A Potential "Black Swan" Event?

“Government spending is always a tax burden on the American people and is never equally or fairly distributed. The poor and low-income middle-income workers always suffer the most from the deceitful tax of inflation and borrowing”- Ron Paul.

As we move closer to one of the most significant events of 2024, both US presidential nominees have proposed policies that will undoubtedly lead to elevated fiscal deficits due to accelerated government spending (sops).

Furthermore, as the economy likely undergoes a “recession”, the government will have to keep spending in large proportions, which will likely lead to higher Debt/GDP ratios in the coming years for the world’s largest economy.

There are only two ways you can fund the populist measures:

1. Increasing the tax revenues manifold, which Kamala Harris has proposed.

2. Raking in more and more debt.

Thus, we can safely conclude that whoever wins the elections, the macro fundamentals of the US economy will worsen over time.

In fact, as these concerns took centre stage, financial markets punished the dollar this week, which should be an eye-opener for both candidates.

Bipartisan support is needed to curb “reckless” spending and execute fiscal prudence in the US.

Nonetheless, this week was data-light, with the NFP revisions being the sole data point that caused an uproar among the market participants.

Today, we will also discuss one of our most intriguing observations regarding a potential black swan event building in one of the major economies around the world.

Until now, we were wary of using the word “black swan”, but unfortunately, the macro data speaks for us, and it’s looking horrendous.

We also dig deeper into the US housing data after a long time, as last week’s shocker stunned the markets.

Let’s begin!

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US!

Before we start the deep housing dive, we want to focus on the macro data that created a considerable fuss this week.

Yes, folks, we are talking about the BLS revisions to the NFP data, a gigantic 818,000.

Long-time readers will appreciate that we take the Non-Farm Payrolls data with a pinch of salt because of the famous birth-death model.

For those who don’t know, the birth-death model estimates the job creation by new businesses (birth) and those who declare bankruptcy (death).

Due to this, there have been stark revisions in NFP; however, significant downward revisions generally transpire during recessions.

Source: BBG

As one can observe, upward revisions occur during expansion and downward when the economy is slowing or in a recession.

Nonetheless, what matters now is what has happened in the last few months.

According to the forecasts, if we get similar revisions this year (April-July), payroll growth will be negative to zero, which has “ONLY” transpired during recessions.

Source: BBG

Note that