Market Update 22nd January 2024

The Sahm Rule

Late last year I came across the Sahm Rule. It says that if the unemployment rate increases by more than 0.5% then a recession is pretty much inevitable, based on previous experience. Everyone started talking about it for a couple of weeks late last year as US unemployment came near to this number but never quite got there.

It is named after an economist called Claudia Sahm and I started following her on X/Twitter.  She used to work at the Fed and naturally tweets about economics. She also tweets about being on social media and her experiences as a female economist. Random strangers pop up and say she is wrong, or stupid, or ugly, or worse. She has blocked nearly 12,000 people – a decent crowd at the Reebok stadium these days.

One thing she feels differentiates her from her peers and one reason she keeps putting herself forward, is that she is interested in the way economic policy affects people’s lives in real ways. She was instrumental in the US covid policy of posting cheques to everyone, something we did not do in the UK, and sees this as a rewarding use of her background and knowledge with a positive, tangible outcome. She believes some of her peers are just sat at their desks with spreadsheets and models, forecasting recessions and unemployment for potentially millions of people, hoping to congratulate themselves on being right, with little thought for the consequences for other people.

The market is still having trouble deciding what it thinks about rates and inflation. The S&P 500 hit an all-time high on Friday, job data out of the US was again stronger than expected last week and US consumer sentiment increased 13% in January. US consumers are the biggest drivers of the global economy. In the long running Bank of America fund manager survey out last Friday, a large majority of fund managers now believe in a soft or no landing – only 17% are expecting a hard landing. But this is strange because fund managers also started the year with record numbers (nearly 100% – higher even than late 2008) expecting lower short-term rates. It is possible to get both, but you don’t have much margin of safety if that is your central case.

Claudia believes we are asking the wrong questions on rates and inflation. She thinks recent inflation was caused by covid and Ukraine-led supply disruptions which happen to have resolved themselves at the same time central banks were raising rates. In the olden days, an eclipse of the sun would lead to a goat being sacrificed to appease the angry gods. The sun duly reappeared, meaning more bad luck for the goats the next time as well.

She thinks identifying the true cause of inflation also helps to explain the real-world market reaction – a strong job market and wage inflation is a positive outcome to a difficult situation. This has contributed to rises in US household wealth. In a recent piece for Bloomberg she said she thought the market was placing too much emphasis on the deficit and level of US government debt. US government debt is $34tn and this is “a lot” but following covid, US household wealth stands at $142tn. Debt service costs are just under $900bn (2.65% interest) or 3.4% of GDP, well below 4.3% of GDP in the late 1990s. I don’t know if she read last week’s Innovation, but she also believes the real risk is political – the semi-regular theatre around the debt ceiling for example, which may damage the reputation of treasuries as the world’s safest assets and create a bigger problem.

These are the real and tangible outcomes of some abstract and often confusing issues and I think we would all do well to remember this and what it means. I don’t know what will happen in 2024 or 2025, or tomorrow, but I do know it’s not about fan charts, or dot plots, and is most definitely not a game. I am mostly just hoping the improving consumer sentiment is a good sign and 2024 is an improvement on 2023.

Robert Fullerton – Senior Research Analyst

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