June 2, 2023

Wage Bowl!

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Bottom Line:


This week, Washington reached a debt ceiling accord that allows unlimited spending on 85% of Federal Budget items (entitlements, defense, and interest payments) while capping spending on 15% of the budget items (discretionary spending) for two years. Way to go, guys!  Eye rolling aside, this does remove a risk factor from the board, which we appreciate. In more meaningful news, the US unemployment rate ticked higher last month from 3.4% to 3.7%, while wages ticked lower from 4.4% to 4.3%, year-over-year. This represents the lowest point in wage inflation since mid-2021, favoring a Fed pause in interest rate hikes on June 14th. Historically, rate pauses have ushered in highly profitable periods for investors over the following twelve months. With Money Market Funds at record levels awaiting the “all clear”, sellers’ remorse may lead to even more rally chasing, moving this highly derided market advance even further up and to the right.



The Full Story:


As anticipated, our government has resolved the 2023 debt ceiling issue by not addressing our debt issue. Let me explain.


  • The US government will spend $6.2 trillion in 2023. Within the $6.2, the Medicare, Medicaid, and Social Security entitlement programs account for $3.8 trillion. The national defense budget accounts for $800 billion. The interest due on the Treasury debt accounts for $640 billion. The sum of these line items totals $5.2 trillion. Politically, these items are “non-negotiable.”


  • This year, the government estimates it will receive $4.8 trillion in tax revenue.


  • Therefore, the “non-negotiable” budget deficit equals $400 billion.


  • Within ten years, the growth in the entitlement programs, the defense budget, and interest payments elevates this annual “non-negotiable” deficit to $1.4 trillion, 3.5x larger than today.


  • The “negotiable” items, known as discretionary spending, amount to $900 billion. This is just 14.5% of total government spending. Therefore, capping discretionary spending for two years, as negotiated, has nearly zero impact on our national balance sheet. As calculated by the Congressional Budget Office (CBO), here is where deficits are headed:




And just to further salt the wound, here is CBO’s estimate of total government debt to GDP over the next 30 years:




Great job, guys!


Friday’s unemployment report contained many contradictions. While US employers reported adding 339,000 new employees, US households reported their unemployment status deteriorated from 3.4% unemployed to 3.7% unemployed. This divergence has led to intense head-scratching, but for our purposes, it’s academic. They use two different survey methods that periodically disagree. What matters most to the Fed is the trajectory of wages. As we entered 2023, we anointed average hourly earnings as the most important data point for the year. With 12 months in the year, that means 12 innings in our Wage Bowl (yes, I realized I mixed metaphors, hang with me). The Fed declared wage inflation the root cause of persistent inflation and, therefore, the target of their tightening. Should wages fall more than they rise, Fed policy will loosen… WIN. Should wages rise more than they fall, Fed policy will tighten… LOSE. It’s binary. Now, let’s check the score!




Wages have fallen sequentially in three of the reports while rising in two, for a slim advantage. However, the current level of 4.3% stands .5% below the December season opener for a wage inflation decline of 10%. Furthermore, the 4.3% level matches the lowest level since July of 2021, before all of this inflation consternation began. The Fed wants this number to fall to 3%. At the current pace, that would occur in about a year, assuming economic growth remained at this level. Any deceleration in the economy would lead to a further slowdown in wage inflation. So, if the Fed is in a hurry, they can force recession, but why be in a hurry when the trend is your friend?  This reinforces the case for a rate pause in June. The market agrees as the odds of a June rate hike have fallen to 35%. If that proves true, it’s time to dust off our “what happens historically when the Fed pauses” playbook:




Over the last 30 years of data, rate pauses have proven highly profitable for investors. US stock investors have seen 24% average gains, while US bond investors have seen 11% gains. Both of these well exceed the historical return on money market funds over the time period. That’s something to ponder with Money Market Funds currently at historic levels:




They say history doesn’t repeat itself, but if it rhymes, this rally has plenty of fuel to burn.


Have a great weekend!


David S. Waddell  

CEO, Chief Investment Strategist




Sources:  Yardeni, Blackrock, CBO.gov




David Waddell
Author: CEO Chief Investment StrategistAfter graduating from the University of the South with a BA in Economics, David began his career with Charles Schwab & Co., Inc. in Phoenix, AZ. Having been recognized for his outstanding business development record, David was promoted to the San Francisco- based Institutional Strategic Accounts Team, which interfaced with the Big 5 accounting firms and Schwab’s largest customers. David left Schwab to continue his education at the graduate level in Boston. While earning his MBA degree with a concentration in finance and investments at the F.W. Olin School at Babson College, he was appointed by the college Trustees to manage a team of seven portfolio managers overseeing the student-managed portion of Babson’s endowment fund. David also founded the Babson Investment Management Association to assist undergraduate and graduate students with training and career path planning in the investment management field. As the firm’s Chief Investment Officer, David chairs the W&A investment committee and combines macro economic forecasting, macro market analysis and macro risk assessments to design portfolio strategies utilizing public market securities worldwide. A civic leader in Memphis, David currently acts as Chairman of Epicenter Memphis, and Co-Chair of the Memphis Chamber Chairman’s Circle while also serving as a board member for LaunchTN and the New Memphis Institute. David previously served as chairman for The Leadership Academy, the RISE Foundation, and the Economic Club of Memphis. He also chaired the capital campaign to build the “Live” stage at the Memphis Botanic Garden. David was a member of the 2004 Leadership Memphis class and has been recognized as one of Memphis’ “Top 40 under 40” by the Memphis Business Journal, and as a finalist for “Executive of the Year” in 2007. In addition to weekly columns in the Memphis Daily News and the Nashville Ledger, David has appeared in the Wall Street Journal, USA Today, Forbes, Business Week, Investment News, Institutional Investor News, The Tennessean and Memphis Business Journal. He has also made appearances on Fox Business News, Yahoo Finance, Bloomberg TV, CNBC, and CBS News and ABC News Channels. Read some of David's articles on his author page in Inside Memphis Business. David has two wonderful children, Easton and Saylor, an obedient Labradoodle named NASDAQ, and a devoted Goldendoodle named Ripley.


David S. Waddell


Chief Investment Strategist

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