Here's the Deal with the Economy- December 22, 2024

Economy: In Slowdown

Market Cycle: Bullish under Pressure

_{Week 51 of 52 for 2024: 98.0% of the way through 2024}

Table of Contents

• Another rate cut and a change in expectations for …

• Two pre-Inaugural headwinds down. 1 major one to g …

• D.O.G.E. gets a win.

• Wild ride in stock markets this week.

• Quantum computing is “born.”

• Time to start keeping a close eye on Commercial Re …

• Yield Curve now uninverted.

• Correction to the travel anecdote shared last week …

• Most Important Data Drops from the Past Week:

Weekly Note:

Yet another week of a US Economy in an Economic Slowdown doing Economic Slowdown things.

From the wild selloff in stock markets on Wednesday to the strengthening of last quarters GDP growth, things seems to be all over the place. That’s typically how Economic Slowdowns play-out. Which is one of the many reasons they catch the vast majority off-guard. The changing of seasons in the economy is tough to follow, but knowing what to look for and when to look for it makes it possible.

Now, if you saw this week that US GDP was revised higher to 3.1% from 2.8% for Q3 and thinking, “What slowdown?” I get it. That has to sound weird. And if I hadn’t done the extensive research on credit cycles going back to the end of WWII, I would be saying “BULLSHIT.”

Truth is, this bump in GDP growth is pretty standard behavior at the end of credit cycles.

Let me break it down:

The economy’s performance is measured by two key indicators: GDP growth from one quarter to the next and relative unemployment levels. Both of which in combination are how the overall score is kept in the economy.

When I say, “on the surface, the economy looks good,” I’m referring to this outward appearance of strength. However, the deeper indicators, the ones “beneath the surface” reveal the true direction and health of the economy. These include factors like corporate profit margins, yield curves, inflation trends, credit availability, unemployment trends, and the overall appetite for risk.

It’s not unusual to see a few quarters of strong GDP growth just before a recession sets in. This phenomenon is one reason predicting recessions is so challenging. It’s like looking at a beautiful, sunny day and assuming tomorrow will be just as glorious because there isn’t a cloud in sight. But to forecast accurately, you need to examine all the surrounding conditions. Just like the weather, there’s often a calm before the storm.

Or consider this parallel: anyone who’s cared for an aging pet may have noticed a sudden burst of energy or vitality just before the end. It’s a natural pattern, suggesting this cycle is part of the rhythm of life.

But don’t just take my word for it. Let’s explore some recent examples from past few credit cycles to see how GDP growth played out:

Notice how The Economy Tracker tends to signal a change from one phase to another slightly ahead of time. That’s intentional. It’s designed to give people the opportunity to prepare before the shift actually occurs. So far, it seems to be achieving that goal, helping individuals and businesses plan more effectively for what’s to come.

And it’s telling us that we are entering the part of the cycle where things become a bit more erratic and extreme.

Best to continue cutting expenses and building up those cash reserves here, as we are heading into the part of the cycle where you might need it and/or can use it to pick up a great opportunity at a discounted price later. Either way, this is the point in the cycle where cash is more important than adding risk, debt, or making a feelgood purchase.

Another rate cut and a change in expectations for 2025.

As expected, the Federal Reserve delivered another quarter point rate cut on Wednesday. More importantly, they also scaled back their rate cut expectations for next year. Instead of three more rate cuts in 2025, they now expect to only cut rates twice.

Powell also stated, “I’m confident we are on path to 2% inflation, it might take another year or two from here to get to 2%.”

This is largely due to the lag effect of increased housing costs in inflation indexes, as well as smaller comparable inflation rates from the year prior. i.e. It’s easier to get a lower rate of inflation when it is compared to a 5-7% rate from the previous year than a 3-4% increase the previous year.

Scaling back on next years rate cut expectations was the final straw for overextended stock markets, helping to spur a wild market-wide selloff on the announcement.

Scaling back on next years expected rate cuts is absolutely in line with the current state of the economy. Inflation is returning, bond yields continue to move higher, and the incoming administration is planning to spend more. All of which puts inflationary pressure on the economy. Meanwhile, the Trump team is also looking to take an ax to the federal budget, which is also helping send US bond yields higher due to the uncertainty regarding the course of action.

Two pre-Inaugural headwinds down. 1 major one to go.

The House and Senate approved stopgap spending legislation to avert a government shutdown and provide more than $100 billion in disaster and farm aid, sending the measure to President Biden’s desk for an almost certain signature.

While the debt ceiling was not raised, an agreement was made by all parties to tackle the issue early next year after the new Congress and President take office. At this point it appears that a deal for a $1.5T debt limit increase is in the cards, as long as it is accompanied by $2.5T in spending cuts. The key will be how quickly the cuts will be implemented. As in $2.5T in cuts over the span of two years? Four years? etc.

This eliminates two of three headwinds facing the economy and markets which we have been tracking here. The other being a near certain port strike, which saw Trump throwing his support behind dockworkers last week.

The timing of which couldn't be more important as a port strike of this size is an inflationary event at a time when inflation is beginning to trend back up. The timing in which this plays out could the contributing factor in if the new uptrend in inflation is simply a bounce or another wave higher.

D.O.G.E. gets a win.

Speaking of the budget showdown, congressional leaders reached a bipartisan deal to keep the government funded through mid-March on Tuesday night. However, that was short lived as Vivek Ramaswamy got to work and reportedly read the entire bill overnight. The next morning he and Elon Musk went on the war path on social media. Posting some of the pork contained in the bill.

This ultimately led to a swift defeat of the once bipartisan bill, and to another bill which was resoundingly defeated. Which then led to the final bill which was passed with extraordinary bipartisan support.

In the end, the original 1,547 page bill was was whittled down to 118 pages which passed by a whopping 366 - 34 margin in the House of Representatives, and 85 - 11 margin in the Senate.

The bill funds the government until March. At which time we get to go through it all again. Yay.

Interesting enough, much of the coverage from Legacy Media has been about the “chaos” our poor politicians have had to endure because of those who are seeking to provide transparency in the Federal Government. Funny thing is, their idea of “chaos” sounds more like a pretty standard day to your average business owner in the US. It serves as reminder that the social media platforms, such as the Musk owned X (formerly Twitter), are direct competitors to Legacy Media. It is also the reason why Legacy Media continues to lose it’s once vast audience and influence.

Case in point, Legacy Media constantly refers to Musk as “the Billionaire Elon Musk.” Very true. He his a billionaire. However, he certainly wasn’t born into the status. Instead he achieved it through innovation and risk taking. So why not refer to him as “Innovator”? Unless of course the purpose is to try to disparage him through name-calling instead of substance.

A few things to think about when reading or watching Legacy Media on this topic.

With that being said, it’s also important to remember that Elon Musk has a long history of making bold claims which ultimately come up short. He also has a bad history of predicting markets and the economy.

Honestly, the whole spectacle was quite the site to see unfold in real-time. Imagine a government where tax-payers can actually see what is inside a bill before it is passed, instead of only 72 hours to review it for Congress. Would be nice. We’ll see if it continues to happen.

Anyway you look at it, this week offered some great insight into what to expect out of D.O.G.E, how politicians will react to it, and how it will be covered by the Legacy Media.

Ultimately, this was a clear early win for D.O.G.E. Whether the Legacy Media wants to admit it or not.

Wild ride in stock markets this week.

The result of the Fed lowering their projections for next years number of rate cuts and turmoil created in DC from Elon Musk and Vivek Ramashamey reactions to the initial bipartisan agreement on the budget sent market into a massive one day reversal.

Which then saw a huge reversal Friday morning as we learned that the PCE numbers came in better than expected.

Wednesday’s selloff also sent the VIX soaring. The continued trend of rising volatility is yet another sign of… You guessed it. Economic Slowdowns.

Quantum computing is “born.”

Remember when I stated a few weeks ago that it looked like Google was in for some comeuppance? Well, someone apparently forgot to tell Google as they launched a new quantum computing chip, Willow.

The craziest part of this is that there was hardly any news on the event. Crazy, because this absolutely one of the biggest innovations in all of mankind. It didn’t even come across my feed while on vacation, and most I’ve spoke to, some of whom have a good level of interest in this sort of thing, weren’t aware either.

I need some time to dig into this further, but thought it was absolutely something you should be made aware. While we are still very early in the path to quantum computing, this innovation is monumental and world changing.

Time to start keeping a close eye on Commercial Real Estate.

It’s also time to begin paying attention to Commercial Real Estate as the office property meltdown is starting to surface at regional banks.

The size, control with which it is handled, and timing will more than likely tell us what severity to expect out of this economic downturn.

Every credit cycle sees an industry get upended and go through a generational change (Housing in 2008, Tech in 2000, Savings and Loan in 1990, etc), and commercial real estate is shaping up to be this credit cycles culprit.

Yield Curve now uninverted.

The 10year - 3month yield curve officially uninverted this week. Typically something you see in the months before a recession begins. We now wait to see if this holds and when both it and the 10year - 2year begin to run higher, known as a steepening. Which signals either an imminent recession or that we will already be in one at that time.

Stay tuned in, as things are becoming much more interesting at a faster clip.

Correction to the travel anecdote shared last week.

I was corrected after last week’s Here’s the Deal with the Economy, in which I stated:

There was only one direct flight last year as well, and it was only the timing which was changed. Nonetheless, there were still many open seats on both legs which was not the case in the preceding years.

Again completely anecdotal and unscientific observations, but it does match the overall trend of the economy.

This is the sort of thing that can happen when you have an awesome gf that magically gets things accomplished, like booked flights.

Other Top Economic Stories of the Week:

A few other stories will be posted in the comment section later.

Most Important Data Drops from the Past Week:

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