YouSaid · the spoken record

Barry Knapp

lines on the record: 95
first: 2024-06-13
most recent: 2024-06-13
sittings or episodes: 1
sources: podcast

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“The size of the Fed's balance sheet and where rates were even at the end of the 2006 cycle when we had column price insensitive buyers of treasuries who were trying to suppress their currencies, Japan and China. So there's a lot of Of borrowers and individuals. Again, it's creating distortions. Asset prices are probably part of the story here.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“There is a discussion underway, we've heard it from Bowman now gave his speech in Tokyo about this. Waller's talked about it in a tangential sort of a way. The Kansas City fed new president Schmidt gave a, you know, his talk, paper, nine-page paper guidepost for a new central banker explicitly said that they should be shortening the duration of their balance sheet and not interfering with the price, which I think is the most important price in the capital market system, the tenure treasury for any capital investment, not just working capital, but real capital investment. That is your risk-free rate. And yeah, I agree with you. The Fed's created all this liquidity in the front end, which people that can take advantage of it, it's hugely problematic. And they're holding longer-term rates lower than where the market would set them, as evidenced by negative term premium.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Policy with their balance sheet. There was a bills only policy in place from the Fed Treasury Accord of March 1951 when we ended the World War II explicit interest rate caps through QE1. And the Fed, other than a brief soare with Operation Twist under Kennedy in the early 60s, where Bill Martin went along a little bit.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“I mean, you're definitely on to something, and I was trying to say that. I think you probably said it better, actually, which is going from a scarce reserve regime to an abundant reserve regime has created all this excess liquidity in the front end, the BIS doesn't love this. They had a great paper called Getting Up from the Floor, and they see all sorts of unintended consequences in keeping all this liquidity and basically ending a market that's been around for, I don't know, five centuries, right? Interbank lending. Read all the books around it. That was how the system operated and the Fed decided, no, we're going to keep all this liquidity in the system. And now they're a little spooked about it. So they cut QT and, you know, there's not a ton of, well, there is agreement on that in the FOMC. There are some serious dissenters. A related point to all that, Jack, is I think they will, but am advocating for them to go back to a bill-only.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Only monetary player in town. Wouldn't we say an inverted curve is stimulative because the Federal Reserve is has a huge operating loss, which is a gain for everyone else. So it's earning the 3% on the mortgages that everyone got to take out. And it's paying the banks 5%. So do you think that the inverted curve is stimulative from the Federal Reserve point of view? because it's having operating losses.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“And that to me is a big underlying issue to all of this and how the Fed went about this, which to me, my mind was all wrong.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Not hiked as much and not had this deep of a yield curve inversion, and that would have increased the probability of a more even recovery. I don't love fairness. That sounds like I'm running for office, right? When I say a fair recovery, but it would have been a much more optimal way to go about tightening policy that would have caused less distortions in the economy, less pressure on small business, less pressure on small banks, not a panacea for retirees with cash holdings and mortgages that they refinanced at two and a half percent and large non-financials being able to term out their debt. Look at that modified duration of the investment grade credit index. It's seven years, the mortgage-backed securities index, it's seven years, the high yield index is two years. So you can see who's vulnerable.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“So then you could sit, you know, you put that together and you say, okay, if you borrow long, you're a household that was able to refinance your mortgage, financial conditions are not tight, they're loose. You've got a 380 mortgage on average. That's the effective mortgage rate. Financial conditions are loose for the household sector. They're loose for large non-financial corporate sectors. We have negative term premium on 10-year treasuries. credit spreads at tights, right? Those conditions are loose. They're uber tight if you borrow at a floating rate, if you borrow from small banks. And so it didn't need to be that way. The Fed could have been more aggressive with the unwind of their portfolio.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“So they never recovered. They were never able to earn their way out of that deep inversion. And we have a similar threat to small community banks today with that deep inversion. So had the Fed decided to go about this differently and other central banks, including the Bank of England, have sold securities outright, they could have sold all the mortgages they wanted at the beginning of 2021. They probably would have had to hike only to four percent or so. That to me is the level that I think is the R starred starred, right? That's the New York Fed financial stability rate, at least for the banking system, because when they hiked through three, the Fed's portfolio started to lose money, carrying negatively. So did the banking system's portfolio, which is 25% or so of bank assets. And they had some cushion there. So for me, 4% is the level that the banking system operates.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“But an inversion of 25 basis points is not the same thing as the three month 10-year inverting by 180 basis points. It's still inverted by 100 basis points. That's an existential threat to small banks, right? Basic banking business model. And in fact, the Volcker inversion set in place a series of events that led to the demise of the thrift savings and loan, Bailey building and loan industry. It never recovered from that. It was being disintermediated on the deposit side by money market funds at the time. And on the lending side, and that industry was 80% of the supply of mortgage credit in 1980, $600 billion outstanding, they were 480 of it. Commercial banks weren't in the business and Louis Renari and his gang, my next door neighbor used to work for him, were just getting started with securitization, right?”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Well, what I'm arguing is through the easing process, they cut rates by 150 basis points, but they bought the equivalent amount in rates of 250 basis points of cuts. The amounts of mortgages and treasuries they bought would have equated to 250 basis points of cuts. It was only 150 basis points of actual cuts. So most of the easing was through the balance sheet. When they started tightening for reasons of simplicity, communication, all the Fed stuff, they decided to passively unwind their balance sheet and aggressively hike rates. That caused the deepest yield curve inversion since the Volcker era. In fact, there's only been three yield curve inversions in US history this order magnitude. Now there's always this debate, right? Does the yield curve forecast a recession? Really does right, or almost always.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Manufacturing workers hire, even though underlying business activity from the private sector is fairly soft. So financial conditions from or policy fiscal policy is uber loose. And then I would argue the Fed went about tightening all wrong. I was arguing for them early on. I'm sure you've spoken to other people that have similar views about this. You spoke to Daniel T. Martine of Booth. She's probably one of them. But most of the easing was in balance sheet management, right? So if you use the Brian Sack paper from 2011 as a benchmark and there's been others that are similar, the estimate is $560 billion or so of asset purchases is the equivalent of 25 basis points of rate policy. And, you know, if you want to equate it.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Written, it's over a trillion dollars. So you have this flow, and when you look at areas like manufacturing wage growth with the isn't manufacturing only having been above 50 one month since September of 22. That was two months ago before it slipped back below 50. And manufacturing wage growth and construction wage growth, which was supposed to be impacted by monetary policy and really struggle. To be sure, housing starts are 25% below the peak a couple of years ago before the Fed started tightening. Yet those wages are running a percent and a half above the service sector, service providing industries, something that hasn't been true for, I don't know, at least 30 years. So say, okay, well, there's fiscal policy, right? Pushing wages of construction workers higher, pushing wages.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Government spending is 24% of GDP, if you correct for all the California tax timing stuff. And when I was learning economics, no economist would have ever forecast a recession with this level of accommodation from the fiscal government. Government direct transfers to individuals as a percent of disposable income are all-time highs other than the pandemic spikes and 100 basis points above where they were in late 2019. So if you consider, first of all, that modern supply-side theory or what most of us call industrial policy, the so-called inflation reduction act really the renewable energy transition act, I suppose, the Chips Act and the infrastructure act and how that spending is being done. Remember the inflation reduction act was supposed to have $340 billion in tax expenditures over 10 years. And the way the rules are going to be going.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“It's always mixed going into a recession. I mean, I was at ground zero for the mortgage crisis and we knew that the mortgage market was an absolute disaster from late 2005 to early 2006. And most people have studied the issue now that Lehman Brothers went under because of outsized commercial real estate positions, not because of residential mortgage positions. But that was very obvious that that was a credit crunch coming. The way I would address the current dichotomy in the data is by considering financial conditions, right? And this is something Powell gets queried on all the time. And it does relate to all this labor market stuff as well. So I would mention it earlier. We have what I would consider to be the most accommodative fiscal policy outside of a recession in U.S. history. We're running 7% budget deficit.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Right. So the census data is a lot weaker than the non farm payroll data. Meanwhile, the tax receipt data looks okay. And I want to shout out to Wa Buffalo on Twitter, whose work I enjoy. Meanwhile, we have the PMIs, which above 50 indicates growth, below 50 indicates contraction. Now the hard data in 2022, the PMIs looked horrible. Everyone was calling for recession, but the hard data held in there. Now the hard data is starting to soften a little bit, but the PMIs are going back up. So it seems to me at this time that there's so many different conflicting data points. And before I ask you your current view, I just want to say to me, this seems strange, but I don't really have that much experience having joined the business recently. Is it always the case or is it often the case where you get data point A indicates recession, data point B indicates a boom, and it really is all over the place? Or is it, as I”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Than we thought. There's a related report called Business Employment Dynamics that shows it only runs through the third quarter of last year, but it shows, yeah, that there were quite a fewer jobs created because of more business deaths than we thought. But it just comes out with such a lag that, you know, in the meantime, we're stuck with this birth death model from that trues up the establishment survey. The household survey is questionable but and volatile, but it shouldn't, it's not subject to that same dynamic, right? Because they're just calling households and saying, are you working or are you not working?”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Well, the real revision to the establishment survey, right? Because the way they true up the establishment survey is this birth death model that estimates small business employment. And they get lots of information on new business creation. There's a new series. It's not that new now. It's about three years old or so, maybe four. They basically take employee identification number applications and provide that data to the public. I've got charts of it. It just showed this big spike during the pandemic. And a lot of people have written about this too. Mike Green's done some good work on it, for example, and said, well, that might have more to do with reporting requirements for people starting small businesses as opposed to a real surge in business creation, but we don't know anything about business deaths. And so a lot of these employee identification numbers might be defunct. And we might have far more business debts.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“But the way that the numbers converge is these big benchmark revisions, right? So we'll get a first cut of it in August and some people will notice it. Wonky people look at the numbers like me, but the real revision won't come out until after the election next year. It's just interesting to come out after elections too because that does impact the political environment as well. So not to go down too far down there.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Million more That had been estimated, so the jobless recovery wasn't all that jobless. Interestingly, at the time, too, the Fed had cut rates to 3%, which seemed like a fantastically low level coming off. You know, when I studied economics 80 to 84 undergrad, the unemployment rate went to 10, 8 and inflation rate went to 14.8. Folker raised the policy rate to 20. When the Fed cut to 3% in the early 90s, it just seemed incredibly low. That was the CPI rate. It was a zero real policy rate. And it turns out that it wasn't such a jobless recovery after all. It probably cost George Bush the presidency. So anyway, that's the part of the point here is, yeah, the numbers will converge over time, like comparing GDI to GDP. I like GDI better than GDP. Income matters more than the sum total of all the widgets we produce.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Correct. Unfortunately, the way they converge is the big benchmark revision. And as just a little historical point, and my brand name is it's never different this time, right? So I love, I've always loved history and I love going back at these prior episodes. But part of the reason that George Bush lost to Bill Clinton in 1992 was a jobless recovery, which when the benchmark revision came out after the election, I don't remember the precise number, but I'm pretty sure it was over a million. So it wasn't such a jobless recovery after all. And in the meantime, Ross Berot and Bill Clinton managed to defeat Bush after he had a 95% approval rating after the first Iraq war.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“So, this is a tough thing to measure. Just it's funny, you take measuring bodies would be easier than, you know, measuring some of the other stuff we try and measure, like productivity. But that's why it's heated up is that data coming out.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“There was a preliminary release of the first quarter data for the QCEW in the middle of May and then the second release of that is supposed to come out today, actually. So I haven't seen it yet, but we're look through it. But there is supposed to be a second release of that. And then all that data needs to get compiled by that and analyzed by the BLS. And then, as I said, that first estimate of the benchmark revision comes out in August. So that's why it's heating up. It takes a little while to go through all of that and discern what it really means. And listen, there's some cautionary comments about that too. There was a Bloomberg story was on top this morning that I was quoted in. The author was Rich Miller, Mark Zandy, who's obviously a reputable economist, said, yeah, that was, looked like there was going to be a big negative revision a year ago, and then it wasn't all that.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“would be enough for the Fed to start to consider cutting rates. As you said, though, if it's driven by weaker labor market demand, not an increase in supply, right? So it's important to differentiate that. You'll hear that sometimes the unemployment rate went up for the right reason, which is more workers. The wrong reason is...”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Worse, right? We have the most trouble measuring. All we have, as I said, is the NFIB survey, and ADP has a pretty good data set, and they're small business employment has been weakening. So it's not likely to show up in the establishment survey until we get this first estimate of the benchmark revision two days before Jackson Hole. And for those who have Bloomberg, Anna Wong wrote a really good research piece about this. She's Bloomberg Intelligence is economist who I think is actually quite clever. Got a thesis around Jobless claims that's interesting as well. But nonetheless, that's sort of the broad thesis. The point I was trying to make was the household survey, which is a phone survey like the conference board survey, which is also pointing to unemployment rate rising above 4% could very well capture that, the unemployment rate going up.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Second, third, and fourth quarters of last year, the negative revision looks like 740,000 jobs. So at the current pace, if the same trend persisted in the first quarter of this year, that's a million jobs less during that time period than we thought we had, and that would be because of the small business weakness. So it's the part of the economy we measure.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“The interest rate to borrow money for them to pay for working capital and inventory and the like, it floats, right? So it's gone up a tremendous amount. And the supply of credit coming from small banks, you know, the weekly Fed HA data banks ranked 26 and beyond in terms of assets, that credit growth has slowed to an absolute crawl. And in CNI lending, it's contracting commercial and industrial basic business lending. And so the thesis is that there's been a lot of businesses that have gone under and that employment growth is much weaker. So the quarterly census on employment and wages, which lags at least by six months, but gets data from the IRS for 13 million businesses, that at this point is showing through the first three quarters of the period revision period, which so from the”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Establishments per year, but like that commercial, you may have seen about you won't watch TV when you're dead, right? We've got the birth death model that trues up what's going on with small businesses. And so the only people responding to that establishment survey are”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Has demand weakened beyond the ability of the economy to support that? And would the unemployment rate go up? So the establishment survey that the job gains come from, the non farm payrolls come from, it's 119,000.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“But the weakest wage growth of all the major sectors is in the healthcare sector So somehow a lot of people are getting hired, but they're getting paid not very much. That's weird to foreign unskilled workers. And so that's kind of what I think is going on in the supply side. So that supply has been holding down wage growth and the Fed has taken some degree of comfort, but it's only in the lower income quartile. You know, when the Atlanta Fed wage tracker breaks it out by quartiles, and you could see how much the lowest income quartile wages have come down and that spread between the highest and the lowest, which was at 3.6% in early 2022, the highest spread in the history of that series, going back to the late 90s, that's collapsed down to less than a half a percent. So, you know, we are having this surge in supply that's put downward pressure on wages and kept the job gains fairly robust. But the question is.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“There's two things, you know, two major things going on with the labor market. One is that we've had a big increase in the supply of labor. Officially, they're labeled as foreign-born workers, right? We know immigration has surged. And you can see that real evidence of that in the JOLTA and in the average hourly earnings data. And what I'm pointing to specifically is the sector with the biggest gap between job openings and hiring is the healthcare sector. Healthcare employment is growing at over a 4% annualized rate. The total private sector growth in employment is growing at 1.7%. By the way, government's growing at almost three. So sort of fiscal policy discussion, which is always fun to have as well. But so that healthcare sector employment growth is really rapid.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“In the labor market, any miss on their employment mandate with no political hurdles to them cutting. I just don't believe that would stop them if the labor market deteriorated.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“To increase fairly rapidly from this point. That is the essence of the SOM rule. The idea that the three-month average of the unemployment rate goes up a half a percent, it doesn't just go up and stop like the current summary of economic projections forecasts. It just keeps going, right? And so the Fed knows that. And in order to combat that, they're going to be highly sensitive to any further deterioration in the labor market. Bottom line here is a weak employment report would be two of three at least a step down from the first quarter pace and would have the Fed in a position where any further deterioration and they'd be likely to start cutting rates. And as much as everyone has decided over the last three months or so, four months that, oh, the Fed's not going to cut it all this year, I've long believed that this Fed is highly sensitive to a deterioration.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Because we have this excess, if you do a scatter plot on that, we were way above the trend line. And he argued with Olivier Blanchard and Larry Summers about this. And he was right, right? Openings came down without any real damage to the unemployment rate. The same thing happened with the Phillips curve. I don't love either of these models, but the Fed does. So we watch them. And the idea was the same. We had a vertical drop in wage growth without a corresponding increase in the unemployment rate. But now we're at the point where the unemployment rate is five tenths of a percent off its low print a year ago. And wage growth is continued to fall. Job openings are now actually below where that regression line would imply they should be, which has the fat on high alert such that if there's any further weakening in demand for labor, the unemployment rate would be expected.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Is weakening the ADP small business employment numbers have been very tepid for at least six months now. The NFIB survey, we probably get that at some point today. That's been trending lower. There's lots of evidence that small business employments weakening. And I think that's more likely to show up in the unemployment rate than the payroll numbers. But the broader point is, would signs that the labor market has gone from coming back into balance, you know, you mentioned job openings. I would just take a step back on that a little bit. I've been talking about the evil curves for a long time, right? The Fed loves the beverage curve. They love the Phillips curve. So the beverage curve is job openings or vacancies on the up access, the unemployment rate on the down access. Governor Waller had this thesis that job openings could come down without a corresponding increase in unemployment.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Roughly. But yes, the idea would be that we're getting this deceleration of growth such that Waller talked about three to five soft inflation prints. Truthfully, what would really get the Fed to move would be an unexpected weakening of the labor market. And 125 to 150 would roughly be that. I'm personally more focused on the unemployment rate because I think it's more likely that the weakness that I believe, you know, there's growing evidence around this that QCEW data that comes out with something of a lag is at this point pointing towards something like a one million negative revision to employment for that year that ends in the first quarter if the current trend persists. That's a decent piece of evidence that small businesses”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Small cap stocks are much more interest rate sensitive because they have a lot more floating rate debt unlike Apple or Google, which have a lot of cash and actually make more money as interest rates go up on their cash balances. So if there was a hot payroll number, you're saying above.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Weaker than SP 500 earnings, anything above 200 in the Treasury market likely has a very bad day ahead of supply next week and small cap struggle in that situation as well. So I've been describing it as a narrow path right now for particularly small banks, small caps, that part of the market to be able to work their way higher this so-called healthy broadening out that has been so discussed on CMBC in Bloomberg over the course of this year.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Institutional index funds. I ran that business at Lehman Brothers back in the late 90s. So I know how that works. Again, we had a couple of early morning sell-offs on these growth concerns after numbers. The market managed to firm up by the end of the day. But I think we have all the makings of a growth scare. And just to add a little bit more granularity on that, I had a discussion through a salesman with a client today. I have a relationship with macro risk advisors. I run a research unit of macro research unit of macro risk advisors in addition to Ironside's macro. And they asked me what payroll number did we need for small caps to rally? My answer was somewhere between 125 and 150 and they might be able to rally lower than that. You get worried about their earnings, which are already much.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Would we get concerned about that in the market look right through it to Fed rate cuts without equities having any sort of a correction? Or would a growth scare be worth a 10% pullback? My inclination is to think that because the Fed is in the risk management business, they need to be decisive evidence that things have slowed in order to start a rate cutting cycle with inflation running above their target. We'd likely have to have equities go down first. And so that's the question. We had a couple of days where after, as you mentioned, the GDP revision on Thursday, the personal spending numbers on Friday, equities were down, 40 handles on Friday morning. They turned and rallied on the close. Undoubtedly, that was pension fund allocation into coming.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“For jobs. So here we are going into this May employment report and the evidence is starting to mount that thesis I had on small business employment is indeed correct. The question, the debate I've had with clients all year long is would the equity market, and remember I'm a reformed equity strategist. I sat in that seat at Berkeley's for six years. You know, one of those key equity strategists talking heads before I went on to work and fix income at BlackRock. But that notwithstanding, would the equity market look right through weaker growth and a potential, you know, slowing of the recovery we're having in earnings from what I think was an earnings recession fourth quarter of 22, first half of 23, we had a shallow earnings contraction, five or six percent or so for S&P 500 earnings.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Overall employment, but how poorly they're measured in real time. And that obviously did not unfold in the first three months. We had, what, I think we averaged 260,000 and change monthly gains in the establishment survey.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Cut to four, the level that would painlessly disinvert the yield curve that is cause no more losses on balance sheets for all the treasuries they accumulated in 20 and 21 and mortgage-backed securities in a very important piece of the puzzle, you need the unemployment rate to go above four and wage growth to fall below four. So I thought that was the most probable scenario. The second scenario would be another real rate shock like we had from August through late October where 10s go to five real tenure reals go to two half or more and it just puts a continued squeeze on small banks, small caps, small companies, small businesses. I actually thought that quadrolema thesis was more probable than another rate shock thesis because of that pressure on small businesses and the role that small businesses play in”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“But those were really mitigated by the mid-2010s. And so, and now we had some catalysts for restructuring those supply chains. So we're sort of on track for this decent path, but to be sure there's elements of Fed policy that are restrictive, and we can talk about overall policy restrictiveness, because I would argue fiscal policy is super accommodative. Feds unconventional policy is accommodative, but their rate policy is restrictive. So when I thought about these two events that could disrupt this equity market rally, and what was a pretty good bond market rally from the Fed pivot point, you know, in late October through the end of the year, I thought, okay, well, there's two things that could happen. One is what I called a quadrilemma thesis. And the idea of the quadrilemma thesis was in order to get the Fed.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“There's some makings of a growth scare for sure. When we started the year, I thought about, and I wrote about the two potential disruption events to the current environment of or the environment that was starting to develop where we were having what I think is going to be a pretty strong capital spending cycle. There's all the makings of a secular boom in capital spending with AI being only a component of that, right? We had a very weak capital spending cycle throughout the last decade, the prior decade. In fact, the second weakest capital spending cycle since World War II, we underinvested in our capital stock. We took changes around tax policy. A lot of the economic factors that made it attractive to manufacture goods in China and ship them back into the US, those are really arbitrages and quite the right word.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT