From Unicorn to Antlers

 It wasn’t too long ago that the unicorn of a soft landing. i.e., puncture of the post-Covid inflation bubble without a punishing recession, hove into view.  But now that we take a closer look, we espy a different beast, this one with antlers we might call the horns of a dilemma – stagflation.

 That brewing outcome was reinforced this morning with news from the Institute for Supply Management that its services purchasing managers index ticked down to 50.1 in July from 50.8 in June.  A survey of economists polled by Reuters had expected a rise to 51.8.  A reading above 50.0 indicates economic expansion, so the new index reading hints at a U.S. economy close to stall speed.

 The report comes on the heels of the July jobs data from the Bureau of Labor Statistics, showing only 73,000 net jobs creation and sharp downward revisions to May and June numbers.  The orange Florida man fired the BLS director after the release of the news on Friday.  It will be fascinating to see what the bureau releases next month and whether financial markets believe it.

Meanwhile, we’ll be watching next week’s consumer price index for July from the same BLS that the Florida man says is rigging numbers to make him look bad.

Fed View: Freshly Squeezed or Concentrate?

 If the orange Florida man is smart – a dubious proposition that – he’ll take a page from Ronald Reagan’s tenure and leave monetary policy to the sous chefs  at the Fed, who, under chairman Paul Volcker, squeezed the stagflation orange dry, tipping the economy into recession at the beginning of Reagan’s first term and unemployment reached double digits. Your correspondent remembers the increasing appearance of Michigan license plates dotting the roads of the Sunbelt capital he resided in then.

The Volcker grip on the money supply did its job, though. Economic health followed and Reagan reaped the hosannas that prosperity evokes.  So could Trump.

But if this orange isn’t exactly plump with juicy irony (much too generous a description for unintended consequences that follow from obtuseness), it does sit pretty much in the bowl of damned-if-you-squeeze, damned-if-you-don’t after Friday’s employment data dump from the Bureau of Labor Statistics and the dumping of its Cassandra, BLS director Erika McEnrtarfer, who Trump accused of rigging the numbers.

The report surprised analysts with weaker than expected job growth in July and sharp downward revisions to May and June job market descriptions, ostensibly setting up the Federal Open Market Committee to deliver on Trump’s artless demand of Fed Chariman Jay Powell that interest rates be cut.

But hold on.  Trump says the jobs data were cooked to embarrass him and that the real statistics should show a robust labor market, which would, of course, call for the Fed to stick to its current stance. What to make of future employment reports, easily the most closely followed of government economic statistics, if  you can’t trust whoever Trump installs?  How can bond vigilantes punish or reward in real time if the time isn’t real?  For the record, U.S. government securities yields were marginally higher early Monday.

Now, the Fed was already behind the eight ball because inflation, which had declined but leveled off in recent months, could be lurking in the tariff declarations of Mr. Trump accompanied by near stall speed economic growth – the stagflation backdrop that Volcker faced in the 1980s.

We suspect the stock market will care little for now, its participants apparently believing that Trump’s vicissitudes matter little in the real world. But that real world also includes valuations that are exceedingly rich, whether measured by market cap to GDP or forward price-to-earnings ratios.  This more than Trump’s antics could dim enthusiasm.

 

(Note to our readers:  We have been silent for far too long and though the pleas for the return of The Donovan Report have been less than deafening, we intend to weigh in on a more less frequent basis in these interesting times.)