Stock market turmoil and economic uncertainty.

I’m Isaac Saul, and this is Tangle: an independent, nonpartisan, subscriber-supported politics newsletter that summarizes the best arguments from across the political spectrum on the news of the day — then “my take.”

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Today's read: 13 minutes.

This Friday.

This morning, Vice President Kamala Harris selected Minnesota Gov. Tim Walz as her running mate on the Democratic ticket, putting an end to one of the strangest pair of party primaries we can remember. A lot of readers have asked us a lot of questions about both the Republican and Democrat process, but they keep coming back to the same three:

How do primary elections work? Why do they work that way? And how could they be different?

We’re answering those questions in a special edition on primary elections this Friday.

Quick hits.

1. Vice President Kamala Harris chose Minnesota Gov. Tim Walz to be her running mate. (The decision) Separately, Harris earned the majority of roll call votes from delegates, officially making her the Democratic nominee for president. (The vote)
2. Several U.S. personnel were injured in a rocket attack at a military base in Iraq. (The attack)
3. In one of the biggest antitrust trials in over two decades, a federal judge ruled that Google violated antitrust laws by holding a monopoly on search and text advertising. (The ruling)
4. Bangladesh's Prime Minister Sheikh Hasina resigned and fled the country after mass protests against a quota system for government jobs ended with demonstrators storming the official residence. The resignation ended her 15-year rule. (The resignation)
5. At least four people were killed in Florida after Hurricane Debby made landfall as a Category 1 storm. (The storm)

Today's topic.

The global market disruption. On Monday, leading indices used to gauge the investor market across the globe plunged. In the United States, the S&P 500 slid by 3%, the Dow Jones Industrial average dropped 2.6%, and the Nasdaq Composite index decreased by 3.4%. In Europe, the pan-European Stoxx index fell 1.5%, its worst one-day drop in over a year, while London’s FTSE 100 fell 1.8%, its worst one-day performance in nine months. Meanwhile, Japan’s Nikkei Stock Average plunged 12.4%, the worst single day for Japan’s flagship index since the day after Black Monday in 1987.

Monday’s dip follows several days of poor economic indicators in the U.S. On Thursday, the Department of Labor (DOL) released its latest jobless claims report, which showed an increase of 14,000 claims over the previous week to a total of 249,000, the highest figure in over a year. Then on Friday, the DOL published its July jobs report that showed 114,000 jobs added in July, missing expectations, while the unemployment rate hit a three-year high at 4.3%. The unemployment rate has now risen a half point over the previous three months, a threshold former Federal Reserve economist Claudia Sahm used to identify the early stages of past recessions (commonly known as the “Sahm Rule”).

Investor concerns led to a sell-off at the end of last week, with the Dow Jones Industrial Average falling nearly 1,800 in a two-day span. Then on Monday, the Dow Jones’s largest one-day loss since September 2022 prompted economists to speculate that the market dip could portend a coming recession. 

"The main factor that has staying power is the economy's slowdown," Wells Fargo Head of Global Investment Strategy Paul Christopher wrote in a report. "Investors have been watching household financial stress build for the past two years, but during that time, job growth remained above its December 2009-December 2019 average of 180,000 new jobs per month."

Another factor many economists believe to be driving the global turndown is the interaction of changing interest rates with “carry trade” in the Japanese Yen. For years, the interest rate in Japan has been set at zero, encouraging many investors to borrow yen. However, the Bank of Japan agreed to raise interest rates last week, potentially prompting investors to sell off assets to cover losses. Others believe persistent interest rates combined with overvalued tech stocks have led to a temporary market correction.

Market concerns have led some economists to push for the Fed to hold an emergency meeting to cut interest rates now to stave off a recession. However, many economists are cautioning that worries about a recession are premature, noting that the S&P 500 and Nasdaq indices are both up by over 9% so far this year while GDP grew by an inflation-adjusted 2.8% in the second quarter.  

On Tuesday morning, trading in Asia showed the downward trend reversing with Japan’s Nikkei rising 10% and the yen giving back some of its gains against the dollar. In the United States, all major indices rose over 1% during the morning session. 

Below, we’ll get into what writers from the right and left are saying about the economic news. Then, I’ll give my take.

What the right is saying.

• The right is worried by the market downturn, suggesting a recession could be imminent.
• Some say the selloff is driven in part by Biden administration policies. 
• Others urge caution, arguing dramatic moves could worsen the problem. 

The Wall Street Journal editorial board said “the easy money reckoning arrives.” 

“The selloff in global stocks that began Friday and continued on Monday is in part a correction from sky-high values, especially in tech shares. But it may also be the start of a reckoning for a decade and a half of excessive spending and easy money that is going to arrive eventually. How soon and rough the reckoning will be is the great unknown,” the board wrote. “The fear is real, and Wall Street and Washington are blaming the Federal Reserve. The theory is that no sooner had Chairman Jerome Powell signaled last Wednesday that he wasn’t cutting interest rates immediately than a poor U.S. jobs report on Friday suggested a recession is nigh.

“The clamor for the Fed to save the day reflects that it’s the only game in town. Congress is gridlocked on economic policy, except for more spending and bad tax and trade ideas,” the board said. “But cheap money is never free, and it can’t last forever. It builds distortions and excesses that are unsustainable and must eventually be addressed. That’s what the Fed had to do by raising rates to arrest inflation, and part of that bill is now coming due.”

In The Washington Examiner, Tiana Lowe Doescher asked “are markets panicking more about ‘Bidenomics’ or Biden-Harris foreign policy?”

“The market movement seems to be less about a fear of an imminent recession and more about the perils of geopolitical chaos sown in part by the failures of Joe Biden’s presidency and now the increasing odds that Vice President Kamala Harris succeeds in beating former President Donald Trump for a second term in office,” Doescher wrote. “The long-needed correction of asset bubbles inflated by rampant deficit spending — for the past 3 1/2 years, the inflationary fiscal policy of Bidenomics — has collided headlong into the practical ramifications of Biden’s foreign policy and the highest odds in months that Trump actually loses to a de facto extension of the Biden doctrine.”

“Sure, some of the sell-off may be the usual desperation we see from Wall Street when it wants to goad the Fed into doing its bidding and reduce the price of borrowing with a premature rate cut. But part of it is the basic calculus that every investor, like every world leader, is weighing in their heads: If you are Iran or one of its proxies, do you begin your barrage of attacks on American allies such as Israel now, when the White House is effectively empty, or do you wait until Trump is in office,” Doescher said. “A justified market correction has run alongside the exogenous reality that the American electorate may give us four more years of bad fiscal policy and even worse foreign policy.”

In City Journal, Allison Schrager wrote “just another volatile day—or something worse?”

“One might write this off as just another day of volatility. The worry, though, is that this is something much worse: the start of a bear market and a long-feared recession. It’s too soon to tell; markets have been jittery for a long time. But the turmoil does show that we have become over-reliant on monetary policy as the solution to our economic problems,” Schrager said. “It also seemed unlikely that inflation would be defeated without a significant slowdown; a soft landing had never happened before. Despite all these concerns, markets mostly kept climbing, and the economy remained strong, though it never felt completely secure.”

“Many are already calling the Fed’s decision not to cut rates last week a great error. Wharton’s Jeremy Siegel even called for an emergency 75 basis-point rate cut now, and another in September. This is the sort of action you’d expect only if the U.S. were in the midst of a grave financial crisis. It is not clear how a Fed rate cut last week would have changed things,” Schrager wrote. “If anything, the current unpredictability shows how aggressive monetary policy, especially in the case of the Japan Central Bank’s keeping rates near zero for a decade and its yield-curve control, can create distortions that cause trouble.”

What the left is saying.

• The left is not concerned about the broader health of the U.S. economy but acknowledges troubling signs in the latest jobs report.
• Some say the Fed should stick to its plan of a September rate cut.
• Others say recessionary fears are justifiable given the economic data. 

In his blog Noahpinion, Noah Smith said “the U.S. economy is not crashing.”

“There’s been a longer, slower decline over the past week — but it doesn’t feel like an abrupt crash. Certainly, comparisons to 1987 — when stocks lost a fifth of their value in a single day — seem a bit overblown,” Smith wrote. “Zooming out, we see that as of this writing, even after this week’s decline, stocks are still up almost 10% for this year so far. That’s actually a really good performance — the S&P 500’s annual average return is about 10.5%, historically speaking, so 9.9% in just 7 months is better than usual. And over the past year, even after this week, the market is still up by 15.5% — an unusually good performance!”

“What’s interesting here is that the economic data coming out doesn’t actually look particularly bad — and yes, that includes the dreaded Sahm Rule. And the economy certainly doesn’t seem to have gotten abruptly worse in a way that should make stocks crash,” Smith said. “Indicators of labor market tightness have fallen, but they’re just about where they were before Covid, when the economy was solid. My favorite labor market indicator — the prime-age employment rate — is still just about as high as it’s ever been, and actually went up in July… In other words, there is a little bit of labor market weakness, but overall the economy looks pretty good.”

In Bloomberg, Marcus Ashworth argued “an emergency Fed rate cut would be a mistake.”

“There’s nothing broken in the US economy, so there's no justification for the monetary authorities to step in and mitigate losses for over-extended equity holders. The fabled ’Fed put’ is a break-glass lever only to be used in event of a proper emergency — and we're not there yet,” Ashworth wrote. “Friday’s July employment report came in weaker than economists anticipated, but Hurricane Beryl effects make it hard to discern any worrisome trend, as opposed to simply a single month of less robust payroll gains. The latest corporate earnings season is also pretty decent across the board, albeit with a handful of exceptions.”

“Emergency rate cuts do happen; but they’re relatively rare, and are only employed when the economy is facing a sudden seizure. The last pair were in March 2020 in response to the pandemic, when interest rates were lowered 150 basis points to zero,” Ashworth said. “The Fed is aware it has been keeping official rates restrictive for possibly too long. But it doesn't need to overreact, especially in an election year. Easing cycles often start with a half-point cut, and this time such a move may be justified — but at the right time and place, at a scheduled meeting rather than as an emergency response to an overdue correction in the stock market.”

In The New York Times, Paul Krugman wrote “the economy is looking pre-recessionary.”

“The United States probably (probably) hasn’t entered a recession yet. But the economy is definitely looking pre-recessionary. And policymakers — which right now basically means the Federal Reserve — need to move quickly to head off the risks of serious economic deterioration,” Krugman said. “It’s already clear that the Fed made a mistake by not cutting rates last week; indeed, it probably should have begun cutting months ago. Unfortunately, we can’t turn back the clock. But the Fed’s open market committee, which sets short-term interest rates, can and should make a substantial cut — probably half a percentage point, rather than its usual quarter-point — at its next meeting.”

“Why do I say that the economy looks pre-recessionary? The most important factor is the unemployment rate, which has been gradually trending up over the past few months. Friday’s employment report triggered the Sahm rule, which says that a sufficiently large rise in the unemployment rate is a strong indication that a recession has started,” Krugman wrote. “The appraisal of the labor market by consumers surveyed by the Conference Board has deteriorated, Amazon has warned that consumers seem cautious, and so on. None of this screams recession, but it does point to a rising risk of a near-future recession.”

My take.

Reminder: "My take" is a section where I give myself space to share my own personal opinion. If you have feedback, criticism or compliments, don't unsubscribe. Write in by replying to this email, or leave a comment.

• A lot more expert people than me are warning us not to draw conclusions, so I’m not going to.
• From what I can tell, the downturn was either caused by Japan’s interest rate hike, the jobs report, or the current U.S. interest rate — or some combination.
• I think it’s a good idea to not panic and wait for more information.

Economist Noah Smith's #1 rule for writing about the stock market is, "Nobody really knows why stocks go up or down, even though everyone pretends to know." Smith has a doctorate in economics from the University of Michigan and taught economics at Stony Brook University. I have a bachelor's degree in non-fiction English writing from the University of Pittsburgh, and I write a newsletter about politics. Suffice it to say, if a respected economist’s #1 rule is that nobody knows why stocks go up or down, I'm not going to pretend that I do.

But since part of my job is trying to understand this stuff, I have developed a pretty good rudimentary idea of what might be happening. From what I’ve read, there seem to be three big things driving yesterday's sell-off:

1) The interest rates in Japan went up. I put a lot of trust into what my favorite economics writer, Matt Levine, has to say, and he thinks this fact is salient. Here are the basics: For a long time, Japan’s central bank set interest rates at zero. This meant an investor could borrow Japanese yen without interest, convert it to a currency like U.S. dollars, then invest that money in assets like tech stocks. If the stocks perform well, they could pay off the borrowed yen and turn a profit. This is called a carry trade. 

The strategy relies on the Bank of Japan keeping interest rates low, but in July, it raised its interest rates. Unfortunately, that happened right around the time the Department of Labor released a bad jobs report. So if an investor borrowed yen to buy U.S. dollars, and then interest rates went up, they'd suddenly need more money than expected to pay back the yen. Investors commonly resolve this shortfall by selling stocks. Thus, the sell-off.

2) The bad jobs report. This one is a pretty traditional market driver: July produced fewer new jobs than economists expected, and unemployment ticked up yet again. Simply put, fewer jobs means a worse economy. By now you've probably heard about the Sahm Rule, which states that every recession has been preceded by the three-month average unemployment rate exceeding the 12-month low by 0.5%. The current difference is 0.53%. So: Recession?

We actually spoke to Claudia Sahm, the woman who created the rule, this morning. She cautioned that the rule should not be interpreted as a “law” but rather “an empirical regularity,” adding that “just because the rule was triggered, it does not mean a recession is a done deal.” Instead, Sahm said the rule is more of a warning. When the unemployment rate starts increasing steadily over short periods of time, “typically that’s happening because there's less demand for workers, which is a sign of there's less spending, there's less investment, and this dynamic feeds on itself.” So while she says the “direction of travel” in the unemployment rate is “worrisome,” it’s not necessarily a harbinger of a recession.

3) Finally, it seems a lot of people ("the market," we might call them) were expecting interest rate cuts. When interest rates are high, borrowing money is more expensive, which cools the economy. The Fed has left rates above 5% for the last couple of years to combat inflation, and it’s been pretty effective, so a lot of people thought they would have cut interest rates by now to safely encourage more spending. However, the Fed again left interest rates unchanged last Wednesday, which might have led investors to look to sell overpriced assets.

To repeat: I don’t know which of these explanations is right or wrong. I do know, however, that the combination of all of them might be really bad. We could be headed toward a recession, or already in one. But I don’t think we are.

This isn't financial advice, but I personally don't think it's time to panic. For years following the pandemic, a chorus of economists insisted we were approaching a recession or already in one. And yet, here we are — August of 2024, still speculating, and still experiencing a strong but complicated economy with poor consumer sentiment and inflation over 3%.

Also: Most of what we are seeing is pretty normal. The Atlantic’s Derek Thompson noted that there is a 64% chance of a 10% correction in the S&P 500 in any given year. Our stock market is coming off an all-time high and our economy is in the midst of a very strong post-pandemic recovery. Inflation is falling. The uptick in unemployment, which doesn’t usually rise gently, could very well be a healthy sign of approaching full employment rather than a metric pointing to a terminal diagnosis. There are plenty of optimistic ways to look at all this, and as of this writing (Tuesday morning) global markets already seem to be stabilizing.

Writing about economics is always difficult because expectations and beliefs play such a big role. In my typical world, predictions can be factually disproven. But in economics, everyone believing in a pending recession could very well bring it to fruition. That doesn’t just affect market watchers and lowly political journalists, but policy makers who know that interpretations of their actions can impact the future as much as the actions themselves.

All this is to say: I don't know what, precisely, caused Monday's market downturn. But we have some good ideas, and we'll need a lot more data before we can say anything definitive about where the economy is headed.

Take the survey: Do you think the U.S. is headed for a recession? Let us know!

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Your questions, answered.

Q: How do you decide to phrase your quick hits? Obviously a few lines can never do a story justice. So I imagine it's tough to write them while sticking to Tangle’s values. And how do you select the hits in the first place? (If you answered these in a previous newsletter, sorry!)

— Sophie from Amsterdam, Netherlands

Tangle: For context, Sophie was referring to this quick hit from our July 23 newsletter:

“Robert F. Kennedy Jr. reportedly floated working for the Trump White House as he considered endorsing Trump, according to The Washington Post. The Trump campaign said it declined the offer. (The report)”

We do have a few guidelines with quick hits that we follow, which were helpful for this story, since it was a little complicated. First, we want to try to stick to the wording used by the reports that are breaking the story, unless we have a good reason to make a change (simplifying wording or avoiding repetition in a summary). Here, we went with what The Washington Post used in their reporting because it seemed deliberate.

That leads us to point two, which is to be as simple and succinct as possible. We used phrasing here that we felt conveyed the story accurately and briefly.

Lastly, we want to make sure we’re qualifying when necessary. The story about Robert F. Kennedy Jr. we linked wasn’t widely corroborated but was instead the finding of a single reputable source. We said “reportedly” to convey that the story had been reported, but not broadly confirmed. This is similar to how we use “allegedly” to describe actions a person has been accused but not legally convicted of.

As for the selection process, that’s a little easier. We select quick hits if they’re appearing on front pages of major outlets (The Wall Street Journal, The New York Times, Fox News, The Washington Post, etc.) or creating a lot of buzz on social media. We also tend to pick stories that provide updates to ones we’d previously covered. More than anything, though, we are answering the question: “What are the five stories our readers need to know?”

Want to have a question answered in the newsletter? You can reply to this email (it goes straight to our inbox) or fill out this form.

Under the radar.

Over 300,000 Americans moved to flood- or fire-prone counties last year, despite the threats posed by an increasing number of severe climate events. The data, drawn from the Census Bureau, the real estate firm Redfin and First Street Foundation (a nonprofit that analyzes climate risk), showed the counties most exposed to floods and fires gained more population than they lost from July 2022 to July 2023. This continues a years-long trend of Americans disproportionately relocating to areas with a high risk of climate-related disasters. The Washington Post has the story.

Numbers.

• 480.87. The number of points the S&P 500 fell between July 16, 2024 and August 5, 2024. 
• 1,148.75. The number of points the S&P 500 fell between February 19, 2020 and March 23, 2020, at the onset of the Covid-19 recession.
• 1,241.60. The number of points the S&P 500 fell between October 2007 and February 2009 during the Great Recession. 
• 46%. The percentage of Americans who rate economic conditions in the U.S. as poor, according to a July 2024 Gallup survey.
• 42%. The percentage of Americans who rated the economic conditions in the U.S. as poor in July 2023. 
• 70%. The percentage of Americans who say economic conditions in the U.S. are getting worse. 
• 63%. The percentage of Americans who say they are not worried about losing their job, according to a July 2024 YouGov survey. 
• 17%. The percentage of Americans who think their financial situation will worsen in the next 12 months.

The extras.

• One year ago today we had just written a team update.
• The most clicked link in yesterday’s newsletter was the ad in the free version for The Daily Upside.
• Nothing to do with politics: 14 word pairs that have the same etymology.
• Yesterday’s survey: 1,043 readers responded to our survey asking if the prisoner swap with Russia was worth the cost with 76% saying that it was. “Glad the folks are home but it is the same as negotiating with terrorists. These folks were ‘kidnapped’ by Russia and they will continue to do this if they think that they will get their criminals back from the West in a ‘swap’,” one respondent said.

Have a nice day.

Minnesota bus driver Jayne Arendt-Verhelst gave her own shoes to a rider who was experiencing homelessness, driving the rest of the route in only her socks. Arendt-Verhelst is known for her happy demeanor, demonstrated through the playful nicknames she gives to her regulars. One regular rider who witnessed Arendt-Verhelst’s generosity said she hopes the receiver of the shoes gained “a little bit of hope because that kind of receiving kindness and hope can actually be a thing that propels you towards choosing to get help.” Fox 9 has the story. 

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