Fed is being cautious, and they're confused: Joe LaVorgna
Qi Research CEO, Chief Strategist Daniel Dimartino Booth and the former White House Chief economist. He's now at SNBC. He's their chief economist, Joe Lavonia. This all of course and just minutes ago we got the Fed minutes. I mean, but what do what do you make of it though, Danielle? Because one thing you've always did, you've talked about a lot as a consumer in ways that you know but he's a plethora of of data to that ways that I don't hear a lot of Wall Street economist talk about them. And and the retail, the retail industry, I mean we've seen the, we've seen a ton of bankruptcies as well. We are and we're we're not just seeing bankruptcies and restructurings, we're seeing liquidations. How many of these stores are going to close? Like, overnight. And that means that somebody is unemployed overnight. And and that is a huge difference compared to a Silicon Valley layoff circa 2023 who gets nine months of fat severance. A much different dynamic. And we're gonna we've already started to see an uptick in initial jobless claims. In fact, initial jobless claims are now growing at a faster pace than continuing jobless claims. We've had a baton handoff here. And yet these minutes say very little about the labor market unlike Jay Powell at the podium debt it's all about inflation all over again went out of his way the last two FOMC Q&A periods to mention labor he just out of if there's a shock in the labor I mean and Joe I'm I'm I'm really this is my theory I I really believe that the Fed is going to use 4.1 maybe 4.2% unemployment as the excuse or reason to start cutting rates. They may Charles it depends where inflation is. The three and six month rates of change have to be at least where they were last November when Powell gave the the the December pivot on the labor market. If it weekend, certainly that could bring the Fed into play much sooner. I do believe the labor market soft. But the Danielle's point about layoffs, the way the BLS does the data, it assumes there's job creation that'll lose the survey. So last year you had the third largest government adjustment in creating jobs that may or may not exist in the history of the net birth death adjustments. So what that means is if the labor market is weaker than what I think and I believe Danielle thinks the same thing, the payroll numbers ultimately will be revised down. But for now, in the short term, if you visions after the fact never move the needle. No, they don't. But here's the thing though, as long as the equity market believes that this is Nirvana, you create a lot of wealth that keeps the party going a bit longer. But OK. So to Joseph's point, you know who cares about the third quarter of 2023 right now, except for the people who originally were part of the 540,000 jobs created, it has now become -192. So we know that we were shedding jobs, which would have been huge news in September, last September, but we know that we were already there, which means lagged revisions as they come. They're not going to talk about them in the White House long. Give me a break. But lagged revisions are showing us that we could easily have gone into recession in the third quarter. If you're basing it on job losses, well, Joe, also basing on market reaction. I mean, you know, I was talking earlier with Jack Ablin about the $22 trillion that's poured into this economy, you know, between fiscal and monetary policy. That's ambrosia for markets. The market loves that. The market is never going to push back against that until things, well, yeah, won't until the inflation stays high and forces the Fed ultimately to have to hike because inflation is unlikely to fall on its own. It's not going to get back to where you think the Fed may hike this power. No, no, no. I'm saying it's in the future, OK? For certain, someone is back in office. They may hike. That was a joke. That was a joke. But but on the unemployment rate, to your point about the rate, if it goes up to four, one or 42, Charles, at that point it probably keeps going up because you even if you look back in the 50s and the unemployment rate was under 3, still went up to six. So to go from a low of 3/4 ultimately up to 5, 1/2 or 6, not hard to do. We're not there yet but it could turn quick and and and actually going back to the 50s for just a second, not that any of us were around then but going back to the 50s the National Bureau of Economic Research dated A recession before they even saw a rise off the low in the unemployment rate. So we the market may be disregarding revisions. The National Bureau of Economic Research is not there's not although it's going to be out to the fact what was it was 366 days right before they dated the last one. We also had two recessions in the 50s where the equity market and the economy peaked at the same time. So this notion you can't have a recession cause stocks were all time highs is a bit misleading. So the consumer, where is where is the consumer? Because I saw Lowe's, I saw Home Depot today I see Target. These are major retailers and forget about whether they beat consensus because that's just a guessing game by Wall Street that's talking same store sells and now Walmart was a winner because they were able to able to get greater traction from lower prices. Same with TJ Maxx, same with Costco. But they're it, they're cannibalizing others and that's what you in the aggregate. I've got a spreadsheet tracking all of these same store sales we're about to slip on a year over year basis to negative territory. If you're looking at all their surviving retailers out there it's it's it's it's not pretty. When Walmart is saying we're getting high end consumers that means that another retailer is losing theirs. Joe Consumer, what do you think the consumer is And inflation adjusted terms were basically back to where we were pre COVID and we've had this huge burst in spending on goods which I don't think it's sustainable because banks have tightened standards, interest rates for the incremental borrow or high. Just a question of when it breaks. But again, Charles, interesting about the Fed is they've raised rates aggressively. They're letting the balance sheet grow well, the bank reserves actually higher than when the Fed started QT, which is a little bit of an offset. I think again, I've been saying this for a while, at some point things will break and what it does, it gets ugly quickly. But you know it's an election year regardless of party in office things tend to go until they don't, we're spending a lot of money. It feels like the big debate in and outside of the Fed, but particularly maybe inside the Fed is have have have rates been restricted enough, right. Yeah. And you know what we're seeing right now and I think a lot of banks are freaking out about it and especially on the private side, my gosh, private lenders right now are in big freak out mode is that commercial real estate is transacting and it's transacting fast. What we avoided in 2023 was what we call price discovery. Right now we've got price discovery in spades. So unrealized, yeah, when I see these these clips of a building that was like 120 million and it was sold for 40 million, that kind of stuff, those those kinds of things are happening in rapid succession as opposed to 2023 when we were in this big extend and pretend mode hoping that the Fed would do what take interest rates back not not by 25 basis points, not by quarter percentage point to 0. Joe, 30 seconds. Is the Fed in your mind just being overly cautious or are they almost as confused as everyone else? Both. It's a very confusing time. It's a difficult set of markets, no question and I do but I do think the Fed is being cautious. What I would argue what what Jay Powell should do is just add a little two way risk in the market and all he has to say is look, we thought inflation would come down. We think inflation is going to come down. We're not going to rule out the prospects of higher rates. We don't think it's necessary. All options are on the table. Instead they've got sort of an asymmetric bent and I and I wish they added that because the markets again rally every time they they say they're not going to hike anymore or they might ease, right. I mean yeah, I mean that's it. That's the all clear sign. Joe, Danielle, thank you both very much.