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Written by: Matt Lloyd | Advisor Asset Management
With the most recent job reports on Friday, the reminder of seeking the signal and noise distinctions has never been more prominent. In a more traditional sense, this occurs at all given points of a market that have always had a buyer and seller in the markets based on their own interpretation of current events and their inherently biased extrapolation of future events. What this truly reveals is that we are always existing within a Confirmation Bias environment and our narratives seek affirmation with our current beliefs and investment holdings no matter what more lucid reality shows.
The jobs report blew away expectations to the tune of a four-standard deviation, well beyond the range of expectations. When events like this occur, the cognitive dissonance portion of economists and analysts naturally seek to diagnose how they were so far away. In this report, the distinction between part-time and full-time jobs naturally pointed to a potentially weakening number as more people are taking multiple jobs to tackle the effects of inflation.
Perhaps the biggest was the increased discrepancy between the NFP (nonfarm payrolls) official report that showed 272,000 in new jobs versus the 180,000 estimate; however, the Household survey results showed a much more distinctive number. As Bank of America points out, the NFP number (Establishment Survey) has not seen a negative print while the household survey shows several large negative monthly prints. This points to the widest disparity between the accumulative Establishment survey versus actual Household surveys.
Conclusion: Choose your fighter for the gamers out there, but it could be dangerous to just take the job numbers as a single point of being overly bullish. It is better to be more vigilant as the numbers and adjustments come forward, read data dependent as the Fed is.
The two metrics that should push those calling for rate cuts in 2024 into a bit more consternation is the surprised increase in wage pressures and that the unemployment rate hit 4.00%. Historically, when the unemployment rate jumps 0.6% within a cycle, it has typically gained steam. Both make the Federal Reserve in a heightened state of limbo moving forward.
While the markets are digesting the jobs report and attempting to not embark on a peyote-induced vision quest to discover the future path, the Federal Reserve released its most recent state of the economy in its Fed Flow of Funds report. As you are likely aware, we look at this closely and in many different components. The first and primary focus is the state of the household and the consumer. The domestic consumption rate of a country is pivotal to direct where one should focus on various economic and corporate metrics.
The U.S. consumer is the primary focus and has been domestically for decades and so pronounced that they tend to compose 17–19% of the world’s economy, which has led to many foreign countries relying on exports to facilitate growth in their economies.
The state of the U.S. consumer is — to put it bluntly — healthy on a macro standpoint. From a top-down view, the net worth and cash holdings historically point to a very strong profile. This includes non-profits as well, but has only a marginally impact on the number.
To put the cash holdings in perspective, the rise in total cash holdings (my tallying all cash levels) stands at $18.3 trillion. The total debt owed on the same report for households stands at $20.5 trillion, or 88% coverage. As we have pointed out, since the Great Financial Crisis, the household had a shift in their financial DNA. In 2007, the total cash to total debt stood at just 50%. If this does not reveal the absolute shift, then the following chart from Strategas showing the growth in money market funds relative to equity and bond flows does so for those who prefer visuals.
Source: Strategas
On a longer-term view, cash as a percentage of assets hit an all-time low of 2.8% when interest rates peaked in 1982. Since then, it has risen to 5.83%.
This can also be shown in the increase in total money market fund assets which stands at just over $6 trillion. One significant point is that the cycle highs in money market funds have been close to market lows in the equity markets. One typically would see significant draw downs as the equity markets rallied; this did not occur in the synthetic pandemic blink of a recession in 2020.
This may be understating the cash equivalent amount as households and non-profits have taken to government securities in the form of U.S. Treasuries because of the large spike in short-yielding debt. It had been decades since the average household had seen “safe and secure” short-term yield over 5.00% or more, until the Federal Reserve began raising rates. Currently, the level of total government securities on the balance sheet stands at $2.416 trillion, the highest on record.
This has spilled over into total debt holdings for households as yields have risen to a more normalized level. While the levels may be approaching historically long-term normal levels, the sequencing from zero Fed Funds rates makes it feel more attractive based on the baseline of investors from a relative perspective. Total debt securities held on balance sheets is at all-time highs as well at $5.14 trillion and follows past patterns of traditional spikes when rates go up, though this only appears in the last two decades.
So, while the health of the macro state of the household is healthy, there is a distinction that needs to be made. The inflationary environment has ravaged a substantial portion of the consumer and as the jobs number pointed out, it continues to look stickier than most have wanted to recognize and hoping the initial claim of being transitory by the Fed would come to fruition.
This chart can explain the dampened sentiment numbers seen on the economy as well as the polling for the current presidential election. Those with the highest incomes have been less impacted by the inflationary environment as the following chart from Apollo shows. However, reports are showing that 75% of households are cutting back certain expenditures to help pay for increased costs of basic components.
Source: Apollo
So, as the job reports showed on Friday, there are undercurrents that need to be addressed in households. It is a reminder of the story of the fox and the hedgehog. Written 2,500 years ago by Greek poet Archilochus, the hedgehog knows everything about one thing and the fox knows some things about many things.
It is a reminder that when looking at investments and evaluating business and economic metrics, it is best to be vigilant and continually affirm or challenge pre-conceived notions. It is important to know you are battling the basic human condition when doing this as the propensity to affirm our biases is strong as is cognitive dissonance. Cognitive dissonance tells us that when a person faces a contradiction to a strongly held belief, the person will actually distort reality to match the previous belief rather than alter their beliefs.
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