It’s official!
The proverbial Groundhog emerged from his den this morning in Jackson Hole, Wyoming — assuring the financial press that we’d see the interest rate cut everyone’s been looking forward to in September.
The Groundhog in this case is, of course, Fed Chair Jerome Powell. And the rate cut is already priced in.
Which leaves both Wall Street and Main Street to wonder; what comes next?
Well, I can think of THREE things that investors should be preparing for right now.
Hit the video below to find out:
Video transcript:
Welcome to Moneyball Economics. I’m Andrew Zatlin.
Today we’re going to talk about three things that are affecting the markets out there.
First of all, we’ve got the Jackson Hole meeting with the Fed. Secondly, we’ve got what’s going on in the AI space and why is it suddenly pulling back. And lastly, I want to talk about wage inflation, particularly coming out of what’s going on with Mexican migrant workers in the United States.
Let’s start though with Jackson Hole…
To recap, we’ve got the Federal Reserve, we’ve got all the associated Wall Street cronies out at Jackson Hole, Wyoming, and they’re huddling up and they’re talking about what the future looks like. In essence, this is a prequel to the rate cuts, and so while the rate cuts are actually going to happen in September, in effect, we find out this weekend where things are going. And the bad news is I see a selloff happening between now and September.
The reason there are three possible scenarios and two of them point to a sell off. Let me walk you through them. So the market’s already priced in a 25 basis point cut. If the Fed’s going to make a cut at all, it’s got to be at least 25 basis points, and that’s been priced in. And so if that happens, it’s a sell the news kind of moment, right? They’ve already priced it in.
Now it’s what comes next that worries them. That leaves two other scenarios, no cut whatsoever or a deeper cut. What are the likelihood of one versus the other? Well, the reality is it really depends on which way the Fed is thinking the future economy is going to tilt. If you look at the labor market, things are very soggy. For example, the latest jobless claims, things got even soggier. We had more claims and we’ve got more continuing claims indicating that hiring is both slowing down and firing is picking up.
So if you’re the Fed and you focus on the jobs market, you’re more inclined to do a deeper rate cut, but you flip that over, we have inflation going on. So if you’re the Fed and you’re worried about inflation, you’re worried about all the things that consumer spending is doing, that demonstrates economic activity still steady, then you’re not going to do a rate cut of magnitude. In fact, you might not do one yet.
So we’ve got two scenarios where you’d see a selloff. One, the Fed delivers pretty much what everyone expects a sell the news moment or they don’t deliver at all. That would cause even more of a selloff. The chances of them doing a 50 basis point cut over delivering about 25%, I wouldn’t bet the house on it. So in fact, I would position for a little bit more of a selloff.
In addition out there, adding a little bit of a headwind is what’s going on with AI. Don’t panic. Now, I told you, I told back in December that come October there would be the “oh, no” moment, actually, I think I called it the “oh shit” moment for Nvidia. And that’s just because growth is slowing down. It just is when you have 50% growth happening year over year over year, at some point in time that stops.
However, when everything has already priced this massive, massive growth rate and it needs to be readjusted, you’ve got revaluations going on. And that’s kind of where we are right now in the AI world, whether it’s Palantir, whether it’s Nvidia. I mean, over the past month as we’ve gone into earning season, it’s been madness, hasn’t it? Palantir up? Was it 40% from July? And so there’s normally going to be a sell off because of that boom.
But here’s where I am in general with AI. The hardware part of the story is where the growth slowdown is going to be most evident. It’s the software part of the story that’s still barely starting. We have got cybersecurity. We’ve got so many elements of AI, so many services that AI is going to produce.
Think of it as a highway. The highways have been built and they’re continuing to be built, but the bulk of it is out there. Now. It’s all the businesses at the off-ramps. It’s all the shopping centers, all the movie theaters, all the things that superhighway enables all those services. That’s where we are right now. So all these businesses are going to grow and they’re going to depend on companies like an Oracle to maintain databases, a Palantir, you name it. All these companies are out there, but they’re on the software side of life.
That’s where the growth will continue.
Little sell off in Palantir after shooting up 40% in two months. Not a moment of panic, but you should be aware the AI trend, as Altman noted, it’s bubbly. And I also think from the hardware perspective, we’re more on the down slope of growth, heading more towards the 20%, 25%, and away from the 40% levels. And that means some new pricing reevaluations.
We’ve got two trends then hitting the markets. Now we’ve got an AI pullback which triggers associated pullbacks, and we’ve got the rate cut potential impact further out. Let’s talk about the third one. Bank of Mexico announced that they are seeing lower remittances from the United States, from Mexican migrant workers, and this is now trend. What they are saying is there’s less money coming from migrant workers who are working in the United States being sent back. That’s bad news for Western Union.
That is one of the more popular ways in which money is shifted overseas.
But overall, what you’re seeing is potential wage inflation. On the one hand, the lower remittances, well, that’s kind of what I’ve been talking about. Not only do you have fewer workers here to send money back, so Trump’s deportation moves are having an impact, but you also have fewer workers claiming, for example, jobless claim benefits.
So they may not have left the country, but they’re not getting paid or they’re not claiming benefits and thereby getting money to send back. Either way, what we’re seeing is a downshift in the supply of workers that is only going to lead to one place, and that is more wage inflation pressure. And the Fed’s watching this and they’re concerned. But that is ultimately the goal of President Trump is to raise the wages that Americans enjoy, get those wages up.
I do, however, see a part two to this…
I also see Trump sometime next year starting to talk about jobless claims and say, how can we have people out there filing for jobless claims when we now have all these jobs out there? This is one way that wage inflation could be moderated. So you force a supply of Native Americans to join the working pool as we remove the supply of non-native workers.
This is a slow rolling train. It’s a trend that will develop and we won’t really see the impact until say, early next year. But by having this wage inflation out there, it’s going to scare the Federal Reserve, make them less likely to do any kind of rate cuts going forward. Food for thought. We’ll see how it develops. In the meantime, we’re in it to win it.
Zatlin out.
Andrew Zatlin
Editor, Moneyball Economics