last-minute Fed Warning

Key Concepts

• Atlanta Fed Real GDP Estimate: A measure of economic growth, with a current estimate of 3.9% indicating a "mega boom" level.
• Blue Chip Consensus: The average GDP forecast from major American companies, historically around 1%.
• Labor Break-Even Rate: The number of jobs needed to maintain a stable unemployment rate.
• Beverage Curve: A concept relating job vacancies to unemployment rates; a steepening curve is considered bullish.
• Stock Breadth: The difference between the number of advancing and declining stocks in a market index.
• Fiserve: A financial infrastructure and payment processing company whose recent performance is seen as a red flag for the consumer economy.
• Quantitative Tightening (QT): The Federal Reserve's process of reducing its balance sheet by not reinvesting maturing assets, effectively removing money from the economy.
• Quantitative Easing (QE): The Federal Reserve's process of buying assets to inject money into the economy.

Pre-Powell Prep Meeting Summary

This meeting serves as a concise preparation for an upcoming Federal Reserve (Fed) meeting, focusing on key economic indicators and potential market reactions.

Economic Strength and GDP

• Atlanta Fed Real GDP Estimate: The current estimate stands at a remarkably high 3.9%. This is significantly above historical norms and suggests a potential "mega boom" rather than a "soft landing."
• Shift in Blue Chip Consensus: For the past two and a half years, the blue chip consensus for GDP growth has consistently hovered around 1%. A recent, significant upward inflection point in this consensus over the last four weeks is a critical development.
• Argument: The speaker disputes the notion that the Fed will lack data for its decisions. The substantial upward revision in GDP estimates, particularly the shift in the blue chip consensus, provides crucial data points that the Fed "would be dumb not to talk about."

Labor Market and Break-Even Rates

• Labor Break-Even Rate: This is identified as the most important question for the Powell meeting. It represents the job growth required to keep the unemployment rate stable.
• Fed's Potential View: The Fed is believed to consider 20,000 jobs as the break-even rate.
• ADP Data: Current ADP figures show 14,000 jobs, which is "decently in alignment" with the Fed's potential view.
• Bullish Scenario (Break-Even): If the Fed states the break-even rate is zero, it's considered bullish, implying minimal labor growth is needed to maintain stable unemployment, even without immigration.
• Recessionary Indicators: A recessionary environment is indicated when the difference between immigration levels and the break-even rate, combined with actual job reports, points to insufficient job creation. For example, high immigration, a 150,000 break-even rate, and only 50,000 new jobs would be recessionary, as job report revisions often turn negative.
• Bullish Scenario (Low Immigration/Break-Even): Conversely, if immigration is negative and the break-even rate is between -10,000 and 0,000, even with 14,000 new jobs, it can be bullish. This suggests that despite layoffs, the unemployment rate could paradoxically decrease.
• Beverage Curve: A steepening beverage curve, indicating low job vacancies and the ability to normalize at a low unemployment rate, is considered bullish. The speaker emphasizes that "the lower the break even we hear from him, the more bullish. The steeper the beverage curve, bullish."

Market Signals and Potential Powell Reactions

• Pre-Powell Sell-off: It is "very normal" and happens "every single time" to see a sell-off in the market leading up to a Powell speech.
• Bullish Powell Outcome: It is possible for yields to rise even with a "bullish" Powell announcement, potentially leading to a rate cut and an increase in the 10-year Treasury yield to around 4.05%, negatively impacting interest rate-sensitive assets.
• "Crappy Dappy" Scenario (Bearish): A highly unlikely but bearish scenario involves Powell "shitting the bed" or "pooping the bed." This would signal a 25 basis point (BPS) rate hike, multiple further cuts, and a focus on credit distress, private credit, and layoffs, all of which are bearish economic signals.

Stock Breadth and Consumer Concerns

• Worst Day for Stock Breadth: Yesterday experienced the worst day for stock breadth since 1990. This refers to a significant disparity between advancing and declining stocks, with the vast majority of S&P 500 companies being negative.
• Fiserve Performance: The speaker highlights the alarming performance of Fiserve, a critical financial infrastructure and payment processor.
  • Technical Detail: Fiserve handles up to 25,000 payments per second and is a key player in e-commerce payment processing, powering terminals like Clover used in restaurants and retail.
  • Financial Red Flag: Fiserve's stock has fallen to COVID-era lows, with adjusted EPS missing estimates by over 20% and forward guidance for EPS down 17%. They missed estimates across the board by 7-9%.
  • Implication: This performance is seen as a significant concern for the consumer economy, as it suggests potential weakness in transaction volumes and payment processing.
• Consumer Stock Impact: The decline in Fiserve is impacting other consumer-facing stocks, with companies like Dave & Buster's, Six Flags, Red Robin, and Cheesecake Factory showing significant downturns.
• Argument: Any discussion by Powell about these concerns would create "heart palpitations" for the market.

Market Concentration and Nvidia

• Concentrated Market: The declining breadth is seen as a sign of market concentration, with a few companies driving gains.
• Nvidia's Dominance: Nvidia is highlighted for its immense pricing power and high margins.
  • Business Model: Nvidia designs chips but does not manufacture them, acting as a "middleman" with incredible margins.
  • Technological Advancements: Nvidia's CUDA platform and its fusion technology built on Blackwell infrastructure for inference in vehicles (processing radar, vision, and lidar data with low latency) are considered game-changers, posing a "real risk to Tesla."
• Sustainability Concern: Despite acknowledging Nvidia's current success and profitability, the speaker believes these growth rates will eventually peak, and the subsequent decline could be significant.

Quantitative Tightening (QT) and Fed Commentary

• QT Status: The immediate status of QT is deemed less critical than Powell's commentary. Even if QT is paused or ends soon, the focus remains on the forward guidance.
• Distinction between QT and QE: The speaker clarifies that ending QT is not QE. QT is described as "vacuuming up money," while QE is "running the printer." Pausing QT means both the "printer and the vacuum are off."

Poll Results and Speaker's Commitment

• Poll on "Your Boy": A poll was conducted asking participants to choose between "April Kevin" and "October Kevin."
• Results: 68% of nearly a thousand votes favored "Jose Bond" (a humorous reference to the speaker, Kevin).
• Speaker's Commitment: The speaker reaffirms his commitment to providing perspective, stating, "Meet Kevin will always be here to give you perspective. Whether you like it or not, I'm going to give you my perspective cuz I ain't never going to bend the knee."

Conclusion

The pre-Powell prep meeting emphasizes the critical importance of the upcoming Fed commentary. Key areas of focus include the surprisingly strong GDP estimates, the nuances of labor break-even rates, and potential signals of consumer weakness indicated by the performance of financial infrastructure companies like Fiserve. While market sell-offs before Fed meetings are common, the specific data points and potential interpretations will heavily influence market direction. The speaker also touches upon market concentration and the impressive, yet potentially unsustainable, growth of companies like Nvidia. Ultimately, the focus remains on Powell's words and their implications for future monetary policy.