Trump’s BLS Drama: All Part of a Flawed Plan

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

What Trump’s jobs drama really accomplishes…
We could still see no rate cuts in 2025…
The trend in liquidity accelerates…
It’s driving well-deserved concentration…
This week only: rate your favorite stocks on our newest breakthrough…

Do you hear that?

The clattering of clutched pearls rang out in cacophony earlier this month as Trump fired Bureau of Labor Statistics commissioner Erika McEntarfer.

His reasoning was as Trumpian as it gets. The BLS’s unusually strong downward revisions on June and July suggested, at best, a flawed approach to reporting deserving of a termination… and at worst, a political conspiracy to tarnish the economic report card of the Trump administration.

This chart from CNBC shows the difference in reported nonfarm payrolls after revisions were applied:

Source: CNBC

At a glance, these revisions do seem quite extreme. We haven’t seen a downward revision so strong since early 2019. And no back-to-back revisions of this magnitude in the past 10 years.

In all likelihood, the BLS’s approach to job reporting needs an overhaul. Treasury Secretary Scott Bessent agreed as much, ally to the president he is.

And while less likely, it’s not totally out of the realm of possibility that BLS economists have political biases that may influence their methods.

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But make no mistake: neither is the key reason for the shock-and-awe move…

Contrary to popular belief, I don’t think Trump makes decisions like a too-drunk cowboy with a big iron on his hip and something to prove.

This firing – along with tariffs, culture-war-tinted executive orders, and endless other moves which have lit up the headlines like a grotesque Christmas tree this year – was calculated.

The real read on this is simple. Trump understands that the job market is in relatively good shape, albeit weakening lately.

He also understands that inflation is back on the rise and could go higher once the tariff costs really sink in.

The problem is, he also really, really wants lower interest rates to help run the economy hot.

He knows the Fed won’t cut unless it sees inflation continue to fall or the labor market falls apart. Worse, inflation is rising as the jobs market softens, effectively nullifying the chance of a cut.

Because of this, he needs to find some other method of pressure.

Penultimately, he understands that 99% of people do not care or even know about BLS revisions to nonfarm payrolls data.

But ultimately, what he knows better than anyone is that people care about drama.

So what’s the best way to get everyone talking about the jobs data?

Fire the BLS chief.

This is the tactic…

Make a big Apprentice-style “you’re fired!” show, and suddenly everyone’s staring at the big downward job revisions and talking about how the labor market is in dire straits.

This puts more pressure on the Fed and adds more support for the president.

The problem with this that I fear few people understand – including the president – is that the more political pressure hits the Fed, the less likely we are to see interest rate cuts in the near future.

The Fed is proud to appear independent of external pressures. If it cuts, even with good data cause, all this pressure will make it seem like the decision came at the request of the president. It hampers integrity.

This is why I continue to think – even after these revisions – we could see 2025 end with rates exactly where they are now. As the pressure ramps up, the chances drop. As inflation heads higher as tariffs inevitably work their way into prices, the chances drop.

The only hope for rate cuts is that more than two of the FOMC’s 12 members decide to manage monetary policy proactively rather than reactively, in addition to accepting accusations of political influence.

I continue to think this will keep rates higher than most expect, if not unchanged entirely, until Jerome Powell’s term is up.

That means, in my opinion, you still want to underweight sectors feeling the brunt of high rates – namely small-caps that borrow to keep the lights on.

A lot of people like to say Real Estate will rip once we see rate cuts, but that’s more a function of long-term rates, which the Fed does not set. And, in fact, if the Fed cuts too soon, the long end yields could run higher just as they did a year ago.

Really, you want to continue investing in large caps with massive cash moats despite the concentration issue (which we’ll get to shortly).

Besides, the Fed is already “cutting rates” in a different way…

And, as it turns out, they’re doing it in a way that benefits larger companies rather than smaller ones.

As we’ve discussed many times before, the Fed is back to printing money. Below is the monthly chart of M2 – a good proxy for dollars in the economy – on an annual percentage change basis.

Source: fred.stlouisfed.org

After spending about a year and a half removing money from the economy at a peak rate of about -5% annually, the Fed has spent the last two-ish years adding that money back at an accelerated rate approaching 5%.

As we’ve argued in the past, liquidity is a key broad driver of asset prices and inflation all the same. The major liquidity expansion in 2020 correlated with a major bubble, bust, and ensuing inflation with about a 12-month lag. The destruction of liquidity in 2023 reflected the previous bear market and disinflation.

Now, liquidity is expanding again… asset prices are at all-time highs… and the biggest beneficiaries are the large-cap tech companies with huge cash moats.

To be clear, the trade is quite concentrated right now…

The top five companies in the S&P 500 – that is, Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), Amazon.com (AMZN), and Meta Platforms ( META) – make up nearly 28% of the entire group.

That’s a level of top-brass concentration not seen since right before the Great Depression.

Here’s the thing, though… These companies are exponential money printers – in the good way that creates productivity, not the Fed way that destroys it.

Knowing that, it’s hard to actually argue that concentration is a bad thing.

Some are more effective money printers than others. And we can prove it.

We recently conducted an internal experiment on 3,920 stocks we track in our database across market cap classes. We wanted to come up with a revenue growth score to rank this pool of names based on their capacity to grow their revenues.

Here are the top five components of the S&P 500, sorted by their spot in the rankings as of last Friday:

NVDA
META
MSFT
AMZN
AAPL

The first four of these stocks ranked in the top 13% of the stocks we tracked. NVDA is the highest at No. 7, followed by META at position 108, MSFT at 253, and AMZN at 537. AAPL is the outlier at position 1,249, barely in the top 30%.

So if you’re worried about concentration in the S&P 500, I might recommend trimming AAPL from your portfolio, as our own Mike Burnick warned you ought to near the start of this year.

But what you should also remember is that these money-printing machines directly benefit not just from higher liquidity, but also from higher rates.

When rates are higher, large caps crush small caps in their ability to invest in R&D. Their massive cash hoards, generated by their productivity, mean they don’t need to borrow to develop new ways to make the money printer more efficient. If they’re skittish, they can even earn billions per year sitting in short-term Treasurys.

I think you need to see interest rates go much, much lower for small caps to look really interesting in a broad sense. And for all the reasons we discussed today, I just don’t see that happening anytime soon.

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Trump’s BLS Drama: All Part of a Flawed Plan