The U.S. Labor Market Throws Another Curveball with Peter Boockvar

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1:23What's happening in the labor market and why does it matter? Welcome to Real Vision Daily Briefing. It's Friday, July 7, 2023. I'm Ash Bennington. I'm joined today by Peter Bookvar, CIO of Bleakley Financial Group and editor of The Book Report. Peter, it's always great to have you with us. It's especially great to have you with us today. Lots of data, Lots of information coming out on labor markets in the last 24 hours. We've got JOLTS. We've got ADP. And today, of course, we have NFP Day. Help us cut through all the noise to the signal. Peter, what's going on? Well, it's interesting because we were sort of thrown around, so to speak, by the economic data with ADP telling us that almost 500 ,000 jobs were created and then sort of a reality check with the BLS.

2:09Now, I think there's one lesson we've learned is that you can't really draw a connection to ADP and BLS in any particular month. But over a 6 - to 12-month timeframe, those numbers should converge. And interestingly, ADP in a way was really just playing catch up after lagging BLS for many months. So year to date, the two surveys aren't that far off on an average monthly basis. I think with the BLS number, there was the possibility of a higher number just based on ADP. But not only was it weaker than expected, there was also downward revisions. And interestingly, the all-encompassing unemployment rate did tick up to the highest level we've seen in a bit, which is worth noting.

2:59I'm of the belief that while the pace of firings has been ticking up based on what we've seen in jobless claims, I think there's no doubt that what precedes that is a slowdown in hiring. And obviously, depending on what industry you're in right now, we are seeing some moderation, I believe, in hiring. Gabrielle, let's take a look at those charts, if we could, to actually walk through what Peter is saying here so you can actually visualize it on your screen if you're watching. This is the non-farm payrolls monthly change number, obviously out today, for June of 2023. You can see that moderation in effect.

3:35You can see the rate of increase decreasing, and you can see the number of absolute additions decreasing as you look at this chart right now. So pretty clear data there when you look on the screen. Pretty clean, nice pattern. Also, I want to take a look at the unemployment rate. This is a longer-term picture. This dates back to 1970 on this chart. what you can see there. Well, it's pretty obvious what you can see if you're looking at this on a screen. You see that enormous spike for the COVID pandemic, and then you see the decline, obviously now below historical levels. Peter, how would you explain this?

4:07How would you contextualize this to someone trying to get their heads around it? Well, if you can, Gabrielle, put that chart back up because there's this belief that how can we have a recession with the unemployment rate so low? But look at the chart. Look at where the unemployment rate has been going back to 1970, right before the shaded columns. It's low right before you enter a recession. We should say, for folks who don't know, shaded columns represent recession on this chart. So what you're looking at is precisely your point, this idea that the unemployment rate is lowest right before those gray bars, right before recession begins.

4:48Right. And this is the U3 measure of unemployment. When I mentioned before sort of the all-encompassing U6, which has been ticking up to almost 7%, that includes workers that are not looking for a job but would take one if offered and a part-time worker who wants a full -time job. Now, the interesting and sort of different thing about this economy right now is there's sort of things are moving in slow motion with a lot of these cross currents. And, you know, there has been a simplistic view of, OK, the Fed's going to raise rates. We're going to go immediately into recession. And obviously, we haven't seen that for different reasons.

5:30But I also think that the flow of fiscal government spending has helped to sort of distort, cushion some of the negative impact from the rise in interest rates and making this somewhat of a bizarre cocktail of analysis and economic reaction to everything being thrown at it. Well, we've got that chart on screen right now, the U6 chart. Obviously, this is the alternative measure of labor under utilization, exactly as you said, a broader measure of unemployment. Peter, that's a pretty stark sort of decline, obviously, over a period where we've seen that change. Explain what we're seeing there. Well, if you're a technician and didn't know what the name of the chart was, you can say we're reaching a bottom and curling up.

6:19So like I said, this is the sort of all-in measure of the unemployment rate. And I think this is something that is worth watching going forward, particularly after the recent uptick in jobless claims, where we had three weeks in a row worth of$260. We had some come down related to the Juneteenth holiday and then$240-ish print this week. But it's something to keep our eye on. And the thing about this sort of debate, recession, no recession, hard landing, no landing, soft landing, whatever. Like I said, things are happening sort of slow motion, but that shouldn't distract you from trying to focus on the trajectory of economic activity and sort of try to predict that how is an economy going to power ahead in a world of much higher interest rates than what we're used to over the last 15 years.

7:24And I think that that is really an important thing here because I've been referring to this higher interest rate environment that could last for a period of time as more of a silent killer to economic activity rather than something you're going to read about in the front page of the Wall Street Journal every single day. and that behind the scenes sort of that everyone is getting affected. Well, I shouldn't say everyone. Somebody is getting affected by this higher rate world every day, whether you're a household whose adjustable rate mortgage just expired and called yet a seven-year arm or a 10-year arm with a three-handle on it.

8:09Now, all of a sudden, your mortgage banker is telling you you're going to have to pay 7 % or you're a business that has a loan coming due or someone has a loan reset that needs to be refinanced. That is what I think chips away at economic activity. I read on Bloomberg News yesterday about Ashford Hospitality, who is defaulting on almost a billion dollars of mortgages on a hotel portfolio they have. So that's an example that you're not reading about as I said in the front page of the newspaper, but this stuff's happening every day behind the scenes because somebody has a loan coming due. Now, on the flip side, we know that there's been a huge amount of government spending.

8:56We have the CHIPS program right now. There's still money left over from the American Rescue Plan that a lot of states are spending a lot of money, $350 billion worth. You have, of course, also the subsidies for green energy investment. So there's a lot of that going on. Two, that is also creating sort of distortions in the data, but is creating a lift to economic activity. I mean, I was talking to somebody yesterday who said that right now we're on the cusp of or in the planning process for 16 battery, EV battery plants in the country. And each one's going to cost three to four billion dollars.

9:38And of course, it's subsidized by the government, but each facility is going to take, call it, 18 months to build. You need workers to build it. And then once it's done, you're going to need probably 4 ,000 to 5 ,000 people to staff it. So that's what I think is sort of complicated, trying to figure out what's going on in the economy. And to my point earlier is that when you see a rise in interest rates, not everyone is affected all at the same time. You know, if the Fed started raising rates in March of 2022, well, if my arm doesn't expire until December 2023, well, I've been good so far. But, you know, a train is coming in my direction.

10:17And same with a business that not everyone is affected has debt coming due all on the same day. So I think the most important point I'll stop and pass it back to you is it's not just, OK, when is the Fed going to stop raising interest rates? It's because we're pretty much done anyway, even if they throw in another one. It's how high and how long, or I should say how long will interest rates stay this high, to me is much more of a relevant thing to be thinking about right now. Just a quick moment to remind you, today's Real Vision Daily Briefing is sponsored by CraneShares. Learn about their KRBN ETF at craneshares.com forward slash KRBN.

11:00Now back to today's analysis.

11:05here that's all so well said and exactly i think what people need to understand to cut through the the sort of daily uh coverage of what's happening in the news cycle that day the data release of the day giving us the big picture so important particularly at a time like this a time of transition in terms of rate regime you mentioned this idea of a secular environment where rates remain higher for longer let's talk a little bit about what's coming up next week which is cpi and the expectation of whether or not we are going to get one, maybe two more rate hikes before we see rate cuts. This is kind of the weird, bizarre period we're in.

11:39We've seen the twos-tens curve upside down yesterday by 100 basis points. It's coming a little bit today with this number. Talk a little bit about that environment, how you think about what's going to happen next, and the sequence of those events. So this TPI and then the end of the month, PCE will sort of be the last two big numbers that the Fed gets to digest. The PCE is less influential on the market because we've already seen CPI. We're definitely going to see a notable step down in the headline figure to about 3 % from 4%, while core still will remain somewhat sticky. But inflation is going to continue to moderate in the back half of this year, both because of the deceleration in services inflation, because it will capture what's really going on in the rental market, where rents include new leases and the rollover existing ones.

12:38The rents are only growing about 3 % right now, maybe 4%, while the CPI is still calculating 8 % type rent growth. I think the question, and that'll be enough, I think, for the Fed to stop after the next one as we get this further deceleration. But a further deceleration in inflation doesn't sort of create, it's OK, it's party time, and maybe we get a two-handle inflation by the back half of the year. It's where inflation actually settles out. And we have the inflation spike. Now we're having the come down. It's where does after that come down, where does it bounce to? Is it just going to go to two and we're going to be one to 2 % inflation and we'll be back to the salad days of pre-COVID?

13:25Or is something structural have changed and 3 % to 4 % is going to be sort of the new norm for a while? And I'm in that camp. And it is that sort of inflationary backdrop, albeit much lower than it was, but higher than it was for the many years pre-COVID, that leads to stickier interest rates. And while the Fed may cut interest rates in response to a recession or an economic slowdown and rising the unemployment rate, the days are going back to zero. There's no chance that happens for a long time because of that stickier inflation. And I think it's that dynamic is that the Fed is not going to be there to save you like it has in previous down cycles.

14:12And I think that's one of the pieces of what is a much different macro landscape than we've become accustomed to. Well, we talk about different macro landscapes. One of the most durable charts right now in finance and economics is taking a look at the 10-year Treasury drift down 40 years, essentially my entire life. When you look at that chart declining to where we got to zero and now beginning to roll over and go back up, this is a really long-term cycle. Yes. And I still think people think that we haven't left the old one and that what we've seen over the past year and a half is just a temporary blip.

14:57And it's not a blip. There's a sea change that has occurred. And I don't think people are appreciating that. And, you know, I get it in a way because people are so trained on, okay, you reach a rough patch. Yeah, we have the spike in inflation, but it's going to come down. And, you know, technology is deflationary, which yes, it is. And everything's going to be copacetic with inflation and interest rates will fall, the Fed will start cutting and everything's just going to be fine. I mean, that's the mentality that we're so trained on. But I just don't think it's going to be that easy. I think that there are more chapters to be written here.

15:38And the Fed's ability to cut rates has more strings attached, so to speak. You have the potential of seeing a notable drop in the dollar if the Fed aggressively cuts interest rates or embarks on QE or at least stops QT. Well, what happens if that leads to a sharp rise in oil prices, which I think is possible? And we see a big jump in import prices. And all of a sudden, inflation starts going up again in a tough economic environment that becomes very stagflationary again. And like, there's no, the beauty of low inflation created this free lunch for central banks that inflated multiples of everything.

16:25And I just don't think that free lunch exists anymore because inflation, again, while it's definitely receded and definitely falling, and again, maybe we'll see it too handled in inflation by the end of the year. it's not staying there. We're not going back to 1 % to 2 % inflation. On the good side, and I've said this multiple times on Real Vision, just to give perspective, in the 20 years leading into COVID, core goods prices averaged zero. Services, inflation, energy averaged 2.8%. You merge the two together. You get the volatility in food and energy on the headline. You average about 1 % to 2 % inflation.

17:14So where do we go from here? Services inflation definitely decelerating probably into next year because we had a lot of apartments that are coming online. But once those apartments are done, there is no new multifamily building going on right now that is starting now. All those projects have been shelved. The only construction that's going on are projects that have already been sort of in the queue and have already gotten started. So to me, can we go back to 2.8 % services inflation? I'm not sure because wage growth is now 4 % to 5%, which is double the 20-year pace leading into COVID. So I think more structurally for the next, call it, three to five years, services inflation is going to be more like three to four, maybe on the upper end, where goods prices are not going back to zero in the next three or five years because of no more low-cost labor around the world, particularly out of China.

18:07Just-in-time inventory has been permanently altered post-COVID. You have all this onshoring and government spending that is just, yeah, it's nice to build more chips here, but it's just going to raise the cost of manufacturing and doing business. So we're not going back to zero. And if we go back to just 2%, You combine the two, you combine 4 % services, and you're going to have 3 % to 4 % type inflation, depending on where food and energy prices go. Yeah, very well said. And to stress this broader point, because I think it's so important when you give this broader context here, if you're a 50-something, grizzled Wall Street veteran, 30 years on the street, you've never seen this before.

18:47That's right. And to your point earlier about these 40 years of declining interest rates, we try to figure out the question all the time. And we have client money that we got to decide, OK, if we're going to buy bonds, where do we go? And you have the people that are analyzing the U.S. economy and saying, OK, we're going into a recession. Inflation's moderating. We've got to buy the 10-year. We've got to take duration risk because it's worth it. And I still think that that is thinking sort of the way that things used to be. And I'm much more comfortable buying two-year treasuries thinking that the Fed's almost done.

19:26And that, to me, that's a much easier call. Like, I can understand those calls for the 10-year. Oh, yeah, we're going to go back to three because we're going to recession and inflation is deflating. But we're coming out of the greatest financial bubble in the history of financial markets, that being in sovereign bonds, which was epitomized by negative interest rate policy. So I have much less confidence in figuring out where 10-year yield should go from here. Because I can argue that the 10-year, and before it got over 4, when it was 3.5, 3.75, I was saying the same thing. I can argue it goes to 4, 4.5.

20:06Of course, we're now at 405, and not for good reason. It's not because growth is accelerating, but because inflation remains sticky. Or we're going to wake up one morning and the Bank of Japan is going to widen yield curve control, which I think is a possibility in July or in the meeting thereafter, particularly after the much hotter than expected wage data that came out overnight in Japan, which many people missed. And how's it going to go with the European Central Bank as they continue to raise interest rates, as they continue to do QT? I mean, look what's happened to the gilt market. Not only are they aggressively now raising interest rates, they're outright selling gilts.

20:43So yields in the UK are at the highest level since 07, 08. And we're already that basically there in the short end here. So why can't the 10-year in the US go to 4.5 % under that scenario? It easily can. So I guess the point is that the 40-year decline in interest rates is over. And now we're going to see where it goes from here. And again, to my point, I just don't see a scenario where it's just too easy to say, OK, the US economy is going to recession. The 10-year is going back to two and a half to three. And the US economy is going to recession. The Fed's just going to cut to zero, and we're going to do QA.

21:22That's the old playbook. You need to throw out that playbook because it doesn't work anymore, I believe. You're so well said and passionately said at that. I want to talk a little bit about something here, which is this disconnect that Andreas Steno-Larsen is pointing to in a clip. Talk me about this disconnect between what we're seeing in survey data versus what's actually occurring on the ground in terms of consumer spending. Let's take a look at that clip. I think one of the reasons why a lot of people, including myself, have been wrong-footed by surveys over the past year here is that surveys tend to send a wrong signal when inflation is high.

22:02Let me give you an example. Let's take the Consumer Confidence Survey, the Michigan University Survey, and show it versus the actual consumption in the economy. We have a chart on that. And as you can see, there is basically a growing discrepancy between the pessimism in the survey among consumers and the actual consumption in the economy. So why is that? Why does that make sense in a high inflation environment? Well, the reason why consumer confidence is low is due to – it's basically driven by high prices, right? So it also sends a signal that the average consumer expects prices to increase.

22:47And therefore, it is also sort of an embedded expectation that it is very costly to wait with the purchase. And therefore, you can have this extreme pessimism while still having elevated consumption at the same time, because the survey essentially hints that it is costly waiting. therefore consume now instead of tomorrow. So Andreas Steno-Larsen on Real Vision yesterday, July 6th, you have this kind of conflict between the extreme pessimism and elevated consumption. What do you make of it, Peter? Well, the elevated consumption on a real basis has grown very little. And I think we have to distill where the money is being spent.

23:34So money is being spent on travel and leisure and hospitality and food and beauty and drugstores. But it's not being spent on electronics and furniture and jewelry and other sort of hard goods that people spent a lot of money on during COVID. People are spending more money on buying cars, but that's because inventories are normalizing. But auto sales are obviously a big ticket item, and they're still trending well below the$17 million rate that we saw before. And also, it sort of gets to sometimes in moments how people feel doesn't necessarily translate into how they spend. And also, there's quite a differentiation right now with income differentials.

24:30Levi Strauss reported earnings yesterday, and they specifically said, and we've heard this many times with retail earnings, that they're getting more spent from people who are making more than$100 ,000. And those making less are being much more discriminating and focused on value brands. So it's important, I think, to sort of further dissect those two lines on that chart. Well, Peter, here are some numbers that you know very well. I'm looking right now, just reading off my Bloomberg terminal. S &P 500, year to date, up 15.5%. NASDAQ Composite year-to-date up 31, call it 32%. NASDAQ 100 up nearly 39 % year-to-date.

25:08We are living in an economy where we have a very divergent path for folks who are earning wages versus folks who are getting capital appreciation. And by the way, they're doing well on their bonds as well. Yes. So that actually has also been a help to the consumer or those that actually have savings and can benefit from the rise in interest rates. That's definitely been a help. So, you know, people are doing the analysis of, OK, there's been much less in tax refunds and the consumer is getting hit by a cut, excuse me, in the SNAP benefits. And they're going to have to start paying back their student debt.

25:44That's sort of one side of the headwinds. But, yeah, the tailwind is if you have savings and you have money in the markets, you seem to be doing better. On the flip side, though, the labor market has been stronger with blue-collar workers, and it's been the white-collar work, particularly in technology, that has actually been much more vulnerable with their job. Here, I've got a question on exactly this that I just want to throw in there because it's exactly to the point you were making. This one comes from Adrian Day from the Real Vision website. Can you talk about the consumer, particularly at the lower half of income and particularly credit card and other debt defaults, talking about the pain that folks in the labor market experiencing right now at the lower end of the income spectrum?

26:23So when you're going through a lot of earnings releases, particularly the last month of retail, it was clear that a lot of retailers, whether you were Family Dollar, Dollar General, Dollar Tree, or you were, again, Levi Shrouse or other type retailers, they saw a clear differentiation in consumers. And the lower end is really focused on just paying for non-discretionary items. And they've cut back dramatically on discretionary items. But even those making north of$100 ,000 are still being more careful with how they spend. It was Walmart and Costco and others talked about how they're seeing more higher income consumers.

27:12consumers. But we've had almost a 20 % rise in the cost of living since right before COVID, since February 2020. And everyone sees it. So whether you're making more money in your savings account or in the stock market or in your wages, you're still conscious of things are more expensive now. Also, I've spent a lot of money on these things over the past couple of years. I don't need to repeat that. I'd rather go on vacation or go out to dinner. So I think there's definitely been, when you get sticker shock in a lot of different things, and it's not just sticker shock on a house or a car, it's sticker shock at the supermarket.

27:52And people in shops, whether you're higher end or lower, and you're going to see it and you're going to respond to it. Yeah, absolutely. And of course, people at the lower end of the income spectrum spend a much greater percentage of their earnings. Here's a question that comes to us from Sandeep Gupta, and it's a good one. With yields rising again, are we going to see an SVB-like event? He's referring, of course, to Silicon Valley Bank, some of the instability we saw, particularly in the regional banking sector earlier this year in May. Well, the Fed's bond term funding program probably lessens the possibility of another SVB, but with the further bleed that it will create with bank deposits, you are likely going to see failures, which on top of now we're just, I think, beginning a credit cycle, which is right now at least initially manifesting itself in commercial real estate, where small, medium-sized businesses are sort of overweight, we can say, as about two-thirds of commercial real estate lending comes from small and medium-sized businesses.