Published November 22nd 2022

Daily Brief - Why are investors so giddy?

“There are two kinds of forecasters,” once said John Kenneth Galbraith. “Those who don’t know, and those who don’t know they don’t know.” Investors and economists are not often right about their economic predictions, but they may be this time. The most anticipated recession in recent history appears to be unfolding right before our eyes. Just look at the chart below.

inflation subsiding

That’s great news, right?

Let’s get this over with so we can move on from hand-wringing about the upcoming downturn and instead indulge in guessing about the exciting asset bubbles the next easing cycle will bring. You can almost feel investor giddiness as they get ready to put the downturn behind them - it’s already priced in, anyway.

Not so fast.

As inflation subsides, it’ll get harder to fight. US wages are growing at an annual rate above 5%, because the labour market is still unbelievably tight.

Sure, Twitterati, Meta Mates and others are being let go in alarming numbers. 35,000 tech workers across 72 companies have been laid off this month according to this neat tracker, for a total of a total of $137k for the entire 2022.

But this - for now - isn’t yet reflecting the real economy. There are nearly two vacancies for every unemployed worker.

In just a single month - October - the US economy added 261,000 jobs. And that’s a NET number. The US government also reports (in a monthly JOLTS survey) total hires and fires/quits. In other words, the gross numbers of which the monthly non farm payroll is the net result.

In September - the latest month we have data for - 6.1 million people got hired while 5.7 million people moved on from their jobs. In a single month!

This is worth keeping in mind to avoid overweighting the job losses across the high profile tech titans in the media. The US economy is a behemoth with enormous churn, and these may be a preview of things to come but they are drops in a virtual ocean.

The job market is tight and with wage growth picking up, inflation may be hard to bring - quickly - below 4%.The Federal Reserve’s 2% inflation target is compatible with wage growth of only about 3-4% (reflecting inflation, productivity growth and perhaps a rebound in workers’ share of economic output).

The Fed is therefore likely to keep hiking until the labour market is much cooler. Inflation may have peaked but a return to 2% will almost certainly require a big slowdown.

So this isn’t the end. But it is, perhaps, the “end of the beginning,” to paraphrase Churchill.

Idea Spotlight:

TOGGLE analyzed 9 similar occasions in the past where analyst revision indicators for JD:NASD were moving up and historically, this led to a median increase in price. This insight received 5 out of 8 stars in our quality assessment.

Chinese e-commerce firm early Friday reported better-than-expected earnings for the third quarter, though sales were light.

jd price chart

Daily Brief - Why are investors so giddy?

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