans are going back to work at a faster clip, and they are also getting paid more to do so. Average hourly earnings jumped by 3.6% from a year ago, in continuation of a trend observed over the past two months. It has become evident that employers’ demand for workers is strong, and they have to offer more to get people to do a job.
On the face of this, isn’t this a blatant indicator that the economy is heating up evermore and inflation is being fuelled beyond the commodity space and has reached the labour market? The natural financial market reaction should have been for long Treasury yields to resume their ascent and for the dollar to weaken. But no, the opposite happened. 10-year rates fell on the news and closed the week at 1.42% and on a 4-month low. The market is continuing its trend of long yields topping out.
A breakdown toward the 1.25% mark is now more likely than a resumption of the upward trend, one we witnessed from last summer into late March and had been a “no-brainer” forecast among the pundit community. Equally, the dollar has remained reasonably strong and curiously detached itself from a correlation with stronger equity markets based on a weaker currency. Stocks are doing what they are meant to be doing, ie go up, despite the sky-high valuations and Cassandras left and right predicting a crash in the making.
What is it then that delivers such a distorted picture? No sense is to be made of it. Bonds are basically telling us that this mother of all recoveries is a fluke and that we are on a sugar high that will vanish in short order. Some of the commodity prices have already moderated, and the labour market is everything else but solid if you look closely. Even though America is firing on all monetary and fiscal cylinders, the labour force as a proportion of the population is still at 61.6% and well below the pre-pandemic level.
It indicates that investors aren’t impressed with ad hoc monthly macro numbers and are suspicious of their sustainability. So is the central bank by the way. Why else would the sages in the ivory tower keep printing excess liquidity like in crisis times? Last week’s reading of the Fed’s balance sheet size came to 8.08 trillion dollars, a new record based on an accelerating move up, needless to say.
While the Weekly Economic Index, a measure that portrays real economic activity and that has always corresponded well with GDP growth, recovered from its horrifying lows of Q2 2020 and surged particularly in the first half of this year, it has lost some of its steam again in the past 2 months. No doubt are we still in decent economic recovery terrain, but we are evidently not reaching for the stars any longer. The smart money has figured this out and keeps positioning.
Again, it’s hard to make sense of it these days, and there is a good reason for it. The Fed has distorted and is still in the full process of distorting economic and financial processes. The wider audience is naturally irritated and stabs in the dark. The academic discipline of economics needs to be rewritten in large parts. Conventional analysis like in previous eras is no longer possible. One is left to ditch the mainstream and most pundits’ assessments and find one’s own path through the quagmire.
