A deluge of data is about to hit the markets, the result of the ending of the longest government shutdown in history. As commented, data distortions might not be resolved until early next year.
The Atlanta Fed’s GDP Now model is projecting a 4.0% GDP annual growth rate for the third quarter, significantly above the long-term historical average of 3.2%. This forward-looking indicator predictive qualities rise as the quarter progresses given the availability of more and accurate data. A question to ask is how much has the data been distorted because of the shutdown?
The driver of this economic growth is AI spending. There is a torrent of cash going into chips, servers, data centers and all the infrastructure around them including electricians, plumbers, HVAC and the like. And then there is the energy demand. The IEA (International Energy Agency) stated that one data center uses as much energy as 89,000-person town. Wow!
This spending also creates vulnerability. According to Bloomberg, that GDP growth is running less than 1% if AI spending is backed out.
And then there are the possible stresses in the bond market. Corporate bond issuance is surging to fund these capital expenditures.
Will this massive funding generate acceptable returns? Wow! This is an answerable question, The variance in outcomes is huge. On paper all this spending makes sense, but the problem is there are dozens of companies making the exact same decision all at the same time utilizing all the same data. Collectively and historically, this leads to massive overbuilding.
Returning to the here and now, inflation has been above the Fed’s target for almost six years, following a prolonged period of time (over 10 years) when inflation was below the Fed’s target. It was during this period that the Fed stated its inflationary speed limit was 2% in an attempt to increase inflationary expectations.
A question that could be asked is whether the Federal Reserve (or any other central bank) is even capable of controlling inflation. Is this possible control just a fantasy?
The narrative is rising that the Committee has acquiesced to a new speed limit of a 3% inflation rate given how inflation has been locked in a very narrow range of 2.8% to 3.2% for the last several years. Writing it differently, is 3% the new 2%?
If this is indeed the case, a repricing in the long end of the bond market much occur.
Today is a 10-year Treasury auction. Will demand be as robust as it was for Monday’s 3-year Treasury auction?
Completely changing topics and perhaps offering some insight into NYC’s election, according to the WSJ and the Bureau of Labor and Statistics, as of October 2024, 30.4% of 20–29-year-olds who had earned bachelor’s degrees that year were not working compared with 21.9% for those who had earned associates degrees.
Many believe the real culprit is enormous government subsidization of higher education, which has distorted the labor supply. The BLS states that more than seven million bachelor’s degree recipients have entered the labor force since January 2020, “many of the degrees having little economic interest or viability, especially in regards of funds spent.”
Additionally, a recent Havard report found that A’s account for 60% of its grades. Yale reports 80% of its grades are A’s.
The educated elite is also having a difficult time finding employment, grousing capitalism is not fair. By comparison those who went to trade school have at least three job offers, many of which pay six figures after completing an internship.
Capitalism is fair and life is not. Once one accepts both tenants, everything else falls into place.
Perhaps Palantir’s CEO summed up NYC’s election correctly when he stated it is reverse class warfare. Karp commented “I think the average Ivy League grad voting for this mayor is highly annoyed that their education is not that valuable, and the person down the street who knows how to drill for oil and gas, and has moved to Texas, has a more valuable profession.”
Enough of the rant, yesterday the bond market was closed for Veterans Day. Equites were bifurcated. The Dow advance about 1.0% while the NASDAQ decline by 0.50%.
Last night the foreign markets were up. London was up 0.02%, Paris up 1.32% and Frankfurt up 1,35%. China was down 0.07%, Japan up 0.43% and Hang Seng up 0.85%.
Dow and NASDAQ futures are up 0.25% and 0.5%, respectively. AMD made bullish remarks about the demand for its chips to use in AI. The 10-year is up 11/32 to yield 4.08%.
