welcome to the 3rd edition covering the US economy via the macro lens, a further improved independent research report with some even more sleek Maverick charts!

Structured: 8 parts + Bonus and designed to be a very comprehensive and inclusive report. The bonus section is dedicated to Going Global Beyond the US economy. Hence, grab a cup of green tea, absorb and enjoy this thoughtful research piece.

Frequency: 4 editions / year and occasionally special reports on top when needed.

Connecting the dots: combining Bottoms-Up industry and company fundamental analysis with a Top-Down macro framework. Specifically, my Macro research as an overlay to my S&P 500 Research Reports, Maverick Charts, Full Equity Research (starting in 2024), and to the general topics for a comprehensive independent research.

Delivery: Macro made simple by breaking down complexities for key insights and takeaways delivered via sleek Maverick charts. This aims to be a key research report, and as well what most people need from the Macro side. How do I know that?

👉 I used to do from the Strategy side a similar Macro dashboard for the CEO and Board Members of a bank and trust me, they don’t waste time nor lack reading stuff

👉 delivered via plain English a’ la the "Margin Call movie scene: Explain It To Me!" because the movie scene resembles reality: as a professional in any field you are at a huge advantage if you can explain things clearly to the widest possible audience

"Maybe you could tell me what you think is going on here. And please, speak as you might to a young child or … a golden retriever. It wasn't brains that got me here, I assure you that!"

The differences: no power point, less formal, banking dashboard connecting the dots from the Macro side to the bank’s strategy with all the big short & long-term projects, had the internal macro view and when details were needed, Macro team would do it.

Hence, use this Macro as a dashboard where you connect your own precious dots!

Overall at times maybe controversial, but as long time readers know it well by now, here it is all about ‘Maverick-esque’ independent research, not a place to please some view, headlines, BS, or sugar coat one side or the other 😉.

The structure with the table of contents and key highlights can be enjoyed already. Feel free to jump to your favorite section as each has at least one dedicated take-away, yet I recommend following this order / logic:

📊 GDP growth: +1.3% Q1, +3.1% Q2 as near-term GDP growth estimates look good

📊 The Job Market: not crazy hot anymore, but still strong

📊 The Consumer aka People: out & kicking strongly: holidays, consuming, investing

📊 Interest Rates & Yields: peak rates & yields rather sooner than later

📊 Inflation: cooling off continues, cooling off aka normalising

📊 Real Estate, Mortgage Rates: mortgage rates set to cool off as well

📊 Sentiment: CEO’s strong, Consumers between perspectives and perceptions

📊 The (R)ecession Talk - Leading Indicators, Probabilities and 2024 Outlook: low probability, 1.5% - 2% growth in the cards

👍 Bonus, Going Global Beyond the US Economy: 2% - 2.5% growth in the cards

👍 Main Maverick Takeaways, for both the Economy and for the Future in General: keep compounding, keep compounding … your people, capital and overall experiences!

This research report is free cost wise for you, and as well ad-free and clickbait free. What would be appreciated from your side? Just sharing it out there, thank you!

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📊 GDP growth 📊

1. Q1 2024 real GDP: the economy grew at a more modest pace by 1.3% in Q1 2024 as per BEA’s second estimate from May 30th, and after a strong 3.4% in Q4 2023

👉 Q1 increase primarily reflected increases in consumer spending, residential fixed investment, nonresidential fixed investment, and state and local government spending that were partly offset by a decrease in private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased

👉 note the 2007-2009 recession, and also the 2020 Covid stop & go big swing

2. Q2 2024 real GDP: +3.1% (q/q) via the June 7th GDPNow Altanta FED estimate

👉 the 3.1% (green) is higher than the BlueChip consensus at 2.2% (blue) while the top/bottom 10 average forecasts are from +1.5% to +3% (light blue range/interval)

Maverick take-away:

👉 I aim for a 2% growth in Q2 (in the middle) … while simply, if it’ll be the 1.5% lower range, or the 3,1% estimate, that’s still good … heads we win, tails we win!

3. Zooming in to see the U.S. states GDP growth distribution via the Philadelphia FED State Coincident Indexes as of April 2024

👉 over the past 3 months: the indexes increased in 46 states, decreased in 3 states, and remained stable in 1

👉 in the past month: the indexes increased in 43 states, decreased in 4 states, and remained stable in 3

4. The general 3-months and 1-month diffusion indexes for the entire US economy

👉 general 3-month diffusion index of 86 from 82 previously

👉 general 1-month diffusion index of 78 from 80 previously

Maverick take-away:

👉 the US and vast majority of states are seeing positive values in their coincident economic indicators (i.e. no current recession) which is telling us the same message as complementary with the previous GDPNow Altanta FED estimate

5. Manufacturing baby, manufacturing! Total Private Construction Spending

👉 soon 3x since 2020, let that sink in! Quite a why the economy is doing well imho

👉 note: JPM's Jamie Dimon on the US economy said recently “Basically, it's booming.”

Let that sink in ... and ... bring the sink if you wish!

6. What about business investment activity? It is UP as well:

👉 New orders for non-defense capital goods (excluding aircraft) with a very sharp rebound since the 2020 pandemic, and currently at a high level of $73.79 billion - while the growth rate slowed down, it still signals strong confidence looking ahead, hence a positive outlook and economic strength in the months to come

👉 new orders for non-defense capital goods is also known as ‘core CAPEX’ or simply put ‘business investment’ … so that you can connect the dots and/or do not get confused with other research or media reports

N.B. core CAPEX is regarded as a key factor driving the economy and one of the leading indictors of business activity / business CAPEX … hence to be monitored for any big swings be it up or down … see how it related to the business cycle with the grey bars showing the recession periods

7. US economy-wide profits and S&P 500 operating profits

👉 very good, not just recovered after the 2020 pandemic, but way above now

8. Profit margins wise, they rose to 15.2% in Q1 2024

9. Complementary, how do corporations manage the high interest rates? Very well!

👉 Corporate net interest costs stable despite rising FED funds rate

👉 Corporations were smart by locking in low rates, and moreover now they get a good yields on their cash balances

10. Stagflation as the most recent ‘hot’ theme & headline: is it here or incoming? No, and very unlikely anytime soon …

As soon as the lower GDP headline & hotter inflation data came out, the ‘Stagflation’ narrative and headlines via news stories went simply parabolic to June 2022 levels! Back then, that was a highly expected via one of the most anticipated recessions ever (which did not come) coupled with the expected inflation post-Covid driven by huge monetary and fiscal stimulus (which did come)!

I believe the fears for stagflation are overblown, we do not have that now for sure while going forward, quite unlikely as well. What is my rationale you might wonder? Before that, Stagflation 101: that is an economy with a low/stagnant or negative growth (low demand), high inflation and high unemployment.

👉 1.3% real GDP growth isn’t stagnant, but very close to the 20y average; moreover, recall from above the +3.1% latest 2nd quarter GDPNow estimate via the Atlanta FED

👉 despite a recent small uptick in Inflation data, the overall actions and directions are solidly pointing out that the around 2% inflation target will be met - working now in parallel to a deep dive report on specifically Inflation … stay tuned

👉 unemployment is hovering at all-time lows and the labor market is still strong

As FED Chairman Jerome Powell said just recently when also asked about Stagflation:

“I don’t see the Stag or the ‘flation’ actually”

Additionally, parallels from today to the 1970s stagflation are quite off the mark:

• oil at 78 is not an alarming level, it is actually below the 3-year average of 81

• even if it would to up a lot, the economy today is way less dependent on Oil, energy costs overall less of an issue for consumers overall given the decent disposable income data … and same for businesses overall …

• stagflation just does not happen without some big supply-side disruption

• the labor market is very strong with even many unfilled jobs, and

• the FED has a way better understanding and tools to manage the economy

Maverick take-away:

👉 things are looking decent: investment activity is up, corporate profits are good, high interest rates are manageable, no stagflation in sight

📊 The Job Market 📊

11. Unemployment Rate (UR) = very low 4.0% - a bit higher lately after the 3.4% in April 2023 when it was the lowest since 1969, yet continues to hover near the 50-year lows

👉 materially below the 35-year median at 5.72% (blue), and before this month when at 3.9% it was below 4% for 27 straight months which equates to the longest streak since the late 1960s

👉 the unemployment rate never got lower than 4% once in the 1970s, 80s or 90s

👉 who would have imagined that after the 2020 Covid panic (bigger even than the 2007-2009 GFC) that we will recover that fast? Amazing what the economy can do!

12. Unemployment Rate with Nonfarm Payrolls combined for further insight:

👉 Nonfarm Payrolls at 272k from 175k previously (NFP = jobs added or lost across a wide range of industries, excluding agricultural jobs, about 80% of total jobs)

2 key notes:

👉 the rule of thumb = a monthly increase of 150 to 200 thousand indicates that the job market/economy is strong (when the economy is weak, NFP turn negative before unemployment rate rises, hence NFP can be seen as a bit of a leading indicator)

👉 we mark the 40th straight month of job gains, hence a robust demand for labor!

Same chart, but shorter time series since 1990 for 2 reasons

👉 for a better zooming into the charts of the 2 time series (better readability)

👉 more representative business cycles: economy before 1990s aka before the internet was less flexible (no gig economy), different structure/composition (energy vs oil) etc

13. Initial and Continuing Jobless Claims

👉 Initial Jobless Claims (people filing for unemployment benefits) up to 229k, back to the 2019 pre-pandemic level and way below the 514k 5-year average

👉 Continuing Jobless Claims (1-week lag metric, people on unemployment benefits for a while) also back to 2019 levels with 1,792m and below the 3,770m 5-year average

14. Job Openings ‘JOLTS’ (Total Nonfarm) - key metric of labor demand/job creation

👉 8 millions of available jobs ready to be filled

👉 1 million extra jobs out there compared to pre-pandemic levels

👉 3.5 million jobs added relative to the pandemic bottom

Maverick take-away:

👉 the recent drop is material while still my view on it is positive & simple: it's a plus reserve to have that many jobs ready to be taken / a lower cushion but still a cushion. A lower job creation pool isn’t the same at all to a major downturn.

👉 N.B. the FED wants a bit looser of a job market in order to chill a bit with the fastest hiking cycle in recent decades … and continue the inflation cooling off process

15. For further key insights into the job market & the FED, a closely watched one by FED Chair Powell & other FED leaders as one of the key factors driving inflation: Job Openings ‘JOLTS’ (green) & Unemployed People (red) as a telling visual if the job market is at any point in time ‘loose’ or ‘tight’

👉 2007-2009 GFC created a ‘loose’ labor market with many unemployed and not that many jobs and it took a while to balance things out

👉 during the 2020 pandemic, the movements were off the charts …

👉 while these days, we have a ‘tight’ labor market after a great & fast recovery as the economy not just recovered the lost jobs from the pandemic but added way more

Maverick take-away:

👉 available jobs are decreasing materially yet still very solid, while combined in this chart with the very low unemployed people makes for a tight labor market - while not a ‘secularly tight’ job market anymore, yet still tight … hence the FED did not cut yet!

16. Job Openings to Unemployed People (ratio of the 2 above): at a nice 1.24x!

👉 job vacancies still exceed the number of unemployed by more than 20%

👉 after peaking at a crazy 2x in 2022, just back now to the pre-pandemic levels

👉 simply put, we have 1.24x job openings for every unemployed person = historically a great time to be looking for work and negotiating a decent salary ...

Maverick take-away:

👉 the ratio going down lately helps cool off inflation via the wage pressure channel

👉 1.24x is a plus / reserve & one of the most obvious signs of excess demand for labor

Fun / key fact: the FED and this ratio - in the February 2023 FOMC meeting, Powell noted there were as many as 1.9 job vacancies per unemployed person, showing that the job market was still very strong, while the unemployment rate still at a historical low, which was a key reason why most Fed members continued to support further interest rate hikes & stated that high interest rates should be sustained for some time

17. Next, does this from above translates into reality via wage growth?

Yes, a solid +4.7% wage growth for March 2024 (5% in February) which is a driver of inflation overall, but also for consumers a hedge against inflation

👉 income from labour = the primary funding source of all consumption

👉 when that does well, consumer spending will naturally follow, especially nowadays when we have higher wage growth than the inflation rate, hence real growth in wages (more on the consumer below when I cover the consumer in the next section)

18. And now the Job Market via 1 Maverick Chart on Steroids for 10,000 Words

From above: Nonfarm Payrolls (green): 272k and Unemployment Rate (red) = 4.0%

Adding 2 new key metrics:

👉 Nonfarm employment diffusion index (blue)

👉 Real-time Sahm Rule Recession Indicator (turquoise)

Maverick take-away:

👉 nonfarm employment diffusion index at 63% is quite above the 50% mark (grey dotted line) which signifies that over half of the industries within the employment population are expanding (conversely, if monthly nonfarm employment consistently falls below 150K to 200K jobs for several months and the diffusion index drops below 50, it serves as a warning sign) - another sign of the labor market strength

👉 Real-time Sahm Rule Recession Indicator (turquoise) = 0.37% from 0.3%

Insight: the unemployment rate (UR) typically decreases over an extended period and is considered a lagging indicator. A notable increase in the unemployment rate often signals that the economic correction has progressed to the middle or late stages. Therefore, it can be used alongside the Sam Rule recession indicator for leading observations: the Sahm indicator calculates the 3-month moving average of the monthly UR and subtracts the previous year's low UR. When this value exceeds 0.5%, it indicates that the economy is undergoing a recession ... not the case now!

19. Puzzle time - economists & market participants having a big one since a while:

‘How comes the labor market has been so strong post-2020 Covid and still is today?’

👉 Dhaval Joshi from BCA Research makes the argument for an imbalance between labor supply and labor demand: usually, demand is the main driver, yet in the post-pandemic world it’s been low supply … which might be running well below labor demand, and that possibly for the first time ever

👉 in such an environment, wages growth should not be a surprise, hence also contributing to inflation … and it’s well known that ‘wages are sticky’, meaning it’s hard to negotiate them down once people earned them

👉 the gig economy also made another leap higher with the pandemic given work from home, new types of jobs and overall more flexible business models where tech facilitates labor/jobs a lot

20. On the tech layoffs hot topic with many alarmingly for not much headlines, WSJ:

Complementary, CEOs are more upbeat on hiring after they saw the economy digesting very will the high interest rates we are having since a while already:

21. This is reflected also in the what I call the ‘job cuts chatter’

👉 job cuts conversations are becoming less and less frequent during the S&P 500 earnings calls via the the companies’ prepared remarks and Q&A with analysts

📊 The Consumer aka People 📊

22. Never Bet Against The American Consumer … ‘Bro!’

👉 the American consumer surprised economists again and again after the Covid outbreak as spending kept trending up & up … stimulus checks buoyed spending longer than anticipated … while the job market helps a lot for sure as detailed above …

👉 currently at $19.34 trillion with a +0.2% increase month over month in March

👉 we know & often hear that the Consumer (Consumer Spending) is 70% of the economy - I would extend that and say that the Consumer IS THE Economy with our collective decisions to spend, save & invest. It usually drives growth during economic recoveries (pandemic rebound) and is key for overall economic growth …

N.B. Personal Consumption Expenditures (PCE) accounts for about 2/3 of domestic spending and is a significant driver of GDP

23. Adjusted for inflation? There you go at $15.71 trillion

24. Digging further: Retail Sales, namely Advance Retail Sales since 2000

👉 the 2020 pandemic meant a dip given the overall stop, but check that rebound which not many at all did expect … while my fun and simplistic analogy would be:

'If humans engage in revenge s*x, why not engaging properly in revenge shopping 😇?' Mav

P.S. not sure about my behavioural economics analogy, but yeah, you got it …😉

25. Retail Sales growth (YoY) rebounding +3% after quite a cooling-off as expected when rates rise, especially how fast they did. Though, the same message applies:

Never Bet Against The American Consumer … Bro!

26. US Airport Traffic as cool alternative data via BofA

👉 Americans flying in record numbers over Memorial Day weekend … and note that the peak summer travel season hasn't even started yet

27. Consumers and travelling abroad

👉 A solid job market + a strong dollar = USA citizens travel abroad smoothly = 20% higher than the pre-COVID record

28. Moreover, in terms of consumer attitudes and buying plans

👉 1 in 5 of survey respondents plan to travel internationally over the next 6 months (a record high since the survey started in February 1967)

👉 during the same time in the 2020 pandemic, only 1 in every 20 Americans intended to travel … while for a better comparison with pre-pandemic times 2019? About 1 in 10

29. What about US Household Debt? It is LOW … and little changed from pre-pandemic times when measured not as an absolute level but as % of disposable income aka what is inside people's pockets ... . Via Oxford Economics:

👉 “Every category of consumer loan is now smaller relative to disposable incomes than before the pandemic”

👉 “That is true even for credit card debt that, despite rising at a solid pace in recent years, remains below its Q4 2019 level as a share of incomes.”

30. Helps a lot = a big part of consumer debt, such as mortgages is fixed rate debt! Hence, households interest costs are stable, did not follow the spike in policy rates

31. Personal Savings Rate (% of disposable personal income after taxes & spendings) = 3.6% now, and it has been making the doom & gloom headlines and social media

Nonetheless, there you got with the Maverick’s take on it:

👉 at the surface, indeed, it is low below both the 5.8% average for the past 20 years and the pre-pandemic 7.2% … but why is it low? (note also the 2020-2021 stimulus checks spikes aka 'did you get your stimmy?')

👉 people not earning enough to save? No, we saw above wage growth and household low debt as % of disposable income. Are people spending irresponsibly on the newest gizmo that they get bored after 2 weeks (I am kind, rather 2 days)? Maybe some of it.

👉 how about recalling that this saving rate is positive since many years, and that it is a behavioural monthly growth snapshot which does not tell us the cumulative savings

Hence, Mav, where is the money? ‘Show me the Moneyyyyy!’ (Tom Cruise, Jerry Maguire)

👉 Households own a whooping $4.5 trillion in Checkable Deposits & Currency which is a cash reserve that more than quadrupled relative to the pre-pandemic levels: $1 trillion in 2019 to $4.5 trillion now. This amount equates to about $17k per each US citizen for more than 4x available cash today than the pre-pandemic … let that sink in! Basically, just like with the job market, there is a big cushion here as well.

👉 recall also, that is after a pandemic, a recession, inflation, fastest FED hiking cycle in decades, some banking issues in 2023 in US , a war in Europe, Israel–Hamas war etc

👉 add on top a stock and real estate market at all-time highs which created a record household net worth in 2023 that rose 8% in 2023 to $156 trillion - via behavioral economics we know ‘the wealth effect’ which tell us in this case, why would people save a lot more money (than the 3.6% current rate) when sitting on a ton of wealth?

👉 hence, at 3.6% currently, it’s not low but rather matches the very strong job market, asset values and overall confidence of the good times we are experiencing

Maverick take-away:

👉 people are now out & kicking: travelling, holidays, consuming & investing …

📊 Interest Rates & Yields 📊

32. US yields - 3m, 6m, 1y, 2y, 3y, 5y, 10y and 30y with a 20-year lookback period

👉 3 hiking cycles in 20 years: not the 1st one nor the last one I tell you that

👉 currently above the 2015-2019 period, and a bit below the 2004-2009 cycle

👉 that front end, namely the 3m 6m and 1-year paying above 5% is not too shabby at all ... paying above even the 2007-2009 period

Getting Paid to Chill 'T-Bill and Chill!' 'T-Bond & Long' is an option nowadays!

33. Where are we headed? FED interest rates projection via the Fed Funds Futures

👉 probability of a rate cut 1.3% for the June 11-12 FED FOMC meeting

34. 2 cuts of 25 basis points priced in / expected by January 2025

35. Interest rate cut probabilities for a complementary view via Bloomberg

👉 June FOMC = close to 0% chance of a cut, July FOMC = highly unlikely at 18%

👉 2 interest rate cuts priced in by January 2025

36. Goldman Sachs survey: ‘How many cuts/hikes do you expect from the FED this year?

👉 more than 2/3 of GS survey respondents expect the Fed to cut between 25 and 50 basis points this year: “Federal Reserve Chair Jerome Powell's remarks at the latest FOMC meeting — specifically around the high bar for any hikes — likely help build investors' confidence on the path ahead,” via GS Oscar Ostlund

37. For a very complementary angle, the 2-year Treasury Yield and FED Funds Rate

👉 FED funds target rate naturally highly correlated with the 2-year yield

👉 as the 2-year yield playing with going down … expect FED funds rate to follow

Maverick take-away:

👉 peak interest rates aka ‘peak FED’ is likely to be here rather sooner than later! First, before any cut, the FED needs to be confident inflation is coming down properly and it can be sustainably around the target, namely “average of 2% over the long run.”.

👉 on investing: after a long long time, bonds pay now decently and are an alternative

👉 on the high interest rates environment and impact on the economy: keeping rates at 0 until 2022 gave the chance companies and families to lock in low interest rates - while the impact of the measures to limit the pandemic’s financial damage was under-estimated: inflation was/is the price … on that topic, more below

📊 Inflation 📊

38. US CPI Y/Y (blue) & M2 growth Y/Y (red)

👉 after peaking in June 2022 at 8.9%, inflation reversed and fell to 3.4% as the key driver M2 money supply growth rate turned negative in Q4 2022 for the 1st time since 1933! Yes, almost a century! Let that sink in!

👉 note: since March 2024 it’s back positive and despite not by a lot, just +0.84%, it is surprising one could say given that the battle with inflation is not won yet

39. Core Inflation Rate (Core CPI, red) a bit higher at 3.6% relative to the 3.4% CPI (blue), though both trending down as inflation gets more and more normalised

Now that we saw the actuals, what about the key question on inflation expectations?

40. US University of Michigan Inflation Expectations:

👉 1-Year Inflation Expectations metric (blue) points to a 3.3% figure after the 2022 parabolic spike … cooling-off big time since then …

👉 5-year ahead expectations (red) stable at 3% - never took off materially given that the expectations are that central banks and governments will always manage to control inflation/deflation every time it pops up big time

How I and you should use this in the real world?

👉 check when the 1-year disconnects materially from the 5-year as seen since 2021 right before we got the big inflation - in reverse now, we’ll likely see inflation stabilise

41. The 5-year forward inflation expectation rate (market's expectation of inflation over the next 5 years)

👉 = 2.31% with the same message: inflation cooling-off and heading back to target

👉 2020 a time when rather deflation was expected while later, inflation expectations grew but were never ‘de-anchored’ as it it did not even reach 3% … which is good

42. New York Fed’s April 2024 Survey of Consumer Expectations - median inflation expectations hovering between 2.6% to 3.3% rising lately at short and longer-term horizons while coming in lower at the medium term. Specifically:

👉 the 1-year ahead horizon increased a bit to 3.3% from 3.0%

👉 at the 3-year ahead horizon, it fell slightly to 2.8% from 2.9%

👉 while at the 5-year ahead horizon, up a bit from 2.6% to 2.8%

43. Neutral/Natural Rate of Interest vs Real Fed Funds Rate (I really like this one)

blue = Neutral/natural rate estimated by the Holston-Laubach-Williams (HLW) model, red = Real Fed Funds Rate, yellow = Real Federal Funds Rate - Natural Rate of Interest

How to read/interpret this chart? When the real interest rate is greater than the neutral interest rate, the monetary policy has a tightening effect and can suppress inflation. On the contrary, when the real interest rate is lower than the neutral interest rate, the monetary policy stance tends to be loose, which may fuel inflation.

👉 Real Federal Funds Rate (red) = 2.68% from 2.63% previously

👉 Neutral/Natural Rate of Interest (blue) = 0.73% from 0.84% previously

Hence, monetary policy tightening is taking action which is driving inflation lower!

👉 note how negative Real Fed Funds Rate (red) were during 2020-2022 reaching even -6.56% in March 2022 (record since 1960s), hence no wonder Inflation came to town …

👉 I kept saying on and on that inflation is coming, we cannot get out of this 2020-2022 episode without any side effects from all the stimulus (fiscal & monetary) … some said no way, we did not see inflation in ages, some said yes, you might be right …

Maverick takeaway:

👉 overall, coming from the 2021-2022 scare where many mocked the FED that inflation will be NOT ‘transitory’, nowadays some short term higher inflation, but the expectations are for the disinflation process to continue

👉 Recall FED’s Powell just said recently “I don’t see the Stag or the ‘flation” actually!’

N.B. Maverick Inflation Special Report coming out soon where I will deep dive into inflation fundamentals, key drivers, target & measures, clearing up confusions, and moreover to inflation expectations & pricing … stay tuned!

📊 Real Estate, Mortgage Rates 📊

44. Mortgage rates

👉 with the FED fighting inflation which is cooling off (disinflation process) rather sooner than later, the FED will also naturally lower rates

👉 and from there naturally the 30-year mortgage rates (blue) will likely be cooling off as well from a 20-year record of 7.79% … for now it is 6.99%

👉 note how it broke in 2023 even the +2 standard deviation (SD) which for me was and is a major sign of a top … from here the next stop at the +1 SD of around 6%

👉 note also the 20-year average/mean (green) of 4.76% is way below the current rate

45. Hovering now above the 2006-2008 peak levels, 2 key notes for further real insight:

👉 distribution of mortgages by interest rates paid: 91% of people have a rate BELOW 5% which is close to the 20-year median of 4.76%. Detailed breakdown:

• 26% have a rate under 3.00%

• 70.7% have a rate under 4.00%

• 91% have a rate under 5.00%

• 96.3% have a rate under 6.00%

46. ‘How many owned US homes are free and clear from a mortgage?’ as that is also a key question on housing and interest rates

👉 42% in 2021 of all owner-occupied homes in the U.S. were owned free and clear, up from 34% percent in 2011. Of those who owned their home free and clear, nearly 78% were owned by homeowners aged >55

👉 Q2 2024 nowadays very likely higher: maybe even 45-50% given that homeowners aged >55 should be close to the end of the mortgage payment schedule

Basically, most homeowners are not much sensitive to movements in home prices or mortgage rates! Note also that home equity lines & reverse mortgages are small = good!

Combining the 2 above we have actually the key take-away and insight:

👉 if 42% of homes (likely even more now in 2024) are owned outright + 71% of mortgages below 4%, we can deduct that in excess of 80% of homeowners do not feel much the effect of high current mortgage rates … let that sink in!

47. Moreover, are residential constructions halted or dropping ? Not at all!

👉 1,36 mil privately‐owned housing starts which is above the 1,22 mil 20-year average

👉 notice the (too) big uptrend leading to the 2007-2009 subprime mortgage crisis: it took quite a while for the construction sector to get full confidence and get back up to speed (note also the 2020 Covid interruption)

48. Home Prices via the big 3 housing indices: S&P/Case-Shiller National (blue), S&P/Case-Shiller 20-City Composite (black), FHFA House Price Index (orange)

👉 all 3 increased in the last month, and take note as well of the quite parabolic move since the 2020 pandemic

👉 when that many people own their own homes and their price increases, the ‘wealth effect’ is on and people are more willing to spend and invest further

49. Isolating the S&P/Case-Shiller National Home Price Index (blue) and adding it’s growth year-over-year (yellow)

👉 a solid 6.47%% growth marking another all-time high in March (despite high rates)

👉 just a great recovery overall after being shortly negative in May 2023

50. What about Mortgage Applications (MBA)? New home-owners anyone?

👉 after mortgage loan applications volume increased for a 3 week growth streak, the last 2 weeks with negative values

👉 after the 30-year fixed mortgage rate declined for 3 straight week to 7.01% (lowest level in seven weeks), back with a slight increase at 7.07%

Overall, affordability is very low, yet despite the FED’s hiking interest rates cycle, hence the current 7.07% 30-year mortgage rate, we see also some green bars (growth) which shows the strong consumer and how wage growth & disposable income is there.

51. Last but not least, Residential Mortgage Debt VS Homeowner’s Equity

👉 on top of fixed interest rate debt as noted previously, U.S. homeowners are sitting on roughly $32 trillion in total equity ... let this one sink in!

Maverick’s take-away on the housing market overall:

👉 affordability for new potential home buyers is not favorable now, yet lower mortgage rates likely soon, all while current mortgages not being paid is not the case

👉 residential construction rolling, home prices up, homeowners equity high

👉 overall headlines are more doom & gloom than they should when it comes to the real estate market overall … but for clicks and views for advertising money they will keep rolling … and once interest rates, yields & mortgage rates will go down, headlines will find something else to beat the doom & gloom drum …

👉 The Rise of Negative Media is now a confirmed phenomenon via solid research besides my own personal observation … a quick take and summary you can read here.

📊 Sentiment 📊

52. CEO confidence increasing across the board

👉 current economic conditions vs 6 months ago, business conditions in own industry 6 months ahead, and expectations for the economy 6 months ahead

👉 as FED started hiking, confidence got a hit … but back now above pre-covid levels

53. Complementary longer time series and take via Schwab:

👉 we have the 2nd consecutive quarter in which the index has a reading above 50, “indicating that CEOs are cautiously optimistic following 2 years of gloom”

54. CEOs, ok, ok privileged & all, what about the Consumer sentiment/confidence?

👉 Conference Board (CB) Consumer Confidence Index (blue): at 102 from 97, not yet above pre-pandemic times, but very well recovering since 2020

👉 University of Michigan (UMich) Consumer Sentiment (red): at 69.10 from 77.20 which is BELOW the 2020 pandemic levels … hence, does not make much sense to me … on the other side, after a multi-year low reached in mid 2022 as inflation was hitting hard & the stock bear market was in full force, it has been recovering well since then

N.B. the main distinction between the UMich Consumer Sentiment Survey and the CB Consumer Confidence Questionnaire is that the former focuses on how consumers feel about the consumption of durable goods, while the latter is closely related to general consumption and employment conditions.

55. Diving deeper for perspectives which matter quite a lot for perceptions via the FED’s Survey of Household Economics and Decisionmaking, namely since 2017:

👉 72% of adults, a big chunk describe their own finances ‘okay’ or ‘comfortable’ and note how despite the pandemic it did NOT change much, very stable since 2017

👉 however, when it comes to the local or US economy (zooming out) being ‘good’ or ‘excellent’, there has been a big drop since the pandemic, 42% and 22% respectively. The latter as a huge 50% gap in 2023 between own finances & the national economy … which does not make much sense, does it? Covid was hard, inflation was and is hard for everybody, yet how can one say his situation is okay/comfortable, yet have such a bad perception about the economy?

Mavericks’ take:

👉 one major reason is the rise of negative media, polarisation, headlines for ads etc

👉 the other, the political battles, extremism, rage and overall not constructive discussions on the topic, from politicians per se, to all adult voters in general … when there is a big perception of disorder, conflict and lack of leadership, this is the result … but a result which does not resemble reality! Narrative is one thing, reality another!

📊 The (R)ecession Talk - Leading Indicators, Probabilities and 2024 Outlook 📊

I am into the no recession/soft landing camp. Now a very common question I get is: ‘What metrics and/or models you look at to track the business cycle and the likelihood of a recession at any point in time?’

Well, there are many out there that I look at and check: one day I will compile all of them into a comprehensive article & overall framework. Nowadays, among many other I look particularly at the following 10 metrics/indicators:

57. Philadelphia FED Recession Probability Index - cooling off materially after in 2022 many market participant expected a recession - yet this metric never breached not even the 50% chance, the maximum in 2022 was 47.17%

👉 current quarter: 14.41% (blue) from previously 17.3%

👉 next quarter: 18.74% (red) from previously 23.94%

👉 four quarters ahead: 25.64% (orange) from previously 25.18%

2 key complementary notes:

👉 this metric has an overall signal/sensitivity/focus more to the current and next quarter (bigger and faster spikes when economic stress happens)

👉 the probability of recession for the next quarter is also referred to as the "Anxious Index", which accurately predicted every economic recession identified by the National Bureau of Economic Research (NBER) since 1970

Overall, this is to be used in practice in tandem with all it’s 3 parts and also other complementary business cycle / recession indicators for a stronger decision!

58. Real-time Sahm Rule Recession Indicator

👉 at 0.37%, previously 0.3% is not signalling a recession due to the historical low levels of the unemployment rate

Background: FED economist Claudia Sahm approach - if the 3-month moving average of unemployment rate exceeds 0.5% compared to the previous year's low, the economy is in a recession or will enter one soon (condition met in past recessionary periods).

59. Conference Board Leading Economic Index (LEI) vs GDP

👉 the Conference Board Leading Economic Index (LEI) is historically a good gauge of where we are in the business cycle ... also picking up lately (less negative) after being negative since July 2022!

👉 seen as a leading indicator as the US economy is likely to recess in the next 2-3 quarters when the YoY rate of LEI falls below 0, currently at -5.21% (previously -5.45%)

👉 Yet, 'is this time different' (tricky finance saying ... )? I would lean rather yes, no recession anytime soon ... the economy is doing quite fine + big fiscal spending + election year ... will be very hard to have a recession in 2024!

Also, business cycle indicators via all CB’s indices - leading, lagging, coincident

👉 the Leading index has been going down since a while given the negative growth from above, yet note the following: unlike in the past, this direction is not confirmed by the lagging or coincident indices

60. NBER Recession Indicators Drawdown

👉 at 0% (previously 0%), no sign of recession here either

👉 when more indicators experience sustained declines or drop significantly, there's a greater chance that the U.S. economy is entering a recession.

61. FED Excess Bond Premium Recession Probability

👉 at 14.92%, dropping from 18.22% - also, showing a low recession probability

Background: In 2016, the Federal Reserve proposed a recession model that based on the excess bond premium (EBP), which is a financial indicator originally introduced by Gilchrist and Zakrajšek (2012). The EBP is a component of corporate bond credit spreads that is not solely driven by expected default risk. EBP is an effective indicator for evaluating investor sentiment or risk preference in the corporate bond market. The higher the EBP, the higher the risk in the bond market.

62. FED Financial Conditions Impulse on Growth (FCI-G)

👉 1-year lookback (red): -0.38 from -0.57 previously

👉 3-year lookback (blue): 0.24 from 0.08 previously

After heavy financial conditions tightening in order to cool-off inflation, financial conditions are not tight anymore, hence no longer a drag on overall GDP growth.

N.B. positive values ​​represent headwinds to GDP growth and negative values ​​represent tailwinds. For example, 1% means that financial conditions will have a 1% drag on GDP growth over the next year.

63. Chicago Fed National Financial Conditions Index (NFCI)

👉 NFCI (blue) at -0.56 after previously at -0.54, financial conditions are good!

👉 the higher the index, the higher the risks are (note, inverted in this chart)

👉 it leads real economic growth by roughly 1 to 2 quarters as real GDP growth (red) is highly correlated to financial market conditions, and it is composed of up to 105 market indicators, which are divided into three categories: risk, credit, and leverage.

64. Alternative cool data from the S&P 500 leaders, namely their indirect thoughts via the frequency of mentioning ‘recession’ via the latest earnings transcripts

👉 in the 2020 pandemic, almost all 500 saw the recession coming, then in 2022 we had the most anticipated recession that never came even if 400 thought so, via WSJ:

👉 “Among companies in the S&P 500, the term ‘recession’ showed up in just 100 transcripts of earnings calls, investor events and conferences recorded in the first quarter, according to FactSet. That was down from 302 in the first quarter of 2023, and the fewest in two years.“

65. Outlook for US Real GDP Growth Expectations for the Next 12 Months through 1 Maverick Chart for 10,000 words showing 3 Leading Forecasts

1) MM Economic Expectations Index: 2.13% from 2.2%! The calculation method is the weighted average of GDP forecast data for this year and next year from major statistical institutions (including the IMF, World Bank, OECD & major think tanks).

2) Philadelphia Fed SPF - Real GDP growth average for the next year: 1.90% from 1.74%! The Survey of Professional Forecasters (SPF) is released by the Philadelphia Fed Statistics. It surveys the expected values ​​of macroeconomics indicators such as economy, consumption, employment, and prices. Here we calculate the GDP as the average of this quarter to the next four quarters.

3) New York Fed’s GDP forecast for the next four quarters: 1.53% from 1.45%! The New York Fed uses quantile regression to analyze the average GDP growth rate of the US in the next four quarters. The main reference variables in the model are Blue Chip Economic Indicators Survey (BCEI), Composite Indicator of Systemic Stress (CISS), and here we take the median GDP growth from this model.

Therefore, 3 Leading Forecasts for Tracking the Future US Economic Growth!

Further insight into the outlook and methodology:

👉 The long-term average economic growth rate for the US is approximately 2%. If the forecast for the next year significantly exceeds or falls below this 2% threshold, actual GDP tends to follow suit with strong or weak performance. These 3 indicators reveal a close correlation with actual GDP, sometimes even acting as leading signals.

👉 For instance, during the 2008 financial crisis, these 3 indicators bottomed out at the end of the year, while actual GDP only started to rebound in Q2 2009. Since actual GDP is typically released about a month after the end of each quarter, the monthly MM Economic Expectation Index and New York Fed projections can serve as leading indicators for GDP.

Maverick takeaway:

👉 the probability of a US recession in 2024 is low, big fiscal spending is ongoing and on top we have an election year

👉 1.5% - 2% growth in the cards, should growth take a hit and about to go negative, intervention is possible and quite likely

👍 Bonus, Going Global Beyond the US Economy 👍

66. Economic Expectation Index for US, EuroZone, China and the World overall by aggregating GDP forecasts for the current & next year from major institutions, including the IMF, World Bank, OECD & prominent think tanks. When the index rises, it signals optimism in the market's economic outlook for the next 12 months

👉 US (green): 2.13% from 2.20% previously

👉 EuroZone (brown): 0.99% from 0.80% previously

👉 China (red): 4.73% from 4.70% previously

👉 World (blue dotted): 2.62% from 2.58% previously

Maverick take-away: the outlook for the next 12 months is looking good.

Bonus as empowering you: in general, how to read/interpret this chart? 2 ways:

1. Global economic growth typically hovers around 3%, which is considered a relatively normal level. A significant drop in global economic growth, falling well below 2%, serves as a potential warning sign of a global economic recession

2. Adjustments in economic expectations often coincide with short-term economic fluctuations, providing a means to grasp turning points in the economic cycle. When economic expectations cease to decline, it typically signifies that the worst phase of economic distress has passed (the bottom should be about there)

67. Global Recession Probability

👉 28.36% now and decreased from last month’s 30.09%

👉 an overall decrease since 2023 when it was slightly above 50% in Q1 2023

Background: 50% reading as the baseline: a reading significantly above 50% for an extended period indicates a high probability of a global recession (including the US economy), where the global stock market may also see a significant downturn, as was the case in 2000 and 2008)

68. Combining the Global Recession Probability with Manufacturing Cycle Index

👉 dropping recession probability with a Manufacturing Cycle index back into positive territory at 0.08 from 0.01 previously = good news

69. The Global Travel/Consumer Economy: Breaking Boundaries, Smashing Records

👉 globally, 9 out of the last 10 all-time record spending days in both cruise & airlines have happened in 2024 (aggregated & anonymized Mastercard transaction data)

👉 below the global index of spend per card for both Airline and Cruise: multiple record setting days in 2024: the appetite for travel continues to grow …

70. Global Geopolitical Risk Index (GPR)

👉 Geopolitical Risk Index: 124.09 from 109.26 previously

👉 Geopolitical Risk Index - Threats: 131.81 from 116.72 previously

👉 Geopolitical Risk Index - Acts: 136.29 from 118.79 previously

Maverick takeaway: the 9/11 terrorist attack from 2001 saw a big spike which was followed lately by the Russia-Ukraine war. We are now below the elevated levels when the war started, yet with an increase via the most recent data. Index background:

• compiled by Fed economists Dario Caldara and Matteo Iacoviello it measures the occurrence of impactful geopolitical events/threats/conflicts by counting the keywords used in the press

• it has shown that a quick increase in the GPR index could have strong impact on private investment, labor market, economic growth, and the stock market

• the keywords include the following: war threats, peace threats, military buildups, nuclear threats, terror threats (Threats) and beginning of war, escalation of war, and terror acts (Acts)

The same chart but a very long time series for a great overview since 1900:

71. Growth: US and The World via the Bloomberg Consensus

👉US growth prospects at 2.4% are breaking away from the pack ….

👉 "when the American economy sneezes, the rest of the world gets a cold?" is an old saying, hence let’s just let the US do its thing as the rest will not mind & likely follow!

72. ‘What is the most likely outcome for the global economy in the next 12 months?’. A key survey question for global fund managers via BofA, odds for:

👉 'soft landing' most likely = 56%

👉 'no landing' = 31% (economy expands, then harder to lower inflation or cut rates)

👉 'hard landing' = only 11%

Maverick take-aways aka 'how to use this stuff':

👉the more extreme any scenario goes, the more one should rather think to go the opposite aka 'contrarian'

👉 when kind of scattered/balanced, rather take the chill pill and wait ...

👉 the money is made in the ass sitting in general, not in the 'action' after each data point... have to swing for the right pitch at the right time, not be active like a Duracell rabbit 😉 ... a portfolio is like soap, the more you touch it, the more it shrinks ...

73. 78% also responded that a recession is unlikely in the next 12 months

👉 which is the highest share since 2022 and also note that

👉 in November 2022 they were expecting a recession at similar levels to the 2007-2009 GFC and the 2020 Covid pandemic … yet we had the most anticipated recession that never materialized …

74. Above in the Sentiment section we saw a US dedicated one, what about global?

👉 Global Fund Managers sentiment is the most bullish since November 2021

75. Last but not least, a key one: are governments overcooking fiscal policy? Yes!

👉 the proportion of global fund managers believing that global fiscal policy is “too stimulative” is at its highest since the survey began (in the wake of the 2008 GFC)

Maverick takeaway:

👉 probability of a world recession in 2024 is low (US leading the world growth wise)

👉 fiscal policy too stimulative, geopolitics remain an issue

👉 manufacturing cycle back positive, sentiment is good, the global consumer travels

👍Main Maverick takeaways 👍

1. Overall take for the 2024 US and the World Economy

👉 US GDP to grow in 2024 at 2-3%, the same for the world economy

👉 the probability of a recession in 2024 is low: fiscal spending is on & election year. Should growth slow down materially / about to go negative, intervention is possible and very likely, especially given the election year in the US

2. Main takeaways for the future in general

The business cycle is the business cycle - we learned about it in the 10th grade at the Economics basics class and we have no reason for it not to be valid going forward:

• every 6-8 years we do get a recession - things do recover, having a plan for when (not if) it happens makes it easy to weather the storm

• since WW2, recessions last an average of just 11.1 months

• the last economic expansion: started after the 2007-2009 GFC & lasted 10.6 years

👉 Implications of any recession vary with each individual situation, my key notes:

• as an entrepreneur: hiring, CAPEX/investment and other major business decisions

• as a trader: risk management, hedging, liquidity

• as a medium-long term investor it really does not matter much as long as one has a solid portfolio i.e. owning stocks should be treated like they truly are, pieces of business, not moving tickers on a screen (never confuse investing and trading)

• I was DOWN 52% during the 2007-2009 GFC & that bear market lasted almost 2 years, 2020 Covid indiscriminate selling & the 2022 bear market was peanuts in comparison, hence it shall be easy to go through the next one as well …

Remember:

👉 the market is structurally net long which is way too often forgotten given the constant news and headlines, or simply not known!

👉 if you believe our dear species will evolve, societies & economies will also … and that will simply be reflected in higher investment portfolios values!

Keep compounding … keep compounding: your people, capital and overall experiences!

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Thank you and have a great summer!

Mav 👋 🤝

first of all, I wish you a great 2024 filled with health, followed by numerous personal & professional achievements! Day by day, step by step, knowledge & effort compound!

Second of all, greetings from Vienna from the Austrian National Library where I wrote yesterday and today this comprehensive research piece. A fresh picture that I just made so that you maybe get inspired to visit the place if you visit Vienna one day.

Zooming out, besides the library itself, there are often diverse special exhibitions in the State Hall and the museums within. I highly recommend a tour around!

On visiting Vienna, some of you got inspired and wrote me before you got here for business or pleasure and with that occasion we also met in person which was great! Therefore, just feel free to write me anytime and we might have a coffee around! Please remind me also if you are one of the anonymous or not folks that did support my research work by donating/tipping this independent research publication. I would be very glad to get you lunch and a coffee as a form of gratitude 😉👋 🤝!

The State of the US Economy in 45 Charts

Structured in 7 parts and designed to be a very comprehensive report. Given this, 4 editions a year and occasionally special reports on top when the situation requires it is what most people need from the Macroeconomics side.

The media will try to keep you glued to the screen with every weekly economic release or latest hot takes or headlines, but that is mostly for their ad revenue at the expense of your precious time, energy, focus and attention which nowadays are very important! Maybe controversial, but this place is about ‘Maverick-esque’ independent research, hence not a medium to please some view, or sugar coat one side or the other 😉.

The structure with the table of contents and key highlights can be enjoyed already:

📊 GDP growth: 4.9% (quarter/quarter), not bad, not bad at all

📊 The Job Market: just like the summer, less crazy hot, but still hot & strong

📊 The Consumer aka People: out & kicking strongly: holidays, consuming, investing

📊 Interest Rates & Yields: peak rates & yields rather sooner than later

📊 Real Estate: Mortgage rates, Housing: mortgage rates cooling off

📊 Inflation: cooling off, cooling off aka normalising

👍 The (R)ecession talk and 2024 Forecast: low probability, 1-2% growth in the cards

📊 GDP 📊

1. Q3 2023 real GDP increased at an annual rate of 4.9% (q/q) … not bad at all …

👉 Q3 increase driven by increases in consumer spending and inventory investment. Imports, which are a subtraction in the calculation of GDP, increased. Overall, 14 of 22 industry groups contributed to the Q3 increase in real GDP

👉 the 4.9% growth rate is more than double the 2.35% median in the last 20 years

👉 note also the 2007-2009 recession, and also the 2020 Covid down & up swing

👉 reminder: every 6-8 years we get a recession, it’s just the business cycle … things recover, having a plan for when (not if) it happens makes it easy to weather the storm

2. Q4 2023 +2.2% (q/q) via the Jan 10th 2024 GDPNow Altanta FED model estimate:

👉 consumer spending looking good while inventories and imports a drag on growth

👉 the same metric but complementary where we can see a lower consensus at 1.5% and also the range of the top/bottom 10 average forecasts

Addressing 3 misconceptions or lack of rigor that I have seen around this often:

👉 Atlanta FED GDP growth estimate is not nominal, but real after counting inflation

👉 best viewed as a running estimate aka a ‘Nowcast’ based on available economic data for the current quarter, and not an outright ‘Forecast’ of real GDP growth - also note that it is not an official GDP forecast from the Atlanta FED

👉 no subjective adjustments - based solely on the mathematical results of the model

3. Given US = biggest economy, we have many economic forecasters - fun fact: these days the dispersion of estimates remains near 40-year highs, let that sink in!

📊 The Job Market 📊

Unemployment Rate (UR) at a very low 3.7%

👉 materially below the 20-year median at 5.1% and has now been below 4% for 23 straight months which equates to the longest streak since the late 1960s

👉 the unemployment rate never got lower than 4% once in the 1970s, 80s or 90s

👉 note also that the 3.4% in April 2023 was the lowest since 1969 … let that sink in!

👉 who would have imagined that after the 2020 Covid panic (bigger even than the 2007-2009 GFC) that we will recover that fast? Amazing what the economy can do!

My fun fact on the unemployment rate: it’s one of those metrics that when it’s high you hear very how bad that is, and when low you hear the exact same thing as many say it signals an impeding recession. My take is simple: a low unemployment rate is always good in my book and it does not signal a recession (not a leading indicator).

America’s Smallest Employers Have a Record Share of Openings via WSJ:

👉 America’s smallest employers have the highest share of job openings on record—more than 1 in 5 available positions ready to be filled

👉 nowadays also small companies can have superpowers thanks to the technological changes that happened during the pandemic: easier scaling, higher efficiency, wide distribution, IT, marketing are now accessible also to the ‘little guy or girl’

A labor market that is strong and inclusive is a strong development because normally when things are bad, small businesses take the hit quite some … now nowadays!

Wondering which sectors will see the strongest employment growth in 2024? Via WSJ:

Initial Jobless Claims (people filing for unemployment benefits) down big time to 202k which is back to 2019 pre-pandemic level, and materially below the 237k median. It sank by 18,000 to 202,000 in the last week of 2023, firmly below market expectations of 216,000 to mark the lowest claim count since October.

Continuing Jobless claims (1-week lag metric measuring people who have been receiving unemployment benefits for a while) also hovering around 2019 pre-pandemic levels with 1,855m and 1814m median.

Job Openings ‘JOLTS’ (Total Nonfarm) also show the strength in the labour market:

👉 8.79 millions of available jobs ready to be filled

👉 1.5+ million extra jobs out there compared to pre-pandemic levels

👉 4+ million jobs ready to be filled added relative to the pandemic bottom

👉 the recent drop is material while still my view on it is positive & simple: it's a plus reserve to have that many jobs ready to be taken

👉 additionally, N.B. the FED wants a bit looser job market in order to chill a bit with the fastest hiking cycle in recent decades and continue cooling off inflation

Therefore, should we slow down from here, there are more than decent 'job reserves’ available … that acts like a cushion which is nice to have.

For further insight, a view closely watched by Fed Chair Powell and other FED leaders (as one of the factors driving inflation): Job Openings ‘JOLTS’ (blue) & Unemployed People (red) as a telling visual if the job market is at any point in time ‘loose’ or ‘tight’:

• after the 2007-2009 GFC we had for quite a while a ‘loose’ labor market

• while now after the pandemic a ‘tight’ one after a great & fast recovery as the economy not just recovered the lost jobs from the pandemic but added way more

The 2 above now as a ratio: Job Openings to Unemployed People: at a nice 1.4x!

👉 job vacancies still exceed the number of unemployed by more than 40%

👉 prior to the pandemic it was about 1.2x and it peaked at 2x in 2022

👉 simply put, we have 1.4x job openings for every unemployed person = historically a great time to be looking for work and negotiating a decent salary ...

👉 the fact that lately the ratio is good as it helps cool off inflation

Next, does this from above translates into reality via wage growth? Yes, +5.2% wage growth for December 2023 which is both a driver of and a hedge against inflation

👉 income from labour = the primary funding source of all consumption

👉 when that does well, consumer spending will naturally just follow (more on that below when I cover the consumer)

📊 The Consumer aka People 📊

👉 the American consumer surprised economists again & again after the Covid outbreak as spending kept trending up & up … the job market helps a lot for sure …

👉 we know & often hear that the Consumer (Consumer Spending) is 70% of the economy - I would extend that and say that the Consumer IS THE Economy with our collective decisions to spend, save & invest. It usually drives growth during economic recoveries (pandemic rebound) and is key for overall economic growth …

👉 people are now out & kicking: holidays, consuming & investing …

N.B. Personal Consumption Expenditures (PCE) accounts for about 2/3 of domestic spending and is a significant driver of GDP

The University of Michigan Consumer sentiment jumped in the latest December reading: a good chunk of the increase is due to less concerns over inflation

Sentiment is also backed by hardcore credit and debit card data via BofA which suggest consumer spending is holding up in December.

“Total card spending per HH was up 1.3% y/y in the week ending Dec 9, according to BAC aggregated credit and debit card data. Spending on holiday items fell 1.5% y/y in the week ending Dec 9. … However, in the 16 days since Thanksgiving, spending on holiday items was up 0.8% compared to the same period last year.“

Goldman Sachs also has a positive outlook on the consumer: the near-record level of Household Net Worth should continue to support spending and implies that the saving rate should remain low by historical standards

Plenty of headlines say the ‘Consumer is in bad shape’: that it is squeezed by the FED’s high rates, inflation, but let’s look at a key chart that is not much mentioned: US Households: Checkable Deposits & Currency Held for insight into the liquidity position of households (amount of funds individuals hold in readily accessible forms).

👉 After the government fiscal stimulus, I do not see a bad shape, but a big cash reserve that went up from $1 trillion in 2019 to $4.2 trillion now. This amount equates to about $17k per US citizen for more than 4x cash today than available pre-pandemic.

👉 recall, that is after a pandemic, a recession, inflation, fastest FED hiking cycle in decades, war in Europe & recent banking turmoil

👉 just like with the job market, there is a big cushion here as well

📊 Interest Rates & Yields 📊

US yields: 1y 2y 3y 5y 10y 30y with a 20-year lookback period:

👉 3 hiking cycles in 20 years: not the 1st one nor the last one I tell you that

👉 currently above the 2015-2019 period, and a bit below the 2004-2009 cycle

Where are we headed? FED interest rates pricing via the Fed Funds Futures:

👉 1st cut in this cycle likely to happen in March (61.5% probability): when the 1st cut happens, often stocks get a boost (lower discount rate / cost of capital = higher valuation) compared to lower-yielding fixed income assets

👉 5 cuts priced in to happen for the whole 2024

Takeaway: peak interest rates aka ‘peak FED’ should be here rather sooner than later!

For a very complementary angle:

👉 FED funds target rate naturally highly correlated with the 2-year yield

👉 as the 2-year yield started going south … expect FED funds rate to follow

📊 Real Estate: Mortgage rates, Housing 📊

Mortgage rates:

👉 with inflation cooling off & the FED about to cut rates, naturally the 30-year mortgage rates cooling off as well from a 20-year record of 7.79% to now 6.62%

👉 note the median of 4.46% is way below the current rate

Hovering now above the 2006-2008 peak levels, 2 key notes for true insight:

👉 distribution of mortgages by interest rates paid: 91% of people have a rate BELOW 5% which is close to the 20-year median of 4.46%. Detailed breakdown:

• 26% have a rate under 3.00%

• 70.7% have a rate under 4.00%

• 91% have a rate under 5.00%

• 96.3% have a rate under 6.00%

👉 How many owned US homes are free and clear from a mortgage?

• 42% in 2021 of all owner-occupied homes in the U.S. were owned free and clear, up from 34% percent in 2011. Of those who owned their home free and clear, nearly 78% were owned by homeowners aged >55

• Q1 2024 nowadays very likely higher: maybe even 45-50% given that homeowners aged >55 should be close to the end of the mortgage payment schedule

Combining the 2 above we have actually the story: if 42% of homes (likely more in 2023) are owned outright + 71% of mortgages below 4%, we can deduct that in excess of 80% of homeowners do not feel much the effect of high current mortgage rates.

Are residential constructions halted or dropping ? Not at all:

👉 1,560,000 privately‐owned housing starts which is way above the 1,204,000 median for the past 20 years

👉 notice the big uptrend after the 2007-2009 subprime mortgage crisis was resolved, and the 2020 Covid interruption

Easy for new people to take mortgages now? No, mortgage applications are at the lowest since 1995. Americans ages 18-38 are buying fewer homes than ever … however, at no point in time everybody can be happy.

Until things settle (interest rates are normalised), renting is quite a cheaper alternative than buying a home: US Housing - Monthly Cost of Buying vs. Renting:

👉 median rent about $1,850/m = 30% cheaper than the median cost to buy at $2,700/m

👉 = gap represents the largest difference between renting and buying in U.S. history … let that sink in!

Renting specifically, asking rents posted the biggest decline in over 3 years via Redfin:

“The median U.S. asking rent declined 2.1% year over year in November to $1,967 — the biggest annual drop since February 2020 — and fell 0.6% from October.“

Therefore, headlines are more doom & gloom than they should when it comes to the real estate market overall. But for clicks and views for advertising revenue they will keep rolling, and once interest rates, yields & mortgage rates will go down, headlines will find something else to beat the drum.

The Rise of Negative Media is now a confirmed phenomenon via solid research besides my own personal observation … a quick take and summary you can read here.

📊 Inflation 📊

After peaking in June 2022 at 8.9%, inflation reversed and fell to 3.4% following the key driver M2 money supply growth rate at -2.66% currently. The latter turned negative in Q4 2022 for the 1st time since 1933. Yes, almost a century! Let that sink in!

Therefore, if inflation is primarily monetary phenomenon (which is in my opinion), how could it not keep going down? US CPI Y/Y (blue) & M2 growth Y/Y (red):

Core Inflation Rate is a bit higher at 3.9% relative to the 3.4% CPI, though both trending down as inflation gets more and more normalised

Now that we saw the actuals, what about the key question on inflation expectations?

US University of Michigan Inflation Expectations:

👉 1-Year Inflation Expectations metric points to a 3.1% figure after the 2022 parabolic spike … cooling-off big time …

👉 note how the 5-year ahead expectations never took off materially given that the expectations are that central banks and governments will always manage to control inflation/deflation every time it pops up big time

How I and you should use this in the real world?

👉 check when both spike up in the same time, hence confirm each other as I noted in the green circle right before we got the big inflation times - in reverse now, we will likely see inflation stabilise

New York Fed’s December 2023 Survey of Consumer Expectations - median inflation expectations declined at all horizons:

👉 the 1-year ahead horizon reached the lowest level since Jan 2021: from 3.4% to 3%

👉 at the 3-year ahead horizon, it fell from 3% to 2.6%

👉 while at the 5-year ahead horizon, down from 2.7% to 2.5%

Side note on Europe given that inflation is naturally not a US phenomenon:

👉 swap traders more confident than the ECB on lower inflation: traders pricing inflation at 1.6% in January 2025 (down from 2.2% a year ago)

👉 while the ECB still sees inflation staying above 2% until 2H25

Last but not least, FED’s latest statement from December 2023 on the inflation target: “Inflation remains well above our longer-run goal of 2%. … It will take substantially more evidence to give confidence that inflation is on a sustained downward path.”

N.B Inflation special report coming out soon from my side … stay tuned!

👍 The (R)ecession talk and 2024 Forecast 👍

I am into the no recession/soft landing camp. Now a very common question I get is: ‘What metrics and/or models you look at to track the business cycle and the likelihood of a recession at any point in time?’ Well, there are many out there that I look at and use: one day I will compile all of them into a comprehensive article and overall framework.

Nowadays, among many other I look particularly at the following 10 metrics & surveys:

1. Philadelphia FED Recession Probability Index also cooling off below 40% levels

👉 note that this metric tracks the probability for the current quarter, next and 1 year ahead with an overall signal sensitivity/focus more to the current and next quarter

👉 as well, to be used in practice in tandem with all it’s 3 parts and also other complementary business cycle / recession indicators

2. FED / FOMC view via the meeting’s minutes:

👉 in the July 2023 FOMC meeting, Chairman Powell indicated that staff economists no longer forecast a recession

👉 while the R-word "recession" doesn't appear even once in the minutes from the last three meetings (which took place between September & December 2023)

3. Goldman Sachs lowered further their 12-months ahead recession odds from 20% to 15% backed by the positive developments on inflation and the labor market

👉 15% is equal to the average historical probability calculated from the fact that a recession has occurred roughly once every seven years since WW2

👉 US GDP is projected to expand 2.1% in 2024, compared with 1% for the economist consensus forecasts surveyed by Bloomberg & the FED FOMC’s 1.4% growth

4. Business & academic economists surveyed by the WSJ (conducted Jan. 5-9 2024) lowered the probability of a recession within the next year to 39% from 48% in the October survey

👉 note how in both the 2007-2009 GFC & the 2020 Covid short recession it spiked to +90% probability - key takeaway: next time whenever this happens and we reach those levels, it’s a good signal of the worst being behind us and the road to recovery is on … likely a time when equities are bottoming also and time to pick some cheap goodies ...

5. Real-time Sahm Rule Recession Indicator: due to historical low levels of unemployment rate, the indicator is not signaling a recession

Background: FED economist Claudia Sahm approach - if the 3-month moving average of unemployment rate exceeds 0.5% compared to the previous year's low, the economy is in a recession or will enter one soon (condition met in past recessionary periods).

6. NBER Recession Indicators Drawdown: no sign of recession here either

7. FED Excess Bond Premium Recession Probability: a further lower 14.46% current probability (December 2023 reading) which dropped from the previous November 2023 reading of 18.81% - and hasn't reached close to levels observed during crisis periods

8. FED Financial Conditions Impulse on Growth (FCI-G): after heavy tightening of financial condition in order to cool-off inflation, financial conditions are not tight anymore, hence not longer a drag on overall GDP growth

9. Goldman Sachs Financial and Credit conditions: impact of changes in financial conditions and credit conditions on GDP growth will swing from a 0.8% drag in 2023 to a 0.4% boost in 2024 (supporting their above-consensus growth forecast)

10. 2024 Election Year = Eyes on Washington Baby

👉 via Goldman Sachs: fiscal policy has become somewhat more expansionary in presidential election years on average

👉 as it looks now, no big fiscal stimulus is to be expected, but should we have some material weakness in Q1/Q2, I think stimulus will likely be deployed

Overall take for 2024

👉 GDP to grow in 2024, yet lower than in 2023 which in turn is actually good in order to cool off inflation and interest rates

👉 Should growth take a hit and about to go negative, intervention is possible and quite likely, especially as we have an election year

👉 hence, probability of a recession in 2024 is low

Main takeaways for nowadays but also for the future

👉 The business cycle is the business cycle: I learned about it in the 10th grade at the Economics basics class and we have no reason for it not to be valid going forward:

• every 6-8 years we do get a recession

• since WW2, recessions last an average of just 11.1 months

• the last economic expansion: started after the 2007-2009 GFC & lasted 10.6 years

👉 Implications of any recession vary with each individual situation, my key notes:

• as an entrepreneur: hiring, CAPEX/investment and other major business decisions

• as a trader: risk management, hedging, liquidity

• as a medium-long term investor it really does not matter much as long as one has a solid portfolio i.e. owning stocks should be treated like they truly are, pieces of business, not moving tickers on a screen (never confuse investing and trading)

• I was DOWN 52% during the 2007-2009 GFC & that bear market lasted almost 2 years, 2020 Covid indiscriminate selling & the 2022 bear market was peanuts in comparison, hence it shall be easy to go through the next one as well

Remember, the market is structurally net long which is way too often forgotten given the constant news and headlines, or simply not known! If you believe our species will evolve, societies & economies will also. And that will simply be reflected in higher investment portfolios values! Keep compounding!

👇 S&P 500 last 30 years: 1,665% return with a 10% CAGR 👇

Research is NOT behind a paywall and NO pesky ads here unlike most other places!

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welcome to the +300 new readers for a total of 2,750 enjoying independent research!

“The best thing a human being can do is to help another human being know more.” from the one & only Charlie Munger. Just like with investing, knowledge compounds!

‘The State of the US Economy in 35 Charts’, edition #1 + addressing 2 key questions:

• what is driving the recent higher US Yields

• recession likelihood

Report is designed to have a natural flow & great to get questions & feedback overall.

Structured in 5 parts + 2 bonus & highlights here in the ToC as executive summary:

📊 GDP: 5.6% or 1.5%? Likely growing at the 3% long term average which is good

📊 The Job Market: just like the summer, less crazy hot, but still hot & strong

📊 Interest Rates & Yields: peak rates & yields are here, or rather sooner than later

📊 The Consumer aka People: out & kicking strongly: holidays, consuming, investing

📊 Inflation: cooling off, cooling off

👍 What is driving the recent higher US Yields: GDP growth & supply of treasuries

👍 Bonus - Recession talk: low probability

📊 GDP 📊

GDP: a stunning +5.6% growth estimate for Q3 2023 via the Atlanta FED GDPNow 1st of September release. This is way above the +1.5% consensus which was lifted from 0% at the beginning of the quarter, and the actual +2.1% for Q2.

This will be very interesting to follow and find out the why behind the big divergence. I lean into the middle of 5.6% and 1.5% for a 3.5% which is very good & close to the long term 3.18% average.

Addressing 3 misconceptions or lack of rigor that I have seen around this often:

👉 Atlanta FED GDP growth estimate is not nominal, but real after counting inflation

👉 best viewed as a running estimate aka a ‘Nowcast’ based on available economic data for the current quarter, and not an outright ‘Forecast’ of real GDP growth - also note that it is not an official GDP forecast from the Atlanta FED

👉 no subjective adjustments - based solely on the mathematical results of the model

📊 The Job Market 📊

Unemployment Rate (UR) at a very low 3.8%

• materially below the 20-year median at 5.25%

• note that the 3.4% in April was the lowest since 1969 … let that sink in!

For further insight, breaking down the UR & alternative measures:

• who would have imagined that after the 2020 Covid panic (bigger even than the 2007-2009 GFC) that we will recover that fast? Amazing what the economy can do!

Initial Jobless Claims down to 230k which is at the same pre-pandemic level and also below the 244k median. Continuing Jobless claims (1-week lag) down also to 1.702m and is at the same pre-pandemic level and also below the median of 1.805m.

JOLTS (Job Openings) also show the strength in the labour market:

👉 8.8 millions of available jobs ready to be filled

👉 2 million extra jobs out there compared to pre-pandemic levels

👉 more than twice relative to the pandemic bottom with 4 million jobs added

👉 the recent drop is material while still my view on it is positive & simple: it's a plus reverse to have that many jobs ready to be taken

👉 N.B. the FED wants a bit looser job market in order to chill a bit with the fastest hiking cycle in recent decades and continue cooling off inflation

Therefore, should we slow down from here, there are more than decent 'job reserves’ available … that acts like a cushion which is nice to have.

For further insight, a view closely watched by Fed Chair Powell and other Fed leaders (as one of the factors driving inflation): JOLTS Job Openings (blue) & Unemployed People (red) as a telling visual if the job market is at any point in time ‘loose’ or ‘tight’:

• after the 2007-2009 GFC we had for quite a while a ‘loose’ labor market

• while now after the pandemic a ‘tight’ one after a great & fast recovery as the economy not just recovered the lost jobs from the pandemic but added way more

The 2 above now as a ratio: Job Openings to Unemployed People: at a nice 1.51x!

👉 job vacancies still exceed the number of unemployed by more than 50%

👉 prior to the pandemic it was about 1.2x and it peaked at 2x in 2022

👉 simply put, we have 1.51x job openings for every unemployed person = historically a great time to be looking for work and negotiating a decent salary ...

Next we look if the above translates into reality via wage growth. Yes, +5.7% wage growth for July 2023 = the highest since the Atlanta fed tracks this, namely 25 years

👉 income from labour = the primary funding source of all consumption

👉 when that does well, consumer spending will naturally just follow (more on that below when I cover the consumer)

Payrolls beats have also been rocking it strong: 14 sequential consensus beats

📊 Interest Rates & Yields 📊

US yields: 1y 2y 3y 5y 10y 30y with a 20-year lookback period:

👉 3 hiking cycles in 20 years: not the 1st one nor the last one I tell you that

👉 currently above the 2015-2019 period, though below the 2004-2009 cycle with the exception of the very short end of the curve which is above

Where are we headed? FED interest rates pricing via the Fed Funds Futures:

👉 we have a chance close to 0 (5.6%) for a hike in September while a 1/3 (32.6%) chance that the Fed will hike once more in November

👉 rates on hold for about the next 6 months with first cuts around Q1-Q2 2024

👉 short-term interest rate markets are expecting peak FED policy rates in November at 5.42%, followed by interest rate cuts in 2024 - note that the 5.42% expected by the market is below the FED forecast of 5.6% = room for surprise higher

Takeaway: peak interest rates aka ‘peak FED’ should be here rather sooner than later!

Higher interest rates naturally made for high US 30-year mortgage rates: above 7% (4.46% median value for the last 20 years) and created many headlines:

Hovering now above the 2006-2008 peak levels, though 2 key notes for true insight:

👉 distribution of mortgages by interest rates paid: 91% of people have a rate BELOW 5% which is close to the 20-year median of 4.46%. Detailed breakdown:

• 26% have a rate under 3.00%

• 70.7% have a rate under 4.00%

• 91% have a rate under 5.00%

• 96.3% have a rate under 6.00%

👉 How many owned US homes are free and clear from a mortgage? Via Census.gov:

• 42% in 2021 of all owner-occupied homes in the U.S. were owned free and clear, up from 34% percent in 2011. Of those who owned their home free and clear, nearly 78% were owned by homeowners aged >55

• Q3 of 2023 nowadays, it is very likely higher: maybe even 45-50% given that most owners are 55+ which should be close to the end of the payment schedule

Combining the 2 above we have actually the story: if 42% of homes (likely more in 2023) are owned outright + 71% of mortgages below 4%, we can deduct that in excess of 80% of homeowners do not feel much the effect of high current mortgage rates.

Easy for new people to take mortgages now? No, mortgage applications are at the lowest since 1995, but at no point in time everybody can be happy. And also let’s recall, the wage growth is quite solid which helps a lot.

Now does this mean multi-family constructions are halted or dropping big time ? Not at all: a new all-time high in July with more than 1 million multifamily units under construction: rental market is always there to absorb housing needs besides outright buying via cash or mortgages.

Therefore, headlines are more doom & gloom than they should when it comes to the real estate market overall. But for clicks and views for advertising revenue they will keep rolling, and once interest rates, yields & mortgage rates will go down, headlines will find something else to beat the drum.

Nonetheless, it is worth pointing a material weakness of the current economy: the trinity high interest rates, commercial real estate (CRE) loans and regional banks!

• CRE debt held more and more in recent years by small banks: currently they hold over 70% of CRE loans and the big question is how many loans will default

Regional banks - KRE ETF (140 constituents) -27.45% in the last year reflecting:

• the lower quality of the loan book which is compounded by

• if/when some banks need to raise cash to compensate for loan loss allowances and charge offs, they would have to sell their T-Bills at a material loss (if one can hold onto the risk-free T-bills until maturity, they are naturally not an issue)

• the effects of high interest rates sometimes have a lag until fully felt

Nonetheless, banking sector comparisons between 2007-2009 and nowadays are way overcooked. In 2023 we saw how smoothly troubled SVB & FRC banks were managed. These days banks are way stronger than during the GFC: capital levels, liquidity, regulatory tools to intervene when needed!

As always, Maverick Equity Research is data first, opinion after hence there you go: US banks are way more liquid than in 2001 or 2008 while EuroZone and UK ones have tier 1 capital ratios 2-3x higher than before 2007-2009.

I did my thesis on the 2007-2009 Subprime Mortgage Crisis and one day on a special edition, I will post snippets with key takeaways. Until then, be it rather new to finance or more experienced, I highly recommend this great 65h course from Yale on the 2007-2009 Global Financial Crisis. Mixing top academician Andrew Metrick with top practitioner former Secretary of the Treasury Timothy Geithner = great insight!

The modules on the response to the crisis & responding to future crisis are key! It was great to revisit my thesis done many years before this course I did in 2018 and connect the dots further. They recently added a module on how Sillicon Valley Bank was solved in 2023 which is a great study case, so the course keeps getting updates.

📊 The Consumer aka People 📊

👉 the American consumer surprised economists again & again after the Covid outbreak as spending kept trending up & up … the job market helps a lot for sure …

👉 we know & often hear that the Consumer (Consumer Spending) is 70% of the economy - I would extend that and say that the Consumer IS THE Economy with our collective decisions to spend, save & invest. It usually drives growth during economic recoveries (pandemic rebound) and is key for overall economic growth …

👉 people are now out & kicking: holidays, consuming & investing …

Investing wise, retail investors with an even bigger appetite than 2021 crazy highs: last month they poured on average $1.51bn/day into the US markets, which set the highest amount on record …

• so it seems buying even while having holidays ;)

• if consumers were in bad shape, I doubt would be spending & investing like now

Recall the high mortgage rates from above? How comes it does not eat into the households & consumers pockets as they keep spending on and on?

• average mortgage rate for CURRENT outstanding mortgages is just 3.6% (orange) & note the disconnection with the current 30-year fixed average at 7%+ (blue)

• note also how the current mortgage rates have been trending down for decades, hence high real estate prices should not be surprising

Plenty of headlines say the ‘Consumer is in bad shape’: that it is squeezed by the FED’s high rates, inflation, but let’s look at a key chart that is not much mentioned: US Households: Checkable Deposits & Currency Held for insight into the liquidity position of households (amount of funds individuals hold in readily accessible forms).

👉 After the government fiscal stimulus, I do not see a bad shape, but a big cash reserve that went up from $1 trillion in 2019 to $4.5 trillion now. This amount equates to $17k per each US citizen for more than 4x cash today than available pre-pandemic.

👉 recall, that is after a pandemic, a recession, inflation, fastest FED hiking cycle in decades, war in Europe & recent banking turmoil

👉 just like with the job market, there is a big cushion here as well

📊 Inflation 📊

After peaking in June 2022 at 8.9%, inflation reversed and fell to 3.2% following the key driver M2 money supply growth rate at -3.89%. The latter turned negative in Q4 2022 for the first time since 1933. Yes, almost a century! Let that sink in! …

Therefore, if inflation is primarily monetary phenomenon (which is in my opinion), how could it not keep going down? US CPI Y/Y (blue) & M2 growth Y/Y (red):

Inflation expectations in 1 chart: about 3% via various technical measures:

Complementary, US consumer inflation expectations via household surveys in order to depart from finance technical measures. Recall, the consumer is key & the economy!

• University of Michigan inflation expectations survey: 1 year and 5-10y ahead

• NY FED survey: 1 year and 3 year ahead

Takeaway:

👉 the NY Fed’s US consumer inflation expectations survey tells a very similar story to last Friday’s University of Michigan price expectations data: going down!

👉 despite rising gasoline costs, consumers think inflation more broadly will continue to slow

👉 bonus: the Fed has got to be happy also with that

N.B Inflation special report coming out soon from my side … stay tuned!

👍 What is driving the recent higher US Yields? 👍

We saw above the mix of:

• rising nominal yields, at a 16y high

• + falling inflation (actual & expectations) which means that we have

• = higher real yields, the highest since 2009 looking at the 10-year yield

Rising real yields signal a firmer growing economy = lower probability of a recession

Along a stronger economy, higher yields are also due to higher deficits through the issuance of Treasury securities - T-bills wise they marked recently a 3-year high:

To sum it up: recent higher yields are a function mainly of GDP growth and new supply/issuance of treasuries, and not because of higher inflation imho.

👍 Bonus: Recession talk 👍

👉 Since the 2022 bear market in both stocks & bonds, we had ‘the most anticipated recession ever’ via the Philadelphia FED tracker which started in 1968:

• in 2022, 43.5% of the professional forecasters believed a recession was coming (social & traditional media full with gloomy headlines also for clicks & ad money)

• yet it didn’t and expectations keep shifting: from Q1/Q2 2023 to Q4 2023 / Q1 2024

Below the most recent 2023 updated chart which shows the odds are way lower:

👉 FED view: during the press conference following the July FOMC meeting, Chairman Powell also indicated that staff economists no longer forecast a recession

👉 Goldman Sachs assigned lower recession odds via the disinflation major progress

👉 I am into the no recession/soft landing camp. A very common question I get is: ‘What metrics and/or models you look at to track the business cycle and the likelihood of a recession at any point in time?’ Well, there are many out there that I look at and use: one day I will compile all of them into a comprehensive article and overall framework.

Nowadays, among many other I look particularly at the following four:

1. Real-time Sahm Rule Recession Indicator: due to historical low levels of unemployment rate, the Indicator is not signaling a recession

Background: FED economist Claudia Sahm approach - if the 3-month moving average of unemployment rate exceeds 0.5% compared to the previous year's low, the economy is in a recession or will enter one soon (condition met in past recessionary periods).

2. NBER Recession Indicators Drawdown: no sign of recession here

3. FED Excess Bond Premium Recession Probability: 21.72% current probability has seen a slight increase this year, but dropped from the 27.59% last reading and hasn't reached close to levels observed during crisis periods

4. FED Financial Conditions Impulse on Growth (FCI-G): after heavy tightening of financial condition in order to cool-off inflation, financial conditions are way less tight and expected to have only a 0.1-0.4% drag on GDP growth over the next year

Main takeaways on the Recession talk, from nowadays but also for the future:

👉 The business cycle is the business cycle: I learned about it in the 10th grade at the Economics basics class and we have no reason for it not to be valid going forward:

• every 6-8 years we do get a recession - since WW2, 6.5 years to be exact

• since WW2, recessions last an average of just 11.1 months

• the last economic expansion: started after the 2007-2009 GFC & lasted 10.6 years

👉 Implications of a recession vary with each individual situation, my key notes:

• as an entrepreneur: hiring, CAPEX/investment and other major business decisions

• as a trader: risk management, hedging, liquidity

• as a medium-long term investor it really does not matter much as long as one has a solid portfolio i.e. owning stocks should be treated like they truly are, pieces of business, not moving tickers on a screen (never confuse investing and trading)

• I was DOWN 52% during the 2007-2009 GFC & that bear market lasted almost 2 years, 2020 Covid indiscriminate selling & the 2022 bear market was not much in comparison, hence it shall be easy to go through the next one as well

Remember, the market is structurally net long that is often forgotten or not known!

👇 S&P 500 last 30 years: 1,700% return with 10% CAGR 👇

This research is NOT behind a paywall & there are NO pesky ads floating around.

Did you enjoy this extensive research by finding it interesting, saving you time & getting valuable insights? Now some of you asked how can one support me which is really kind of you 🤗. Therefore, it would be great & highly appreciated if you would support an independent investment researcher for the ‘Maverick-esque’ ongoing & future research. A donation or a tip to support my work can be done via the following:

PayPal

Buy Me A Coffee

Revolut

Thank you & have a great day!

Mav

here we go with Goldman’s Top 10 Charts to Watch & Bonus ones. Enjoy!

Coverage is NOT behind a paywall & there are no pesky ads here. It would only be highly appreciated you just spreading the word around to likely interested people.

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Report structure:

📊 Goldman Sachs Top 10 charts to Watch

📊 Bonus Charts: 10 more to Check

📊 Goldman Sachs Top 10 charts to Watch

1. Market stress has picked up around the US banks stress but did not spill over to equities or more broadly

2. Recession: imminent recession risk has been priced out while latent risk remains

Market-implied US recession risk (average of univariate logit models). Orange shade: NBER recession.

3. S&P 500 & Inflation: a peak in inflation is not sufficient – monetary policy and recession risk matter too

S&P 500 total return. Data since 1950s. Indexed at 100 at historical inflation peaks

4. Some real assets including real estate, infrastructure and precious metals can do well as inflation normalizes. Data since 1970s when available. Performance as of March-23

5. Commodities have been the worst performing asset class as inflation normalizes; cyclicals have outperformed recently. Data since 1950:

6. Risk appetite picked up materially earlier in the year but is now more neutral

7. US equity/bond correlations declined sharply last month after being positive last year. S&P 500 vs. US 10-year bond correlations (daily returns)

8. Sharp outperformance of long duration Tech vs. US domestic cyclicals kept equity volatility lower. Nasdaq vs. Russell 2000 relative return (monthly)

9. US 10-year interest rate volatility implied by macro variables peaked & is falling

10. Right tail risk for rates has been priced out while left tail risk has picked up

📊 Bonus Charts: 10 more to Check

As bonus, another 10 cherry picked charts via Goldman Sachs:

1. Stock buybacks are on in both US & Europe (S&P500 & STOXX Europe 600)

2. Flight to quality:

👉 Signs of rotation into defensive equity (Exhibit 1)

👉 Signs of reversal of the significant large cap outflows (Exhibit 2)

👉 Large inflows into global quality ETFs since the banking crisis (Exhibit 3)

3. Investor sentiment surveys much more bullish in April compared with March

4. Cross-Asset Global Fund Flows in 2023: Money Market a winner by distance …

5. Cross-Asset Global Fund Flows: Cumulative & 1-month rolling by asset class & region

6. Equity Global Fund Flows: Foreign/Domestic Investor Flows

7. Retail investors single stock net buying/selling:

"Retail investors sold twice what they accumulated during the pandemic over the last 15 months." Not really buy & hold investors imo it seems … buying ticker symbols not pieces of real & solid businesses … rarely is a good strategy …

Complementary view - Retail Selling has reached a new Milestone: In April, we reached a milestone in retail trading trends in NASDAQ single stocks. After a buying frenzy during the pandemic, we estimate retail investors started to sell stocks in February 2022. Selling continued until they sold all of their pandemic-acquired NASDAQ single stocks as of November 2022. The selling intensified in early 2023, and we estimate retail investors have now sold more than twice what they acquired during the pandemic

8. Gold ETFs flows picked up materially since the banking stress …

9. Positioning & Sentiment indicator has made a round-trip over the past couple of months, turning bearish around the March banking stress and recovering to neutral levels now. Risk-off skew has increased across risky assets.

10. U.S. Investment Grade (IG) and High Yield (HY) debt interest coverage ratios (ICRs): they look pretty solid (median values):

Should you have found this cherry-picking endeavour interesting and valuable, just subscribe and share it around with people that might also be interested to read this kind of content in the future. Twitter post can be found here. Thank you!

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Disclaimer: information on this site should not in any case or form be considered financial, business, tax or legal advice

as 2023 is around the corner, there you go with my 2022 Review & Top 50 charts. It is always interesting and beneficial to have a yearly review so that we can reflect and improve our thinking and investing process going forward. This special edition will be a mix of my own research charts & 3rd party cherry picked ones and will cover:

📊 Stocks & Bonds 📊

🏦 Macro: FED, Interest Rates & S&P 500 Valuation🏦

📊 Special Country Report 📊

👍 Bonus Charts 👍

2022 was an atypical year from many points of view: many charts had the y-axis stretched like in 2008 GFC & 2020 Covid crash with plenty of outliers & interesting developments. In January 2023, a 2023 Outlook with a focus on the S&P 500 will follow.

Report is not behind a paywall & there are no pesky ads here. It would be highly appreciated if you just spread the word around to people that might also be interested.

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📊 Stocks & Bonds 📊

1. Stocks & bonds in negative territory in 2022:

👉 S&P 500 (SPY) went into bear market mode & about to end the year around -20%

Bonds down, though note how not all bonds got crushed as headlines say:

👉 TLT (20-year+ maturities) took the biggest pain with a -31.24% drawdown

👉 AGG (US investment grade: treasuries, corporate, MBS, ABS, munis) with a way lower -12.93% drawdown, though a key note: it is the worst year ever & there has never been 2-years in a row for the index … bounce back in 2023+?

👉 SHV (1-year or less maturities, cash proxy) even with ramping inflation & interest rates, ended the year with a remarkable positive +0.89%

2. Similar like with not all bonds being down, not all stocks are down. Let’s check for who are the 2022 S&P 500 winners via a price scatterplot view with the Return % YTD '&' Above 52-week Low %:

👉 OXY & ENPH: Buffett rocking it again with OXY ... or, as Charlie Munger says: “We found some things we preferred owning to treasury bills”

👉 FSLR solar with a great run also in 2022

Overall, 135 stocks ended the year positive, 365 negative with 198 of those having a return of -20% or more. 121 stocks had a return worse than -30% (~24% of the index). 26 stocks had a return worse than -50% (~5% of the index).

Any stocks in the S&P 500 that both pay dividends & do share buybacks? Answer via the dedicated scatterplot with the shareholder yield made out of the dividend yield & share buyback yield:

3. What about the Dow Jones price scatterplot?

👉 CVX Chevron is up 57% also: in Q1 2022 Buffett went bonkers and added 120.9m shares (70% of the position), Q2 & Q3 some more for a total 8.8% stake = 3rd largest position in Berkshire BRK-B

4. At the S&P 500 11 sectors level, XLE Energy leading by far in 2022 & with XLU Utilities, the only 2 positive sectors with XLC Communication Services the biggest laggard. Energy continues to lead agnostically: when oil is up, when oil is down, when yields are up, or when they are down, when the market expects a more hawkish or dovish FED:

5. 2022 = Stock Picking Market? Yes also via BofA:

👉 2022 the best market for stock pickers in more than 20 years, let that sink in!

👉 More than 60% of stocks outperformed the S&P500 this year, surprised?

👉 And that is the most since 2001

6. Are there winners in the global equity markets in 2022? Yes, Brazil!

7. How often/rare does it happen that both stocks & bonds fall in the same single year? ‘‘Not often bro’ ‘‘, 2022 as an outlier:

👉 only 3 times since 1926 when Stocks & Bonds had combined negative returns: 1931, 1969 & 2022! Let that sink in & brink the sink in like Musk did at Twitter

👉 note also how well did US Bonds perform in 2008 during the GFC/Lehman times

👉 will one catch the bottom these days? No, luck or hard! Though, what shall happen after this? Zoom out: looking back in 2028-2030, today is an interesting investment opportunity for both Stocks & Bonds … Market = Discounted …

8. Specifically, the classic balanced 60/40 stocks & bonds portfolio had its worst performance in a … century! Let that sink in! Rule of thumb in markets: bad times create good opportunities. Check what happened after: mostly very good returns.

9. Going global beyond US: stocks & bonds correction is heavier than during the 2007-2009 Global Financial Crisis … with hindsight, GFC was an obvious opportunity to invest … a story that repeats in every downturn, very likely it will be not different now. In short, what you would have done at the end of 2008 with the benefit of hindsight?

10. Complementary view, international/world stocks (ACWI) and bonds (BNDW) also corrected in 2022. Stocks with -17.7% while bonds -12.5%:

11. Stocks & global bonds with one of the tightest correlations in the last 22 years. Not good when one relied on bonds providing a safety net when equities go down:

12. 10-year treasuries isolated:

👉 2022 as the worst year since 1788

👉 note that in the 1780s there was an ever worse performance, but check what happened after: mostly very good returns. Rule of thumb in markets: bad times create good opportunities … and here we are talking about the mighty US Treasuries (the risk-free rate / benchmark), not some small cap, EM, crypto or so

13. Near final tally of the "no where to hide" year. 85% of equity ETFs, 80% of bond ETFs down on the year via Athanasios Psarofagis:

🏦 Macro: FED, Interest Rates & S&P 500 Valuation🏦

14. Main ‘culprit’? Interest rates given inflation! FED had to step in strongly to cool-off inflation & still battling. FED, 2Y & 10Y rates & the Yield Curve in 1 chart:

👉 at 4.5% now, FED’s interest rates hiking cycle continues and note that we are currently above the 2019 local 2.5% peak while still below the 2007 5.25% peak

👉 note also how the current cycle is way less gradual relative to the previous two; in fact the FED engaged in its most aggressive rate-hiking cycle since the 1980s

👉 starting point note: ramping up nice & easy ‘data dependent’ when rates are already at 5% is different than ramping up quickly when they have been ‘nada’ 0%

👉 Note also the 2-year at 4.3% & 10-year rate at 3.8% are now back ‘below’ the 4.5% FDTR (Federal Funds Target Rate): inflation peaking & ‘peak’ FED priced in?

👉 The Yield Curve defined here via the 10Y vs 2Y, is currently inverted like Maverick in the Top Gun scene when he went into a 4G inverted dive to show ‘the birdie’ to the Russian MiG-28 enemy aircraft. ‘Is this your idea of fun, Mav?’😉, talking about birdies together with the Yield Curve!? Yeah! ‘What are you doing here? Communicating! Keeping up foreign relations (with the markets in our case😉)’ … ‘Jeez, I cracked myself up!’😉

15. Let’s plot now also the US interest rates across the yield curve: 1y 2y 3y 5y 10y 30y with a 20-year lookback period:

👉 3 hiking cycles in 20 years: not the 1st one nor the last one

👉 currently above the 2015-2019 period, though below the 2004-2009 cycle

16. Even Long Term Trends can end: looking at the 10-year interest rate alone, we see how the very long term trend of lower & lower rates ended in 2020 when we started to see rates going higher & higher with higher & higher inflation coming in strongly and biting like there is no tomorrow:

17. Higher rates put a lot of pressure naturally on bonds, but also on stocks via the cost of capital/discount rate in valuations. I say this because note this very interesting chart from BCA Research: S&P 500 profits barely declined in 2022 and in the first part of the year they were even increasing. Yet, price went into a bear market with the P/E multiple compressing materially. The 30-year treasury bonds took the biggest beating:

18. Complementary S&P 500 valuation via the real rates:

👉 P/E (forward) closely tracks the path of real rates 10-year US treasuries

👉 Higher real rates lead to lower P/E multiples & conversely lower real rates lead to higher P/E multiples

👉 2023: keeping track of real interest rates ...

19. Complementary S&P 500 valuation note via the WACC (Weighted Average Cost of Capital): just a year ago it was 4.1% which was close to the lowest level in history. In 2022, that turned around and surged by the markets amount in 40 years: 2% higher to 6% (from 4.1% almost a 50% increase) which is the highest level in a decade (via GS):

20. What about the mighty US tech stocks with higher rates & inflation? This kind of ‘long duration’ assets, did take a serious beating in 2022. Nasdaq 100 -34.56%

21. Tech sensitivity visualised: it moves lower with inverted real yields … bonds/fixed income shows that currently there is an alternative out there chasing yield

22. Tech valuations dropping is a public markets development only? No, tech private markets felt also the lower liquidity with higher inflation & interest rates biting:

23. Cash flow & profitability is king & back in fashion, back to basics now:

24. Have you wondered, what was the best signal that Tesla stock should be taken profit from or to be hedged? At some point it was 2x the value of Berkshire BRK with Buffett & Munger compounding it for many many decades … let that sink in! No matter how good Tesla is as a business and will be, stock price / valuation can be a very different ball game. Interesting how they danced 6 times so far in terms of valuation. Note also the drawdown patterns:

25. Tesla market cap drop is bigger than the combined legacy car industry…

26. Alternatively, via Arny Trezzi let’s look at the interesting Palantir Technologies (PLTR) situation: trading at all-time lows, -40% since going public in 2020, but with record $1.3bn Deals Closed in 2022 … 2023+ should be interesting to see …

27. Growth stocks have reached historic levels of underperformance. Even just a mean reversion play should yield solid returns. If interest rates fall that just adds fuel to the fire (via Game of Trades):

30. Complementary, software EV/NTM multiple since 2017 with hyper-growth, high growth, moderate & mature growth split:

👉hyper-growth (blue) a big multiple expansion even BEFORE covid & parabolic once FED/CB ample liquidity

🧐now at 2017 levels!!! Overcooked up & now on the way down? Opportunity?

31. Going forward, inflation cooling off & rates to follow aka FED pivot? For that let’s have a look at the M2 money supply 12m % change since 1959: FED bazooka deployed once Covid crash, bazooka removed once inflation came: inflation should take it easy from here

32. Container shipping costs back to pre-pandemic levels, should cool-off inflation:

33. Supplier delivery time, from supply scarcity and bottlenecks to supply abundance:

📊 Special Country Report 📊

35. My 2022 Country Special Report pick is: GREECE 2.0: CONTEMPLATING FUTURE GROWTH via Nicolas Roth from REYL Intesa Sanpaolo. Report access.

• Greece is fully emerging from all recent crisis and is now ripe for radical transformation and growth

Greece is quite under-covered lately & stock market wise, via Sofokleous Street: unbelievable resilience by the Greek stock market this year. 2nd best in Europe and one of the only few global markets with a positive return in 2022 …

👍 Bonus Charts 👍

36. From the crypto space: following last month's FTX debacle Bitcoin & Ether have been consolidating at lower levels:

37. Solana keeps tumbling bringing crypto token’s 2022 plunge to 94% given its close connection with the SBF debacle:

38. Coinbase (COIN) market cap dropped from $75bn to $7.98bn = 90% drawdown. Fun fact: Dogecoin is now worth more than Coinbase (largest U.S crypto exchange) & Silvergate (largest U.S crypto bank) COMBINED!

    Let that sink in!

39. Next shoe to drop in the crypto 'land'? Crypto miners MARA (Marathon Digital) >36% short interest now ... could be hedge funds, also 'classic' investors (both retail & pros) that were waiting for the right time to deflate empty boxes ...

40. Have you wondered: what is the number of months in 2022 that the S&P 500 has been UP or DOWN at least 7.5%?

👉 5 times! Not much, a lot, an outlier ?

👉 Well, that is the most (at par) since 1937! That is since pretty much everybody started investing & trading. One more occurrence in November/December and we have one for the history books in 2022 ... let that sink in!

👉Choppy market, trying to time it ? Source: GIR

41. Curious about 1% intra-day reversal days? 2022 setting up to be the year with the most swings of this type since 2008

42. S&P 500 (SPY) spent 200 days (81% of the year) below its 200DMA moving average, source Athanasios Psarofagis:

43. What happened with the usual sweet Christmas Rally? Santa is no where to be found. Big outlier this year: we have the 3rd WORST DECEMBER for the stock market IN HISTORY going back to 1926.

44. Contrarian indicator - CEO Business Confidence:

👉 currently at the lowest level since 1985

👉 good time to DCA cheaper into equities and/or lump sums?

45. Retail investors sentiment & the S&P 500: as low as during the Covid crash with indiscriminate selling ... Surprised or not ? I am ... not that it is low, but that low. Just like with the CEO confidence metric, this is imo a contrarian indicator.

46. Recession expectations ?

👉 peaking / turning among investors ...

👉 these expectations coincided with the: '09 (GFC/Lehman implosion) and '20 (Covid Crash) bottoms ... Long 2023+?

47. Should we expect for a good 2023+ rebound in equities given 2021 & 2022 correction 'outliers'? In 100 years, drops in the 2nd year have been deeper than in the 1st with a 24% average decline. That exceeds this year's decline by 20% ... this time will be different or not

48. Portfolio Managers seek safety in corporate balance sheets searching for the right stocks to buy: BofA Survey shows respondents overwhelmingly desire firms to improve balance sheets rather than prefer executives invest in capital projects or return cash to shareholders

49. Where does the money go in January ? It goes into the laggards typically:

50. How much action? January Flows as the biggest market dynamic:

👉 22bps of new money (not including money leaving bonds/cash) comes into the market every January... = $62bn of new money

👉 more inflows in January than the other 11 months of the year combined

I hope you enjoyed this Special Edition. What would help a lot from your side? Easy, just spread the word around & share this with people that might also be interested.

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In January, my 2023 Outlook with a focus on the S&P 500 will follow. Furthermore, Full Equity Research on single stocks will start, more stocks screeners, trading ideas/special situations & sleek valuation scatterplots across sectors and peers!

Have a great New Year’s Eve and a great 2023!

Maverick Equity Research