Macro Thoughts #2

Stage 1: In a market cycle downturn, housing is one of the first markets to soften. We are seeing that now. The number of homes on the market is at its highest since 2009 and many Americans are behind on utility bills. Supply is high, demand is low, prices go down.

Stage 2: What is next is new manufacturing orders. If we look at the manufacturing new orders index, we have dropped from 66.7 in January down to 48. That is a 28% drop-- and could keep moving.

Stage 3: If new orders slow, the obvious next indicator is profits. Hard to make money when your revenue is lowering.

Stage 4: Finally, when profits are down, we have increasingly higher layoffs-- and unemployment rises. Ruh-roh.

As I mentioned previously- the bond market spread is also predicting this outcome.

This cycle can take 2 years to complete and is pretty miserable. But artificially low interest rates for a decade is a heck of a stimulus drug and we have to detox a bit.

Ironically-- this can have some positive impacts on some of the funny money hysteria we've had. All a sudden, people are happy to have work again. The tough times create stronger people.

But I don't see this holding for very long. Here's why:

Countries right now have massive debt to GDP ratios.

As they raise interest rates to combat inflation, the burden on their own debt is increasing. Add in the impact of stage 3 and 4 (reduced profits and reduced employment) = reduced tax. Reduced tax is lower gov revenue.

So if you put it all together, the government might not have enough tax receipts to pay the interest (we're not even talking principal!) on the US debt.

Okay, so what does this all mean?

It means that either the government defaults on its debt or it kicks the can down the road further with another massive stimulus to debase our currency further and help fund whatever needs funding.

Because America defaulting on its debt is basically political suicide, my base case is a massive stimulus.

Could be the "energy crisis", could be UBI, I'm not sure where the biggest needs will be.

But when that happens (late 2024?), we'll be back to growth mode for another cycle.

Thoughts?