The Breakdown - After Weak Jobs Report, BLS Commissioner Gets the Ax

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on Macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Monday, August 4th, and today we are talking macro with an emphasis on what numbers we can even trust anymore. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes. a bit.ly slash breakdown pod. All right, friends, welcome back. There is a lot of intrigue happening in Washington right now,

Starting point is 00:00:46 and it's a huge point of discussion, with some wondering if we have potentially just crossed the Rubicon. TLDR, in case somehow you missed it, President Trump shot the messenger on Friday. He fired the head of the Bureau of Labor Statistics hours after they reported a dramatic slowdown in the labor market. Trump accused the bureaucrat of political bias posting, I was just informed that our country's jobs numbers are being produced by a Biden appointee,

Starting point is 00:01:09 who faked the jobs numbers before the election to try and boost Kamala's chance of victory. We need accurate jobs numbers. I have directed my team to fire this Biden political appointee immediately. She will be replaced by someone much more competent and qualified. Now, on the one hand, nothing out of the ordinary for this president, claiming political bias within the bureaucracy and calling for firings. The difference here was that Trump actually acted on those impulses and followed through with the threat. Unlike federal reserve officials or heads of regulatory agencies like the SEC, the BLS Commissioner isn't

Starting point is 00:01:37 generally thought of as a partisan figure. They serve four-year terms which overlap administrations, and there's basically no precedent for an early firing. For many financial professionals, this is a concerning escalation. Peter Malook, the CIO of wealth management firm Creative Planning, said, I can't believe what I just saw. This is not healthy. We can't have a set of numbers come out and fire someone that served under numerous administrations in various roles because you don't like the numbers. Even the BLS Commissioner from Trump's first term thought that this was a dangerous move. Speaking with CNN on Sunday, former Commissioner William Beach said,

Starting point is 00:02:08 This is damaging. I don't know if there are any grounds at all for this firing. It really hurts the statistical system and undermines credibility in BLS. At the same time, however, and for the sake of completeness, for some, the credibility of the BLS went out the window a long time ago. The entire post-COVID period has been marked by huge revisions to employment numbers and increasingly questionable inflation figures. There's been a general shift towards imputation,

Starting point is 00:02:31 of data rather than measuring it directly. Over the past few years, Fed Chair Powell has frequently looked through BLS data in order to get to the underlying truth of the economy. At times, he's outright rejected the numbers due to various issues with how the data is compiled. Still, these were never suggestions that the data was unreliable or biased. It was more a recognition that there are lags and errors involved in the BLS's methods. For the administration, these lags and errors are enough to suggest manipulation. Speaking with CNBC on Sunday, Chief White House Economic Advisor Kevin Hassett said,

Starting point is 00:03:00 the bottom line is that there were people involved in creating these numbers. Now, when asked if Trump is going to be firing anyone that offers data he disagrees with, has it pushed back, commenting, no, absolutely not. The president wants his own people there so that when we see the numbers, they're more transparent and more reliable. Now, the entire episode begs the question, what does Trump actually want to see in the economic numbers? Friday's payroll numbers were dismal. July saw just 73,000 new jobs added, which was well below forecasts. Revision for May and June removed around 250,000 jobs from the numbers, making those months very close to zero. This makes the last three months stretch the worst period for labor market growth since the pandemic. Bloomberg economist

Starting point is 00:03:37 led by Anna Wong wrote, the main takeaway from the jobs report is that labor demand appears to be falling faster than labor supply. The labor market is not solid, as Powell characterized it, and we expect him to revise his opinion accordingly. While a rate cut in December remains our base case, we're seeing growing chances of an earlier move. The market, meanwhile, is seeing an overwhelming chance of an earlier move. Odds for a rate cut in September moved from 37% to 80% when the data was released. Markets are now pricing in between two and three cuts this year, adding another one and a half cuts to the baseline assumption. Now, Trump wants rate cuts, but apparently he wants the Fed to cut rates without any signs of an economic slowdown. Justin Wolfers is an economics professor

Starting point is 00:04:14 at the University of Michigan and Brookings Institute fellow tweeted, the economy is so good that I'm firing the BLS commissioner for reporting number so grim I refuse to believe them, and also demanding the Fed cut rates typically seen during a recession. And to be clear, although Wolfers is viewed as a partisan liberal, the outcry has been coming from across the political spectrum. Jason Furman-Obama's chief economic advisor noted, I've yet to see a single economist not working for the Trump administration defend this senseless and egregious act. Now, the BLS was not the only institution in upheaval over the weekend. A few hours after the BLS commissioner was fired, Federal Reserve Governor Adriana Kugler resigned effective this coming Friday. Kugler's term was already set to expire in January,

Starting point is 00:04:51 so she's just pulling forward that moment. Her resignation letter gave no particular insight into why she decided to leave early. She simply wrote that she was, quote, proud to have tackled this role with integrity, a strong commitment to serving the public, and with a data-driven approach strongly based on my expertise in labor markets and inflation. Cougler was absent from last week's FOMC meeting citing a personal matter, suggesting that this is more of a coincidence in timing rather than a political maneuver. Now that said, Coogler's resignation gives the Trump administration a lot more leverage over the Fed.

Starting point is 00:05:19 Powell's term doesn't end until May of next year, but it was already being floated that the administration could install a shadow Fed chair in Coogler's seat in January. That timeline is now accelerated. The administration could install the next Fed chair as a governor as early as the first week of September when the Senate returns from break. They'll need to wait until May to be elevated to the chair, but the jawboating can begin immediately. Investment manager James Fishback tweeted, President Trump doesn't need to fire Powell. He can just neuter him by naming his replacement immediately. Markets move on expectations. If the bond market believes the next Fed chair will cut rates by a lot, they'll start to price it in immediately, which will send Morgan's treasury rates down delivering relief far sooner than anyone expects.

Starting point is 00:05:58 Combined with Governor's Waller and Bowman, who dissented that last week's FOMC meeting, the Fed board would be split three-three along partisan lines with Powell being the seventh. All four voting Fed presidents this year were Biden appointees, so presumably they won't rubber stamp a rate cut for political purposes. Basically, Trump can't install a Fed governor and immediately get his rate cuts, but the presence of a shadow Fed chair should dramatically change the ballot. of power at the Fed. Derek Tang, an economist at L. H. Meyer, noted, the ball is now in Trump's court. Trump is the one who's been putting pressure on the Fed to do this

Starting point is 00:06:26 and that, and Trump says he wants to have his own people on. So, now he has the opportunity. Now, this is potentially a double-edged sword. If Trump installs a Fed governor in September and starts to get his rate cuts later that month, then he'll be seen to be getting his way. But he's also starting to run out of scapegoats at the economy weakened substantially in the final quarter of the year. Trump for his part said that he was, quote, very happy that there's now an opening on the board, stating that he expects to announce a replacement within a few days. Today's episode of The Breakdown is brought to you exclusively by Grayscale. Grayscale is almost certainly a name you know. They've been offering exposure to crypto for

Starting point is 00:07:03 over a decade now and offer over 20 different crypto investment products, ranging from single asset to diversified to thematic exposure to crypto and the broader crypto industry. They have long been innovators at the intersection of tradfi and crypto, and one of the benefits for a lot of us is that Grayscale products are available right through your existing brokerage or IRA. Now, of course, investing involves risk, including possible loss of principle. For more information and important disclosures, visitgrayscale.com. Go tograyscale.com to explore their full suite of crypto investment products and invest in your share of the future. Overall, market participants are getting increasingly concerned

Starting point is 00:07:43 about the White House interfering with the independent functions of government. Both the Fed and the BLS, have a tradition of independence that's viewed as integral to the credibility of the U.S. as a global economic leader. Brent Donnelly of Spectrum Markets wrote, My guess is that Kugler out plus BLS head fired takes gold up to 3450 this week. It is consolidated enough and we're headed towards a more Turkish style of monetary policy, slowly but surely, a liberal democracy with Turkish monetary characteristics and some Chinese style industrial policy all erodes trust. Alberto Cavallo, a professor at Harvard Business School, commented,

Starting point is 00:08:14 Unfortunately, today's firing of the BLS Commissioner is not without precedent. Months ago, I gave a talk at the HBS reunion about a similar episode in Argentina in 2007. Economist Steve Hanke, who has spent decades tracking inflation crises in emerging markets, said, This is what I call Caracas on the Potomac. This is the kind of thing Maduro does in Venezuela. This is unprecedented in the U.S. A breathless Larry Summer said during an interview on Sunday, this is way beyond anything Richard Nixon ever did.

Starting point is 00:08:40 This is the stuff of democracies giving way to authoritarianism. Firing statisticians goes with threatening the heads of newspapers. It goes with launching assaults on universities. It goes with launching assaults on law firms that defend clients that the elected boss finds uncongenial. This is really scary stuff. Banking expert Chris Whalen put it more succinctly tweeting, Welcome to Brazil.

Starting point is 00:08:59 Now, regardless of which country's playbook, you most think we're following, making monetary policy and economic data collection political is an extremely dangerous game to play. That didn't stop some from trying to defend Friday's firing on the basis that the BLS was desperately in need of reform. Chimath Palahapitia tweeted, bottom line is that BLS isn't so much conspiratorial as it is inadequate in its approach.

Starting point is 00:09:19 They're all over the place and add little directional signal. They constantly revise and in both directions. The sampling techniques they use are brittle and don't work for a large and dynamic economy like the U.S. Trump was right to fire the head of the BLS because she ran a critical aspect of the U.S. economic machinery in an unpredictable, haphazard, and sloppy way. There needs to be a new Oracle-like data provider for this critical information. Taking up from that theme, many have been making the case to bring the BLS into the 21st century with various real-time data feeds. In fact, there was an existing modernization effort at the agency during the Biden administration,

Starting point is 00:09:49 but the Commerce Department disbanded the board overseeing that initiative at the beginning of Trump's term. And ultimately, even if you think it's reasonable, that the BLS needs new leadership and a technological overhaul, firing the commissioner in response to bad data, with the president clearly spelling it out that they were firing the commissioner for her perceived political bias isn't really the way to go about it. Political reporter Jordan Weissman commented, faking economic data for political purposes and leaning on the central bank to cut rates in order to keep government debt payments low like Trump wants is the kind of combination that actually brings about

Starting point is 00:10:20 hyperinflation. Zooming out, the Trump administration needs to be a little careful of what they wish for. The premise of strong-arming the Fed into rate cuts is that they will also lower interest costs on government debt and reduce mortgage rates. That isn't necessarily how things work. The Fed only controls the short-term end of the bond market with less and less influence the further out you go. We already saw unusual behavior last year when the 10-year bond rates spiked as the Fed was cutting.

Starting point is 00:10:44 An even clearer example is happening in the U.K., where the Bank of England has cut rates four times in the past 12 months and is expected to cut again at this week's meeting. 10-year and 30-year bond rates are up substantially since the BOE began cutting and five-year rates are up slightly. According to Bloomberg analysis, this has actually pushed the average UK mortgage rate up over the past year. The data is less clear in the U.S., but there are signs we could see the same dynamics being played out. The average 30-year-fixed mortgage rate hit a two-year low of 6% in September of last year,

Starting point is 00:11:12 and once the Fed started cutting, the mortgage rate started rising again. It's currently at 6.75%, basically flat over this year. 10-year-bond rates have steadily risen from a local low in September. The risk is that the Fed could cut rates and longer-term bond yields could move even higher, compounding the issues facing the U.S. Treasury and housing market. Some real estate analysts are warning that interest rate manipulation by itself can't fix what's happening in the housing market. Zillow, economic analyst, Anishya Prakash reported last week that mortgage rates would need to fall to 4.4% to make the typical home affordable to a buyer, but, quote, that kind of rate decline is currently unrealistic. Meanwhile, an average home in New York, Miami, and the four major metros in California wouldn't

Starting point is 00:11:49 be affordable even at a 0% interest rate. Throughout his feud with the Fed, Trump has been claiming that rate cuts will lead to a trillion dollars in savings on interest for the U.S. debt. If long rates head higher once the Fed starts cutting, the only way to achieve those savings is to fund the government with T-bill issuance. As we saw when Yellen started issuing more bills, a very similar effect to QE. Spencer Hacomian of Tulu Capital wrote, If you thinking Powell cutting the Fed's fund rate is going to solve anything, you don't understand how bond markets work. Powell wrongly cut by 100 basis points this time last year, and all it did was raise the 10-year yield by 100 basis points. Nobody borrows based off the Fed

Starting point is 00:12:23 funds rate. That's for commercial banks overnight, not for your home loan. You want lower 10-year yields. One, remove tariffs and bring inflation down. Two, stop borrowing $4 trillion per year. Everything else is a waste of time. Macro analyst Danny Deyen doesn't like where this is all heading, tweeting, today is not the day, but at some point foreign investors are going to ask why they hold U.S. bonds with the current deficit trajectory in banana republic behavior, like the spiraling debt forecasts and firing of data collectors when you don't like the job report. The doom loop will return. Bitcoin analyst Will Clemente responded, our emerging market Ponzi mode is coming, when, not if. Luke Groman, who's been suggesting a heavy golden Bitcoin allocation for years, commented. A few

Starting point is 00:13:01 years ago, some economists and investors laughed at us when we said the U.S. economy was heading towards Argentina with U.S. characteristics. This is another signpost on that journey. When a reply guy said that they wouldn't be selling their stocks, Gromond elaborated, why would you sell your stocks that the U.S. was becoming more like Argentina. Argentina was the best performing stock market for years running in local currency terms. Same thing is happening in the U.S. stocks rising in dollar terms, but falling in Bitcoin and gold terms. Now, ultimately repeating these views doesn't add all that much to the conversation. People like Gromman and Lynn Alden have been talking about these risks for years. They now have more evidence that their macro view is correct, but there's no real new signal in this.

Starting point is 00:13:36 The signal is that the rest of the world is recognizing that something has gone wrong in the fiat money system. J.P. Morgan's CEO, Jamie Diamond, was out on a press store this weekend, promoting his bank's new partnership with Coinbase. In an extremely uncomfortable interview, he acknowledged, it's what the customer wants and not what J.P. Morgan personally wants. Jordan Wiseman, that same economic journalist with bylines and semifor in the Atlantic, has never thought that Bitcoin made any sense. However, after covering the events of last week, he wrote, I'm thinking of buying some Bitcoin. Congrats to the crypto dudes. You've managed to make your asset more useful by destabilizing the world's most important superpower. Quite the move. Now, I don't think this is exactly how Trump's Bitcoin donor drew it up, but the point still stands that the institutional

Starting point is 00:14:15 trust which fiat money depends on is degrading. The point is that this weekend, very serious people of all political stripes claimed that a line had been crossed. Ultimately, we will not know for some time whether this is the first step towards an Argentina-style collapse or just another Trump headline getting blown out of proportion. However it works out, though, there is a strong consensus forming that Bitcoin is an insurance policy just in case. That's going to do for today's breakdown. Appreciate you listening, as always, and until next time, be safe and take care of each other. Peace.

The Breakdown - After Weak Jobs Report, BLS Commissioner Gets the Ax

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.