Here's the Deal - November 3, 2024

Economy: In Slowdown

Market Cycle: Bullish

_{Week 44 of 52 for 2024: 84.6% of the way through 2024}

Weekly Note:

The week that the whole world has been waiting for has finally arrived. It’s decision time, and the result will affect you more than most things in your life whether you are aware of it or not.

I am talking, of course, about Fed Week. As the Federal Reserve will announce their decision on interest rate cuts this Thursday. Expect a 25bps cut this time around.

Many people might say the big news this week is the U.S. election, but here’s something to consider: decisions by the Federal Reserve and who controls Congress will likely affect your life more directly than who becomes President. Unless of course, you let others shape your fears and opinions. In fact, the bond market has a bigger impact than the Fed itself, as the Fed has largely been following bond market trends since the early 1980s.

You won’t hear much about these realities on the evening news or from the Legacy Media. Why? Because a less informed public is easier to influence. Instead, they fill our screens with mindless political mudslinging, reality shows featuring materialistic and unhappy characters behaving like spoiled teenagers, and sports packed with ads for drugs, sugar, and political agendas. All distractions that can keep you from thinking critically about what truly impacts your life.

As Tony Robbins says, “Where attention goes, energy flows.” So, what truly has your attention lately?

Being into politics right now is like choosing to stay at a Diddy party past 2am. Nothing good is going to come of it for you.

Politics used to be interesting and meaningful. Then it went main stream. When things become popular amongst the masses they get idiotic, as the lowest common denominator must then be catered to as well. This is how a group of people who are typically intelligent and thoughtful in their decision making, spirals into the utter insanity of “Mob Mentality.”

The people who succeed consistently in life know how to keep their cool, stay focused, and think for themselves. Especially when others around them are panicking. They don’t let themselves get drawn into ideas or mindsets that benefit someone else at their own expense. Instead, they stay steady and stick to what they know works.

But let’s get back on track: recent economic news has been adding to the confusion. That is unless you understand what an economic slowdown is, how it typically unfolds, and can recognize that the overall data is showing that this is exactly what’s happening in the U.S. economy right now.

It’s seems tough to believe that the economy is slowing with news that the initial Q3 GDP showed the economy grew by 2.8% from the previous quarter. Not bad.

But under the hood, more red flags are popping up.

I’m not simply talking about the huge miss on this weeks payrolls report. As Here’s the Deal highlighted last weekend, we expected a big miss due to Hurricanes Helene and Milton as well as the ongoing strike at Boeing. As Only 12K jobs were added to payrolls in October, which was way below estimates of 140K.

The report also brought more revisions lower in employment from August and September totaling 112K, as the labor market continues to slow. Which helps the case for another 50bps in rate cuts before the end of the year. One 25bps on Nov 7th, and another 25bps cut on December 18th.

On top of that, JOLTs are once again back to their pre-pandemic highs of just under under 8M. For anyone trying to hire people 2016-2018, you know how difficult it was to find decent candidates at that time. So still very elevated at these numbers.

The evolution of AI continues to bolster the economy as Tech giants see AI bets starting to pay off.

Which continues to add to the demand for more power supply. That is the driving force as to why Big Tech is paving the way for a nuclear breakthrough.

Although the payoffs in the near future look to be outweighed by the investment costs as Microsoft forecasts sparks concern about AI and Cloud Revenue. This is very significant due to Microsoft taking a leadership position in the industry by betting heavily on AI with their huge ChatGPT investment and attempted deal for Three Mile Island.

That wasn’t the only negativity out of sector, as it is no longer all rainbows and butterflies in the land of AI as news of Ernst and Young dropping SMCI as a client rocked the stock and the industry this week. This could also see SMCI get kicked out of the S&P 500, which they only recently became a part of in March of this year. It will be interesting to hear what they have to say when they report on Tuesday.

More importantly, the SMCI news is something to keep an eye on going forward as a possible contagion in the sector. SMCI is Nvidia’s third largest customer, so should this turn into something which gets out of hand it could also drastically hurt Nvidia as well. That is significant as Nvidea is now the US’s most important company, is the 2nd largest component of the S&P 500 at just under 7%, and was recently announced that it will also be added to the Dow Jones Industrial Average. So, while there’s no immediate reason to change expectations, this is definitely something to watch. The timing could impact companies like Nvidia and others in the AI sector in the coming months. You know, right around the time you would expect a market jolting event based on the timeline of the credit cycle.

On top of that, the Rejection of Amazon-Talen nuclear power agreement, while not exactly unexpected, shows that however corporations are going to purchase the huge amounts of electricity they need, it won’t be as easy as they were probably hoping.

The mistake is to think that the new headwinds will make AI a fad. As the evidenced in OpenAI adding a search engine to ChatGPT, challenging Google. As this sector continues to improve, more people will use ChatGPT, or other AI sites, as their go-to for information. Your kids are probably already doing so now.

But getting back to the disappointing Microsoft forecast, this is the real theme to begin watching closely now.

With 70% of S&P 500 companies having reported earnings so far, 75% of those have beat EPS estimates while 60% have beat their revenue estimates. However, 10% have lowered their forward guidance while only 5% have increased guidance. This along with profit margins, are the two the most important things to watch in the coming months. Should the forward looking guidance continue to be lowered and profit margins begin contracting, that will tell us that a recession is likely very close or has already begun at that time.

The current earnings data is exactly the type of thing you would expect to see in an Economic Slowdown that is getting close to its midpoint, when compared to past credit cycles.

Speaking of history, this week also brought the anniversary of Black Monday, which happened 95 years ago on October 28, 1929 and ushered in the Great Depression.

And Happy Birthday to Bitcoin, which began in the depths of, and as a response to, the Great Financial Crisis on Oct 31, 2008.

Again I reiterate, the most important shift that is happening in the economy right now at this moment is the lowering of guidance and continued higher profit margins for companies which have reported so far. This is exactly how Economic Slowdowns play out. And we knew it was coming in the beginning of Q2 2024 because of The Economy Tracker.

So remember, when the nutters of the winning party this week want to punish the losers whose nutters will be wailing in the streets, happiness and validation are found in finding solutions as any idiot can spot and then cry about a perceived problem.

Should the anxiety get to you this week, remember to breath and go outside for a walk. I promise that there will be another election in four years and it too “WiLL bE ThE mOsT ImPorTAnt eLEcTIon EVER!!!” and “dEMacRaCY wiLL bE on THe BaLLot” then as well.

After all, they will continue to pull this divisive shit for as long as we allow them.

So, is your focus this week on things you can control? Or, are you focused on what you’re being told to focus on by those with a vested interest in keeping your attention rather than your betterment?

That’s your real choice this week.

More Top Economic Stories of the Week:

Mastercard’s Earnings Top Estimates as Consumers Keep Spending

Why it matters: Credit card companies do very well in Economic Slowdowns as people continue to try to keep up with their spending habits which increased during the economic Expansion.

Americans Are Spending Big on Cosmetic Procedures — and Wall Street Is Cashing In

Why it matters: You don’t see big expansions in cosmetic procedures during a recession.

Homebuilding Stocks Tumble As Largest Builder Finds This Chilling Trend

Why it matters: Higher rates are better for new home builders as they can offer multiple incentives to home buyers without cutting prices. So their sweet spot is coming to an end. And yes, affordability will continue to be a challenge for years to come because there is simply not enough housing units available for the current aggregate lifestyle of Americans.

Most Important Data Drops from the Past Week:

This Week in Markets

Yet another fund manager in the prime of his career made the claim that markets are telling us that Trump is going to win, as Ken Griffin follows the Stanley Drunkenmiller and Paul Tudor Jones with the assessment.

Probably why bond yields continue to rip higher as $7.75B in increased debt is an outrageously bad idea at this point in the cycle and is more likely to lead to a secular bear market than further economic growth. Not like $3.95B is much better though.

The Thursday morning gap down caused by the Meta and Microsoft earnings misses does give me reason to pause a bit. Not for some historic crash, as the economic clown car of fake econ experts are once again warning about for the umpteenth time in four years. But this ~2.5% correction could turn into a 5% or 10% correction, which would be normal for an Economic Slowdown.

Possible, but still unlikely at this point. As the vast majority of indicators remain very bullish. Maybe that will be different this time next week, but that is no reason to turn this giant bullish tailwind into a headwind for your prosperity because you have a hunch.

As for what to expect out of markets from the election results, I was actively trading when the January 6th, 2021 mayhem was happening. Want to know what markets were doing at that time? Ripping higher. On one screen I had the news showing the debacle at its peak, on a few other screens were basically the entire stock market on an absolute tear. One of the most surreal experiences of my life, and a massive learning moment that I will never forget.

Which is why I’m not terribly concerned with a momentary freakout by the losing party’s most easily manipulated. What is a bit more concerning is a prolonged battle after the election to certify the winner, but we’ve also gone through that in more recent history. The most concerning is an overnight unwind of positions and buying of new ones because markets made the wrong bet, much like we saw on election night in 2016.

With that being said, people will continue to need housing and food, and AI will continue to need more power no matter who wins. Which is why those sectors have been my focus lately in the markets.

In my view, onward and upward until price says otherwise and then confirms the change. Whenever that happens, so will my outlook. That is how the winning is done in markets.

The Week Ahead

Economic Data to watch:

Earnings to watch:

The Truth About the BS You’re Hearing About

Visual proof that employment revisions are normal and to be expected. The directions of the revisions is determined by the credit cycle, NOT politics. Just another reason why understanding credit cycles makes you less susceptible to manipulation.

WTF of the Week

Quote of the Week

Click the Leave a comment button if you have any questions or comments, or need something clarified. Don’t be shy. The main point here is to improve constantly. Questions and comments help us both and tells me what you are interested in learning/hearing more about.

If you enjoyed this post or found it useful, do me a favor and hit the like (heart button all the way back to the top of the post and to the left) and share it with others.

Learn. Improve. Pass on.