Monthly Market Rollup: End of August 2024
The US moves closer to a Recession and all eyes turn to the Fed with the potential for rate cuts. But does the Fed have the ammo to cut rates, or is Central Bank gold buying in the driver's seat?
Hello again, and welcome to our Monthly Market Rollup for the end of August 2024. We send these chart heavy market summaries at the beginning of each new 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.
As usual, we divide these monthly notes up into an Economy section currently focused on the potential for a Recession, an Inflation section, a Geopolitics section, and a Fed focused section along with a Conclusion. Enjoy!
Introduction:
That klaxon warning siren you are hearing is the sound of the 10 year - 2 year yield curve un-inverting, which happened on Wednesday last week by 1 basis point, and which now rests ominously at the 0bps line, unsure if it will re-invert or move to an un-inverted yield curve.
Source: https://fred.stlouisfed.org/series/T10Y2Y
Elsewhere in the curve, the 2 year Treasury yield is in free fall, in anticipation of the Federal Reserve doing some type of rate cut:
Source: https://fred.stlouisfed.org/series/FEDFUNDS
US markets are potentially overbought:
https://x.com/GameofTrades_/status/1824117269196149045
And with that as our set up, let’s get into it!
Economy Watch:
Every month looks like we are getting closer to a Recession. When it hits, and how hard it hits are the ongoing questions, but the direction of the Economy does not change among the various charts we have for you this month.
Conference Board Jobs are pointing towards an increase in Unemployment:
Source: https://x.com/KobeissiLetter/status/1830601959989977269
The number of US states having an increase in Unemployment is increasing, which often predicts a rise in national unemployment:
Source: https://x.com/GlobalMktObserv/status/1826975178628481535
Those national numbers have already turned up, by the way:
Source: https://x.com/GameofTrades_/status/1828885337290203647
Labor market conditions are declining:
Source: https://x.com/GameofTrades_/status/1828155919232049610
Buying Conditions are worsening:
Source: https://x.com/VPatelFX/status/1824454842825474054
And the Sahm Rule (a signal that uses changes in the Unemployment rate relative to the lowest point in Unemployment in the last 12 months) has triggered:
Source: https://x.com/GameofTrades_/status/1828130388579152304
And it might be trivial to say, but the SP500 would likely roll over if Labor markets weakened dramatically:
Source: https://x.com/jessefelder/status/1828115854317265182
Inflation Watch:
In contrast with the indicators for the Economy, Inflation seems to be getting harder to forecast.
The resurgent inflation that I’ve been showing in the charts of my last few notes appears to be late to the party, at best.
And to that end we have charts this month that show both the potential for a rebound in inflation and a dramatic drop off in inflation.
Shipping rates are still climbing:
Source: https://x.com/WinfieldSmart/status/1822316805760647622
Which leads US PPI:
Source: https://x.com/ISABELNET_SA/status/1827289629512421797
And with similar types of liquidity measures all pointing towards higher Inflation levels:
Source: https://x.com/crossbordercap/status/1823390982810825216
We have other models pointing towards a steep drop off in Inflation…
Source: https://x.com/AndreasSteno/status/1823743999154512150
The Mosaic Company ($MOS) is an American chemical company based in Tampa, Florida, which mines phosphate, potash, and collects urea for fertilizer, through various international distribution networks, and Mosaic Fertilizantes. It is the largest U.S. producer of potash and phosphate fertilizer. (Source)
And fertilizer demand -as it predicts CPI- would have you believe CPI will fall soon:
Source: https://x.com/i3_invest/status/1828115195400724691
Lurking behind the ongoing downturn in Inflation however, is the comparison to the 1970s, which is eerily tracking against a potential enormous blow up in Inflation:
Source: https://x.com/zerohedge/status/1830791752229224754
Geopolitics:
The investment community all stopped and took note of Gold earlier this week, with a note out from Goldman Sachs titled ‘Go for Gold’. Highlighted in the piece is the fact that Central Banks are buying gold at a record pace:
Source: https://x.com/CEOTechnician/status/1830973170184048725
If you’ve been following my stuff for a while, the idea of Gold isn’t new to you. But it’s useful to think about where Gold goes in the context of the Fed’s upcoming rate cut will they/won’t they decision.
Federal Reserve Watch:
Back in October of 2022, investing legend Stanley Druckenmiller sat down with Joe Kernen at CNBC's Delivering Alpha and commented on the risk/reward of the Fed attempting to effect a change in the 2024 Presidential Election:
So maybe the silver lining is we get a crisis that doesn't destroy us, but it's bad enough maybe to bring us together and someone comes out of nowhere because we definitely need to change. Half the country hates the other half. Um, we got myopic economic policies, boom/bust policies, You don't really get change unless bad stuff happens to catalyze the change.
That's what brought in Paul Volcker, G. William Miller, and Arthur Burns preceded him. So, as gloomy as I am, um, I'm open to something really great happening out of nowhere that we don't see by, you know, Catalyzed by something bad.
…
82 was a terrible recession. Everybody says, Oh, my God, are we gonna have a recession? 82 was a terrible recession. First of all, politically, Reagan won 49 states in 84. Secondly, it brought in 20 years of prosperity. So if the Fed engineers something here that we have some short term pain for, um, To me, they're doing the right thing and it'll be worth it.
The risk is, because it was preceded by 30 trillion dollars of QE, that it turns into something worse. And I'm not predicting that, but I'm open minded to it.
Source:
The point being made here is that with 49 states voting for Reagan, the country was united post the 1980 election. Yes, the resulting recession was bad in 1982, but the country was united and we got 20 years of prosperity out of the bargain, with growth ultimately subduing the inflation concerns of the 1970s. A good deal overall.
We are now on the precious edge of what seems like a capital ‘R’ Recession.
The Fed is set to start cutting rates soon, but the 30 trillion of QE, the unexpected Inflation of the COVID response, the resulting persistently high Treasury rates, and strategic buying of Gold by Central Banks points towards an enormous risk to Treasury markets if the Fed cuts too dramatically.
Moreover, as Druckenmiller indicated, the pain is what caused the political change.
I've been indicating for months that the Fed would much rather stay on the sidelines during the Election than play a major role in it. This, especially as the Fiscal side of the equation remains more important now than the monetary side.
Conclusion:
The setup that we have now is similar but not exactly the same as the late 70s. Most importantly is the inflation dynamic, and the impact that dynamic has had on long term rates and the ongoing rotation out of Treasuries and into Gold by global players.
And though inflation seems subdued for the moment, I think the Fed will play it safe with one rate cut. If they make it two cuts, then I wouldn’t be shocked. But I think the Fed is fine to be behind the market if it allows them to play for time.
The potential for resurgent inflation lingers, and though the world wants the USD to weaken, I don’t think the Fed wants to be seen as playing a major role in this election, which is two rate cuts would be interpreted as.
With the Election as close as it is, any action by the Fed that is interpreted as political could jeopardize the Fed’s independence (or perhaps just J. Powell’s job) after the Election.
Until next month.
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