SPX: The Great Recovery?
Throughout history, one can always look back and categorize a period of time such as "The Great War", "The Great Depression", "The Progressive Era", "The Gilded Age", etc. We humans do not think of the present in such terms because everything feels as it is. There is no cognitive thought that can pinpoint that we are in a historical period until we reach what is known as hindsight. A pivotal point of reflection on the past that enlightens in a way that was not previously possible. This exact dynamic is why historical data and charts are so important in not necessarily predicting the future, but by considering a calculated perception not possible without this information.
So, let's use this information to our advantage.
Here are just a few historical facts:
~No bear market in history ended before the recession
~No bear market in history ended with the Fed raising rates
~No bear market in history ended before the true Fed pivot
~No bear market persistent inversion was NOT followed by a recession (US10Y-US02Y has been inverted since July) & (US10Y-US03M inverted in October).
President Biden last week touted, "The US economy is expanding, and income has increased faster than inflation".
Okay well, two things:
First, here is a simple but impactful fact;
Since the start of this year, Stock Market losses have wiped $9 Trillion from Americans' wealth
cnbc.com/2022/09/27/stock-market-losses-wipe-out-9-trillion-from-americans-wealth-.html
Second, if wages are growing faster than inflation (Inflation grew exponentially in comparison to the last 40 years), then why is the data showing an immense gap between Labor costs & Corporate profits?
epi.org/blog/corporate-profits-have-contributed-disproportionately-to-inflation-how-should-policymakers-respond/
Its best to see the data for yourself, but here is a snippet:
Corporate profits- (2020 Q2-2021 Q4= 53.9%) & (1979-2019= 11.4%)
Unit Labor Cost- (2020 Q2-2021 Q4= 7.9%) & (1979-2019= 61.8%)
That is roughly a 155% difference in the WRONG direction. (Unit Labor Cost)
This exact same dynamic was the main reason for the Great Depression to have happened in the first place. Corporation profits grew larger while Labor Wages vastly lagged behind. It not only led to a complete collapse of industrial spending but would condemn the economy to almost a decade of misery and mediocrity.
Let's move on to arguably the most important part of the post which is the FED's preferred Recession Indicator. (US10Y-US3M). It has finally flashed a Recession warning as it has inverted for the 4th time since 2000. Each time this has happened there has been a Recession that followed.
Pair this with the Energy crisis across the world which has also marked very valid Recession signals:
It is also well known that the housing market holds the majority of individual wealth so let's take a peek at where it stands:
This chart from a technical perspective almost guarantees a local top after housing prices soared by almost 27% following the 2020 recovery. Take a look at the RSI paired with rapid acceleration to the upside. What follows is pretty clear, at least locally.
Interestingly enough, a FED Pivot/Inflation Peaking is amongst the most popular narratives being passed along and at face value it makes sense, but once you dive deeper the matter makes anything but sense. Let me explain:
Here is Inflation overlayed with the FEDS Fund Rate:
As you can see, not only was the FED late to the party regarding policy to fight inflation (possibly intentional due to exponential debt) but it also wasn't until Interest Rates matched the Level of Inflation was when Inflation truly peaked. This has not been met today.
Furthermore, let's see what happens once the FED pivots and begins decreasing rates again:
Again, if you notice when the FED began to decrease rates, the market did NOT act the way the public is expecting it to react today. It is a counterintuitive proposition because it is positive that monetary policy is more favorable but WHY is the FED decreasing rates? Most likely because of economic weakness. If the FED is hiking confidently, this means the economy is still intact and able to hold the brunt of the impact. This dynamic is missed by a great majority of market participants.
One thing I want to focus on in the last chart is the 40-year trend break of monetary policy. We see this break in all charts representing yields/rates in terms of governmental sectors. For example;
Here is the US10Y: Breaking a 40-Year trend
As well as the 30-Year Fixed Rate Mortgage does the exact same thing:
This to me indicates we are in a historical transitional period. If this is in fact the case, this would mean we would be transitioning from the old trend to a new trend. Now let's think about what trend we have been in for the last 20 years minimum. Its been astronomical QE and endless money printing which has brought us to today. What's on the flip side of this coin?
So, let's use this information to our advantage.
Here are just a few historical facts:
~No bear market in history ended before the recession
~No bear market in history ended with the Fed raising rates
~No bear market in history ended before the true Fed pivot
~No bear market persistent inversion was NOT followed by a recession (US10Y-US02Y has been inverted since July) & (US10Y-US03M inverted in October).
President Biden last week touted, "The US economy is expanding, and income has increased faster than inflation".
Okay well, two things:
First, here is a simple but impactful fact;
Since the start of this year, Stock Market losses have wiped $9 Trillion from Americans' wealth
cnbc.com/2022/09/27/stock-market-losses-wipe-out-9-trillion-from-americans-wealth-.html
Second, if wages are growing faster than inflation (Inflation grew exponentially in comparison to the last 40 years), then why is the data showing an immense gap between Labor costs & Corporate profits?
epi.org/blog/corporate-profits-have-contributed-disproportionately-to-inflation-how-should-policymakers-respond/
Its best to see the data for yourself, but here is a snippet:
Corporate profits- (2020 Q2-2021 Q4= 53.9%) & (1979-2019= 11.4%)
Unit Labor Cost- (2020 Q2-2021 Q4= 7.9%) & (1979-2019= 61.8%)
That is roughly a 155% difference in the WRONG direction. (Unit Labor Cost)
This exact same dynamic was the main reason for the Great Depression to have happened in the first place. Corporation profits grew larger while Labor Wages vastly lagged behind. It not only led to a complete collapse of industrial spending but would condemn the economy to almost a decade of misery and mediocrity.
Let's move on to arguably the most important part of the post which is the FED's preferred Recession Indicator. (US10Y-US3M). It has finally flashed a Recession warning as it has inverted for the 4th time since 2000. Each time this has happened there has been a Recession that followed.
Pair this with the Energy crisis across the world which has also marked very valid Recession signals:
It is also well known that the housing market holds the majority of individual wealth so let's take a peek at where it stands:
This chart from a technical perspective almost guarantees a local top after housing prices soared by almost 27% following the 2020 recovery. Take a look at the RSI paired with rapid acceleration to the upside. What follows is pretty clear, at least locally.
Interestingly enough, a FED Pivot/Inflation Peaking is amongst the most popular narratives being passed along and at face value it makes sense, but once you dive deeper the matter makes anything but sense. Let me explain:
Here is Inflation overlayed with the FEDS Fund Rate:
As you can see, not only was the FED late to the party regarding policy to fight inflation (possibly intentional due to exponential debt) but it also wasn't until Interest Rates matched the Level of Inflation was when Inflation truly peaked. This has not been met today.
Furthermore, let's see what happens once the FED pivots and begins decreasing rates again:
Again, if you notice when the FED began to decrease rates, the market did NOT act the way the public is expecting it to react today. It is a counterintuitive proposition because it is positive that monetary policy is more favorable but WHY is the FED decreasing rates? Most likely because of economic weakness. If the FED is hiking confidently, this means the economy is still intact and able to hold the brunt of the impact. This dynamic is missed by a great majority of market participants.
One thing I want to focus on in the last chart is the 40-year trend break of monetary policy. We see this break in all charts representing yields/rates in terms of governmental sectors. For example;
Here is the US10Y: Breaking a 40-Year trend
As well as the 30-Year Fixed Rate Mortgage does the exact same thing:
This to me indicates we are in a historical transitional period. If this is in fact the case, this would mean we would be transitioning from the old trend to a new trend. Now let's think about what trend we have been in for the last 20 years minimum. Its been astronomical QE and endless money printing which has brought us to today. What's on the flip side of this coin?
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.