As the saying goes, the plural of anecdotes is not data. It might also be said that the plethora of anecdotes does not make for accurate news. Before around mid-December 2018, media outlets particularly those like Bloomberg and the Wall Street Journal anxious to vindicate the technocrats at the Federal Reserve couldn’t print enough stories about the labor shortage.
Barely a day would pass without an article describing the desperate situation for US businesses. Forced to compete for workers, allegedly, managers were becoming creative in trying to lure job-seekers. It was either left unsaid, or buried down in the text, how imagination and ingenuity are easily displaced by common sense. Pay workers what they want and like magic there is no shortage.
The unspoken implication for the labor market was in how employers weren’t doing that. Reasonable analysis would’ve concluded it was because they couldn’t. And if they couldn’t, the economy wasn’t in nearly as good a shape as was being implied by the surplus of anecdotes.
Those LABOR SHORTAGE!!!! stories are themselves scarce of late. In their place are new ones, though still describing the desperate struggles of US businesses. From the Wall Street Journal today:
An Alabama welding supply company is delaying purchases of new gas cylinders. A men’s clothing store in Louisiana has trimmed fall orders for suits and high-end sportswear. An information technology consulting firm in California is holding back on planned hiring.
These are only reasons to be mildly concerned, in the mainstream analysis. The Journal has apparently taken to the Mario Draghi approach; there is no reason to be alarmed by an economy slowing down from epically awesome levels. “After a banner year, many small businesses are becoming more cautious about their investment and hiring plans.”
It could be something, but it’s probably nothing. Except, it’s no longer a labor shortage. That quietly disappeared into the past, suggesting more something than nothing.
And it did so before the bond market massacre ever happened. Something is obviously wrong. For years we’ve been bombarded with “interest rates have nowhere to go but up” and so many calls for the end of the 30-year bond bull market there was no way to keep track of them all.
The labor shortage meant, or was supposed to have meant, businesses competing for scarce workers. In having to compete for an insufficient supply of labor, wage rates would rise forcing companies to raise the prices of their products and services. This overheating economy would oblige the Federal Reserve into a more aggressive posture, meaning inflation pressures combined with economic opportunity combined with short-term rate expectations would make the US Treasury and German bund markets the very object of stupidity.
Because there is no current alternative to Economics, this narrative became the basis for real activity here and around the world. Corporate managers having apparently learned little from Euro$’s 1, 2, or 3, still uniformly subscribe to things like the Blue Chip Economic Survey – and make decisions that impact the real economy based off of it.
In the financial world, extreme bets were made on Janet Yellen’s (now Jay Powell’s) behalf. They aren’t going to go away quietly.
“The market’s assumption that the Fed will not raise interest rates at all this year is very misguided, against a background of continued economic strength,” Sonal Desai, chief investment officer for the fixed-income group at Franklin Templeton, wrote in a blog post this week on the heels of the Fed’s dovish shift. “Expectations that the U.S. economic cycle is coming to an end are highly overstated.”
That would be true, IF. In other words, had the unemployment rate and labor shortage been anything more than a made-up hysteria pieced together for emotional reasons rather than sound analysis, then, yes, current weakness might not be so eye-opening. If the economy was simply slowing from awesome to good, no big deal.
But should the labor shortage prove to have been nothing but a narrative fiction, that’s an entirely different story (literally, at least for now for the Wall Street Journal). And we don’t need media anecdotes, even the shifting tone and focus of them, for that proof. The bond massacre never materialized.
Sonal Desai, for one, was betting on it in a very big way.
Average duration, a measure of sensitivity to changes in interest rates, dropped to minus 1.6 years in the $33.5 billion Templeton Global Bond Fund at the end of December.
Her funds were short bonds to a ridiculous degree. Same as Bill Gross’ funds and all the other proclaimed bond kings.
Obviously, given the yield and eurodollar futures curves’ collective behavior over the same timeframe, Desai’s view was actually in the minority all along. If the market agreed with her assessment, or Bill Gross’ 2015 take on bunds being the short of a lifetime, the bond massacre would’ve been self-fulfilling and it would’ve happened years ago.
The LABOR SHORTAGE!!! stories never would’ve been written if the economy had progressed the way it was supposed to have gone in Economics.
Something is always missing: the agenda. It gets back to, it always gets back to what Bill Dudley and the rest of the FOMC was arguing in the days leading up to the outbreak of worldwide offshore monetary panic; the first one.
MR. DUDLEY. You know, it’s certainly possible that, when people want to hedge their risk in areas where they can’t easily sell the assets, they would buy something that will perform well if those assets continue to deteriorate. One thing to do would be to buy Eurodollar futures or Treasury securities. So, at least temporarily, those yields may not fully reflect what the market expectations are. That said, the Eurodollar market is a very deep market, and if one thought that the Fed was not going to do what the market priced in, there certainly would be the ability of people to take the other side of the bet. [emphasis added]
The Sonal Desai’s and Bill Gross’s of the world have been taking the other side of the bet this whole time. They’ve been trying to talk you into taking it with them. Not only that, they’ve been upfront and open about why they are on that side; they’ve done it because they buy the Fed’s recovery story. The labor shortage was no anecdote in their funds.
And yet, the curves don’t bend the right way. Where has everyone else been? Ignoring the hawks. Desai and Gross are in the extreme minority, but you sure don’t get that sense from the media. If the bond market ever really thought there was an ongoing and legitimate labor shortage, everyone would have been on Yellen’s side with Mr. Gross and Ms. Desai long before there ever was a Chairman Powell. Time’s up.
The other side of the flat now inverted curve has been sparse meaning there never was a labor shortage. And now there’s not the anecdotes, either.
The bond bears will, however, still dominate the “news.” It will be small consolation. Actually, it will be no consolation to them or us. That’s what being a bond “bull” really means.