One Important Thing You Can Learn About Government Data From Mean Girls
Make Sure You Know What You're Consuming
Eventually, The Facts Will Catch Up With You
Regina George thought Kälteen Bars would help her lose weight, and her frenemy Candy Heron told her so.
In fact, Kälteen bars were used by athletes to bulk up, and Regina George gained weight, not understanding why.
Financial markets obsess about the monthly jobs report - not always, but when markets are tense, as they are right now, these data points have traders on the edge of their Bloomberg terminals.
Jobs are one key component of GDP (gross domestic product), which is why growing economies need GDP to drive growth.
GDP is the pie we all share. If it’s growing, we have more to share. If it’s shrinking, there is less to go around.
Take a look at this chart from the UK:
If you want a recipe to create unrest:
Increase the number of people sharing in the national pie (see above) and make that increase in population come from immigrants whose cheap labor stomps on wages, which increases corporate profits and pushes wealth to companies and investors
Increase the cost of each pie slice by…a lot
And then don’t increase the size of that pie for ten years
And you get this:
Jobs, Jobs, Jobs
There is a lot of jobs data. Here are some of the key payroll surveys used by the Bureau of Labor Statistics (BLS):
The household survey includes agricultural workers, self-employed individuals, and those working in private households. It counts individuals with multiple jobs once.
The establishment survey excludes these categories and focuses on non-farm payrolls (NFP). It counts individuals with multiple jobs more than once.
The establishment survey covers about 30% of non-farm employment, a larger sample than the household survey. In 2023, the sample survey covered 666,000 individual worksites.
QCEW (Quarterly Census of Employment and Wages) is a count of Unemployment Insurance (UI) administrative records submitted by 11.9 million establishments. It is a far more accurate measure…but it is only quarterly.
It is important to note that both the household survey and the establishment survey surveys are surveys and depend on answers from a cohort of individuals and businesses.
Both surveys employ complex statistical techniques to obtain their answers. The most controversial of these is the so-called birth-death model.
The birth-death model uses data about business start-ups or failures as a proxy for measuring new jobs before they become apparent in the non-farm payroll numbers.
The description of the methodology is quite unpleasant to read.
It is controversial because it tends to underestimate job growth as the economy is growing and underestimate job losses as the economy enters a recession.
The most-watched number is NFP from the establishment survey. This is where the market was looking on August 2nd, 2024.
The problem was that the market estimated 180,000 jobs. The market doesn't like missing expectations, so it flipped out, ignoring the fact that the economy and jobs grew.
Another problem was unemployment:
The unemployment rate grew and triggered the so-called Sahm rule.
Economist Claudia Sahm developed the “Sahm Rule,” which states that the economy is in recession when the unemployment rate’s three-month average is a half percentage point above its 12-month low. As shown below, the latest employment report has triggered that indicator.
Another factor that gives me pause when I look at the jobs data is the discrepancy between the more accurate QCEW and non-farm payrolls, together with the magnitude of the revisions to non-farm payrolls for the full year 2023.
The BLS’s revisions total over 700,000 downward adjustments for 2023. Comparisons with the QCEW data suggest that the discrepancy is higher—perhaps as high as 900,000.
Clearly, the more accurate measure of jobs suggests a far less rosy outlook than the one the market is primarily focused on.
Why Does This Matter?
The financial markets obsess about the monthly jobs data, but they don’t obsess about the revisions.
They don’t obsess about the ~700,000 jobs that the monthly data suggested were there in 2023, and the revisions and the QCEW confirmed were NOT there.
Bad data is like empty calories: a short-term fix that doesn’t build muscle and doesn’t nourish.
It matters because the economy needs to build muscle to pull the weight of a nation behind it.
We need actual jobs, not fictitious jobs. Fictitious jobs don’t feed families, don’t pay mortgages, don’t build companies.
We don’t live in a fictitious economy.
Fictitious workers don’t drive company earnings and don’t underpin actual stock prices.
Fictitious Politics - Fictitious Markets
Sentiment rules politics, perhaps even more than financial markets.
For months, the Democratic Party maintained that its chosen presidential candidate, Joe Biden, was up to the job, sharp as a tack, and ready to lead the nation for another four years.
People had a sense that this was false, but no one said the quiet part—he isn’t—out loud…until the debate on June 27th.
Then it was obvious: like the 700,000 jobs that suddenly disappeared, his fitness for purpose dissolved on screen.
Everyone realized this at the same time, and his candidacy unraveled.
Bull markets climb a wall of worry until the point where people realize something really important is wrong. Then they head for the exits.
I’m not saying that’s where we are right now. I’m saying we ought to pay attention to the data before it’s too late.
What Should We Do With The Data?
I have warned before not to follow the crowd. That means paying attention to the things the crowd is ignoring.
If we decide we are not heading for the exits, then the reason is either:
We understand why the market continues to do well and will do until the election or
We don’t want to give up the last gasps of an upward trajectory
Which is it? Annoyingly, I think it’s both.
This time, it is different. Why?
It’s different because we have never had so much passive investing before.
Passive investment tends to underpin the trajectory of the market. Every dollar that goes into an exchange-traded fund (ETF) has to be allocated according to the weight of all the stocks in that ETF.
The percentage of these funds has grown significantly over the last ten years.
ETFs mostly are NOT contrarian. They go with the flow, up or down.
If seven stocks comprise 31% of the S&P 500 index, then 31% of every dollar invested will go into those seven stocks.
Passive investing is crowd-following. It pays the most attention to the monthly NFP and less to the revisions and reconciliation to the QCEW.
Passive investing has major implications for market structure. The passive stock selection process is mechanical. It relies on the research of active investors to provide price discovery about the stocks that comprise the index.
Passive investors will be heading for the exits at the same time.
Who Is Doing All The Passive Investing?
This chart from the New York Times is revealing:
The NYT estimates that, of the $84T of wealth to be passed down from boomers to their children, $16T will be passed down in the next decade.
Boomers are the generation that has embraced passive investment. Asset managers who have traditionally been active are now using ETFs to express the investment goals of their clients.
In addition to the wealth transfer that is scheduled to happen, the mechanics of the retirement funds known as 401Ks are worth a thought.
There are two reasons why people withdraw funds from their 401K:
They have to because they are of a certain age, and tax law requires it
They are in economic distress
Over 50% of boomers will retire with less than $250,000 of savings.
They will withdraw on a predictable schedule, pay the deferred taxes, and then use the proceeds to fund their retirement—not all of them, but some.
How Does This All Add Up and What Does It Mean?
Jobs data is weaker than the most commonly relied upon measure—non-farm payrolls—suggests.
We are closer to a recession than this data suggests.
We must examine our investment portfolios to see which investments will likely be better placed in a recession.
The Federal Reserve's conditioning of us to expect help whenever a crisis appears has bred complacency about market downturns.
The vast increase in passive investment has fundamentally altered market structure, amplifying economic trends and stock market behavior, going up and going down.
We have not yet seen the impact of passive investment in a recession.
Bad data will lead to bad decisions.
Eventually, the empty calories will take their toll.
Dig into the data—this newsletter will continue to do so—to get a clearer picture.
I hope no one gets hit by a bus and breaks their neck when they storm the exits as Regina George did.