Darius recently sat down with Maggie Lake on Real Vision‘s Daily Briefing to discuss the labor market, the Fed, corporate profits, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. Labor Hoarding Has Spared The Business Cycle So Far… How Long Will It Persist?
In early 2022, the gap between labor demand and supply reached a peak of approximately 6 million.
Since then, it has steadily decreased to around 2.4 million – this is significant because it helps alleviate wage pressure in the labor market.
Additionally, for the first time in the time series, a significant divergence has emerged between the JOLTS Total Job Openings and the Household Survey Total Employment figures.
The slack in the labor market being created for almost two years now is coming from an abundance of job openings rather than a decrease in total employment.
This could pave the way to a soft landing, because the high number of unfilled jobs will likely reduce the upward pressure on wages, helping to moderate inflation without drastically increasing unemployment rates.
2. Surging Productivity Growth Is Supporting Rising Expectations of A Soft Landing
In late October, productivity growth came in at approximately 5% on a quarterly basis and 2% year-over-year, and these figures have since been revised upwards.
Corporate profits, which bottomed a few quarters ago, are now returning to more normalized levels.
This recovery in corporate profitability suggests that there is less pressure on corporations to reduce labor costs or to pass on price increases to customers, supporting the expectations of a soft landing.
3. Investing Is Not About Predicting Outcomes. It Is About Being Positioned to Take Advantage of What Happens In Asset Markets.
The Federal Reserve is aware that the effects of monetary policy are subject to long and variable longs.
As a result of the positive inflation, labor market, and productivity outcomes we have seen, we believe the Fed recognizes there is no need for further tightening.
Returning to 2% inflation without disrupting the labor market would be a highly favorable outcome – especially in a general election year that features an incumbent president.
However, as an investor, it should not matter whether the economy “soft”, “hard”, or “no” lands.
Instead, what is important is the trajectory that asset markets take to the ultimate outcome, and being positioned accordingly.
Over the past six weeks, 42 Macro clients have made a ton of money being positioned for, first, the pain trade higher in stocks and bonds, and, second, the eventual market regime transition to GOLDILOCKS. Our models will signal in real-time when it’s time to book these “soft landing” trades and begin betting on either the “hard” or “no” landing scenario.
That’s a wrap!
If you found this blog post helpful:
1. Go to www.42macro.com to unlock actionable, hedge-fund-caliber investment insights.
3. Have a great day!