Fed Shock: Powell Walking into A Trap?

We’re now coming down to the wire — with just a few weeks left before Jerome Powell’s Fed officials decide whether or not we’ll see a rate cut in September.

Right now, the economic data is looking good. The American economy looks strong.

But as I’ve showed you time and again these past few weeks, that data isn’t exactly all it’s cracked up to be. That means the Fed (along with markets and the economy at large) could be in for a serious shock.

What does that mean for your portfolio? I’ll show you right now…

Click below to start the video:

Video transcript:

Welcome to Moneyball Economics, I’m Andrew Zatlin…

It’s almost showtime.

The Federal Reserve, like a groundhog popping up from underneath is going to meet next month in September and decide if they’re going to cut interest rates or not.

Well, unfortunately, for most people, it looks like the economic data that’s coming out this week says don’t cut interest rates. The economy’s doing just fine. In fact, chairman Powell, your wait and see approach may be vindicated.

Now the reality is we don’t have to wait till September to hear what the fed’s going to be doing next week. The Federal Reserve and all their cronies and all their buddies are going to fly out to Jackson Hole, Wyoming, where they’re going to have a big three day powwow, and guess what? The Fed’s position will be announced more or less. Then they’re going to tip their hand next week.

And so if there’s going to be disappointment, it’s going to happen next week. So you want to position four, the fed’s saying, yeah, we might do a token rate cut, but we’re not going to do the 50 basis points that a lot of people want, especially me. What is the data they’re seeing this week that is probably going to have a huge impact on their positioning?

Next week, we’ve got four key pieces of information. We’ve got what’s going on with inflation, both consumer and producer inflation. Guess what? Inflation’s moving up. We’ve got retail spending, our consumers leaning in and spending a lot more, meaning the economy’s doing strong. Guess what? I think so. And then we’ve got the labor market, the jobless claims data indicating if the labor market’s robust, guess what seems to be? So we’ve got consistency through this week’s economic data pointing to a robust economy.

Not huge, but certainly not falling apart.

Let’s talk about the data and well maybe pick at it a little bit…

Retail. The Fed likes to look at something that tracks consumer spending called PCE, personal consumption expenditures, basically consumer spending. They want to track consumer spending because it is the blood, the lifeblood of our economy. It drives 70% of everything. And so the way they like to track it is they like to look at everything. After all taxes and social security, everything’s taken away, how much money’s left over and is it being spent in a discretionary manner? Retail dollars, that’s a good subset of personal consumption. How much is spent at the retail space?

And so that number’s coming out Friday. I have a forecast that’s pretty robust. It’s actually way above consensus because everything I’m looking at from gambling to all other kinds of illicit vice activities indicates consumers are out there.

They’re not hugely gung-ho, but they’re spending and well, it looks like that might be the case. A lot of credit card companies have been coming out saying last month consumers leaned in, they were using their credit cards, so we got a lot of spending going on at the consumer level that would say the economy’s perking up.

And when we look at some of the data in the inflation information, well, it’s consistent with a consumer out there spending. What I mean by that is when we look at inflation, whether it’s the core inflation on CPI or the overall inflation in PPI, a lot of it is driven by service inflation. That’s right, PPI surged for the month largely on the backs of service price hikes. I’m talking dentists raising their prices. I’m talking about airlines raising their prices even though gas costs went down.

This isn’t cost driven stuff. This is opportunistic. This is taking advantage of buyers who feel like they can spend the money. If you see belt tightening, you will not see this kind of price hike if costs haven’t gone up.

And so what I’m saying is the inflation data and the retail data are probably going to be very consistently saying consumers are spending, they’re absorbing a lot of the inflation at this point in time, and it’s also got that feedback loop of driving some of the inflation, and that’s not very compelling if we want to see rate cuts, but it gets a little bit worse.

We also have the real tariff induced inflation out there. See, the fed sees inflation coming in from people spending money. They don’t like the idea of inflation coming in. Well, they don’t like inflation in general, but they don’t like the idea of inflation coming in via tariffs because that creates a lot of unknowns.

We’ve known that tariffs would come in by about July and start hitting inflation and goofing it up. And that was because when Trump first started on his campaign of tariffs, he was throwing out numbers like 30 and 50%, and all that did was drive all these businesses to go out and stockpile inventory, get months and months of inventory and let it sit on the shelves.

After a while, that inventory is burned off and you got to start buying at the new cost levels. And I had predicted that July would pretty much be that point, and it looks like it is. I mean, you’ve got already a delay from just the way that costs filter into the supply chain then hit the consumer. The inventory bulking up runs out, and that’s another reason why everything was delayed till now. However, there’s a third reason and it has to do with tariffs weren’t that high.

I mean, let’s face it, Trump is out there talking 30% and 50% and he really just landed on 15% and China we’re still toing that that’s still getting kicked downstream. So in effect, what I’m saying is not only were tariff inflationary pressures delayed, they were diluted.

So while the Fed isn’t as scared as they were, well, it’s still pushing up inflation at the margins and it’s going to start kicking in even more and more and more. And so wait and see. Seems to be the approach when we talk about inflation because quite frankly right now the economy seems to be fine, but inflation getting a little hot that speaks against rate cuts and now when you turn to jobless claims, a good indicator of where things are in the labor market. Well, you see positive stuff out there. Yes, payrolls a couple of weeks ago were terrible.

Jobless claims seem okay, meaning a lot of people are saying the economy’s doing fine, companies aren’t firing. Jobless claims seem okay, but yeah, they’re not hiring, but that’s okay. A lot of people in a wait and see more, but we’re not falling apart. We’re probably going to inflect up.

My problem is when I look at the jobs data, I see weakness in both payrolls and in the latest jobless claims data. And that’s what I want to share with you because we’re talking about a divergence. We’re talking about everyone out there consensus in the fed, holding hands and saying, gee, the economy’s doing just fine.

And then the wheels are going to start to fall off because suddenly people are going to say, I don’t have a job in the jobless claims, Nominal data that came out, the data that got released, what we see is the jobless claims, well, they’re in that same sweet spot I’ve been talking about, that 225,000 plus minus this case, they came down a smidge, but they’re in that sweet spot that’s consistent with a relatively good economy with GDP at around 2%.

At the same time, the continuing claims story also looks pretty good. Now remember initial claims, that’s what you always hear thrown out. This 225,000 number for example, that’s first time someone going out and saying, I just got fired. Continuing claims are people saying,

Hey, I’ve been out of a job for a while, at least two weeks if not more. If we’re in an environment where companies are hiring, that continuing claims number is low and kind of trickling down, and certainly that’s what we would expect to see because jobless claims have crashed over the past eight weeks. They’ve gone from 250,000 down to about 225,000 plus minus. They’ve crashed week in and week out.

And so you would imagine with fewer people over two months raising their hand saying, I don’t have a job. That continuing claims number would also be coming down. In fact, it hasn’t.

It’s been stuck at 1.95 million for eight weeks. It’s been stuck. It should be coming down, but it isn’t. And that inconsistency drives me forward because that tells me that the data itself may be problematic. I believe, and I’m going to walk you through why I believe this…

I believe that what’s going on is initial jobless claims are coming down for the same reason that continuing claims are not going up, and that’s because undocumented Mexican workers are afraid to file for claims because they’re afraid of being deported. Now, for evidence, it’s unfortunately kind of a forensic thing, but let me share with you what I’m seeing, and first of all, it kind of falls into one of two buckets.

I’m noticing a lot of Hispanic AKA Mexican workers are filing for claims. They’re raising their hand, they’re getting their unemployment benefits, but they’re hiding it. They’re hiding the fact that they’re Mexican or some of them simply aren’t filing because they’re scared of being deported.

When payrolls came out, one of the interesting things that came out with payrolls was suddenly we saw a drop in non-native AKA Hispanic workers, but we saw a sudden surge in native workers. Almost two to 3 million teenagers raised their hand and said, guess what? I’m a native worker. That doesn’t happen.

But what would drive that drop and rise is if suddenly people said, you know what? I’m not going to say that I’m Hispanic going forward. I’m not Hispanic when I report myself, and that’s what’s happening in the jobless claims because when we look at jobless claims each month for the past couple of months, the share of workers who are filing for jobless claims on a monthly basis has dropped 1% per month. And so what we’re talking about is roughly 20,000 people each month have said, I’m not Hispanic. No, why would I say I’m Hispanic?

And remember, you can claim you’re Hispanic or not. It’s voluntary. What’s not inconsistent with this filing, but hiding is what’s going on in California. If you look at California’s reporting of their demographics, each state reports, demographics, age, race, sex, and also job category, unless you don’t, you can say, I’m not going to tell you where I’m working. I’m not going to tell you if I’m working in construction, manufacturing, public administration. And so there’s this left blank category. What’s interesting is California, the volume of left blank is massive. It’s gone from being roughly 45,000 per month to over a hundred thousand.

That’s 120% increase in the number of people saying, I’m not going to tell you where I work. Now, what’s interesting here is you’ve got to focus on California for a couple of reasons. California drives almost 25% of all jobless claims, but when it comes to Hispanic workers, they drive 40% of jobless claims.

So they definitely dominate the world of undocumented workers. What’s further interesting isn’t just that California Hispanic workers may not be reporting themselves as Hispanic. California themselves is no longer reporting data. That’s right for two months. Now, California has not reported the demographics for their jobless claims. They’re the only state not doing it, and they did it suddenly.

And that makes sense. I mean, go back in time. California is very much at the forefront of protecting undocumented immigrants, AKA Mexican workers, and the reason being is they depend on them.

Farm workers are largely undocumented workers of the roughly 50,000 farm workers out there, 30 to almost 40,000 are in California, and California has been at the forefront of pushing back on the Trump administration efforts to deport. So you add this up, we start with the fact that California stopped reporting their data. We go to and in the run up to not reporting the data, we have a lot more people saying, I’m not telling you where I’m working.

I don’t want you to know that I work at a farm because you might come out to that farm, California dominates construction, farm working, and even a lot of the restaurant sectors where you see a huge proportion of them being illegal workers. It makes sense why they wouldn’t report it, but it makes the data a little bit difficult to look at.

Let’s talk about filing, but hiding versus just not filing. So filing but hiding would mean I’m going out for the claims, but I’m not going to tell you if I’m Hispanic, I’m not going to tell you where I work. I’m still going to file. The jobless claims are still viable. However, it’s the ones who aren’t filing, and this is what’s interesting.

I mentioned a moment ago, agricultural workers, construction restaurant workers, largely Hispanic. What’s interesting is the context for jobless claims is jobless claims have gone up about 10% year over year.

We’ve got about 10% more people filing for claims this year than they were last year, and that’s been trend at the same time in those three sectors.

Miraculously, we’ve got fewer jobless claims being filed, roughly 30,000 fewer people are raising their hand this year than they did last year saying, I don’t have a job. I’m a farm worker. I’m in construction, so forth, 10%. Every other sector going up except for these heavily illegal immigrant document, illegal immigrant dominated sectors going down. See what’s happening folks, is roughly 30,000 to 40,000

Mexican workers are not filing for their claims entitlements because they’re afraid of being deported. That’s on a monthly basis, at least at a bare minimum, 40,000 fewer people per month. Well, it’s 10,000 per week. That means, in essence, the real nature of the jobs market is jobless claims are not at the 225,000 zone. They’re in the 235,000 zone and sometimes perking up, not alarm bells, not a red flag, but definitely not as positive as we would believe.

And that’s the same thing for continuing claims. They likely have been going up, up, and up, but a lot of these workers are not filing for claims. The jobs market is soggy. It’s not bad, but it’s not as strong as perceived, which means going forward, the jobs market problems will continue and continue and continue.

But again, this is at the low end, at the lower income level, so we can have a striation where upper income people, middle income people feeling good, lower income people are not. And so the question is, what is the Fed going to do?

Because the data right now is telling them life is good. Don’t cut rates. Will the wheels fall off this cart eventually because the jobless claims are reporting one thing when the truth is another. I think we’re going to have to wait a couple months to find out. In the meantime, you might want to take a long-term bet that the market might stumble sometime in the next few months because better data comes out and it indicates that more rate cuts not less are needed.

We’re in it to win it.

Zatlin out.