Why are investors so jumpy?

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0:36Pushkin. Stocks are down, way down. No, wait, this just in, they're up. No, they're down again. Wait, no, they're definitely up now. Today on the show, some zigzags in the equity markets and other markets too. This is Unhedged, the markets and finance podcast from the FT and Pushkin. I am Rob Armstrong, coming to you from New York City, where it's not just markets that are volatile. It is my internal emotional state. I can't handle all this zigging and zagging. I am joined down the line from London by Dara McFadden, the newest member of the Unhedged team. Dara, are you managing to remain calm in the face of all of this?

1:26I'm reverting to the mean, Rob. That is the spirit. So we've had an absolutely wild couple of days in markets, Dara. Friday, abysmal. Monday, starts strong and then sags drearily. And as of recording time today, we look like we might have a good one. What is all this chaos, Dara, and where did it begin? Let's go back to Friday. Friday was bad. And the reason it was bad was a job support that was actually quite good. So in the US, one of the key economic indicators we pay a lot of attention to is the non-farm payrolls that comes out from the Bureau of Labor Statistics once a month. Last Friday, we got the report for the number of jobs created in May, and it came in far above expectations.

2:19There were 172 ,000 jobs created. more than double the market was expecting. And what's amazing about this to me is that if we were talking on this show four months ago, we would be talking, and I'm sure, by the way, we did talk four months ago about how the kind of equilibrium level of U.S. job creation was zero. Working age, native-born population not growing. Donald Trump cuts off the immigration flows. America can have a stable unemployment rate with no jobs added. And here we are, this is the third report in a row. We're adding, you know, 100 ,000 jobs or even more. It's an amazing turnaround in some way.

3:06Yeah, there's something kind of weird about that, actually. 55 ,000 of the jobs that were created in May were government jobs. And that's not normal. Normally, we'd expect to see around 14 ,000 jobs a month in government. But for some reason, this time around, there was this very heavy contribution from government. What are they all doing, all these government employees? Are they coming to spy on us? Who are these people? If you know, listeners, let us know. But in any case, big spike in government jobs. You know, when you see a good jobs report, what you want to see is not non-cyclical jobs in places like government or healthcare.

3:42What you want to see is job growth in the cyclical sectors, construction, say, or finance, something like that. And we did get some of that, didn't we? Yeah. So in that respect, it actually did pretty well. There were 70 ,000 new jobs created in leisure and hospitality. Some of that is probably that we're heading into the summer season. We've got the World Cup starting in the US very soon. Understood. A pretty good jobs report, the third pretty good jobs report in a row. So explain for the benefit of our listeners the thing that puzzled them, perhaps, and certainly the president of the United States.

4:19How is it that a good jobs report means markets go down? Well, yeah, the market reaction just got a bit silly, in my opinion. And partly that's because if you have a jobs report coming in that more than double the market expects, that suggests that the economy might be reaccelerating. Things are heating up. More people are going to have more disposable income. and that's going to contribute to inflation. And inflation means the Fed has to tighten. Higher interest rates mean stocks go down. That's a crude overgeneralization, but stocks don't like higher rates. Exactly. So the immediate response on Friday morning, you know, these reports come out before market opens or at the time that market opens, was that the treasury yield spiked by about 11 basis points.

5:05You mean the short term, the two-year term. The short term, two-year treasury yield. Yeah. So that's telling you the market sees rates going up. I mean, it's a bit strange because, you know, we've talked about this a bit in the past or written about it in the column that it's almost like a situation where we don't know what the Fed is going to do. Right. Because some parts of the economy look hot. Other parts not as hot. Wages aren't that great. So it's like you're looking at the Fed and we have a new Fed chair, of course, his first meetings next week. You're looking at the Fed and you're like, what are these guys going to do?

5:42Are we, you know, it's almost uncertainty rather than just plain old fear of higher rates. Right. We went into this year expecting that the Fed was going to cut rates. And part of that was because of this new chair, Kevin Warsh. He's made a very strong claim for the productivity benefits of AI, allowing him to cut rates. But obviously, the picture has changed massively since the start of the Iran war. And it now looks like there's going to be all sorts of inflationary pressures coming down the pike. And by the end of this year, the market is expecting the Fed to have to increase rates. Here's something you have to explain to me, Dara.

6:19If this market is up because AI is the greatest technological innovation and the greatest potential boost to productivity since the invention of fire and the wheel combined, how can it be that a market with that going for it can be spooked by the prospect of a 0.25 % increase in interest rates? That just strikes me as all out of proportion. It's kind of weird, isn't it? I mean, part of the story has to be that they're freaking out about the idea that the borrowing costs on all the companies that need to do these expensive capital investments for the AI infrastructure build out are going to be much higher.

7:06I think that's a more plausible explanation because it's more short term. And the other one that I came up with is maybe this is, and we'll talk more about leverage shortly, but maybe there's a worry that if the borrowing that investors are doing to buy stocks becomes more expensive. They will buy less stocks. So there's different kind of causal pathways we can talk about. But I think the other aspect of this market that is important is not just that it has an uncertain and slightly spooky Federal Reserve hanging over it. It's that it's incredibly narrow. The data center stuff is all that's really working.

7:49Yeah. If you're not in AI or semis at the moment, you're losing out. And it's interesting that not even Bitcoin is joining the party. You know what I mean? Usually, six months ago, a year ago, if risk sentiment was good, if the market was going up, especially in tech, you'd see Bitcoin kind of chasing it up sympathetically. And that has fallen away. Right. Which is kind of the ultimate symbol. There's not ambient risk appetite floating around in the atmosphere. there's just AI appetite floating around. It's really different. Maybe that's people selling their Bitcoin so that they can invest in SpaceX.

8:30We need a name for that trade. Listeners, we're looking for a name for the sell Bitcoin, buy SpaceX trade. Any suggestions? Unhedged at FT.com. I got a question for you, Dara, and I'll ask this question to you about the United States and indeed about the globe. We've talked about how the market is narrow. Is the economy narrow? Yeah. I mean, the job support, even though it added 172 ,000 new jobs, the other data on the unemployment rate and wage growth weren't as good. So the signs are that the labor force is actually not growing very much in terms of people joining the job market. And the signs are that the unemployment rate actually hasn't come down in the last three months.

9:18So it's kind of stuck around 4.3 % at the moment. That's not bad, but it's not a great sign if you're adding 172 ,000 jobs and several positive job months in a row. But the unemployment rate is kind of stuck at that level. To pause on that, it is two different surveys, right? One is the jobs added number comes from a survey of businesses, the establishment survey. And the unemployment rate comes from a survey of households. So is some failure of fit there normal? I don't know. I just want to throw it out there as a possibility. Yeah. I mean, this is an important point of all these sorts of data releases.

9:57They're preliminary. They're imperfect. There's different ways of gathering these numbers. Further data comes in later on. And that's why we have upwards revisions later on. You know, maybe worth adding that for the data that came in on Friday, we also got upwards revisions for March and April. Good point. And so there's 93 ,000 additional jobs for those months if you combine the two of them. But you mentioned this, and I think it is worth hitting hard. We had been seeing real wages, that is wages minus inflation, the growth slow down, and we've hit basically zero now. And that cannot be good for the economy at large in the United States.

10:42Yeah, the story here is that real wage growth has been falling since its peak a few years ago in the aftermath of COVID and that supply shock. Workers were able to negotiate real increases in their wages. But if you look at the trend line over the last few months, it's definitely coming down and it's now slowing at about 3.4%, you know, the annual rate of wage growth. The important thing about that is that that is below where we expect inflation to come in. We've got CPI data coming out in the U.S. tomorrow. And we've got Kevin Walsh's preferred inflation data coming out in a couple of weeks' time.

11:21And the sort of forecast for those is that they're going to be, you know, above 3%, closer to 4%. Which means the average household is accepting a real terms pay cut. Yeah. And that can't be good. And it lines up with what we hear from companies from Walmart to the food companies, the whole retail sector. You know, I'm always suspicious of these comments by CEOs in companies that have direct contact with the consumer. But, you know, they always talk about strain on the consumer. The mid-level and lower-end consumer is under strain. And, you know, maybe that's because nobody wants to buy your peanut butter or whatever, and you're just making an excuse.

12:05But there's enough of these comments coming from the CEOs of retail companies that it feels like there is a certain number of American households that are feeling the pinch now. And, you know, if somebody in the household isn't working in the tech sector, things might feel pretty different than it does, you know, if they are. That's right. I mean, on the other hand, the Fed may be able to rely on this to do some of its work for it on getting inflation down. Correct. If households don't have as much income, they're not able to buy as much with their dollars, then the Fed may be able to let himself off the hook a little bit and not have to raise rates, which is really the last thing that Kevin Warsh wants to do, given everything that we know about his desire to cut interest rates.

12:52Yeah, that's fair enough. And I guess we are contractually obligated at this point to mention the drip-drip problem of the Strait of Hormuz in the background. With the Strait closed, inventories continue to dwindle. And the possibility, as we've written many times in the newsletter, of a real spike in oil prices that would depress household real incomes further. It's just a live possibility in the next couple of months. I mean, that's a genuinely tough one. I mean, we've all been surprised by how well the economy has done these last few months, despite higher oil prices and less oil coming out of the Middle East.

13:34But it just does not look like this can go on for much longer. All of the analysis that's coming out for the bank says, you know, the inventories are falling. And if we get to August and there is not an open straight of our Hormuz, then we're going to be seeing oil prices at like$140,$150 per barrel, if not more. Yeah, yeah. All of this, of course, against the background. And, you know, I almost hate to talk about this because I've been talking about it for so long. But everything's expensive. stocks are expensive corporate bonds are expensive spreads are tight nobody really knows how valuations interact with markets or it's very unpredictable in any case but you know talking about the volatility and the nerves in market a background of having to pay a lot for everything that can't help right in terms of this volatility let's turn to the last topic the one that many people, many listeners might have expected us to start with, which is we got some monster supply coming into equity markets in the days and weeks to come, starting indeed this week.

14:49Yeah, that's got to start with SpaceX who start trading on Friday. And that money, some of that money will be new money coming into the market, but some of that money has to come from somewhere. And we think that part of that will be money flowing out of other investments. Yeah. No, I think it's really hard to say. There have been high cash flows into U.S. stock funds, and that helps with this problem a little bit. In other words, new real money is flowing into markets. But this is a big IPO, and then we have the Google secondary, we have talk of a meta-secondary. We have talk of an Anthropic IPO.

15:33We have talk of an OpenAI IPO. There's just going to be more of this stuff to buy in weeks to come. And you've nailed it. Where do the dollars come from to invest in those stocks? What is the source? I think everything rides on the SpaceX IPO now, even though Anthropic and OpenAI have filed their documents to the SEC, which is their intention to go public, they don't actually have to. That's not a commitment. And if market conditions don't support them going public, you can expect to see them delay their listing. Very interesting. And you know why I find it slightly reassuring that everything rides on SpaceX, which just saying that it sounds worrisome, but everybody involved from the investment banks involved to the fund managers involved to the indexes, to the markets themselves, everybody knows this thing has to work if the golden goose, which is the US equity market, is going to continue laying eggs.

16:47So there's going to be a lot of motivated people making sure all these shares find a home at a price that looks good. We will be all hands on deck with Long and Short after a short break.

17:29We'll be right back. lively debate and get insights from every angle to further inform your view. Listen to The Flipside on your favorite platform.

17:41Listeners, this is Long and Short, which is the part of the show where we go long things we like and short things we don't like. Dara, are you long or short something today? I'm short deal trinkets and all the sorts of tacky marketing that comes up around these sorts of IPOs. And I don't know if you saw this story, Rob, but Goldman Sachs has erected rockets in the lobby of its New York headquarters, which is its way of signaling that it's all in on the SpaceX IPO. I'm going to get me one of those. I'm going to sneak into the lobby there and try to walk out with one of those in the guise of a repairman or something.

18:23Yeah. I'm long the San Antonio Spurs. I live in New York and I love this city, but I'm not a Knicks fan having been born in Boston. And the San Antonio Spurs won a game last night and everyone on that team is about 20 years old. And if there's anybody who can come back mentally from being down to nothing, it's a bunch of 20 year olds. It's the irreverence of youth. So I'm long the Spurs. Listeners, we will be back with more longs, more shorts, and more discussions of all things markets on Thursday.

19:24available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.