The Sahm Rule

Hi guys, just a quick note from me today and some stuff you may have missed.

Earlier this week I talked with economist and former analyst at the Federal Reserve Claudia Sahm about her eponymous “Sahm Rule” which measures unemployment data to detect the early stages of a recession. The rule was triggered technically by last week’s July Non Farm Payrolls report but she’s not so sure this is an accurate signal at the moment.

Regardless, the permabears jumped all over it, twisting the meaning and signal of her research far and wide. Claudia came by and cleared some stuff up for us, I think you will learn a lot from this:

JC and Joe Fahmy stopped by…

Our friends JC Parets and Joe Fahmy came by last night and we taped an absolutely epic episode of The Compound and Friends. JC showed us one of the most important confirming indicators for the current bull market - the Dow Jones Transportation Average. We rolled through a whole host of its components to get a feel for where things could be headed. The trains and trucks all look like they’re on the verge of a breakout. We get into how absurd the Vix was on Monday morning and why the actual Vix futures that people can trade was significantly lower than the index itself. Joe shared a bunch of lessons from the greatest traders of all time and Michael still doesn’t believe “price has memory.”

You can listen below or wait for the video on our YouTube channel later this evening.

Big Days

Callie and Matt put this together for our advisors and their clients. I thought it was a great illustration about the nature of brutal sell-offs - they tend to be accompanies by huge up-days like the one we had yesterday. This is neither good nor bad, it just is. Which means missing the worst days - even if you could - would also probably mean missing the best days, because of how clustered together they typically are.

In fact, Callie says that "In 28% of years since 1950, the best and worst days happened within a week of each other.”

You can clearly see above how the greens and reds mostly (but not always) go together. You also see these large up- and down-days tending to occur in the midst of bear markets or corrective phases. Ten years ago we built a proprietary tactical strategy called Goaltender as our answer to this market tendency.

Should Presidents set interest rates?

Donald Trump told reporters yesterday at his press conference that as President he will have direct say on when and how the Federal Reserve sets interest rates. He says his own instincts are better than the people who work at the Fed and that Powell will lose his job if he doesn’t do the right thing, whatever that is. He doesn’t think the Fed should cut interest rates ahead of the election because that would be a “gift” to the Democrats. He’s told colleagues that he wants a more subservient Fed Chair for his next term - someone who takes the word from the White House on where rates should be and then uses this directive to negotiate with the committee until the other voting members can be convinced.

In 1972, Nixon was able to browbeat the Fed Chair - who had previously been his own economic advisor - into keeping rates low for political purposes. This proved disastrous as the resulting inflation was so destructive it cut the stock market in half threw the economy into convulsions. Presidents sometimes think low rates or cutting rates will help them politically but it’s just not true. The number one lesson we’ve learned in recent years is that the thing Americans hate the most is inflation. They hate it more than falling home prices and more than rising unemployment. They hate it more than anything. Even if it coincides with their getting a raise at work. Doesn’t matter. When the grocery bills and utility bills and car lease payments and credit card rates are rising, no amount of economic growth or job security will offset the anger.

Joe Biden didn’t scream at the Federal Reserve on Twitter for hiking overnight rates from zero percent to five and a quarter. He knew that inflation was one of the primary reasons for why he was so unpopular with unemployment low and steady economic growth. Or he wasn’t paying close attention to what the Fed was doing, it’s hard to tell.

Any efforts by either political party to direct monetary policy from the White House will surely backfire.

You can read all about Trump’s Federal Reserve comments here at the Wall Street Journal.

Last thing, and not to get political, but the guy Kamala picked to be her running mate doesn’t own any stocks. At all. I know we should be glad to hear this because he’s not using high-level government knowledge to enrich himself…but I also don’t trust anyone who makes it to 60 years of age and has had no personal involvement with the stock market. What’s up with that? It’s almost anti-American…

via Axios:

I get it, he’s a teacher, teachers don’t need the stock market as much as the rest of us do because of the way their retirements are funded. Also, teachers aren’t risk-takers by nature. The security is one of the major attractions of the job for those who choose to teach. But still, not one stock?

Walz was a big proponent of the STOCK Act, which Obama signed into law in 2012. It was meant to keep elected officials from abusing their access to information and capitalizing on it via stock trading, but it doesn’t actually do anything and these people are still trading their faces off. They’re disclosing their trades now, which I guess is better than not. Why they can’t just own ETFs and do their job for a few years is beyond my comprehension.

I don’t need Walz to be an avid stock trader, per se, it would just be a bit more normal if he owned a few names or showed some interest in the thing.

And just like that…

This Sunday my wife and I are flying our daughter to her college move-in. We’re excited, nervous, happy and sad all at once. It’s a big moment. I haven’t cried yet but my older friends tell me it’s going to hit me like a ton of bricks while I’m there. A chapter of our lives closing, a change in our household dynamic, a major milestone in our lives. Wish me luck.

Talk soon! - JB