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I hope everyone is having as much fun as I am, as we navigate this tumultuous Feb-Mar period.
This really should be part 2, as a sequel to my prior post but I haven't maintained full chronological coherence without lapses, so unfortunately consider it a random addition.
*Unrelated:*
*Sealed my driveway - but didn't mix one tub properly so have a thick white acrylic patch that I'll have to sort. Frustrating. I'm told xylene works well.*
Anyway, continuing on, the USDYEN and DXY have shown close correlation to economic and macro indicators coming out of both the US and Japan (suprise surprise). Although my reason to monitor them is partly to do with the FX position, it is more as a reflection of the health of the markets and underlying US economy. I'll likely begin re-screening for more deep value stocks & positions once I get a clearer idea of the market signal (bull or bear).
**Recent Key News**:
\* *LDP Landslide Win* : The LDP supermajority on February 8 established a mandate for Prime Minister Takaichi’s fiscal strategy. Initially there was significant concern raised regarding irrational spending plans, higher debt loads, and reduced short to medium term GDP and national revenue. As I believe the markets are also suspecting, Takaichi will pivot to more sound fiscal strategies in line with Gov Ueda (BOJ) and MoF advice. Recent statements from PM Takaichi are supportive of this shift. Thought so.
\* *Chinese De-risking & Cascade Risk*: Chinese regulators have advised domestic financial institutions to reduce exposure to U.S. Treasuries to mitigate concentration risk per Bloomberg, February 9. BRICS nations may take significant note of this posturing and derisking.
\* *Yield Convergence*: Japanese Government Bond yields have reached multi-decade highs, with the 10-year yield at 2.28% and the 30-year at 3.65%. This tightening yield spread is approaching pain territory.
\* *Employment Expectations*: National Economic Council Director Kevin Hassett has begun to manage expectations ahead of the Jan Non-Farm Payrolls report, which is forecast at approx. 70k jobs. This media appearance had me intrigued.
**The Hassett Productivity-led Expansion Thesis & Critique:**
In what appears effectively to be damage control, a televised interview on CNBC, Feb 9 had Kevin Hassett arguing that a sequence of lower employment figures is consistent with GDP growth due to exponential efficiency gains from AI.
Further and more unsound in argument, Kevin Kassett stated that the equilibrium employment rate to maintain low unemployment is now lower due to population decline and the deportation of undocumented immigrants.
This logic is a facetious conflation of supply efficiency with aggregate demand stability. While AI & tech adoption may increase output per worker, the absence of wage growth or labor demand creates a long-term consumption-inventory mismatch, or glut.
Additionally, a contracting labor pool directly reduces the total addressable market of the domestic economy. And to consider international audiences as the desired markets would be at odds with the US position as a net importer.
Ultimately fewer participants in the labor market reduces aggregate demand, which is inherently recessionary regardless of productivity gains.
The purported productivity gains hypothesis is essentially framing labor market weakness as technological evolution to mask likely resulting future demand contraction.
**The road ahead & forks present:**
USD, DXY, YEN currently seesawing in no-man's land. Markets likewise.
Upcoming events I'm monitoring:
Feb 11 NFP. Feb 13 US CPI. Feb 20 US Supreme Court IEEPA. Mar 18 FED rate. Mar 19 BOJ & Trump/Takaichi Summit.
**Immediate Post-NFP Avenues/Reactions:**
A. A Jobs Surprise OR Accepting the Treasury Hypothesis: The market accepts the \*new\* equilibrium employment rate thesis, interest rates are held, USD and DXY remain steady, markets remain sideways to upward. A positive surprise may give markets a second wind.
Having said that, media appearances by the NEC director frontrunning an important NFP report to calm markets may be a warning signal worth heeding.
B. Consumption Contraction: If the employment report confirms a genuine labor market shrink, the productivity argument may lose steam due to aforementioned logical counterarguments. As personal savings sit at a multi-year low of 3.5%, a March rate cut will be increasingly more probable with demand predicted to stangate or reduce.
The bigger the job losses the greater the risk of outcomes aligning with research from the Federal Reserve Board, showing that L-shaped recessions may have increasing difficulty returning to pre-recessionary status. A productivity increase as explanation for job reductions only solidifies the reduced likelihood of a jobs rebound.
I see increased probability here. Central banks forecast this outcome at circa \~35%.
C. Systemic Liquidation: Should Chinese Treasury divestment accelerate, US yields will likely spike, and resulting instability may trigger breakdown of the 155 USDYEN support, and compress stock multiples. USD bearish, YEN bullish. Unlikely, however not off the table.
**The Outlook**:
The focus on a lower replacement threshold ignores the reality that high productivity is a liability if the consumer base is obliterated by permanent job losses and household liquidity depletion.
The upcoming NFP will be one of several upcoming key factors that I'll be monitoring closely, in shaping the future financial outlook.
Defensive positioning may be prudent in these circumstances.
I'm currently cash & utility heavy, with a sprinkle of moonshots for funsies.
Absolute toss-up between grind up, stagflation, recession makes for chaotic markets and kudos to those successfully trading these volatilities.
Let's see what this NFP data brings.
Best of luck to everyone navigating this distorted fiscal landscape and following the absolute shenanigans that is American politics currently.
🍀