Forbes Magazine wrote in Feb 2009 that Warren Buffett is said to have observed, “You pay a very high price in the stock market for a cheery consensus.”
On the other hand – you know about the one-handed economist – Baron Rothschild is credited with quipping in the 18th century that “the time to buy is when there’s blood in the streets.”
(Harry Truman is said to have asked in exasperation for a one-handed economist, because all of them kept saying, ‘On the one hand…on the other…’.)
I see our Steamboat kingpin and early Millennium alum Michael Craig-Scheckman at Deer Park Road Management believes the blood is flowing in America’s office buildings. They’re buying commercial real estate distressed credit.
But that’s what Deer Park Road does.
There is indeed cheery consensus in stocks. Yesterday all day long on CNBC was a love fest on how great everything is. Noted economist Ed Yardeni declared the “phantom recession” dead – but also warned it would mean no more 2024 rate cuts.
So if everything is awesome, what’s to fear?
For one, there’s no blood in the streets. The bible says teleologically that the “last days” are like Noah. Everybody was eating and drinking, marrying, right until the flood swept them away.
I’m not looking for a flood or drawing inspiration from the sorrowful state of western North Carolina, where our hearts and prayers are (as they are with the FL gulf coast today).
I’m saying the cheery consensus should sober us to have a look around.
In that spirit, I crunched some data. As is my custom. I was curious how a weakening economy could manifest a surge in jobs in the October report last week from the Bureau of Labor Statistics.
What I found was troubling. They were all in two large categories: Leisure and Hospitality, and Education, Healthcare/Social Svcs and Government.
So, I modeled jobs in Leisure Hospitality for Aug-Oct of each year from 2014 through 2024. Why? It’s a transitional period from summer to fall, when vacations end, the kids go back to school.
Curiously, there was a jump in these jobs in this year’s October report after big declines. In the historical data, if you back out the Pandemic recovery, it’s a massive outlier. It’s just common sense that you’re not adding 78,000 leisure jobs after the summer is over.
But that’s what the data say.
And then I looked at combined jobs in Education, Healthcare and Social Services, and Government, with the same methodology: Aug-Oct each year, 2014 to 2024.
Holy cow. These jobs have exploded.
I picked them because they depend in large part on government spending. Using 2014 as a benchmark year, jobs in those categories were up 70% every year on average the past four years from 2014. Model the numbers of new jobs, and they account for about 70% of the total three million new jobs since Dec 2019.
There’s this overarching sense that the US economy has added many millions of jobs. Untrue. In Dec 2019, the Bureau of Labor Statistics says we had 158.8 million people with jobs. As of Oct 2024, there are 161.8 million employed adults, a difference of three million.
That also means there are 100.4 million adults not working.
Mostly we were getting back to where we had already been (but with a 25% rise in inflation). What cheers us little is that the bulk of our new jobs are in professions requiring spending by government, rather in areas where productive output is adding to our gross domestic product.
But apparently the stock market is unaware, to anthropomorphize equities.
What’s also apparent is a great mushrooming of the jobs statistics into 2022, thanks to the rush back into the workforce as the Pandemic subsided.
In Steamboat Springs, CO, where we live, that great rush caused a massive surge in construction and municipal spending. There was a mistaken belief that a return to level would fuel some kind of epochal economic Shangri-la.
Now the city of Steamboat Springs is wringing its hands over dwindling surpluses, looking at cutting city services and casting about for new sources of revenue.
What if that happened, and is happening, everywhere?
I don’t know that it did, or is. But I can read trends and patterns. It’s what I do for a living. And the reason we run models that foster patterns and trends is so we can understand what’s coming. It’s what we do for public companies, and investors.
The Federal Reserve in my view fixates on points in time and misses trends and patterns. You can’t manage the commercial interaction of 340 million people – who trade with billions of others – by tweaking rates and opining from a lectern.
And you shouldn’t try. The Fed could fix the value of the currency and let it ride, just like the government has never touched 13Fs since 1975. Even though the 1975 market doesn’t exist. Really, why would you watch the stock market go from telephones and dot matrix printers to trades in microseconds and think 13Fs are fine?
But oh, we need to cut the interest rate 50 basis points because…well, because we think we should have a “neutral rate” where interest minus inflation is zero.
Who would save money? Maybe that’s the point. If you’re not saving, you’re spending and borrowing, and my how the government needs us to spend and borrow.
So, I’m sobered as we lope toward the election and the end of another year. I think one should beware the very high price of cheery consensus. And public companies and investors, it’s vital to know the trends and patterns, so you’re not swept away.
