Weak Labor Market Will Push Asset Prices Higher

To investors,

The Federal Reserve cut interest rates in September under the guise of addressing a weakening labor market. It didn’t matter that data suggested the Fed should have been cutting rates much earlier in the year, the central bank’s stated reason was the labor market issues.

Jordi Visser has been pounding the table to point out this is proof the Fed is more worried about job losses than they are about inflation. I don’t disagree.

But this development begs the question: Why is the labor market weakening?

Apollo’s Torsten Slok took a stab at explaining the slow job growth. He writes:

There are three reasons why job growth is slow: 1) Lower immigration, 2) AI implementation and 3) fewer government jobs.

Specifically:

* At the current level of GDP growth, nonfarm payrolls should be 263k every month.

* A key reason for the slow job growth is that the growth rate in the foreign-born labor force has been significantly weaker than normal. Fewer people looking for jobs means fewer people get hired.

* AI implementation is likely improving productivity.

* Government job growth was artificially high in 2022, 2023 and 2024. Combined with DOGE, government job growth is now returning to more normal levels.

The bottom line is that the weak labor market is not due to weaker labor demand, but rather to weaker labor supply because of immigration, AI implementation and a normalization of job growth in the public sector.

This analysis by Torsten is important because it highlights three major trends that are unlikely to change in the near term. So that suggests the labor market is going to have continued weakness, which means the Fed is going to keep bringing the cost of capital lower and lower.

As the Fed cuts rates lower, we should expect asset prices to go higher. Investors and corporations salivate over cheaper capital. They can push further out on the risk curve, they can invest more in R&D, and they can pour more capital into various assets.

In a very simple way, the lower the labor market goes, the higher asset prices are going to go. That is nearly the complete opposite of what has happened in history. Usually a weaker labor market means a recessionary period, which pushes asset prices lower.

But the inputs to a weaker labor market are not structural issues, but rather signs that companies are becoming more productive and efficient, while the US government is becoming less bureaucratic and bloated. Those are both big wins for the private sector.

Weak labor market, all-time high asset prices right now. Welcome to the future.

Have a great day. I’ll talk to everyone tomorrow.

- Anthony Pompliano

Founder & CEO, Professional Capital Management

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