Part I: Nonfarm Payrolls
The labor market marches on with 311,000 new jobs in February. While revisions took a smidgeon of the shine off of January’s gangbusters report, we are still running at a rate of ~400,000 new jobs per month in 2023. This is roughly twice the pre-pandemic pace for the American jobs machine! Meanwhile, labor force participation ticked up to 62.5% even as the official unemployment rate increased to 3.6%. Hourly earnings also increased 0.2% MoM, which has more to do with where the jobs are coming from—leisure and hospitality AGAIN! Roughly one third of last month’s payroll expansion can be chalked up to hiring among restaurants, bars, hotels, etc... It is difficult to get a clear read on how much of this rampant hiring activity is attributable to Americans with more than one job. To be sure, there has been much debate about the percentage of multi-job holders in the US lately. For instance, BLS surveys suggest roughly 5% of the entire US population has more than one job (current employment to population ratio, 60.2%). So, we could say that based on data from the Bureau of Labor Statistics the effective percentage of workers with two or more jobs is approaching double digits. Of course, that could be a gross understatement as other studies put this figure significantly higher. Regardless of your preferred dataset, the point is that there have never been more workers with multiple occupations in US history than there are today. Driving for Uber, DoorDash, and having a “side hustle” (at the same time) isn’t a sustainable, long-term solution. To put it politely, something’s gotta give.
At the risk of sounding like a broken record… inflation is still a problem for the US economy, and Jay Powell is determined to fix it. How kind will history be to Mr. Powell? That is an OPEN question. It is remarkable how far interest rates have come in one year’s time—we are staring at 4.57% fed funds flickering on our screens. That is quite a ways from what was basically 0% at the beginning of 2022! To add some context, the previous high watermark with Jay Powell at the helm of the world’s most powerful central bank came in December 2018, when the FOMC elected to raise rates for the last time in that hiking cycle. Effective fed funds hovered around 2.40% for the next seven months before Powell began cutting them, which was largely a function of pressure from the Trump administration and the conclusion of “The Donald’s” trade war. Of course, dynamics are different today. Instead of pressure coming from the White House, the Fed now faces pressure chiefly from progressives within the Democratic Party to ease its hawkish stance. On Tuesday Senator Elizabeth Warren of Massachusetts reminded Mr. Powell during his semiannual congressional hearing that he was “gambling with people’s lives.” It is worthwhile to note that Senator Warren is up for reelection in 2024 (the clock is ticking). Moreover, inflation is “stickier” today (>2 jobs available per unemployed person) than it was five years ago, AND we have ~$7T (nominal terms) more sloshing through our financial system. For those keeping score at home, we are talking about an increase of ~50% in M2 money supply over five years! The upshot is that the economy is resilient; the downside is the same can be said of inflation. It's easy to see why capping insulin payments and hammering on corporate America to eliminate “junk fees” aren’t having the desired disinflationary impact.
The Great Financial Crisis, the Great Virus Crisis, and now… the Great Devaluation. We are roughly 15 months into this most recent seismic economic event, and yet it feels like YEARS. Why? Because nothing has changed except the shape of the treasury curve—and the valuation of every asset on the planet! The amount of denial at the Fed and on Capitol Hill is shocking. If you are so inclined, here is a link to Chairman Powell’s most recent testimony before the Senate Banking Committee (Note: there are some tense moments), then there is the nonsensical budget proposal from the Biden administration (Step 1: Reduce asset values by ~20%, Step 2: Raise taxes?). Let’s take a quick stroll down Memory Lane. At one point inflation was transitory, then it persisted because of Covid-19, then the war in Ukraine was to blame… Where are the adults in the room? Isn’t bad policy enough of an answer? Perhaps some accountability would do everyone some good. Alas, objectivity doesn’t win elections.
Historically speaking these sorts of inflationary episodes crop up from time to time. Economies are built to adapt after all and asset prices need to reset periodically to foster healthy growth. The trouble this time around is that our domestic economic shortcomings are being compounded by an uptick in crime and poverty in US cities in conjunction with blatant disregard for American foreign policy on the world stage. Furthermore, it is difficult to reconcile safety issues in our schools and communities with the fact that state and local governments are flush with cash! However, if history is any guide, then markets could be set for a dramatic rebound once we have reached the terminal fed funds rate (even if things still “feel” crumby). Our base case is for fed funds to reach ~5.50% in the coming months, which should be adequately restrictive from an economic perspective. The real question will be what shape the economy is in at that point in time. How long can the Fed sustain this level of restrictive policy? We are beginning to see financial repercussions extend beyond the crypto space—FTX was one thing but SVB is more closely associated with venture capital. These sorts of events can move quickly in financial markets. So, it is too early to say with any certainty what kind of shape the economy will be in once fed funds reach their apex; we are only now beginning to see the impact of last year’s historic run in interest rates—our best guess is still one or two quarters at the terminal rate. Time will tell, so we will stay glued to the data.
Part II: Ukraine—The First 12 Months
A year has passed since the onslaught of the war in Ukraine. A war that the Kremlin initially believed would be fought and won in a matter of weeks has now dragged on for more than 12 months (with no end in sight). The oft repeated term, “special military operation,” hints at the timeframe Vladimir Putin had in mind for victory after ominously amassing troops at the Ukrainian border. An operation, after all, is meant to be short-term in nature; it is intended to be a tactical procedure. This “operation,” however, has been carried out with anything but surgical precision. From the outset Putin’s campaign has been mired in poor logistical planning/ management and woeful military leadership. What we are seeing today has more in common with trench warfare than it does a blitzkrieg. No wonder there has been so much “turnover” inside Putin’s regime! Russian bluster has fallen flat on the battlefield, and the deficiencies of Putin’s once vaunted military machine are on full display for all the world to see. No doubt an uncomfortable position for an autocrat, BUT the path forward will be tricky to navigate for the West. Let’s not forget: Vladimir Putin is a nemesis, not a novice.
Former Supreme Allied Commander Europe (SACEUR), James Stavridis, penned an article recently recounting the struggles of the Russian military on the battlefield over the last couple of centuries. It is also noteworthy that Admiral Stavridis found himself on Putin’s sanctions list last fall. Regardless, the Admiral cautions against underestimating Russian resolve in spite of its hapless military history. He goes on to encourage the reader to pick up a copy of One Day in the Life of Ivan Denisovich. The point is simple: attrition is a feature of Russian warfare. Former Secretary of State, Condoleezza Rice, went a step further in suggesting we should abandon the phrase, “Time is on the Ukrainian side.” As critical as it is to understand Russian tendencies in combat, it is also important to pay close attention to Moscow’s messaging... specifically, the verbiage of Mr. Putin and his tightly knit group of “advisors.”
Broadly speaking the Kremlin’s most common soundbite centers on the age-old Russian diatribe against the liberal West, which is nothing new since the time of the Czars. Certainly, we can understand the political motivations underpinning an “us versus them” mantra especially during wartime, but the rhetoric of Putin and his acolytes stands out to me. What’s more is the consistency/ frequency of the specific words. We are not talking about a Mad King George wandering the halls of Windsor here. Putin is methodical and his words have in all likelihood been carefully chosen by the Kremlin in order to resonate in the hearts and minds of the Russian people (at least those brave souls who haven’t already fled or emigrated to a more comfortable climate). Putin frequently describes the West as “Satanic.” This sort of ideological terminology could easily be written off as the mutterings of a madman, a ranting despot trapped by his own malevolence, but a closer look could reveal more about the current state of affairs in Russia than meets the eye (or ear in this case).
It is fairly well known that the average Russian gathers much of his or her news/ information from the television— the one exception is YouTube (not kidding). Much of what is available on Russian television is closely censored by the Kremlin. It should also be noted that any distribution of “misinformation” regarding the “special military operation” in Ukraine via any media outlet can be subject to punishment (i.e. prison time in Siberia— again, not kidding). According to a US report, roughly two thirds of Russia’s population identify themselves as Christians (a sharp uptick in the past decade) and nearly 90% of Russian Christians are Orthodox. Meanwhile, the Russian Orthodox Church is very much aligned with the Kremlin regarding the invasion of Ukraine even as the papacy in Vatican City leans in the other direction. Putin’s appeal to his populace in the face of a flagging war effort cannot be understated. He needs to win hearts and minds (ideology and past prejudices are powerful motivators in today’s world). This explains much of Putin’s rhetoric and rationale— his “special military operation” has morphed into a crusade.
In the same way that Western media intends to frame Putin as a second world leader teetering on the edge of his rocker, the East is quick to point out the flaws in liberal Western culture. The language here again is telling. Time and time again the US and its allies are cast as powers that have passed their prime; their populaces plagued by self-indulgence and consumerism. Read some Dostoevsky in your spare time to get a sense of what social attributes have historically been upheld by Russian culture as virtuous (Hint: much of what is “good” is typically “Eastern”). Perhaps more telling are the flawed characters exhibiting qualities that ought to be considered deplorable (Hint: the “bad” is… you guessed it, “Western”). Keep in mind much of Dostoevsky’s best work was published in periodical form, so his readership was broad and continuous— let’s just say he had a following (and it serves as another link back to today’s Kremlin-sponsored rhetoric).
In a post-Covid world still wrangling with supply chain issues and labor shortages the demarcation lines of producer economies (Eastern) and consumer economies (Western) have never been clearer in the 21 st century. Producer economies are having their moment after nearly forty years of globalization, declining interest rates, and muted inflation expectations. It is also important to note that the emerging economies of the geopolitical South (India, Africa, etc…) are also effectively acting as swing consumers in today’s fraught economic environment, which is a new dynamic with which the West must contend. Indeed, it seems an opportune time to paint the West as having lost its way although its long- term viability remains very much intact. Of course, economies adapt and the scales of power rebalance over time. We must remind ourselves that the world has navigated challenging geopolitical straits such as these many times in the past and this will not be the last time that the civilized world witnesses such atrocities as we have seen in Ukraine these last 12 months. The first step is dialogue, the next step is a ceasefire, then comes peace. Perhaps when it’s all said and done Ukraine will have a certain post- Potsdam feel to it with NATO effectively in the West and Russia in the East. Naturally, this is an outcome no one particularly wants in the present, but it is an option that could serve as a building block for the future in a multi-polar world.