David Lin
Why Fed Is About To Make ‘Biggest Policy Error In History’ | Danielle DiMartino Booth
Most Important Insight
The Federal Reserve is committing a historic policy error by relying on lagging, heavily revised BLS employment data while ignoring real-time indicators of systemic credit contraction and a surge in corporate bankruptcies.
Most Original Insight
State-level WARN Act notices and business bankruptcy filings are currently providing a more accurate, non-linear signal of economic health than the headline non-farm payrolls, which are being artificially inflated by birth-death model assumptions.
Key Points
- The divergence between the Household Survey and the Establishment Survey indicates that full-time job losses are being masked by a rise in part-time employment.
- Chapter 11 bankruptcy filings have accelerated to levels reminiscent of the 2008 financial crisis, signaling acute distress in the middle-market corporate sector.
- Quantitative Tightening is removing liquidity from the financial system at a pace that threatens to trigger a repo market dislocation similar to September 2019.
- Commercial Real Estate (CRE) valuations have yet to bottom, and the impending maturity wall in 2026 will force regional banks to recognize massive unrealized losses.
- The Fed's 'higher for longer' mantra ignores the fact that the neutral rate of interest (R-star) has likely fallen due to high debt-to-GDP ratios.
- Consumer spending is being sustained by dwindling pandemic savings and credit card debt, a trend that is reaching its mathematical limit as delinquency rates rise.
- The Fed will be forced into an emergency rate-cutting cycle once the 'official' data finally catches up to the reality of a deep recession already underway.
Investment Implications
| Asset / Sector / Instrument | Action | Source | Notes |
|---|---|---|---|
| US 10Y and 30Y Treasuries | BUY | implicit | Anticipates a massive flight to safety and a rapid decline in yields when the Fed is forced to pivot to address the recession. |
| Gold | BUY | implicit | Serves as a hedge against the eventual return to aggressive monetary easing and potential currency debasement to save the banking system. |
| S&P 500 | SELL | implicit | Current earnings estimates are based on a 'soft landing' scenario that ignores the impact of credit contraction on corporate margins. |
| Regional Banks | SELL | implicit | High exposure to the CRE maturity wall and the negative impact of an inverted yield curve on net interest margins. |
| High Yield Credit | SELL | implicit | Spreads are currently too tight and do not reflect the rising trend in Chapter 11 filings and corporate defaults. |
Hang on a sec…
- The claim that this will be the 'biggest policy error in history' is highly hyperbolic given the Fed's role in the Great Depression and the stagflation of the 1970s.
- The assertion that BLS data is fundamentally 'broken' or 'manipulated' lacks definitive proof, as statistical revisions are a standard part of economic reporting.
- While CRE risks are real, the prediction of a systemic banking collapse ignores the significant capital buffers and regulatory oversight implemented since 2008.