**"It's no use going back to yesterday, because I was a different person then." **Alice, in Wonderland
**‘You can ignore reality, but you cannot ignore the consequences of ignoring reality’ **Ayn Rand
Forgive me in advance, for there will be some rambling this morning. I had lunch with an old co-worker, who has wisely left the business for the ivory tower, and we reminisced and talked about the state of things. One of the wonderful aspects of the trading world is the deep-seated friendships that develop by being ‘in the trenches’ every day with one’s co-workers; even clients who I have met a scant few times over the years I consider friends because we’ve spoken so regularly . High-intensity environments will do that, I suppose.
But, as usual, I digress. I go down so many rabbit holes on a regular basis I may as well be called ‘Bugs’. (Oh wait, I’m doing it again.) OK, so it occurs to me that ( as all old folks say) those were simpler times. You wore thongs to the beach and rubbers in the rain (‘Philip, wear your rubbers; it’s going to rain’ is said NEVER to young children today). And yes, when tween girls were slow to reach puberty, they sometimes wore ‘falsies’; If you don’t understand, ask your parents.
Nowadays all those terms refer to something else. Unless you’re Amish or have been living in a cave, you know the first two. So let’s talk about falsies. We could discuss echo chambers, but I've already ranted about them. I am torn, standing at a fork in the rhetorical road, and brevity demands choosing one.
With that said, remember when rules were rules? When norms and customs were important? This country is a Constitutional Republic, with separation of powers and the rule of law sacrosanct. Or is it? What we are experiencing now is an abrogation of that paradigm over and over by an administration apparently only interested in ‘getting what it wants’ at any cost.
The latest example- and it’s a silly but telling one, is the issuance of this ‘special’ $1 coin by the U.S. Mint. Now, federal law does not allow the use of any living person’s face of federal currency, but somehow, that didnt matter. Not only that, but it seems there is a profit margin built in. According to Heather Cox Richardson-whose daily piece I recommend:‘Yesterday the U.S. Mint began selling $1 “gold” coins bearing Trump’s likeness and “LIBERTY 1776–2026” on one side and the presidential seal on the other. The mint says the gold-colored coins, which are composed of copper, zinc, manganese, and nickel, are legal tender, as well as collectibles to honor the nation’s 250th birthday. Although the coins are worth a dollar, Aimee Picchi of CBS News reports, a roll of twenty-five costs $61, and a hundred of them cost $154.50.’
So, they’re worth a dollar, but they cost more. O-kaaaay. I mentioned this Venezuela oil deal yesterday, but think about it: the Pentagon is precluded—by law—from taking equity stakes in ventures, yet it is doing so anyway. We removed the President—who we claimed was in power illegally — yet support his vice-president and have now decided that ‘recompense’ for this extrajudicial kidnapping would be getting access to their oil reserves. Note: It is very dirty crude, which our refineries cannot currently process, so it will take years to use, but fear not, we can announce it ahead of midterms for the P.R. benefit. By law, states run elections; now, by executive order, the Administration is attempting to impose restrictions. Laws, shmaws.
And remember when officials were required—REQUIRED— to put their assets in a blind trust? Well, why should that get in the way of current officials having their sons run their money while being involved in investment decisions and policy? Why shouldn’t the government ‘just happen’ to give major contracts or ‘loans’ to the same companies the children of officials take stakes in?
I could go on, but Cody is looking for food, so let’s move to the markets
The S&P 500 closed at a record 7,747.71 yesterday. Nothing wrong with the price. The price is the price, it cleared, it printed, people were paid. What is holding it up is a different question, and every single thing holding it up right now is a proxy for the thing it claims to be, and every one of those proxies is reading better than the thing.
A Federal Reserve governor said on the record that he would support a hold if inflation keeps making progress. Not the chair. A governor, one of twelve votes, and one who said in the same breath that his September decision turns on a CPI print that has not been published yet. Hike odds for the 16th fell by about a third in an afternoon. The 2Y fell 5bp. And equities rallied 1.06% to an all-time high as though the committee had voted.
The unemployment rate is 4.1%. In the last reported month, the labor force fell by 264,000 people, and the rate is a ratio with the labor force in the denominator. Payrolls printed minus 23,000 with the two prior months revised down by 103,000 between them.
Gold went up 2.9% on the same session and held it overnight, which is the one price in the building that is not a proxy for anything, because it does not have an issuer who can restate it.
Three of those readings are gold-colored. One of them is gold.
Anyway. Payrolls at 8:30.
Onward.
**THE HOLD IS A FRONT-END EVENT AND THE RECORD PAID FOR THE WHOLE COMMITTEE.**Short the long end, own the steepener. I’M WRONG IF the 2Y closes through 4.45% with the 10Y under 4.85%.**THE UNEMPLOYMENT RATE IS THE PROXY, NOT THE LABOR MARKET.**Position for the print through the curve, never through beta. I’M WRONG IF payrolls beat +100,000 with participation and hours both higher.**THE BID UNDER THE RECORD IS MECHANICAL, NOT CONVICTION.**Systematic exposure is two thirds of its peak and equity funds took $2.8bn. I’M WRONG IF VIX closes through 18.**GOLD IS THE ONE PRICE HERE WITH NO ISSUER.**The producer long is the only line paid by a hike into weak labor. I’M WRONG IF gold closes under $4,400 with the dollar higher.
The S&P 500 closed at a record 7,747.71, up 1.06%, after a governor said he would support a September hold. The 2Y fell 5bp to 4.34%, the 10Y fell 2bp to 4.77%, and 2s10s steepened to +43bp.
Hike odds for the 16th fell to about a coin flip from about two in three. The decision now turns on core CPI on the 11th, which nobody has seen.
August payrolls print at 8:30. Consensus 53,000 to 58,000 with unemployment at 4.1%, after minus 23,000 in July and 103,000 of downward revisions across May and June.
Brent sits at 94.90 after a settle above 95 on a session that carried missile strikes on Kuwait and a dead tanker crew. Retail diesel hit a record $5.85 a gallon.
Equity funds took $2.8bn last week, the smallest inflow in nine weeks, with technology out $1.5bn and financials out $0.9bn for a fifth straight week, while cash took $30bn.
START WITH THE ARITHMETIC, because it is the load-bearing number and everything else in this note is an angle on it.
Five basis points came out of the front. Two came out of the back. The equity market took a 1.06% record out of the difference.
Two different objects with two different owners.
A hold is a front-end event. It repriced the path of the policy rate over the next two meetings and it did not touch, and structurally cannot touch, the compensation investors demand for lending money to this government for thirty years. Those are different objects with different owners. Gilts printed a 28-year high on the 30Y this week at 5.85%, up from a 2007 high on the 10Y at 5.27%, and the Bank of England did not do that to them. Bunds sat near 3.38%, the highest since 2011. Three foreign long ends at multi-decade peaks in the same week is not a story about Christopher Waller.
THE UNEMPLOYMENT RATE IS A PROXY AND THE PROXY IS READING BETTER THAN THE THING.
Take the rate apart. Unemployment at 4.1% is a fraction: people looking for work who cannot find it, over everybody in the labor force. In the last reported month the denominator fell by 264,000. People stopped looking. A number that improves when people give up is a number that improves for the wrong reason, and it is the number the entire hold argument is standing on.
Now put the numerator next to it. July payrolls printed minus 23,000. May and June were revised down by 103,000 between them. The three-month average is 20,000 a month, against a labor force of roughly 170 million. ADP had private payrolls at 38,000 in August against 47,000 expected, the weakest since January, with manufacturing minus 17,000 and professional services minus 16,000. Volkswagen’s board signed off on 50,000 further job cuts this week and the stock rose 9.7%, which tells you what equity holders now pay for. The services survey has its employment sub-index at 47.8, contracting for a second month, on a headline that printed 55.4.
The chart above is the two of them put together: the unemployment rate less annual payroll employment growth, monthly, back to 1950. One number goes up when people are out of work and the other goes up when hiring stops, and adding them gives you a labor reading that cannot be flattered by a shrinking denominator. It sits just above 4 and it is higher than it has been roughly two thirds of the time since 1950. Every recession band on that chart is preceded by the same shape.
Not a forecast. An arithmetic identity that the headline rate hides.
The chart is not subtle.
**THE CASE AGAINST ALL OF THIS, and it is not weak.**Three readings say the labor number is fine and I am pattern-matching.
The benign read on the shrinking labor force is that it is supply rather than demand. Deportation policy and the cancellation of temporary protected status for Haitian workers remove people from the count who were working, which shrinks the denominator without a single firing. Under that reading 4.1% is a real number rather than a cosmetic one, the economy is tighter than the payroll print looks, and the Fed should hike into it.
The demand data could also be telling you nothing is breaking. Services activity at 55.4 is the highest since February. Costco reported August net sales of $23.70bn, up 9.9%, with comparable sales up 8.4% and digital up 17.9%. The Beige Book had activity up modestly with data center demand a notable driver, and second-quarter corporate profits were strong. India grew 7.8% in the second quarter. None of that is a labor market rolling over.
And services prices paid at 72.6, a four-year high, may simply be the barrel arriving with a lag. Prices paid at a four-year high with crude in the mid-90s and retail diesel at an all-time nominal high of $5.85 a gallon is the input side of an inflation problem rather than the resolution of one, and a slow hiring rate does not have to mean a slow economy when the cost side is doing that.
Take all three seriously. My answer is that the first one cuts both ways, because a labor force shrinking on policy still produces the same wage bill, the same tax receipts and the same consumption, and a hiring rate of 20,000 a month is a hiring rate of 20,000 a month whatever the reason nobody is counted looking for it. Confidence, moderate.
Weakest link in the note, stated rather than buried.
**WHAT PROXIES HAVE TO DO WITH THE CURVE, since I opened on a coin.**Every falsie has the same structure. A thing you want, a cheaper object wearing the appearance of the thing, and somebody with an interest in you accepting the second one. The gold-colored dollar. The blind trust that can see. The rule against a living face on the currency, which is a real statute right up to the morning it is inconvenient.
The market version runs the same way.
Nobody here is lying.
The proxy simply has a different owner than the thing ... which is a distinction that only costs you money at the moment it stops being academic.
An unemployment rate is a proxy for labor demand, and its denominator is set by who shows up. A governor’s conditional is a proxy for the reaction function, and the function has twelve votes and a chair whose Jackson Hole speech is what put September on the table in the first place. A credit index at 265 basis points is a proxy for credit conditions, and it prices the borrowers who can still issue. Systematic equity exposure is a proxy for demand for stocks, and it is set by a volatility formula rather than by anybody’s view.
Gold has no such gap. No issuer, nobody who can restate it, which is the entire reason the Dutch central bank moved roughly 86 tonnes out of New York and Ottawa to London while citing ‘increasing geopolitical unrest’, and the reason France replaced its remaining New York position with bars in Paris. Central banks bought 863 tonnes last year after three straight years above 1,000. Custody preference moves over years and a half-unit producer long is marked in days, so the flow is the reason the floor keeps rising rather than the reason to own it this week. Norway’s sovereign fund proposed cutting government bonds to 50% of its bond portfolio from 70%, with Treasuries most affected. The louder version of this argument says the dollar system itself is ending, which is not my view and does not need to be true for any of it to matter. The dollar is still 57.1% of disclosed reserves and nothing is replacing it, so the repatriation is not a currency story. Call it a custody story, and custody is what you care about when you have stopped assuming the rules are rules.
Which was Phil’s point about the coin, arriving from the other end.
**THE WAR’S JOB IN THIS NOTE IS THE BARREL’S CUT LINE, NOT THE DIRECTION.**Thursday carried missile and drone strikes on US forces in Kuwait, a tanker crew killed, and US strikes on Iranian tankers. Three escalation inputs. Brent settled above $95 and closed LOWER on the session, and it sits at 94.90 this morning, ten cents under the line that governs tonight. A market pricing an escort corridor rather than a war.
The premium is in the product, not the barrel. Retail diesel at $5.85 is an all-time nominal high, through the June 2022 peak set in the week after Russia invaded Ukraine, and the national gasoline average at $4.14 has never been above $4 on a Labor Day weekend, against a prior holiday record of $3.82 set in September 2012. Global food prices rose 1.9% in August to their highest since late 2022. A consumer paying record diesel and four-year-high food is a consumer whose discretionary line item is being taxed by a war that the equity index is looking through.
**Flight Check:**gold bid, bonds bid, yen bid, dollar offered, equities at a record. Second consecutive session with that reading. Four of five legs say policy eases from here and the fifth says nothing is wrong, and one of the two has to be wrong by the 16th.
**08:30 ET, the August employment report.**Consensus 53,000 to 58,000, unemployment 4.1%, average hourly earnings up 0.3% on the month and 3.1% on the year, participation 61.5% against 61.4%. The published range runs minus 25,000 to plus 140,000, which is a survey that has no idea. What matters is the composition rather than the headline: hours worked, the revisions, temporary help, and whether participation rises or the denominator shrinks again.**Through the session, the barrel and the strait.**Hormuz transit is the only input that can move the energy leg before Tuesday. A settle below $95 tonight cuts the energy arm to zero under its own written rule, without discretion and regardless of the headline that produced it. Ten cents away.**Three-day weekend.**US markets are closed Monday. Bitcoin is not, which matters to exactly one line on the sheet.
**The two prints that matter most this week point opposite ways on the same theme, and I am not going to resolve it for you.**One says the AI build is accelerating and the other says the market has stopped paying for the part of it that has been paid for already.**BROADCOM, down 2.74% on the close after a 6.3% intraday drop.**Revenue $29.6bn.…
