Welcome to one of the last days before the proverbial "shit storm" hits both Main Street and Wall Street. Lars Toomre's sense in the next thirty days is what many will feel that the proverbial economic train has flipped off the tracks as suggested by the image below.
There are a series of issues that are all likely to come to a head around the first of October. The UAW may well be out on strike against perhaps all three of the Big Three traditional automakers. There certainly appears to be no compromise ahead of a September 14th strike date.
Congress may well not have been able to kick the budget compromise further "down the road" and hence be facing a government shutdown. The Department of Treasury will be funding the excessive government spending in a bond market where many buyers of the past 15 years are stepping away, and it is unclear if the domestic market can fund more than a trillion dollars of new debt forever into the future.
Since the recent Jackson Hole Economic Symposium, capital market participants are beginning to realize that remaining higher for longer may well mean zero cuts to the Fed Funds rate until after the 2024 Presidential election. As a former Bond Vigalente from the 1980s, let Lars suggest that the yield curve will begin to normalize with the long-end selling-off significantly. Ever contemplated what a world with a 6.5% yield on the Tsy 10-year sector would be like?
There is significantly more pain to come with those institutions that extended Commercial Real Estate Loans and/or who hold or need to refinance high-yield debt before the 2025 maturity wall hits.
People talk about long and variable lags happening when the Federal Reserve raises the Fed Funds rate. Certainly that has been true in this normalization cycle. However, the capital markets has not before had an American executive branch administration that seemingly "sugarcoats" all economic numbers to be better at initial release than the subsequently adjusted numbers.
The payroll report on September 1st is a good example. Do you really believe that all seven prior payroll reports could be adjusted down without the cause being political manipulation? It is virtually impossible statistically. Then, look carefully at a number of the payroll report's internal series: the number of foreign workers vis-a-vis domestic workers, part-time jobs as a percentage of all jobs, the number of workers with more than one job, and the BLS favorite "plug", the number of small business employees added due to new business starts. The August seasonal adjustment factor also looks mighty suspicious.
In short, the American economy and capital markets are about to go through some volatile and relatively negative times. Now, ask yourselves what would happen if NVDA (the current AI/equity market darling) was demonstrated to have manipulated its recent quarterly report(s). Did only two customers account for a very high percentage of sales, or did some strange financial engineering deal for about $2.3 billion almost exactly match the amount of the NVDA sales beat?
So much to think about ... and virtually none of it is positive.