Mike Green: Passive Stock Market Edifice Put To The Test As Recession A Near Certainty
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Jack: Forward guidance is brought to you by Van Eck, a global leader in asset management since 1955. You'll be hearing more about a Van Eck ETF later on. But for now, let's get into today's interview. We have mayhem in the markets and maybe in the economy. I am recording on the morning of Friday, August 2nd, and the jobs market came in with some pretty big news.
There was a non nonlinear jump in the unemployment rate from 4.1 percent to 4.3%. Unemployment now stands at 7,200,000, up 352,000 for July. Nonfarm payroll gains were only a 114,000. The SOM rule has been triggered, that recession trigger, and now the short term interest rate market is pricing in a 65% chance that the federal cut in September, not 25 basis points, a single cut, but that it will do a double cut. The stock market S and P is down 1.6 percent.
As we record, the Nasdaq is down 2.2%, and I am so glad to be joined by Mike Green, chief strategist at Simplify Asset Management, PM of the FIG ETF and author of the yes I give a fig substack. Mike, great to see you. What are your thoughts? We've got a lot to talk about.
Mike: This has been a frustrating one to say the least because the economic data really couldn't have been clearer if you actually understood what you were looking for rather than trying to justify where the s and p was going. And so this is one of these great ironies. Right? We understand that the s and p 500 is supposed to be a leading economic index. It's supposed to be one of the factors that contributes to a forward looking insight, and it's increasingly relied upon by policymakers.
Same thing would be true for things like credit spreads, etcetera, market derived measures of economic activity and risk in the economy, often playing into what are called financial conditions. The problem is is that when you create a data dependence and you create a data dependent fed that says we're gonna look at the data that's coming out, you are presuming that that data is actually giving you information that is valid. And unfortunately, what's happened over the last several, really over the last decade is just that the datasets have been increasingly manipulated to try to reflect a smoot
Things like the quarterly census on employment and wages and the business employment dynamics analysis. Those come out with a lag, but we already know that they're telling us the data we received last year was horrifically inaccurate.
Jack: Meaning it it showed that the labor market was stronger or less weak than it actually was?
Mike: Significantly last week. So somewhere in the neighborhood of 60 to 70% of all jobs that were created in the last year were created in a fictitious birth death model. Right? This is a model that was modified in 2,000 12 and again in 2020 to try to give a, quote, unquote, smoother view of the economy, try to incorporate or reduce, revisions to the datasets, which historically had been to the top side. The government had traditionally under forecasted how many jobs were introduced.
Now I would argue that that's actually a feature, not a bug. If you are overly cautious in your expectations, you're more likely to behave in supportive manners of the economy. We've now flipped that around, and for over a year, we've had data that suggested that the economy was strong, that inflation was persistent. That's encouraged the Fed to keep rates at a very high level that is candidly just raising the costs of the ultimate financial distress and reducing our ability to work our way through this. We've seen the weaker segments of the economy, the commercial real estate, auto sa
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