Monthly Market Compass: October 2024
The Fed cuts 50 bps. Recession and Inflation look like they both could land soon, amidst War in the Middle East and Port Strikes. Do all roads lead to Gold, or does the US Election offer an antidote?
Hello again, and welcome to our Market Update. We are going to merge our chart heavy market summary with our liquidity measurements update for you this month and give our regular followers a glimpse of what subscribers get mid month.
As usual, we divide these notes up into an Economy section currently focused on the potential for a Recession, an Inflation section, a Geopolitics section, and this month we are starting with some market observations and then throwing in an ISM and Liquidity section at the end. I hope you enjoy the extra content this month!
Please be aware that these notes are not investing advice and should be enjoyed as entertainment and for informational purposes only. Always do your own research. Sources can be found below each graphic.
Introduction and Market Observations:
It’s good to be back with you after a long month.
It seems like everything is starting to happen all at once.
In the US, the International Longshoremen Association who work the East and Gulf coasts are conducting a massive port strike which might send US inflation soaring again.
Separately, we have rising tensions in the Middle East as Iran fires a large number of missiles at Israel, which is impacting shipping costs and Oil prices.
The Federal Reserve has cut 50bps in rates, which was more than I and many others anticipated.
Gold continues to surge.
And the US election continues to loom on the horizon with prediction markets indicating a near dead-even race:
Source: Polymarket - Oct 1st, 2024
And with that opener, let’s jump into it.
Inflation Watch:
Inflation concerns are popping up again, and this time in the form of labor demands.
In previous notes, I’ve been showing container shipping prices surging recently…
Source: https://x.com/WinfieldSmart/status/1822316805760647622
…and it looks like those prices are whetting the appetite of the longshoremen who offload them.
So, if you haven’t seen this video, do yourself a favor and watch the Chief Negotiator for the International Longshoremen Association describe what will happen if his demands for ‘his guys’ aren’t met:
Source: https://x.com/BrotherMikeyX/status/1840770964314820647
Hopefully this is a short strike… hopefully:
Source: https://x.com/AndreasSteno/status/1841118885371597040
But while employers are seeing the Recessionary writing on the wall… Longshoremen are trying to claw back decades worth real wages from the tech fueled productivity boom since the 1980s.
Source: https://fred.stlouisfed.org/
Elsewhere in the concerns for inflation, we have M2 expanding:
Source: https://x.com/GameofTrades_/status/1838231896729543100
As a reminder of the fear that beats in the hearts of everyone who can remember the 1970s… this is where we might be here in the Inflation cycle:
Source: https://x.com/zerohedge/status/1836471480319627292
Economy Watch:
So the Fed cut rates by 50bps, which often happens at the beginning of Recessions:
Source: https://x.com/GameofTrades_/status/1836465395752145223
The Yield Curve, the Unemployment Rate, and Consumer Expectations all look bad:
Source: https://x.com/albertedwards99/status/1833068477696881147
The 2yr rate minus Fed Funds looks very Recessionary:
Source: https://x.com/GameofTrades_/status/1836136540105511164
Median Home prices are contracting… something that has only occurred during or before a Recession:
Source: https://x.com/GameofTrades_/status/1841161875800912204
Home Buying conditions are falling:
Source: https://x.com/GameofTrades_/status/1838210199754305736
Labor market conditions are contracting:
Source: https://x.com/GameofTrades_/status/1836736829464490271
As we noted above, Unemployment is moving up, and here looks like it will continue moving up:
Source: https://x.com/Econ_Parker/status/1838600921619599516
Job openings are declining:
Source: https://x.com/GameofTrades_/status/1838571575253307870
Consumer loans default rates are rising:
Source: https://x.com/GameofTrades_/status/1833890795985797464
It appears that credit card interest rates are at an all time high:
Source: https://x.com/GameofTrades_/status/1838254597200367721
While credit card and subprime auto loan defaults increase:
Source: https://x.com/MikeZaccardi/status/1837928305733079523
Might be a good time to start a car repo company:
Source: https://x.com/TaviCosta/status/1829529601145499724
And the undefeated Sahm Rule remains triggered towards Recession:
Source: https://x.com/GameofTrades_/status/1836042556213502050
For awareness the Sahm Rule tracks the lowest point of the three month moving average of the unemployment rate, looking back 12 months. The Sahm Rule then shows when that number rises significantly over that lowest point. When it rises 0.5% or more (the dotted line) it triggers. In essence it shows when there is a sharp increase in unemployment compared to the previous 12 months.
Geopolitics:
Remember those increasing shipping container prices back in the inflation section? Well it turns out that wars will do that to shipping prices:
Source: https://x.com/anasalhajji/status/1838048625676460281
Internationally, the dance between USD/US Treasuries and Gold continues to be the correct lens through which to view much of what is happening in the world - especially as both US political parties appear to have no plan to reign in the twin deficits and ballooning US debt:
Source: https://x.com/SoberLook/status/1835984864358658271
Interest expense on US Debt it increasing with no plan to address it:
Source: https://x.com/GameofTrades_/status/1834292671965442536
Gold seems to amazingly keep up with true inflation:
Source: https://x.com/VladTheInflator/status/1838685914798919717
And various banks and research groups are raising their targets for the yellow metal:
Source: https://x.com/GoldSeabridge/status/1840188012656775392
‘Who are the buyers?’ you ask. How about China.
Source: https://x.com/minenergybiz/status/1835283415656018045
They certainly seem to be making less companies these days:
Source: https://x.com/FT/status/1834126807165022469
Oh, and Russia also:
Tweet: https://x.com/KingKong9888/status/1831686387223163361
Primary: https://www.jpost.com/business-and-innovation/precious-metals/article-818775#818775
And even GFC hero and Billionaire John Paulson has indicated that he’ll buy gold if Harris wins: https://www.zerohedge.com/political/hedge-fund-billionaire-sell-stocks-buy-gold-if-kamala-wins
ISM and Liquidity Overview:
US Credit Markets as the forecast the ISM seem up, indicating a lower likelihood of a Recession. (Though in recent years the ISM has not been the best indicator, with many suspecting that the low response rate of survey respondents undermines its usefulness.) Still this is a bit at odds with our Economy watch charts, which mostly show a likelihood of a Recession:
Source: https://x.com/crossbordercap/status/1835983473632280707
Some Liquidity measures look promising:
Source: https://x.com/Marcomadness2/status/1839609944615559590
Source: https://x.com/crossbordercap/status/1823390982810825216
And the Crypto guys love the global M2 measure:
Source: https://x.com/RaoulGMI/status/1835778746990678078
The ISM vs Empire Fed chart is pointing up:
Source: https://x.com/AndreasSteno/status/1835662822669230435
Conclusion:
Overall the Gold story seems like it has more to run - as it generally does well once the Fed starts cutting (on top of everything else):
Source: https://x.com/Ole_S_Hansen/status/1836472170966339916
Both parties are indicating a focus on spending, and neither have addressed the concern of the rising interest expense.
Yellen has funded the Government with short term US Treasuries, many of which will get rolled soon. Amazingly if a hard Recession comes in the near term, she or whoever ends up being Treasury Secretary may be able to roll the debt at a lower interest rate, in the 2 to 5 year duration time frame.
A curve steepener might work here, anticipating the long end moves higher as the response to this Recession continues, and everyone continues flocking to the safety of the short end.
At the moment the Fed is indicating one to two .25 bp cuts in November, and I think both the Recession watchers and the ‘cuts benefit risk assets’ types might end up being right together. Small caps and most equities down. Gold and some crypto, up. Guessing on NVidia either way seems like a vanity trade at this point. Possibly this best-of-times-worst-of-times, bifurcated market continues:
Source: https://x.com/biancoresearch/status/1832612583087485023
On the whole, Gold seems like the easiest thing to be right about.
And with that I’ll call an end for this note.
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All the best,
-Jack