Interview with Financial Sense on Running for Political Office and the Macro Outlook for 2020

I was interviewed by Cris Sheridan of Financial Sense on December 17th.

This was a two-part interview; in the first half, I discuss my current run for political office and the challenges facing small cities; in the second half, I discuss the macro and equity outlook for 2020. If you want to skip around, here are some guideposts:

• 2 minute mark: my reasons for running for political office
• 11 minute mark: the challenges facing small towns like ours in the next decade
• 24 minute mark: the US macro outlook for 2020, with a focus on housing and other leading indicators
• 32 minute mark: what macro and things like investor sentiment mean for the stock market in the coming year

My thanks to Cris for the opportunity to speak with him and to his editor for making these disparate thoughts seem cogent.

Listen here.

If you find this post to be valuable, consider visiting a few of our sponsors who have offers that might be relevant to you.

September Macro Update: Rising Possibility of a Recession in 2020

Summary: The balance of the macro data remains positive. A recession starting in 2019 is unlikely, but, for the first time, a recession in 2020 is a rising possibility.

The bond market sees weakening growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (dots). The lag between inversion and the start of the next recession has been long: at least 7 months and in several instances as long as 2-3 years. Notably, the yield curve finally inverted in August; on this basis, the current expansion will likely last through 2019 but 2020 is now at risk (from JPM). Enlarge any image by clicking on it.

August Macro Update: Housing Weak But Recession Unlikely In 2019

Summary: The 25bp rate cut by the FOMC this week was warranted given ongoing weakness in housing, but the balance of the macro data remains positive, meaning a recession starting in 2019 is unlikely.

The bond market sees continued but modest growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (dots). The lag between inversion and the start of the next recession has been long: at least 7 months and in several instances as long as 2-3 years. The yield curve has not yet inverted; on this basis, the current expansion will likely to last through 2019 at a minimum (from JPM). Enlarge any image by clicking on it.

July Macro Update: Housing Remains The Weakest Link

Summary: A small "insurance" rate cut by the FOMC later this month appears warranted given ongoing weakness in housing, but the balance of the macro data remains positive, meaning a recession starting in 2019 is unlikely.

The bond market sees continued but modest growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (dots). The lag between inversion and the start of the next recession has been long: at least 7 months and in several instances as long as 2-3 years. The yield curve has not yet inverted; on this basis, the current expansion will likely to last through 2019 at a minimum (from JPM). Enlarge any image by clicking on it.

June Macro Update: Employment and Housing Strong, Manufacturing Weak

Summary: It's been a noisy few months for macro. The prolonged government shutdown in December significantly delayed many data reports. Into this mess, several reports were ugly:

Retail sales in December fell into yoy contraction for the first time since 2009. 

New employment in February fell to the lowest level since 2010. 

New home sales growth in December dropped 14% yoy, the lowest rate since 2011.

That weakness now looks anomalous: the data from the past month mostly point to positive growth. A recession starting in 2019 is unlikely.

The bond market sees continued growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (dots). The lag between inversion and the start of the next recession has been long: at least 7 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely to last through 2019 at a minimum (from JPM). Enlarge any image by clicking on it.

Don't Fear The First Rate Cut

Summary:  The Fed may soon cut rates and that prospect is making investors nervous. Is the start of easing necessarily bad for equities? In short, probably not, at least not immediately. There's more to it than that.

Equities have most often risen after the first rate cut. The only times when equities have consistently traded lower was when they were already doing poorly.

Moreover, the economic data had already been persistently weak for many months (even years) prior to the times when the first rate cut was followed by a recession and an equity bear market.  That's not at all the case this time, making it similar to years like 1984, 1995 and 1998 when rate cuts were subsequently reversed with further rate hikes.

There are never any guarantees but it's probably different this time, in a good way.

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The Fed is now expected to cut its overnight rate 3 times in the next year (from Jim Bianco). Enlarge any chart by clicking on it.

April Macro Update: Employment and Housing Rebound

Summary: It's been a noisy few months for macro. The prolonged government shutdown in December significantly delayed many data reports. Into this mess, several reports were ugly:

Retail sales in December fell into yoy contraction for the first time since 2009. 

New employment in February fell to the lowest level since 2010. 

New home sales growth in November dropped 14% yoy, the lowest rate since 2011.

That weakness now looks anomalous: the data from the past month mostly point to positive growth. A recession starting in 2019 is unlikely.

The bond market sees continued growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (dots). The lag between inversion and the start of the next recession has been long: at least 7 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2019 at a minimum (from JPM). Enlarge any image by clicking on it.

January Macro Update: 2018 Employment Was The Second Best Since 2000

Summary: The macro economic story has started to change. The data from the past month continues to mostly point to positive growth, but there is a very important exception: weakness in housing is apparent. If this persists and other measures, especially employment, start to also weaken, a recession in 2019 is possible.

For now, the bond market sees continued growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 8 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.

December Macro Update: Recession Risk Low, But Starting To Rise

Summary: The macro economic story is starting to change. The data from the past month continues to mostly point to positive growth, but there is a very important exception: weakness in housing is apparent. If this persists and other measures, especially employment, start to also weaken, a recession in 2019 is possible.

For now, the bond market sees continued growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 8 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.

Interview With Financial Sense on Macro Risks and The Market Correction

We were interviewed by Cris Sheridan of Financial Sense on November 12th. During the interview we discuss the macro-economic environment, specific risks that are unfolding and current market technicals as stocks suffer their second correction in 2018. One theme of our discussion is what to look for over the next several months.

Our thanks to Cris for the opportunity to speak with him and to his editor for making these disparate thoughts seem cogent.

Listen here.

If you find this post to be valuable, consider visiting a few of our sponsors who have offers that might be relevant to you.

November Macro Update: New Employment Among Highest Since 2000

Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 8 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.

October Macro Update: Economic Data Suggests US Equity Bull Market Will Continue

Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 8months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.

September Macro Update: A New 49 Year Low in Unemployment Claims

Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.

August Macro Update: Recession Risk Remains Low

Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into early 2019 at a minimum. Enlarge any image by clicking on it.

July Macro Update: The Economy Is Fine. Trade War Rhetoric Is The Main Risk

Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.

Interview on Real Vision Television

We were interviewed on Real Vision Television on May 29th. During the interview, we discuss our long term equity market view, the current macro-economic environment and market technicals.

Our thanks to Real Vision for the opportunity to share our thoughts. Click here to become a subscriber.

To watch the interview, click here.

If you find this post to be valuable, consider visiting a few of our sponsors who have offers that might be relevant to you.

Time To Not Freak Out About Debt Again

Summary: Debt is a perennial worry.  It's a natural human tendency to think of debt as bad, that by incurring debt we are living beyond our means. But much of what you hear about debt in the US is hyperbole. Here are the facts:

Household debt has fallen in the aftermath of the Great Recession: on a per capita basis, it's back to the same level as 14 years ago. Households' debt relative to their net worth is as low now as in 1985. For all the consternation about the threat posed by student loans, their default rates are actually falling.

Corporate leverage today is not materially different than it was in 1993 or 2003, i.e., early in two expansion cycles. The delinquency rate on corporate loans is lower than at any time during the prior three expansion cycles. High yield spreads are falling and default rates are well below average.

The "tax reform" bill signed in 2017 is forecast to further expand the federal debt.  But examples from around the world do not show a strong correlation between federal debt and economic growth over the next 5-10 years. For all the hand wringing about high federal debt, the interest cost of that debt is just 1.3% of GDP, as low as during the halcyon days of Eisenhower and Elvis.

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Like most people, you're probably worried about the amount of debt in the US.  We seem to be going broke. Enlarge any chart by clicking on it.

June Macro Update: Unemployment Claims at a 49 Year Low

Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.

Separating an Innocuous Correction From the Start of a Sinister Bear Market

Summary: It's true that equities fall before the start of most recessions. So why bother following the economy; why not just follow the price of equities?

"Market corrections" occur every 20 months, but less than a third of these actually becomes a bear market. Recessions almost always lead to bear markets, and bear markets outside of recessions are uncommon.  For that reason, discerning whether a recession is imminent can help determine when an innocuous correction is probably the start of a sinister bear market. Volatile equity prices alone are not sufficient.

The future is inherently unknowable. We can never say with certainty what will happen in the month's ahead. But the odds suggest an imminent recession in the US is unlikely at present and, barring a rogue event like 1987, a bear market is not currently underway. That means equities are most likely on their way to new highs in the coming months.

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Why bother following the economy? Why not just follow the price of equities?

It's true that equities fall before the start of most recessions. Take the last 50 years as an example. There have been 7 recessions and the S&P has peaked and started to fall ahead of all except one (the S&P peaked with the start of the recession in 1990). On average, the S&P has provided a 7 month "heads up" that a recession is on the way. That's enough for even the slowest investor to get out of the way. Enlarge any chart by clicking on it.

Demographics: The Growing Prime Working Age Population

Summary: Demographics is a key driver of economic growth (and, thus, the stock market). Many investors fret over the aging of the Boomer generation.

But the Millennial and Gen X birth cohorts are almost twice as large as the Boomers. Behind the Millennials is Gen Z, a group almost as large as the Boomers. The mid-point of these three generational groups does not enter retirement age until 2055. This prime working age group heavily consumes housing and other goods as they pass through their reproductive and household formation years. "The movement of these younger cohorts into the prime working age is a key economic story in coming years."

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Starting around the year 2000, many investors began obsessing over the aging demographic profile in the United States. The concern seemed reasonable. The working age population in Japan had peaked in 1995, 5 years after the Nikkei stock index. The stock market had halved by 2000 as the working population declined (by 13% from 1995 to 2018).  Enlarge any chart by clicking on it.