Francois Trahan, M²SD
@FrancoisTrahan
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Founder of the @macroinstitute and Trahan Macro Research. Publishing sell-side research for 25+ years.
Joined November 2022
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Economic uncertainty has made mastering macro the key to investment success.
The Macro Specialist Designation (M²SD) connects the influence of macro forces to financial markets, stock selection, and portfolio design.
See the bigger picture.
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I had to check the numbers a few times, but they seem legit. Now this is just the delinquency rate that Freddie Mac is experiencing but half of the mortgage debt outstanding in this category are from the agencies...
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Friendly Reminder: It's normal for the economy to be doing well at the end of a Fed tightening cycle. In fact, real GDP growth has averaged 3.7% at the end of the last five tightening cycles. The economy grew slightly slower than that in Q3, but still in the right ballpark.
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I have heard countless times now that the current divergence between the S&P 500 and the Conference Board's Leading Economic Index is "unprecedented". I don't know if this is just a byproduct of being old (read: seasoned), but this is certainly not "unprecedented" for me!
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Bond yields are closing in on cycle highs. As the chart shows, bond yields typically peak around the end of Fed tightening. You would have to think that there are a lot more hikes to come to not view this as an opportunity. In our framework, it looks like the Fed is done hiking.
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This one caught me by surprise. I had not looked at it in some time, BUT inventories as a share of sales have never been this high outside of recessions in the last 60-some years?!
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I don't update this often, but housing starts and S&P 500 returns are correlated over time. The degree varies across time, but it's been tight in recent years. When we first looked at this, I remember being shocked at how good it was during the Great Inflation of the 1970s.
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I like to keep an eye on what is happening with trucking, as it is an early cycle industry that often moves ahead of broader economic trends. The chart here shows that truck tonnage slowed precipitously in January. Note that the same happened with...
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IF the yield curve is impaired and we should ignore its "recession" message then why is it still correlating with volatility just as it has historically? I think most of you know by now that I am not a believer that the yield curve is broken as many currently argue.
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The beginning of a bull market is usually marked by a recovery in appetite for risk. That is a world where you see a broad-based rebound in the stock market (not just five stocks carrying the index) that is generally led by small-caps and high-beta stocks ... again risky stuff.
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We are really focused on Revenue Guidance as it is often the catalyst to market downside when EPS are under pressure from margins. This is the story of 2008 and 2001. EPS initially come under pressure from margins but it is when Revenues dip that investors tend to react strongly.
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Today's ISM has NO SILVER LINING. Employment was terrible, New Orders were terrible. Here's what the ISM Index tells us about the earnings outlook of the market's favorite segment: Growth. It argues that Revenue Surprises will continue to deteriorate for at least six more months.
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It's a deflationary recession! That's what lies ahead. You can believe that the structural backdrop has changed and is now more prone to inflation than it used to be and still think deflation is likely in the coming downturn. These things are not mutually exclusive.
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Equity Leadership within U.S. equities has long been influenced by trends in China. We used this chart to help make our case for a bear market rally last Fall. The relationship now hints that we are re-entering risk-off markets once again.
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The ISM release was weak overall, BUT it is the employment component that is the big story. If we leave out the GFC and the pandemic, this is the weakest the series has been in over 20 years. I try not to make too big of a deal out of any one data point, but the trend is clear.
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I get excited when I see a data point I've never encountered. This is the difference between Real GDP growth (GDP is growing slowly) and Real Gross Domestic Income growth (GDI is contracting slightly). The NBER uses both measures of economic activity when determining recessions.
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I've been tracking the bull/bear spread from Investor Intelligence for as long as I can remember. It's not the type of thing I look at every week or even every month, but when it feels like sentiment is extreme, I like to be able to quantify it and this is a great tool for that.
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I sat down for an interview in French with Canadian media legend Stephan Bureau. I have lived & worked in English for 25 years and not gonna lie, I had to think about which words to use here and there. Bureau is a phenomenal interviewer and made it easy.
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I have been so immersed in the disinflation story that I had not looked at this one in a while. It is the "Plans To Raise Wages" series from the NFIB. It has nearly recovered to new cycle highs in recent months .... arguing that wage inflation will be moving higher again in 2024.
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Nvidia is very much a macro story! Here are a few stats:
1) Nvidia accounts for over a third of semiconductor market cap.
2) Nvidia's revenues are cyclical.
3) Semi stocks are VERY much driven by macro forces.
4) Monetary tightening points to much lower Global PMIs ahead.
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I've been around long enough to know that you never want to make too big of a deal about one data point. That said, ISM New Orders completely cratered in May. It does get revised at times albeit not a lot in the grand scheme of typical data series (it's existed since 1948).
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We will soon find out if the economy is operating on cue with past trends in interest rates. I have 20 series that are all coincident indicators of the economy (i.e., they follow rates by about two years), but truck tonnage is the one I stare at the most after EPS expectations.
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I'm aware that plenty of companies beat their Q4 estimates. Many other companies have missed earnings however, and we have seen layoff announcements rise. Those two points are related if history is any guide. It is the banks that I see as the big story of the Q4 reporting season.
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This is one to keep an eye on … Happy Tuesday. FT
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I try to not make too much from one series, but this series is not looking good. It's from the University of Michigan survey of confidence and measures income expectations. It's rarely been this bad, and markets certainly don't jive with the other two times it plunged like this.
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The words "Soft Landing" are prominent in the media right now, a reflection of the Fed's views no doubt. We almost always debate "Soft Landing vs Recession" in a tightening cycle. This chart shows how intense "Soft Landing" idea was pre-GFC and even more during the Tech bubble.
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I spend a lot of time tracking housing data (especially when there's monetary tightening in the pipeline) as it gives us a sense of what lies ahead for the broader economy. Ed Leamer documented this phenomenon in his seminal paper from 2006 titled "Housing Is The Business Cycle".
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There are some interesting dynamics at play within equity leadership ... never a great sign when trucking stocks are struggling ... meanwhile, the two biggest publicly traded pawn shops are near highs. Hmmm. Happy Sunday. FT
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Not sure there is much to say, but this is the picture after the rebound in equities of the past week. A mere two stocks now account for 15% of the S&P 500's market cap. Here I thought 2000 was a big deal ... I love seeing things for the first time but this is a bit overdone no?
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I asked
@jonathan_zucco
to look at historical examples of deviations between earnings expectations and consumer confidence and there were not many. When they did occur, they were generally resolved with earnings following the consumer and not the other way around.
Not trying to be overly negative, but our job is to point out risks. When it comes to earnings there are plenty of series that look unusual. The decline in consumer confidence is disturbing, and since consumption makes up 68% of U.S. GDP, it plays an important role in earnings.
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Can someone please explain to me in plain English exactly why we should currently ignore the recession signal from the yield curve? Ideally with facts and not just opinions. Seems to me like the yield curve is doing what it typically does when the Fed is tightening policy ...
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Disclaimer: I know nothing about Nvidia other than what I've read in the media. What I do know is its revenues have been cyclical for the last 20 years, and this, with the most aggressive Fed tightening cycle in generations. FOMO wins the day, but I suspect macro wins the cycle.
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I realize it's been a while since we had a real tightening cycle, and many folks working today were not around for it. There are a few commonalities seen at the end of a Fed tightening cycle .... one of which is the belief that the economy will be fine (soft-landing narrative).
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If housing was a bubble in the 2000s then what would you call it now? The Dallas Fed sees the dark side here. The Price/Income ratio in housing is worse than it was at the height of the 2000s housing boom according to their work. How does this end well? Hello soft landers?
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Between this & the events of the last week maybe the Fed can put an end to the "soft landing" farce?! The NY Fed's Recession Probability model currently sits at its highest since the early 1980s. It's worse than 2001, worse than 2008, worse than 1990... I think you get my point.
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Not trying to be overly negative, but our job is to point out risks. When it comes to earnings there are plenty of series that look unusual. The decline in consumer confidence is disturbing, and since consumption makes up 68% of U.S. GDP, it plays an important role in earnings.
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For those wondering if the last two weeks were random ... not likely. Volatility usually starts to pick about 2.5 years after the beginning of Fed tightening. It's not a perfect relationship, but if it was, we would be staring at higher volatility into the second half of 2025.
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This won't make a difference for today's numbers. NFIB Hiring Plans typically leads by a few months, but this is another labor market LEI that is back to pre-pandemic levels (just like Quits Rate). The NFIB is a broad survey, so it's clear that something is starting to change.
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IF the yield curve is impaired as many suggest and that this time is indeed different (at least for this one indicator) and that there is no recession ahead then why does it still correlate with economic data so well?..
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It's rare that you see any series go from a 60-year lows to near-60 year highs in a short amount of time!?! This is personal expense as a share of consumer spending (note that it excludes mortgage payments) and the original version was published by Axios...
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There is plenty of work from academia that shows that a rise in rates from low levels packs a bigger punch on the economy than a rise from higher levels. Worded differently, going from 2% to 3% in rates is a bigger deal than going from 8% to 9%.
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"Artificial Intelligence" is this cycle's "internet"?! I don't know much about correlations, but it looks like there is something here. All kidding aside, we had this chart in our conference call last week. The quote says a lot.
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Friendly reminder that core inflation doesn't typically ease to normal levels in a matter of months. It takes two years on average for core inflation to halve following a cycle peak. Note that half would not even get us to the Fed’s mandate, but that is a story for another day.
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What is that old rule of thumb from the FDIC => Never spend more than 28% of your income on housing costs. Now if you look at the FDIC's website they include in that 28% the costs of property taxes and insurance as well. This chart does not, however. This is JUST the cost of..
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Let's recap for those under 40: The S&P 500 is up 15%, the Russell 2000 is up 19%, we have seen one major bank bailout, but now the data is looking a little better. Portfolio strategists are raising year end targets and market technicians are calling this a new bull market.
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Time will tell where the unemployment rate tops out for the cycle, but odds are that this will not happen for a while. It generally takes about two years for a change in the Fed Funds Rate to be reflected in employment. It seems clear that the story is just beginning.
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We are currently witnessing the second longest plateau in the Fed Funds Rate in modern history. The only one longer was in the run up to the GFC. Several Fed officials have admitted that, with hindsight, they wished they would have provided stimulus a lot earlier at the time.
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This helps explain why markets strongly bounced higher when Initial Claims data beat expectations in recent weeks. This always matters, but there is going to be greater focus on it in the wake of Fed tightening when investors debate the economic outlook and earnings uncertainty.
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I have been staring at this one a lot in recent days as the big banks get ready to release their Q4 results tomorrow. Banks are very cyclical businesses of course, and their revenues tend to follow the economic cycle closely (and interest rates with a long lag just like GDP).
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It's been nearly two years since we posted one of our reports online. This is the Intern Guide that we put together every June as a macro primer for Summer interns. I think this is the 20th edition. Feel free to forward around.
Link to Report:
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A lot has been said about the large Growth stocks carrying the S&P 500 this year. I thought I would take this occasion to point out that Apple's revenues are cyclical no matter what anyone tells you.
Here are a few facts:
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Yes, a spike in volatility is usually a sign that the economy is about to slow ... in this case it is "discounting" or "pricing" in an abrupt slowdown. We shall see. FT
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If the Fed holds rates steady today, then we will be witnessing one of the longest "pauses" ever. The only time the Fed took longer between their last hike and first cut was prior to the GFC. I think it's clear that they wished they would have cut rates sooner in that episode.
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Hiring trends have changed. The NFIB Plans to Hire series is back to levels not seen in 10 years, and the JOLTS Private Hire Rate is behaving similarly. These are leading indicators of employment, and they are painting a very different picture for the second half of 2024.
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The Quits Rate, which is a great gauge of labor market tightness is now down to pre-pandemic levels ... 2017 levels actually. This is just one gauge of labor market tightness, but it is a good reflection about how employees feel about their ability to find another job.
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20 stocks explain the gains in the S&P 500 this year!!! Not exactly an easy backdrop for portfolio managers to operate in. Also, this shows just how narrow this rally has been which is not exactly the hallmark of a healthy bull market.
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I think of youth unemployment the same way I think of small-caps. They are very useful series to follow near inflection points in the cycle. Their volatility makes turning points easier to see. The unemployment rate is only 0.5% higher, but youth unemployment is up much more!
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In recent decades, higher copper prices were not really a big deal because the starting point to a conversation about inflation was usually one where CPI was low and well contained. This development might mean more this time around ... for a short while anyway.
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Good news for those looking to get work done on their house. Maybe I can finally get an electrician to call me back?
This is the biggest decline in construction job openings in the history of the JOLTS data. Construction is an early cycle industry and leads the broader economy.
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It's UNUSUAL for the Fed to raise rates when their Probability Of Recession model is above 20% (it's currently above 70%). The inflation story isn't over as core inflation is sticky. Still, we're about to see how serious the Powell is as we've not seen this combo since Volcker.
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The NFIB August survey came out this morning and it was not inspiring. This is what the earnings picture looks like for smaller businesses, or at least how they are reporting feeling about them. It is currently slightly lower than the depths of the pandemic, which is stunning.
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Almost 80% of the world's PMIs are now below 50. This is surprising to me. I expected this data to improve some given the rally in stocks in recent months. We've been at these levels before of course, generally when the world economy is under pressure.
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Well, this has been quite the morning. The employment report had a mix of positives and negatives. The surprises today are the ISM Services PMI missing expectations by 2 points and the extreme weakness in its Employment component.
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Economic data is coming in weaker than expected, impacting equity market leadership. Market leadership has been defensive in the wake of disappointing data releases. Stock indexes are at all-time highs, but the rally has a risk-off tone.
Read More Here:
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IF you believe that the economy is headed for a soft landing after one of the most aggressive tightening cycles in generations, then you are arguing that things are truly unique. It's not impossible, but I'm not sure those pushing the soft-landing narrative are aware of the odds.
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We are not going to see May's payroll numbers until Friday of next week. Still, labor market statistics are THE data points to focus on right now, as it is especially prescient at Fed Funds Rate peaks. It gives insight into the Fed's likely next move and the earnings outlook.
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Just an interesting stat. I guess I would say that nothing good is going on when this type of stuff happens. Going to see a lot of firsts this year and next I suspect.
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If you're counting on equity analysts to explain why the markets are melting, think again. I know I am not going to make any friends here but let's be real, overall, this community is a mouthpiece for the companies they cover.
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Full Disclaimer: I'm 100% in the disinflation camp when it comes to 2024/25. Slower economic growth is the best cure for inflation, and slower growth is what you see after a Fed tightening cycle. This chart argues that the path to that scenario is going to have a lot of zig zags.
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It's a lot easier to forecast trends in earnings expectations than a quarterly move here and there. Still, we have a few helpful indicators. This is mortgage rates and is somewhere between trend and short-term. We normally use this to forecast GDP or industrial production.
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"Sometimes the questions are complicated and the answers are simple." - Dr. Seuss
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This series is subject to revision, but it’s one of the only official reads on new rents. It’s average rents that get reported in PCE and CPI. It's important because new rents tell you what’s happening in the housing market as opposed to the average renter's experience.
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Not gonna lie SVB is giving me a little PTSD from the GFC. Funny enough I found an old mug that was used for marketing my bearish housing thesis at Bear Stearns back in the day. Looking at it just now it is still pretty appropriate.
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Whoa?! This is surprising. The chart is from the Fed, but I found it in an article on Bloomberg entitled, "Financial Fragility Worst In A Decade For Households" ... not the headline you want to read going into a recession.
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Sorry, the 5 stocks responsible for the S&P 500's gains this year won't work forever. This chart plots the change in Forward Revenues for those 5 stocks across time. Think of this as the erosion in revenue expectations and the lower the ISM goes, the bigger that erosion becomes.
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I'd call this a marginal change, but this NFIB series was flat for a long time, so this is the first uptick in awhile (resonates given Apple's comments on revenues). I think it's known that weaker revenues/earnings lead to layoffs. This chart is a cool way to show that concept.
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I have exciting news!
Today I’m announcing the launch of the Macro Specialist Designation Program, or M²SD. Until now, the only way to gain practical macro investment knowledge was through years of on the ground experience.
The M²SD is changing that.
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This chart gives perspective on delinquency trends. The first thing that stands out is that both credit card and auto loan delinquency look eerily like they did in the ramp up to the GFC?! Second, student loan delinquency ... whoa?!?
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Invitation sent Mr. Cramer…
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This is absolute GOLD ... enjoy. FT
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The other story beyond earnings this week are rate cuts getting priced into the bond market. File this under "be careful what you wish for". Rate cuts usually mean the economy isn't doing well, which means earnings come under pressure and that tends to overwhelm P/Es.
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A lot has been said about the warning signs coming from the poor state of breadth in the marketplace of late ... well the same goes for market leadership. The beginning of a bull market does NOT typically see cyclical stocks lagging the overall Index this badly, if at all.
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Debt is something that doesn’t matter until it becomes a critical issue. Gov and company debt rarely make headlines when the economy is doing well. Back tests show that debt as a stock-picking factor adds zero alpha in an expansion, but becomes significant when the economy slows.
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If there is one clear lesson to takeaway from August it is that equity markets are now hyper focused on employment data. Inflation has clearly taken a backseat in the eyes of investors. We have 8 or 9 series we look at to forecast the unemployment rate.
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I've always seen the relative performance of the Consumer Discretionary sector as an all-encompassing gauge of consumer wellbeing. The sector's performance reflects the macro forces that impact consumers, which mainly boils down to interest rates and inflation.
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It's a question of WHEN labor markets fall apart. There is no "IF". This narrative that somehow "it's different this time" because of the low level of labor supply does not pass the smell test. Anyone see how many Job Openings disappeared in February in yesterday's JOLTS release?
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This is not a good sign. Not surprising given recent headlines, but still nice to see it quantified. I am going to date myself here, but I remember when FactSet first offered a search function for key words in 10Qs and 10Ks. I think that was 2007?
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Fed Pivoters pay attention. Lower bond yields won't revive the equity market. It does not work that way. P/Es get hurt in the tightening cycle and then again once earnings start to fall. The Fed is usually cutting rates by then and still P/Es move lower.
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I am surprised at how many regional banks I have seen miss their Q4 earnings numbers in the last week. Granted these are mostly smaller regional banks, but I do wonder if there are longer-term consequences when the disappointment seems to be this broad?!
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I'm still in the lower inflation camp overall, but there are a lot of charts that argue headline CPI will remain elevated near-term. Not unusual, (think about the inflation spike in 2008... the ECB raised rates that July!) but it'll put the Fed in a bind if data starts to weaken.
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IF you BELIEVE the market is entering a new bull market then you'll likely focus on FACTS that support this. Other facts you might ignore include "most aggressive Fed tightening cycle in decades" or "inverted yield" or "every time CPI goes above 5% post WWII you see a recession".
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This is super interesting. It's from the Philly Fed and tracks "the number of people that switch from one job and immediately land another". Best quote from the article was "the dwindling number of job switchers ... suggests that workers are insecure about their job prospects".
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It's rarely a good sign when small-caps are lagging the broader indices. A lot of talk has been made about the performance of the S&P 500 this year and how concentrated it is in just a few large stocks. In my experience, small-caps lag when economic expectations are softening.
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It certainly feels like the tone coming from the Fed has changed in the past week. This is another data point that argues for "Fed friendly" data ahead. It shows the NFIB's Jobs Hard to Fill as a leading indicator of the Atlanta Fed's wage growth tracker.
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This is really interesting. I think some of you know that I am really focused on housing/construction or really anything from early cycle industries. I do not know the author
@johnburnsjbrec
, but I have seen other cool charts on this topic from him (i.e. look him up).
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This has been a fun weekend! I'll spare you the details but even for my fairly "apocalyptic" macro view this is troubling. It's a reminder that when you raise rates the way the Fed has (75 bps 4x) there are consequences. Companies don't have the time to adapt, banks especially.
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Even my 6-year old is starting to understand the effects of inflation…
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I realize it's not until next week, but I am already thinking about the March payroll report. Employment always matters, but it is especially prescient after the end of a tightening cycle. Most leading indicators of employment point to weaker data in the second half of the year.
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This does NOT happen when things are going well. Friendly reminder that housing & its byproducts are early cycle industries. This is a fancy way of saying that what happens in housing/construction/renovations is an indication of what will eventually happen to the broader economy.
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Not surprising, but there is a strong correlation between corporate spreads and PMIs. After all, Baa Spreads and the ISM New Orders Index are both part of the Conference Board's LEI. They are both a function of the economic cycle, so it makes sense that they would look similar.
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Hmmmm ... I wonder if this is about to throw a wrench in my "lower inflation" call? I am more focused on the state of the business cycle than anything else when it comes to inflation, but supply chain distortions can and do make a difference at times.
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