watch before Friday morning

hey everyone me kevin here mode eurodear

oh dear the new productivity numbers

from the federal reserve were published

today for labor productivity and folks

deep breath because they were not good

this is where you want to make sure you

have life insurance that you can get in

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life folks look

the federal reserve has consistently

been promising that don't worry yes

wages are going up but worker

productivity is also going up so as long

as worker productivity goes up with wage

growth

then we're less likely to see the wage

price spiral lead to more inflation

let me clarify that going in the

opposite direction

if wages go up so it now costs you

fifteen dollars an hour to flip

hamburgers instead of ten dollars an

hour

then the price of that hamburger has to

go up

unless the person flipping burgers for

fifteen dollars

can flip fifty percent more burgers than

the person working for 10 an hour that

would be productivity going up with wage

cost and you actually have an

equilibrium to where

you have a net zero effect on inflation

but if you have to pay 15

but you're flipping the same amount of

burgers as the 10 burger flipper

well then the price of the burger either

goes up or the margin the profit margin

the company goes down which the

company's always going to try to share

some of margin loss with the consumer

which means the consumer will eventually

pay at least 50 percent of the burden if

not more if not completely all of it uh

since again that's what businesses do

they pass along consumer costs cost to

customers to maintain margins it's very

important uh and then you have inflation

and so

so far the thesis has been hey don't

worry productivity is going up we don't

need to be worried so much about wage

price inflation because as long as

productivity goes up we're good

unfortunately the latest numbers do not

look good the federal reserve found that

non-farm worker productivity

in quarter three

and these months are very important

remember these july august and september

fell five percent at an annualized rate

that is the largest decrease in worker

productivity that we've had in since

well actually since 1981 that's 40 years

the largest decrease in annualized

uh and quarter over quarter worker

productivity that we have had in 40

years at the same time q3 wages

jumped by 1.5

in just the quarter

from where i mean that's that's like a

six percent annualized rate right from

where we were a year ago wages and

incentives grew 4.6

wages excluding perks grew 4 compared to

a year ago and some companies like tesla

and chipotle have raised prices to

manage higher wage costs and it's not

just tesla chipotle it's it's almost all

companies are raising prices

so when you bring this together it's

like wait a minute these both indicate

the potential for more inflation lasting

longer which is not good

now the increase in wages itself

isn't as scary it's when you pair it

with low productivity and that's what we

just got in this last report now

we have to think logically here because

the emotional reaction is to say that's

it

the market crash is coming inflation is

out of control which in fairness it is

jerome powell literally yesterday used

the words

to get inflation under control

which means it's out of control right

it's the first time he's uttered those

words and transitory inflation has now

turned into

eventually transitory inflation right

but anyway which we kind of predicted

that the fed would kind of change their

tune in that direction and they did but

anyway

we have to use logic and reason to dig

into this why would productivity go down

in q3 ask yourself this why could

possibly productivity go down in q3 when

companies keep talking about worker

productivity going up kathy wood at arc

invest talks about productivity going up

so why is productivity going down in

this report

well in my opinion it could potentially

have to do with the fact that

in q3 we had a substantial

increase of covet cases think about this

in q2 which is april may june nobody was

really worried about the delta variant

nobody was really worried about the

delta variant until the end of july so

q2 was april may june in april may june

worker productivity increased by 2.4 at

an annualized rate

then the delta variant comes around

and we lose worker productivity by about

twice that towards the negative five

percent annualized rate but in q3 we

also saw covered cases skyrocket take a

look at this

daily new covet cases per million people

what do you see these are the these are

the seven day average lines here the u.s

is the

light blue line here you see our winter

spike right here but take a look at

exactly where this spike was folks

literally smack dab q2 july

august september and by the time you get

to october it's basically already back

down to uh you know april loves

so q or this being q3 right

so q3

got devastated by a surge in delta cases

uh and a lot of fear

the increase in cases likely resulted in

we saw this in more restrictions and

precautions more mask wearing more covet

testing more screening more sick days

and guess what happens when people spend

time at home they have to go get

covet-tested they have to go get their

vaccines they have to you know they have

to get their masks or wear their masks

or deal with all this crap right or

spend time even worrying about it well

obviously then that's time you're not

spending on being a productive worker

and so my best estimate here is that

this fallen worker productivity is not

necessarily a sign of a potential market

crash coming or market collapse

it is really a symptom of the delta

variant and so this means we're actually

in this market still getting crappy data

from q3 thanks to delta

but right now it actually doesn't look

like we are going into any kind of

coveted winter again please knock on

wood

though we do not see a cove winter again

that would be very very bad okay i want

to keep the stethoscope away although

it's kind of cool it's like abalone oops

you can't really see it though i don't

think oh oh yeah now you can look at

that ooh that's nice that's i paid good

money for this because you know

stock doctor but anyway it's also worth

noting that hours worked increased at a

7 rate last quarter that's up from 5.9

percent the pace logged in the second

quarter so

so far this hasn't really been an issue

of salaried employees working less

uh if we're actually working more it's

actually that productivity has just gone

down and we really think this is

potentially because of covid now if this

trend continues and we have bad

productivity in q3

that's gonna be bad that's going to be

bad for inflation and it's going to be

very bullish for crypto

i am bullish on crypto for about the

next nine months because i do believe

that once inflation reflects down there

are going to be some risks

to cryptocurrencies but until then i

think there are way more positive

catalysts than negative catalysts i am

also again happy to say since some of

you know that i was on margin again for

a brief period of time i am out of

margin again so i'm very happy about

that and uh and building up uh some

positions again where i did a little bit

of trimming

so uh and and of course if you ever want

to know all of my buy and sells

everything that i'm doing not meant to

be copy just meant to give you an idea

of where i'm looking for deals or

opportunities check the programs linked

down below i'm building your wealth but

am i just speculating that covid was the

issue well it's worth noting this jp

morgan released a set of business

surveys and they found that business

momentum

actually bottomed

in q3

in august

which is really interesting because

again if business momentum bottomed in

august and were up from there then again

that potentially reiterates that this

was all covered based this is a little

hard to see but basically what you want

to look at is see the 20 at the bottom

and that massive fall off the chart yeah

look to the right of that look more kind

of where that blue line is going up

again under that orange line

and that little bottom that we see right

there the summer was really productive

that's the pmi the producer

and product manufacturing index

this is good producers manufacturing

index this is good but we bottomed out

there in august and we could already see

in september and october that inflection

up and so this is a report here again by

jp morgan showing that uh

we essentially bottomed in terms of

slowing momentum

which is very good

we got that behind us so this is just

another example and a little bit more

evidence to reiterate that yeah this is

probably a all covert related i hope so

but it's a warning that we want to win

that we want to be careful of anyway

tomorrow we got big jobs data let's talk

briefly about jobs data because we've

got some big expectations from tomorrow

in fact i'm going to pull up the

economic calendar and the projections

for tomorrow so tomorrow we have

non-farm payrolls

and private payrolls manufacturing

payrolls we get a lot of things what

we're expecting is the unemployment rate

to go from 4.8

down to 4.7

we are expecting average hourly earnings

to instead of being up 0.6 like they

were last month to be up 0.4 that would

be an annualized inflation rate of 4.8

in wages

we are expecting

the uh total

figure of non-farm payrolls to come in

at 450

000

we and that is uh compared to the prior

release of 194 000 which was a complete

disaster

we are expecting the labor force

participation rate to raise or rise

point one percent so one tenth of one

percent to 61.7 which is still a pretty

low number

and then we do next wednesday get cpi

data we're actually expecting a high

headline read of 5.8 percent

so tomorrow my expectation is oh and

it's worth seeing the labor force

participation rate as well i'll show you

this in just one second but it's worth

noting that tomorrow

when we get this jobs report uh if we

get a number that comes in above

700 000 uh 700 000 jobs i think that's

going to be bullish for the economy

picking up and potentially more tapering

the pace of tapering continuing or even

perhaps accelerating i think if we get a

low low read like we did last month

because of the september jobs report we

could end up with something like 200 000

jobs again that's not going to be good

that might actually lead the fed to slow

down their taper a little bit which

usually if the numbers come in too hot

tech stocks fall because people are

worried about like overheating and then

interest rates going up sooner

if it used to be that if the jobs

numbers came in too low then that was

good because that would mean that more

cheap money would be coming our way and

tech stocks would go up but that's

recently changed to where the market's

almost kind of wanting rates to go up a

little bit to quell inflation since it

is lasting longer

and so i would argue probably good news

might actually be good news tomorrow and

if we could just like meet expectations

that probably be the best case scenario

just keep away from the the extremes to

both sides that would be my expectation

no guarantees obviously now it's also

worth

looking at the labor force participation

chart since you may not have seen this

before this is the labor force

participation participation chart excuse

me it's from bloomberg thank you

bloomberg

it is

uh showing the surveyed read in the

purple line and the actual read in the

blue line

and uh so you can see we used to be at

labor force participation handsomely

here around uh this would be like 20 15

16 17 18 pretty much regularly around a

62 and a

and half

half percent and we've really plummeted

to 61 and a half so it doesn't seem like

that much when you just read oh labor

force participation is down two percent

but two percent's a lot because remember

if you have a workforce of 150 million

people

two percent is three million people

right ah two percent there we go that's

three million people three million

people is literally like an extra 250

000 jobs every single month for a year

so that labor force participation number

it matters a lot it feels insignificant

but it actually matters a lot so i will

see if we get a beat on that we'll see

what happens with the inflation number

so far 10-year treasury yields are

actually falling and that's possibly

because the bank of england who is

widely expected to raise interest rates

decided not to raise interest rates

which was a real big shocker this

morning in fact the 10-year treasury

right now take a look at it here 10-year

treasury sitting at 1.53 we in april ran

up to about 1.75 recently we ran to

about 1.691.7

it's come down a good chunk

especially after that uh that that uk

surprise or i should say bank of england

surprise so a little bit of a shocker

there but we could continue to see yeah

see look at this 10-year treasury of

falls is investors digest fed decision

as well we could potentially see

yields actually continue to rotate down

ironically as

as maybe we

expect the recovery to be slower

inflation to be a little bit longer

lasting but not the point of

hyperinflation to where the bond market

is indicating any real signs of concern

the bond market seems to be pretty happy

with where it is which is below historic

levels right now anyway in fact you

could just click on the 10-year and then

just go out to the five year and you

could see how we're below historic

levels worth noting that at the end of

2019 we did sit around the 1.8 to 1.9

range so again at 1.53 we're still

decently below where we have been so

we're expecting less inflation in the

bond market now

than we did even before the pandemic

kind of worth noting not that the

10-year treasury bond is the perfect

measure of inflation anyway i think a

better

one to look at would be the 10-year

break even

which you can look up by just typing

into google st louis fred st louis

fred's ten year break even this takes

the difference between the tips and the

ten year which this would show a little

bit higher of an inflation expectation

this is the better way to say it and

here it makes more sense right that

we're expecting more inflation than we

had before uh the pandemic that makes

more intuitive sense right so there's

more here at play and because you're

seeing such a discounting in tips

as as more people buy it the yield

continues to go down on it because the

demand for treasury uh insured and

protected securities is going up demand

goes up price goes up yield goes down

and as yield goes down on the tips

because more people are buying it and

the 10-year treasury goes up you get

this widening and that widening is

measured by the 10-year break-even

inflation rate it's just basic it's

literally the difference between the

10-year rate and the tips

at which the tips is negative right now

that's why the number the reading is

2.56 because you're like negative one

percent on tips well but anyway it does

show you that inflation expectations are

indeed higher now than they were before

so uh i'm i'm glad we moved on to sort

of the 10-year break even rather than

just the 10-year but the point is

nonetheless the 10-year is

down from 2019 uh people are not jumping

up and down

for uh

dumping the treasury bonds because if

folks were expecting high inflation like

really expecting high inflation we would

expect people to say why would i have a

10-year treasury bond that's going to

pay me 1.53

let me dump that and sell it when you

sell it the price of bonds goes down

more selling pressure means price goes

down and then yield goes up but we're

not really seeing these get dumped so

you really see that that debate and that

massive argument we have in the market

right now on inflation but anyway

tomorrow's going to be a big tell

productivity numbers were a

disappointment but probably because of

covid and then we have expectations that

we went through for job numbers tomorrow

which will be very interesting to pay

attention to i expect to be awake at 5

30 a.m to cover them hopefully

anyway thank you so much for watching

the video and folks we'll see in the

next one goodbye

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