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Here are some things I think I am thinking about this week:
1) That Big Employment Revision.
The biggest news of the week was the -818K employment revision for 2024. This was the biggest revision since 2009 and very large by any measure. For perspective, here are the most recent revisions:
- 2018: +43K
- 2019: -501K
- 2020 -173K
- 2021: -165K
- 2022: +462K
- 2023: -306K
Oh boy, the tinfoil hat guys are gonna have a field day with this one. Now, the initial media response to this was basically “the BLS is scamming us all with fake figures every month”. And sure, it’s true that the revision was large, but the monthly employment reports are notoriously noisy. They get revised every month and then every year as more and more data trickles in. And Covid created unusually large labor market swings, so the inevitable revisions were always going to be large.
All that said, I don’t think the weak revision was terribly surprising. Anyone reading the data under the hood over the last year could tell that the labor market was weakening, and the consistent discrepancy in the household and the establishment surveys told very different stories. And given what an imperfect science these surveys are, it’s always wise not to read too much into the initial data. But one thing all of this reinforces is that the US labor market is weaker than we’ve already thought, and so the probability of rate cuts only goes up with this revision.
2) Reserve Currency Myths That Refuse to Die.
Not a day goes by where I don’t read some nonsense about the US “reserve currency” status and how we’re inevitably on the verge of collapse. The intuitive narrative usually starts with the trade deficit and then people assume that it’s bad because the word “deficit” implies bad. But I’ve read some version of this myth for my entire career, and the story never changes. I’ve tried to debunk the “Dollar collapse” narrative for 15 years now. All the while, the USD keeps going up in value and the dreaded “collapse of the Dollar” never materializes. So now, every time I hear someone write “petrodollar” or “Bretton Woods” in the context of reserve currency status, I almost instantly know this person needs to be read with a grain of salt. Let me explain.
My basic explanation for US reserve currency status is one of complete and utter economic domination. The USD compromises 60% of global currency reserves. The Euro is just 20% and the Yen is just 4%. There isn’t a currency that really comes close, and the relative difference has only marginally changed in recent decades. Yes, it’s shrinking a bit, and it will likely shrink further, but this is not the scary narrative you’ve read online. The reason why is because the USA is just unfathomably wealthy. And the USA is wealthy because the USA has virtually all of the largest and most productive corporations in the world. 8 of the top 10 companies by market cap are US companies. The median American is in the top 1% of global income earners. American household net worth was $160T as of Q1, with household debt of just $20T. These are insane figures. Americans are so rich that our currency is in huge demand by foreigners who want to do business with these wealthy consumers so they can obtain the currency that gives them access to the best financial markets in the world and the best goods and services in the world.
So the scare stories are exactly backwards. We aren’t world reserve currency because of the petrodollar or Bretton Woods or our big military. We are the world reserve currency because we have the wealthiest consumers in the world and the most innovative and productive companies in human history. So the rest of the world has insatiable demand for the USD as a result. People think China has us over a barrel because we run a trade deficit with them. It’s the exact opposite. China is hugely dependent on wealthy US consumers to buy their manufacturing. And China desperately needs US firms to invest in China and build goods there so they can continue to do business with US consumers. If anything, we have them over a barrel.
The weirdest part of this narrative is that it usually comes from Americans hating on the USD while shilling Bitcoin or gold. And look, I’ve got nothing against people who talk their book, but if the USD collapses, as these people hope, then the value of your Bitcoin is going to be the least of your concerns and something you’ll definitely wish you hadn’t wished for. 1
3) Are We In a Recession?
There was a big brouhaha last week about the Sahm Rule being triggered and the inevitable recession it portends. Claudia Sahm, the creator of the rule, was quick to tone down the rhetoric and explain that the strange post-Covid labor market might result in a false alarm. Her basic reasoning is that recent immigration policies and Covid turmoil created some base effects that are now exaggerating the figures.
What’s my take? I suspect Claudia is on the right track more than anything else. And that’s largely because the very famous Roche Rule confirms her thinking. Yes, the very famous Roche Rule, created by one Cullen Roche and named by…wait a minute, Cullen Roche. Am I talking to myself now? Yes, you are. No, I am talking to the reader. Sorry for that. I am sometimes lonely, and so I talk to myself regularly. Anyhow, the Not-So-Famous (or not famous at all) Roche Rule is similar to the Sahm Rule but uses different metrics to quantify recession. I prefer a rolling average of jobless claims combined with long-term unemployment as opposed to Claudia’s rule which is just a 3-month rolling average change of the annual unemployment rate. You get to similar conclusions in general, but the Roche Rule has not triggered recession yet and has not at any point in the last few years. We’re ticking up, but not there yet.
So, as I’ve noted many times in the last year, the data is generally moving in the wrong direction, and we’re increasingly veering into that territory where something minor can tip us into recession, but for now, the data isn’t screaming recession, but it is screaming that things are softening and perhaps headed towards recession.
1 – I’ll never be able to figure out why Bitcoiners and gold bugs root for the Dollar to collapse. You don’t need the Dollar to collapse in order for the value of these assets to increase. You don’t need to be a Dollar bear in order to be a Bitcoin/Gold bull. And in fact, I think being long USD denominated assets and “real” assets is just good financial planning.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
