Juggling Dynamite

Recession Guessing Game — DiMartino Booth and Charles Payne of FBN Answer Questions. Here is a direct video link.

The five most expensive tech companies now comprise 25.7% of the S&P 500 (a record since the infamous Nifty Fifty stocks in 1972). Rebounding 33% year-to-date, the tech-centric Nasdaq 100 (30.51% weighted in information technology companies and 28.46% in electronics and hardware) has risen the most compared with the economically-sensitive Russell 2000 (small cap index) since the stock market peak in March 2000 (as shown below since 1985, courtesy of ISABELNet.com). In the 2000 cycle, the US Fed paused tightening efforts in May 2000, with the first rate cut in January 2001, and a mild recession was officially declared (after the fact) to have started in March 2001. Broad stock markets fell 42% in the 29 months after the Fed pause.

When such rare mania pricing reversed historically, the splatter hurt stocks broadly and produced a generational investment opportunity a couple of years after the cycle tops. Sadly, by then, buy-and-holders were in the fetal position with little cash or mental strength to take advantage of anything. Most liquidated in losses after the crash and did not buy back in until valuations and capital risks were high again.

A long-term view of Canada’s TSX index tells a similar story (shown below since 2008 courtesy of my partner Cory Venable). Even with a 3% rebound year-to-date, the Canadian stock market has gone nowhere in 24 months, with very poor risk-adjusted returns since its commodity-mania top 15 years ago.  A retest of the pink band below is the base case during a recession and would evaporate all capital gains since 2008.
Maintaining a valuation discipline is hard, but not having one is much worse.

Always a relief to hear an admission that Emperors are naked…

If you spend any time reporting on the world of crypto currency and Bitcoin, then you’re going to run across the name Molly White. She’s a software engineer who has been called “the cryptocurrency world’s biggest critic.” Michael Lewis gets her on the line for a lively conversation about why she spotted hucksterism and fraud early on in crypto’s rise.

BLS estimates (notoriously revised after the fact) boosted the May US job report more than anticipated last week. Under the hood, the actual average work week contracted to 34.3 hours and is back to January 2020 levels. If this contraction is factored into the numbers, Friday’s payroll number was negative 140,000 jobs, not the positive 339k estimate reported. Tellingly, the number of unemployed people rose by 440,000. At the same time, the labour force participation rate for prime working-age people rose to 83.4% from 82.6% a year ago–this denotes the highest supply of labour for this critical cohort since January 2007 (Rosenberg Research). At that point in the last cycle, the Fed had already ended its tightening moves six months earlier in July 2006. They were back to cutting by September 2007, and the stock market bottomed 18 months later, in March 2009.

Today’s guest, Lakshman Achuthan, co-founded the Economic Cycle Research Institute specifically to identify these key turning points for investors. Which key turning points are in play right now? And how can we best take advantage of them? Here is a direct video link.

Also, see Get Ready For the Full Employment Recession; here’s a taste:

Labor productivity fell 2.1% in the first quarter from the fourth at an annual rate, and was down 0.8% in the first quarter from a year earlier, the Labor Department said Thursday. That is the fifth-straight quarter of negative year-over-year productivity growth—the longest such run since records began in 1948.

Those calculations are derived from gross domestic product, which shows output rising at a 1.3% annualized rate in the first quarter. But another key measure—gross domestic income—declined, implying an even bigger productivity collapse.

GDI is the yin to GDP’s yang, measuring incomes earned in wages and profits, while GDP tallies up purchases of goods and services produced. In theory, the two should be equal, since someone’s spending is another’s income.

They never exactly match because of statistical challenges. Lately, though, the divergence is dramatic. “Over the past two quarters, real GDP shows the economy expanding by 1.0%, not far off potential growth, whereas GDI shows it contracting by 1.4%, which amounts to a decent-sized recession,” said Paul Ashworth, chief U.S. economist at Capital Economics. The divergence is ominous: GDI previously undershot GDP dramatically during the 2007-09 financial crisis and in the early 1990s recession, Ashworth said.