for more inside an early morning trading.
I'm joined by Dean smith PM and chief strategist at
fully
folio beyond right,
is that correct?
It's a little weird in my prompted right there folio
beyond Thank you so much for joining us this morning.
Want to jump right into what is actually moving the market right?
We got this job report.
It follows kind of a full week that that paints a better picture of the labor picture.
It follows obviously the jobless claims yesterday and then the jolts report we got
on Wednesday.
What's your headline read on the report?
My headline read on the report.
Is that any expectation for a soft landing is off the table.
The market had been sort of pricing in
and an expectation that maybe this is all gonna be over soon.
And we had a rally in bond interest rates and um, that was yet again,
another head fake.
We think that um, with the strength we're seeing in the labor market,
the strength we're seeing in other sectors,
the ongoing supply chain constraints.
This Fed has got a tough job ahead of it and
that's what the market is realizing yet again this morning.
Alright, that's a pretty strong read. I have two questions for you.
One paint the picture a little bit more for me in terms of, you know,
why you think a soft landing is off the table based on
kind of this report and maybe data this week and then to
does it even matter if we get a soft landing, if we have a really strong labor market,
even if we dip into a recession by almost every account,
it'll be a technical recession, but it probably won't be one that we really feel.
Yeah.
You know the the definition of a recession,
the official definition is two quarters of declining GDP.
Um The technical definition doesn't really matter these days.
Um There's been a lot of changes in the
economy since those definitions were brought into use.
Um What matters right now is that the strength of
the labor market and the shortages that employers are facing?
We had labor participation actually decline
in this most recent report means that wage pressure
is still going to be a significant factor.
We are seeing continuing wage pressures coming in a variety of sectors had
some layoffs in some technology that's related to growth prospects and so forth.
But
until the fed can break this wage price spiral,
the psychology that underlies that um we're gonna continue to see high inflation,
whether we get technical recession or not, it's kind of beside the point.
So speaking to that a little bit more because I think
that's what the markets are moving on the most right now,
this concern that certainly the last cp I read showed
inflation did not peak and there was the hope that,
okay, this next report, we're gonna get that we're gonna get that peak.
You get to read like this and you're like, well maybe we don't.
And where truly is the top when we're talking inflation, Is that the concern?
Yeah.
You know, I have an expression that every time someone says peak inflation,
they need to put $100 in the swear jar.
I mean you just need to ban that expression entirely.
Um inflation is high,
it's going to remain high until the Fed moves aggressively enough
to change the psychology of employers and wage earners.
Um and that's gonna take a real change in real economic activity.
The way it works is you have to reduce aggregate demand
to come into line with aggregate supply.
Everybody wants to think there's some other formula for it, but there isn't
until you get supply and demand reconciled
inflation is going to remain a problem.
And the way to fix that is to raise interest
rates as high as necessary for as long as necessary.
So pulling back on an even bigger picture here, right?
And another layer to why I think the markets are also reacting
negatively to to this positive report um
for the Fed, what does this mean?
Because there are big implications for sectors like the housing market
or just the broader equity markets when we're looking at valuations.
Yeah,
Yeah. I mean, I mean, the housing market is in trouble.
I mean,
there's there's been a sharp decline
in mortgage applications primarily for refinance,
but also purchased money loans as well.
We had large layoffs in the mortgage origination and mortgage services
sectors. So that's where you're starting to see the first signs
that higher interest rates are beginning to bite.
But remember we haven't really seen much in the way of actual interest
rate increases compared to past tightening
cycles were really just getting started.
And so when the Fed puts out a message like they did in the minutes the
other day that we're going to do whatever it takes to break the back of inflation.
But only for a little while we're gonna wait and see after
a couple of quarters how things go that undermines the message.
And so what they really need to be is speaking with one voice.
We're gonna do what it takes to break inflation.
No, if andS or butS
Yeah. And they have the room to do it in this report. This report is clearly signaling
the Fed has the room to do what they're gonna do.
It just seems like the Fed refuses to decouple itself with the market.
And and while it's not a mandate of the Fed,
it is clear the Fed is concerned about that.
How worrisome is that reality?
You know, here's the thing.
I mean, if you compare the economic damage that comes from sustained inflation
for a year or two or three, whatever it takes versus what could be a potentially,
you know,
significant recession for a quarter or two. It's not a close call.
We need to bring inflation down for the benefit of the entire economy and everyone.
Um And if it takes a recession to do that then the Fed needs to get
on with the task of doing that because
the the corrosive effects of High rates of inflation
sustained over long periods of time are really
really terrible and people are forgetting that people who
didn't live through the 70s don't have you know that mental image of what it's like.
It's not good. And so the Fed really needs to get on with the show.
It's a matter of perhaps just ripping the band aid.
I had a guest on yesterday at this very same time
who essentially said he hopes that we're in a recession.
Let's just get this over with.
And again with a tight labor market and a strong labor market.
It may be a technical recession, but one
that we don't feel, you know,
especially certainly not to the likes of what we saw back in in 0708
one.
No no no. I just want to layer this on one, add one more layer to this right?
We got the jolts report out on Wednesday and that was kind
of another big indicator that we saw job openings come down.
That was something the Fed wanted to see.
Um, and then we saw that that great resignation number,
the quits number that take down a little bit
when you lay the jolts report onto this report.
Um is there any further insight you glean.
Yeah,
I mean I think the thing that is the real X factor here is labor participation rates.
So you've got the job openings and then you've got the number of
people who are entering the marketplace to take up those job openings.
And in this most recent report,
we saw a decline in the labor participation rate in particular among, I think it's 55
and older.
So people who dropped out of the labor force during uh,
the pandemic aren't really coming back in the numbers that would be required
to bring labor supply and labor demand back into back into line.
And so there's a lot of crosscurrents here. It's a difficult problem
to, to analyze. But at the end of the day,
until the fed decisively moves
to take rates higher, we're going to continue to have high rates of inflation.
Obviously we've been talking a lot about the labor
picture because that is what's dominantly moving the market
today and really what everyone was anticipating all week
long leading up to this report moving forward though.
Second quarter earnings,
that's going to be kind of the big picture I was mentioning earlier in the show,
we've been focused on this macro picture.
Everyone is about to go micro,
let's talk about second quarter earnings, we got levi Strauss out this morning,
a nice beat on the top and bottom line, some good guidance moving forward.
I think, you know,
everyone that I have talked to say says that sentiment on Q two isn't that great,
but this is kind of bucking that trend, a nice kind of start to Q two.
What are you looking at?
You know, when it comes to, you know, maybe levi Strauss support,
but more broadly when it comes to Q two earnings.
Well, I mean if we look at we don't, you know, we're not a stock shop, were a bond shop.
So you know, we we focus mostly on macro factors,
but we do obviously care a lot about corporate earnings.
The thing that we look at for an indication of sort of where that number is going
is is corporate investment.
Our company is actually using deploying new capital and making
investments that are going to sustain longer term growth and
that's where the higher interest rates really starts to impact
corporate earnings is if companies don't deploy capital and uh
plan for future growth, then, you know,
the next quarter or two isn't really the big story,
what it really amounts to is what's going to happen over the next year or two.
That's kind of the focus that that we take a longer term.
We're not stock pickers in the short term.
Dean, such great insight, really appreciated Dean smith PM and chief strategist
at folio beyond thanks again,