Republi-Crats did it again, voting to approve the Omni Bill. A 4000+ page bill that no one had the time to read. Felt a bit like Nancy Pelosi’s comment in 2017 about Obamacare. “We have to pass the bill so that you can find out what is in it, away from controversy.” I’m not going to dive into the rabbit hole of the bill in this post, only to say our national debt is over $31 TRILLION. This is a ticking time bomb. But rest assured the Fed has it all under control.

I’m no economist, and my crystal ball is as clouded as anyone, but having lived through more than one economic disruption sometimes the indicators become self-evident. And history has a way of repeating itself. As we find ourselves heading into the second half of 2023, I would present we’ve been in a “soft landing” and the recession is coming, when is anyone’s guess, but this one may last a while and could be a severe contraction to work off and repair 20 years of excess within the markets and economy.

I see the U.S. markets reflecting a combination of 2000 and 1987 which both happened rather expediently. As you know during 2000, in less than a month, nearly a trillion dollars’ worth of stock value had completely evaporated. In 1987, Black Monday occurred, (October 19th) in the space of 24 hours stock markets in Asia, Europe, and the US suffered falls of up to 23%. At the time it was the biggest crash in living memory.  

While markets are complex, history does tend to repeat itself. And although there are differences, many similarities between the two periods and others not noted here currently exist within this market.

• Tech stocks were overvalued. 
• Rising Interest Rates.
• Retail sales are down. 
• Govt. provided liquidity to avoid defaults. 
• Trade deficits were an issue.
• GDI down.
• And many people had a gut feeling of a coming crisis. 

We currently have a positive GDP but a negative GDI. Historically when we have real GDI negative YOY on back-to-back quarters of decline, that has been a recession signal back to 1948…100% of the time.

The Fed’s yield curve has been deeply inverted for over a year. The most since 1980. One can argue we still have not felt the effects of the rate hikes as the Fed effect lags. In March of 2022 Powell himself told us “If the curve ever inverts it’s telling us the economy is supremely weak and the Fed will need to cut”. Now the curve is inverted and the Fed, albeit softening, by all appearances has left the door open to raise rates as we face recessionary concerns. The kicker is this time when the recession comes the Fed is not in a position to bail the economy out. Even as they will be compelled to lower rates in 2024.

DEBT

• Federal debt is exploding, as is the interest payments to cover it. OVER $32 TRILLION. Nominal GDP is at 5-6% yet deficit spending to the percentage of GDP is 7-8%. When you back out the Federal red ink you’ve got negative private sector growth.
• More global debt than 2008, and it is increasing – 72 countries are not solvent. The EU is already in a recession.
• The leading economic indicators have been negative for 14 straight months. 
• Corporate debt – derivatives. In a conversation I had two years ago while at a conference in Washington DC with a person from the Treasury Department, I asked her where she saw the next Achilles heel, she shared… “Corporate derivatives, it will be 800 times bigger than 07-08 mortgage crisis.” Currently, 37% of firms are on the solvency fence. Much of this debt is with floating rates, will they be able to refinance their debt with the new interest rates? 
• Already, for the first 2 months of 2023, corporate bankruptcies were at a 12-year high (111 bankruptcies). This is more than double this time in 2022, and we are on track for a projected 670 bankruptcies in 2023. Venture-backed startups are also failing this year at record highs.
• Student Loan debt is now approaching 2 Trillion and payment is coming back online, of course, they are all saved for the day of reckoning.  Bidens loan forgiveness faces continued legal challenges. However, Bidens next brilliant idea is to make it easier to eliminate this debt via bankruptcy, which stays on a credit report for ten years.
• China is in dire straits; provinces can’t pay their bills and the CCP doesn’t have the funds to bail them out.  Economic internal corruption is coming back to haunt them.

INDICATORS

• As of April the PPI has been declining at the fastest rate in its 75-year history, yet the recent uptick raises new inflation concerns.   
• Commodities are dropping – Natural gas dropped 80% last year alone. US natural gas prices slumped 8% last Thursday to the lowest levels in nearly two years. Here the argument of deflation comes into play. However, the energy sector invites more research as oil prices are down, as are supplies. Transition from high output energy to low output renewables will not happen overnight as proponents romantize.
• Fed is about to pull $1.5T of liquidity out of the market. Will we see a failed Treasury auction? Will there be enough buyers, and if so, at what price?
• No credit to shore up the dikes. 
• Auto Debt at an all-time high. 
• Repos are increasing. 
• Auto Dealer inventory is at record levels, and flooring costs are eroding balance sheets. 
• However, car prices are coming down – deflation. 
• Dealers are now creating their own financing captives due to the credit crunch as banks reap the effects of rising repos and their collusion in financing poor consumer lending ratios. Sound familiar.
• Unemployment is rising, 45 states are seeing initial claims rising.
• M2 money supply is finally declining and contracting creating a velocity issue. 
• S&P has been level, Nasdaq up 30% – rally led by a few names. 
• Stock prices are rising faster than underlying profits warrant.  

HOUSING          

• The housing market has peaked and is residing. ( I constantly get notifications of price reductions in the Hood River area I’m researching. ) 
• Foreclosures are rising, with future ramifications resulting from rising unemployment.
• Evictions are rising, and filings in many cities are more than 50% higher than the pre-pandemic average. Protections against landlord evictions have ended, and rents are going up.
• Air BnB revenues are down.  
• Open Door the largest Wall Street housing investor has cut 40% of its workforce in the past six months. Their stock has dived 81% in the last year. They lost $1.4 Billion in 2022. Could they be one of the 670 BK’s in 2023, if so a significant housing liquidation will occur.
• Is another Mortgage Crisis brewing?
• Homebuyer Debt-to-Income Ratios (DTIs) are now approaching 40% in the beginning of 2023. That means homebuyers are now spending 40% of their gross income on mortgage and interest costs. Same level as in 2006.

After the 1987 crash Nobel Prize winning economist Robert Shiller surveyed 889 investors. The most common response was a general investor gut feeling of an impending crash driven by excessive debt. Yet if you watch CNBC, life is a Bull, Cramer is on a roll. Reminiscent of the euphoria prior to the dot-bomb bubble. The last time CNBC told viewers the bad news their ratings dropped, and Cramer picks have never beaten the market.  

One could argue the industrial side is already in a recession, historically what follows is the consumer side. The cardboard box sector is depressed. Having been outside of the U.S. living in Panama for the last 18 months and recently returning for an extended stay it was a stark reality of the increased cost of living here. Especially with the rising cost of protein to a family’s budget. Additionally, the increased cost of labor is reflected in all costs, especially in the service industry. 

The Biden train wreck is taking us down a shit hole that is like a case of shingles, it will itch for a long time. But be clear, they’re all a bunch of Republicrates who feed in the same trough on K-Street. History has shown they will throw you under the bus in a heartbeat. But unique opportunities are always present, be patient, disciplined and keep some dry powder at hand. Be careful of whose advice you take, learn from many voices, find those that resonate and learn to trust your intuition. The more you use it the better it will work.

Below is one of those voices to consider. Guy Turner with Coin Bureau. If you’re not familiar with him and his team, he is one of the more educated voices out there, and certainly, commentary to consider as you decide to what degree Bitcoin and other options might play in your life. The site does not give financial advice, however, does deliver a pragmatic perspective. Below is a recent video to sample.

In the meantime, pause a moment and go tell someone how much they matter in your life. When life gets hard, we need those we love and trust the most, don’t wait until tomorrow to tell them. Peace