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The Good, The Bad, & The Ugly

Data is all over the spectrum, making signal tougher to find.

Nik Bhatia

Aug 22

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Dear Readers,

Everybody’s homeboy Jerome Powell takes the stage tomorrow in Wyoming, and we genuinely await his speech. Unlike years passed when it felt like he was on borrowed time impersonating Paul Volcker, this year will require more truth-telling. We’ve noted throughout his reign that unlike his predecessor, who currently serves as Treasury Secretary, Powell generally doesn’t insult our intelligence. He knows how to watch repo markets (the single largest piece of evidence I personally need to take him seriously), watch corporate bond issuance, and interestingly enough, watch the Eurodollar market for signs of trouble. From that perspective, Powell is an admirable policymaker.

The admiration, however, must give way to reality, in which the Fed drives an entire economy with a clean windshield and blurry rear-view mirror, but only chooses to use the latter. This week’s 818,000-job downward revision is a shining example—Powell hinted that this would be a primary justification for a rate cut earlier this summer but still couldn’t pull the trigger because the revision hadn’t yet occurred. Markets didn’t make that mistake, as today’s sub-4% Treasury yields aren’t the gift that investors need. Good economic data, still present, has asset allocators overweight risk, while bad data convinces Treasury bulls to settle in for a run. It turns ugly if volatility is unleashed.

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Good morning

At USC, past semesters have featured an investment whitepaper from Fidelity that ties strong economies to strong risk-asset returns. And how could I argue with that? Healthy economies produce solid wage earners, who spend and contribute to corporate profits. The opposite should also hold true, as profits decline if people lose their jobs.

Then, there’s this sneaky yet omnipotent concept of “liquidity” into which we’ve leaned. It suggests that asset prices are far from a world driven by corporate profits—instead, they’re driven by the size of balance sheets (influenced by many factors), the price of sovereign bonds, and the power to use those bonds in the repo market to create new money...

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